<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1995
REGISTRATION NO. 33-63957
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KINETIC CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 7352 74-1891727
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
KINETIC CONCEPTS, INC. RAYMOND R. HANNIGAN
8023 VANTAGE DRIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER
SAN ANTONIO, TEXAS 78230 KINETIC CONCEPTS, INC.
(210) 524-9000 8023 VANTAGE DRIVE
(210) 308-3993 (FAX) SAN ANTONIO, TEXAS 78230
(210) 524-9000
(Address, including zip code, and telephone (210) 308-3993 (FAX)
number, (Name, address, including zip code,
including area code, of registrant's principal and telephone number, including area code,
executive offices) of registrant's agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN D. SEIDEL, ESQ. THOMAS C. SADLER, ESQ.
COX & SMITH INCORPORATED LATHAM & WATKINS
112 EAST PECAN STREET, SUITE 1800 633 W. FIFTH STREET, SUITE 4000
SAN ANTONIO, TEXAS 78205 LOS ANGELES, CALIFORNIA 90071-2007
(210) 554-5500 (213) 485-1234
(210) 226-8395 (FAX) (213) 891-8763 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
investment reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
KINETIC CONCEPTS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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<CAPTION>
FORM S-3 ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page of Registration Statement;
Cross Reference Sheet; Outside Front Cover
of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page of Prospectus
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Management; Principal and Selling
Shareholders
8. Plan of Distribution....................... Underwriting
9. Description of Securities to be
Registered............................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Not Applicable
11. Material Changes........................... Not Applicable
12. Incorporation of Certain Information by
Reference................................ Documents Incorporated By Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED DECEMBER 28, 1995
PROSPECTUS
8,185,849 SHARES
LOGO
KINETIC CONCEPTS, INC.
COMMON STOCK
------------------------------
All of the shares of Common Stock offered hereby will be sold by James R.
Leininger, M.D., Peter A. Leininger, M.D., John H. Leininger, O.D., Daniel E.
Leininger and certain family trusts and charitable foundations (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
directly receive any of the proceeds from the sale of shares by any Selling
Shareholder. See "Use of Proceeds."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KNCI." On December 27, 1995, the last reported sale price for the Common Stock
was $11 7/8 per share. See "Price Range of Common Stock."
------------------------------
FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" ON PAGES 6 TO 8.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
<S> <C> <C> <C>
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Per Share......................... $ $ $
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Total(3).......................... $ $ $
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company and the
Selling Shareholders estimated at $ .
(3) Certain Selling Shareholders have granted the Underwriters a 30-day option
to purchase up to an additional 1,227,877 shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Selling
Shareholders will be $ , $ and $ , respectively.
See "Principal and Selling Shareholders" and "Underwriting."
------------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered to and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made on or about , 1996 at the offices
of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------------
BEAR, STEARNS & CO. INC. ALEX. BROWN & SONS
INCORPORATED
, 1996
<PAGE> 4
[INSIDE FRONT COVER PICTURE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in or incorporated by reference into this Prospectus. Unless the
context otherwise indicates, references in this Prospectus to the "Company" or
"Kinetic Concepts" are to Kinetic Concepts, Inc. and its subsidiaries.
THE COMPANY
Kinetic Concepts designs, manufactures, markets and distributes therapeutic
products, primarily specialty hospital beds, mattress overlays and mattress
replacement systems, that treat and prevent the complications of immobility.
Persons may become immobilized as a result of surgery, trauma or disease such as
congestive heart failure, respiratory failure, stroke, chronic neurological
disorder, coma, burns, cancer and AIDS. Prolonged patient immobility can result
in a variety of complications including (i) skin breakdown (decubitus ulcers or
pressure sores), (ii) circulatory complications such as deep vein thrombosis and
edema, and (iii) respiratory problems such as pneumonia. These complications
occur frequently, can increase patient treatment costs by as much as $75,000 and
can result in death. By preventing these complications or accelerating the
healing process, the Company's products and services can significantly reduce
the cost of patient care. Because many of its products are used primarily by the
elderly (the fastest growing segment of the U.S. population), the Company
believes that the use of its products and services should grow.
From an initial base of specialty hospital beds designed for and used
almost exclusively in acute care hospitals, the Company has broadened its
product line and expanded its distribution network to serve the extended care
(e.g., skilled nursing facilities and rehabilitation centers) and home care
settings. More recently, Kinetic Concepts has applied its therapeutic expertise
to develop innovative medical devices to treat wounds and prevent deep vein
thrombosis. The Company has also developed a product line to aid in the care of
obese patients.
The Company believes that it is well positioned to meet the significant
changes currently affecting the market for health care products and services.
Among these changes are: the increased pressure on health care providers to
control costs and improve patient outcomes; the accelerating migration of
patients from acute care facilities into extended and home care settings; the
consolidation of health care providers and national and regional group
purchasing organizations; and the growing demand for clinically proven and cost
effective therapies. Kinetic Concepts is positioning itself for future growth in
this evolving market by:
ADDRESSING INDUSTRY COST CONTROL PRESSURES. The Company believes it can
best serve cost conscious health care providers by offering cost effective
therapies. Kinetic Concepts offers a broad line of specialty hospital beds,
mattress overlays, mattress replacement systems and medical devices that help
reduce the overall cost of patient care by allowing health care providers to
match the needs of particular patients with appropriate therapies, whether in a
hospital, an extended care facility or at home. The Company also offers health
care providers a variety of rental, lease and purchase options on most of its
products. Moreover, the Company's national distribution network enables Kinetic
Concepts to offer a single source solution to national and regional purchasing
entities.
FURTHER PENETRATING THE ACUTE CARE MARKET. The Company serves over 1000
medium to large hospitals and is presently focusing its marketing efforts on an
additional 2000 similarly sized hospitals in which the Company has a relatively
small presence. The Company believes that the recent introduction of four new,
technologically advanced products -- the TriaDyne, the BariKare, the PlexiPulse
All-in-1 System and The V.A.C. -- will enable Kinetic Concepts to further
penetrate the acute care market.
INCREASING PRESENCE IN EXTENDED AND HOME CARE SETTINGS. The Company
provides therapies to patients across multiple care settings with its broad
product line which is designed to provide a "Continuum of Care." The Company's
sizable clinical staff also enables it to make on-site recommendations on
appropriate patient surfaces during the transition between care settings.
Because of the cost pressures within the health care industry, patients are
leaving the acute care setting sooner, thereby increasing the demand for the
Company's products in the extended and home care settings. This demand increases
the utilization of certain of the
3
<PAGE> 6
Company's products which were originally developed for acute care settings and
provides an additional market for sales of low-cost products such as mattress
overlays and mattress replacement systems.
EXPANDING INTERNATIONAL MARKETS. Health care systems in established
economies are increasingly seeking methods to provide improved care at a reduced
cost and are therefore becoming aware of the benefits of therapeutic patient
support surfaces. The delivery of improved levels of health care is also growing
in certain emerging economies. The Company has expanded to serve the growing
international market by establishing direct operations in ten foreign countries
and by utilizing independent dealers in other selected markets.
CAPITALIZING ON INDUSTRY LEADERSHIP IN CLINICAL RESEARCH. Kinetic Concepts
believes that it maintains the most extensive collection of published clinical
studies in its industry, which serves as the foundation of its marketing
program -- The Clinical Advantage. These studies support the cost effectiveness
of the Company's products and provide the necessary clinical data demanded by
health care providers.
UTILIZING INFORMATION PROGRAMS. The health care industry requires advanced
management information programs to capture cost of service and patient outcome
data. Kinetic Concepts has made substantial investments in its proprietary
information system and several management information programs that collect and
analyze patient data and enable the Company to deliver its products and services
more cost effectively.
CONTINUING PRODUCT INNOVATION. The Company continues to search for new
therapies and technologies to improve patient outcomes and to reduce the cost of
patient care. Since January 1994, the Company has introduced a number of new
products including: the TriaDyne, a multiple therapy bed; the BariKare, a
specialty bed for obese patients; the PlexiPulse All-in-1 System, a non-invasive
vascular assist device; and The V.A.C., a medical device that promotes wound
healing.
Beginning in 1993, the Company recognized the need to restructure its
management and operations to meet the needs of the changing health care
environment. The Company's Chairman began assembling a new management team that
has concentrated on the Company's core lines of business, divested
underperforming businesses and implemented various programs to reduce the
Company's operating costs and to improve its information systems. In September
1994, the Company settled a patent infringement suit with its principal
competitor for $84.8 million. The proceeds of this settlement and the
divestitures were used to repay the Company's long-term debt and provide
additional funds for future growth.
THE OFFERING
Common Stock offered by the Selling
Shareholders................................ 8,185,849 shares
Common Stock to be outstanding after this
offering(1).................................
44,332,778 shares
Use of Proceeds............................. The Company will not directly
receive any proceeds from the
sale of the shares. However,
James R. Leininger, M.D., the
Company's Chairman of the Board,
will repay a loan from the
Company in the amount of $10
million, plus accrued interest,
from his proceeds of this
offering. See "Use of Proceeds."
Nasdaq National Market Symbol............... KNCI
- ---------------
(1) Excludes approximately 2,857,333 shares of Common Stock subject to
outstanding options granted by the Company under certain stock option plans
and through direct grants, of which 1,079,435 shares are exercisable as of
the date of this Prospectus, 1,400,000 shares of Common Stock issuable upon
the exercise of stock options to be granted, subject to final approval by
the Company's Board of Directors and shareholders, under the 1995 Senior
Executive Stock Option Plan, and 150,000 shares of Common Stock issuable
upon the exercise of an outstanding warrant. See "Management" and "Shares
Eligible For Future Sale."
4
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- SEPTEMBER 30, ----------------------
PRO FORMA -------------------- PRO FORMA PRO FORMA
1992 1993 1994 1994(1) 1994 1995 1994(1) 1995(1)
-------- -------- -------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
EARNINGS DATA:
Total revenue............. $278,491 $268,872 $269,646 $222,084 $210,075 $178,423 $162,686 $176,938
-------- -------- -------- -------- -------- --------
Gross profit.............. 102,822 80,519 91,023 74,289 68,404 65,435 52,141 63,950
-------- -------- -------- -------- -------- --------
Operating
earnings(2)(3).......... 55,112 20,535 124,078 113,383 110,398 31,028 100,937 33,373
Interest expense (income),
net..................... 7,195 5,908 4,528 (1,209) 5,477 (3,496) 15 (4,140)
-------- -------- -------- -------- -------- --------
Income taxes.............. 19,405 7,175 55,949 44,591 49,625 14,175 38,626 15,348
-------- -------- -------- -------- -------- --------
Net earnings(2)(4)........ $ 28,512 $ 8,062 $ 64,383 $ 70,783 $ 56,078 $ 20,349 $ 63,078 $ 22,165
======== ======== ======== ======== ======== ========
Earnings per
share(2)(5)............. $ 0.63 $ 0.18 $ 1.46 $ 1.60 $ 1.27 $ 0.45 $ 1.43 $ 0.49
======== ======== ======== ======== ======== ========
Shares used in earnings
per share
computations............ 45,060 44,627 44,143 44,143 44,006 45,306 44,006 45,306
Cash flow provided by
operations.............. $ 58,007 $ 56,538 $ 96,451 $116,627 $ 44,151
Capital expenditures...... $ 43,317 $ 33,402 $ 13,814 $ 10,706 $ 25,190
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
-----------------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 49,853 $ 59,853
Working capital.................................................................... $ 95,176 $105,176
Total assets....................................................................... $239,248 $239,248
Total debt, noncurrent............................................................. -- --
Equity and other capital accounts.................................................. $203,162 $203,162
</TABLE>
- ---------------
(1) The unaudited pro forma selected consolidated financial data is based on the
historical financial statements of the Company, giving effect to the sale of
certain assets of the Company's Medical Services Division ("Medical
Services") and all of the capital stock of KCI Financial Services, Inc.
("KCIFS") as if such sales had been consummated as of January 1, 1994, and
giving effect to such other assumptions and adjustments as set forth in the
notes accompanying the pro forma condensed consolidated statements of
earnings. Such adjustments do not include any adjustments for the sale of
the assets of Medical Retro Design, Inc. ("MRD"). The operating results and
sales proceeds of MRD were not material compared to the overall results of
the Company. See Unaudited Pro Forma Condensed Consolidated Statements of
Earnings and the notes thereto and Consolidated Financial Statements and the
notes thereto included in this Prospectus.
(2) See Note 11 of Notes to Consolidated Financial Statements.
(3) Excluding the effect of the proceeds of $84.8 million from the patent
litigation settlement and other unusual items, operating earnings and pro
forma operating earnings for the year ended December 31, 1994 would have
been $39.2 million and $38.6 million, respectively, and operating earnings
and pro forma operating earnings for the nine months ended September 30,
1994 would have been $27.5 million and $26.2 million, respectively.
(4) Excluding the effect of the proceeds of $84.8 million from the patent
litigation settlement and other unusual items, net earnings and pro forma
net earnings for the year ended December 31, 1994 would have been $22.0
million and $25.1 million, respectively, and net earnings and pro forma net
earnings for the nine months ended September 30, 1994 would have been $14.9
million and $17.4 million, respectively.
(5) Excluding the effect of the proceeds of $84.8 million from the patent
litigation settlement and other unusual items, earnings per share and pro
forma earnings per share for the year ended December 31, 1994 would have
been $0.50 and $0.57, respectively, and earnings per share and pro forma
earnings per share for the nine months ended September 30, 1994 would have
been $0.34 and $0.40, respectively.
(6) Adjusted to give effect to the sale of the shares offered hereby and the
application of approximately $10 million of Dr. Leininger's proceeds to
repay a loan, plus accrued interest, from the Company. Excludes 2,857,333
shares of Common Stock issuable upon the exercise of outstanding options
granted under the Company's stock option plans and through direct grants,
1,400,000 shares of Common Stock issuable upon the exercise of stock options
to be granted, subject to final approval by the Company's Board of Directors
and shareholders, under the 1995 Senior Executive Stock Option Plan, and
150,000 shares of Common Stock issuable upon the exercise of an outstanding
warrant. See "Management" and "Shares Eligible For Future Sale."
5
<PAGE> 8
RISK FACTORS
The following risk factors should be carefully considered in evaluating the
Company and its business before purchasing the shares offered by this
Prospectus.
UNCERTAINTY OF HEALTH CARE REFORM
There are widespread efforts to control health care costs in the United
States and abroad. Various federal and state legislative initiatives regarding
health care reform are being considered. For example, the United States Congress
is currently considering pending legislative proposals to reform the Medicare
and Medicaid programs. Some current proposals call for reduced payments to
hospitals under the existing Medicare prospective payment system, limitations on
payment for and recognition of ancillary items or services, establishment of a
prospective payment system for Medicare reimbursement of skilled nursing
facility costs, freezing of durable medical equipment fee schedule payment
amounts and the establishment of a "block grant" program that would give states
greater discretion in designing and administering their respective Medicaid
programs. The Company believes that government and private efforts to contain or
reduce health care costs are likely to continue. These trends may lead
third-party payors to decline or limit reimbursement for the Company's products,
which could negatively impact the pricing and profitability of, or demand for,
the Company's products. The Company cannot predict whether or when any such
legislative or regulatory initiative will be enacted or any such market reform
will be initiated. If enacted or initiated, there can be no assurance that such
initiative or reform will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General," "Business -- Reimbursement" and "Business -- Market
Outlook -- Increased Pressure on Health Care Providers to Control Costs and
Improve Patient Outcomes."
CONSOLIDATION OF PURCHASING ENTITIES
One of the most tangible results of the health care reform debate in the
United States has been that it has caused health care providers to examine their
cost structures and reassess the manner in which they provide health care
services. This review, in turn, has led many health care providers to merge or
consolidate with other members of their industry in an effort to reduce costs or
achieve operating synergies. A substantial number of the Company's customers,
including group purchasing organizations, hospitals, national nursing home
companies and national home health care agencies, have been affected by this
consolidation. Because larger purchasers or groups of purchasers tend to have
more leverage in negotiating prices, this trend could have a material adverse
effect on the Company's business, financial condition or results of operations.
In addition, the consolidation of health care providers often results in the
renegotiation of contracts and in the granting of price concessions. Finally, as
group purchasing organizations and integrated health care systems increase in
size, each contract represents a greater concentration of market share and the
adverse consequences of losing a particular contract increases considerably. See
"Business -- Market Outlook -- Consolidation of Health Care Providers and
National and Regional Group Purchasing Organizations" and
"Business -- Distribution Network."
REIMBURSEMENT OF HEALTH CARE COSTS
The Company's products are rented and sold principally to hospitals,
skilled nursing facilities and durable medical equipment ("DME") suppliers who
receive reimbursement for the products and services they provide from various
public and private third-party payors, including the Medicare and Medicaid
programs and private insurance plans. As a result, demand for the Company's
products and services are dependent in part on the reimbursement policies of
these payors. In order to be reimbursed, the Company's products and services
generally must be found to be reasonable and necessary for the treatment of
medical conditions and must otherwise fall within the payor's list of covered
benefits. In addition, the manner in which reimbursement is sought and obtained
for any of the Company's products and services may vary based upon the type of
payor involved and the setting in which the products and services are furnished
and utilized by patients. For example, although the Company is seeking
reimbursement status for The V.A.C. and the PlexiPulse, neither of these
products has been classified as a reimbursible ancillary item for skilled
nursing facilities or Medicare
6
<PAGE> 9
covered DME in the home setting. There can be no assurance concerning the
coverage decisions of the various payors, the amount of reimbursement available
to providers and suppliers for each of the Company's products and services or
whether such payors will continue to provide reimbursement for the Company's
products and services in the future. The failure of providers, suppliers and
other users of the Company's products and services to obtain sufficient
reimbursement from payors could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Reimbursement."
FRAUD AND ABUSE LAWS
The Company is subject to various federal and state laws pertaining to
health care fraud and abuse including prohibitions on the submission of false
claims and the payment or acceptance of kickbacks or other remuneration in
return for the purchase or lease of Company products. The Office of the
Inspector General of the United States Department of Health and Human Services
has recently launched an enforcement initiative which specifically targets the
long term care, home health and DME industries. Although the Company believes
its business arrangements comply with federal and state fraud and abuse laws,
there can be no assurance that the Company's practices will not be challenged
under these laws in the future or that such a challenge would not have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Government Regulation -- Fraud and Abuse
Laws."
PRODUCT LIABILITY
The manufacturing and marketing of medical products necessarily entails an
inherent risk of product liability claims. Although the Company has not
experienced any significant losses due to product liability claims and currently
maintains umbrella liability insurance coverage, there can be no assurance that
the amount or scope of the coverage maintained by the Company will be adequate
to protect it in the event a significant product liability claim is successfully
asserted against the Company. See "Business -- Legal Proceedings."
GOVERNMENT REGULATION
The Company's products are subject to regulation by numerous governmental
authorities, principally the United States Food and Drug Administration (the
"FDA") and corresponding state and foreign regulatory agencies. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, withdrawal of marketing clearances or
approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any product manufactured or
distributed by the Company.
In August 1995, the FDA issued a Warning Letter to the Company following a
June 1995 inspection, in which the FDA asserted certain alleged violations of
the FDA's Good Manufacturing Practices ("GMP") and Medical Device Reporting
("MDR") requirements. In the Warning Letter, the FDA notified the Company that
(i) no premarket submissions for the Company's products to which the alleged GMP
deficiencies are "reasonably related" will be cleared "until the violations have
been corrected"; (ii) the FDA will not grant requests by the Company for
Certificates for Products for Export until the alleged "violations related to
the subject devices" have been corrected; and (iii) Federal agencies will be
advised of the issuance of the Warning Letter and may take the information into
account when considering the award of Federal contracts to the Company. In
September 1995, the Company submitted a written response to the Warning Letter.
On November 21, 1995, the FDA responded to the Company and stated that the
Company's response to the GMP deficiencies addressed most of the FDA's concerns.
While the FDA agreed with the Company that all but three events mentioned in its
August 1995 letter did not require the filing of MDRs by the Company, the FDA
maintained its request for the filing of MDRs for three events, which the
Company has submitted to the FDA. The FDA advised the Company that in future
inspections, the agency will closely examine the Company's policies regarding
reportable events and failure investigations. In a letter dated December 21,
1995, the FDA reiterated that the Company's responses appear to be adequate, but
requested further verification that the proposed corrections set forth in the
Company's responses are being implemented. At the
7
<PAGE> 10
FDA's suggestion, the Company intends to engage an independent consultant to
verify that the Company is implementing the proposed changes and to certify to
the FDA that the Company is in compliance with GMPs.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operations. See "Business -- Government Regulation."
COMPETITION
The Company faces substantial competition from other companies which
manufacture or market specialty beds, mattress overlays, mattress replacement
systems or medical devices. The Company's principal competitor has financial and
other resources substantially in excess of those available to the Company.
Competitive pressures could result in increased price competition or the
introduction of new products by the Company's competitors, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Competition."
CONTROL OF THE COMPANY
James R. Leininger, M.D., beneficially owns approximately 66.7%, and Dr.
Leininger's brothers beneficially own, in the aggregate, approximately 9.6%, of
the outstanding shares of the Common Stock. After completion of this offering,
James R. Leininger, M.D., the Company's Chairman of the Board, will beneficially
own approximately 52.9%, and his brothers will beneficially own, in the
aggregate, approximately 4.9% of the outstanding shares of the Common Stock. As
a result of their Common Stock ownership, Dr. Leininger together with his
brothers will be able to elect all of the members of the Board of Directors of
the Company and thereby continue to control its management and affairs. See
"Principal and Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of Common Stock.
The Company will have 44,332,778 shares of Common Stock outstanding immediately
following this offering, of which 23,800,851 shares (assuming no exercise of the
Underwriters' over-allotment options) will be held by affiliates of the Company.
All of such shares are restricted or control securities under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
In addition, as of December 15, 1995, the Company had 2,857,333 shares of Common
Stock subject to outstanding options granted under certain stock option plans
and through direct grants, 1,400,000 shares of Common Stock issuable upon
exercise of stock options to be granted, subject to final approval by the
Company's Board of Directors and shareholders, under the 1995 Senior Executive
Stock Option Plan and 150,000 shares of Common Stock issuable upon exercise of a
warrant, exercisable on or after April 13, 1996, at an exercise price of $6.625
per share. The shares of Common Stock issuable upon exercise of the warrant are
subject to certain registration rights and, upon the effectiveness of a
registration statement covering such shares, will be eligible for resale in the
public market without restriction under the Securities Act. Sales of shares of
Common Stock under either Rule 144 or pursuant to a registration statement could
have an adverse effect on the price of Common Stock. The Selling Shareholders
and the Company have agreed, subject to certain exceptions, not to sell,
contract to sell or otherwise dispose of any shares of Common Stock for a period
of 180 days after the date of this Prospectus without the prior written consent
of the Underwriters and the other directors and executive officers have agreed
not to sell, contract to sell or otherwise dispose of any shares of Common Stock
for a period of 90 days after the date of this Prospectus without the prior
written consent of the Underwriters. See "Shares Eligible for Future Sale" and
"Underwriting."
8
<PAGE> 11
USE OF PROCEEDS
The Company will not directly receive any of the proceeds from the sale of
the shares of Common Stock by the Selling Shareholders. In August 1995, the
Company made a loan of $10 million, with a term of two years and an annual
interest rate of 7.9375%, to James R. Leininger, M.D., the Company's Chairman of
the Board. In accordance with the terms of this loan, Dr. Leininger will repay
the outstanding principal amount plus accrued interest from his proceeds of this
offering.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KNCI." The following table sets forth the high and low closing sale prices of
the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1993
First Quarter..................................................... 10 3/8 7
Second Quarter.................................................... 7 1/4 4 1/4
Third Quarter..................................................... 4 3/4 3 1/4
Fourth Quarter.................................................... 5 1/4 3 5/8
1994
First Quarter..................................................... 4 1/4 3 3/4
Second Quarter.................................................... 4 1/4 3 3/8
Third Quarter..................................................... 5 7/8 3 3/8
Fourth Quarter.................................................... 6 7/8 5 3/8
1995
First Quarter..................................................... 8 1/4 6 9/16
Second Quarter.................................................... 8 1/8 6 5/8
Third Quarter..................................................... 11 5/8 7
Fourth Quarter (through December 27, 1995)........................ 13 10
</TABLE>
As of December 27, 1995, the closing sale price of the Common Stock was
$11 7/8 per share. As of December 15, 1995, there were approximately 473 holders
of record of the Common Stock.
DIVIDEND POLICY
Beginning in the second quarter of 1992, the Company has paid a quarterly
cash dividend of $.0375 per share of Common Stock. The Board of Directors of the
Company will consider future dividends on a quarter-by-quarter basis. The
Company's credit agreement contains covenants which under certain circumstances
may limit the Company's ability to declare and pay cash dividends in the future.
9
<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Long-term obligations................................................ --
Shareholders' equity:
Preferred Stock, $.001 par value; 20,000,000 shares authorized; no
shares outstanding.............................................. --
Common Stock, $.001 par value; 100,000,000 shares authorized;
44,269,000 shares outstanding(1)................................ $ 44
Additional paid-in capital......................................... 11,700
Retained earnings.................................................. 190,858
Cumulative foreign currency translation adjustment................. 750
Notes receivable from officers..................................... (190)
--------
Total shareholders' equity................................. 203,162
--------
Total capitalization....................................... $203,162
========
</TABLE>
- ---------------
(1) Excludes 2,857,333 shares of Common Stock issuable upon the exercise of
outstanding options granted under the Company's stock option plans and
through direct grants, 1,400,000 shares of Common Stock issuable upon the
exercise of stock options to be granted, subject to final approval by the
Company's Board of Directors and shareholders, under the 1995 Senior
Executive Stock Option Plan, and 150,000 shares of Common Stock issuable
upon the exercise of an outstanding warrant. See "Management" and "Shares
Eligible For Future Sale."
10
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data set forth below with respect to the
fiscal years ended December 31, 1990, 1991, 1992, 1993 and 1994 are derived from
the Company's audited consolidated financial statements. The selected
consolidated financial data for the nine months ended September 30, 1994 and
1995 are derived from the Company's unaudited consolidated financial statements
which in the opinion of management include all normal, recurring adjustments
necessary to state fairly the data included therein in accordance with generally
accepted accounting principles for interim financial information. Interim
results are not necessarily indicative of the results to be expected for the
entire fiscal year. The unaudited pro forma selected consolidated financial data
set forth below with respect to the fiscal year ended December 31, 1994 and for
the nine months ended September 30, 1994 and 1995 are derived from the Company's
unaudited pro forma condensed consolidated statements of earnings. All of the
data set forth below should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations, the Consolidated
Financial Statements and the notes thereto, and the Unaudited Pro Forma
Condensed Consolidated Statements of Earnings and the notes thereto included in
this Prospectus or incorporated herein by reference.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------- SEPTEMBER 30, ---------------------
PRO FORMA ------------------- PRO FORMA PRO FORMA
1990 1991 1992 1993 1994 1994(1) 1994 1995 1994(1) 1995(1)
-------- -------- -------- -------- -------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
EARNINGS DATA:
Revenue:
Rental and
service...... $192,040 $223,192 $244,905 $232,250 $228,832 $194,337 $177,790 $152,138 $142,477 $152,138
Sales and
other........ 21,646 25,529 33,586 36,622 40,814 27,747 32,285 26,285 20,209 24,800
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
revenue.... 213,686 248,721 278,491 268,872 269,646 222,084 210,075 178,423 162,686 176,938
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Rental
expenses....... 124,632 146,112 156,682 169,687 159,235 135,221 125,167 102,009 100,792 102,009
Cost of goods
sold........... 12,746 14,238 18,987 18,666 19,388 12,574 16,504 10,979 9,753 10,979
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross
profit..... 76,308 88,371 102,822 80,519 91,023 74,289 68,404 65,435 52,141 63,950
Selling, general
and
administrative
expenses....... 33,212 39,538 47,710 53,279 51,813 35,653 40,874 34,407 25,951 30,577
Unusual
items(2)(3).... 6,540 -- -- 6,705 (84,868) (74,747) (82,868) -- (74,747) --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating
earnings... 36,556 48,833 55,112 20,535 124,078 113,383 110,398 31,028 100,937 33,373
Interest expense
(income),
net............ 5,057 6,736 7,195 5,908 4,528 (1,209) 5,477 (3,496) 15 (4,140)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Earnings
before
income
taxes,
minority
interest,
extraordinary
item and
cumulative
effect of
changes in
accounting
principle... 31,499 42,097 47,917 14,627 119,550 114,592 104,921 34,524 100,922 37,513
Income taxes..... 13,350 17,260 19,405 7,175 55,949 44,591 49,625 14,175 38,626 15,348
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Earnings
before
minority
interest,
extraordinary
item and
cumulative
effect of
changes in
accounting
principle... 18,149 24,837 28,512 7,452 63,601 70,001 55,296 20,349 62,296 22,165
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Minority interest
in subsidiary
loss........... -- -- -- 560 40 40 40 -- 40 --
Extraordinary
item -- debt
extinguishment,
net............ -- -- -- (400) -- -- -- -- -- --
Cumulative effect
of change in
accounting for
inventory...... -- -- -- -- 742 742 742 -- 742 --
Cumulative effect
of change in
accounting for
income taxes... -- -- -- 450 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net
earnings... $ 18,149 $ 24,837 $ 28,512 $ 8,062 $ 64,383 $ 70,783 $ 56,078 $ 20,349 $ 63,078 $ 22,165
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Earnings per
share...... $ 0.35 $ 0.49 $ 0.63 $ 0.18 $ 1.46 $ 1.60 $ 1.27 $ 0.45 $ 1.43 $ 0.49
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Shares used in
earnings per
share
computations... 50,993 50,469 45,060 44,627 44,143 44,143 44,006 45,306 44,006 45,306
Cash flow
provided by
operations..... $ 58,695 $ 60,241 $ 58,007 $ 56,538 $ 96,451 $116,627 $ 44,151
Capital
expenditures... $ 35,471 $ 32,661 $ 43,317 $ 33,402 $ 13,814 $ 10,706 $ 25,190
Cash dividends
per share paid
to common
shareholders... $ .09 $ .12 $ .14 $ .15 $ .15 $ .11 $ .11
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 1,888 $ 12,191 $ 6,963 $ 10,280 $ 43,241 $ 49,853
Working capital..................................... $ 14,924 $ 32,206 $ 55,473 $ 60,907 $ 90,731 $ 95,176
Total assets........................................ $250,155 $277,820 $286,915 $284,573 $232,731 $ 239,248
Total debt, noncurrent.............................. $ 40,468 $101,781 $102,237 $101,889 $ 2,636 --
Redeemable convertible preferred stock.............. $ 6,734 $ 3,034 $ 3,307 -- -- --
Equity and other capital accounts................... $133,664 $ 99,182 $123,813 $125,707 $185,423 $ 203,162
</TABLE>
- ---------------
(1) The unaudited pro forma selected consolidated financial data is based on the
historical financial statements of the Company, giving effect to the sale of
certain assets of Medical Services and all of the capital stock of KCIFS as
if such sales had been consummated as of January 1, 1994, and giving effect
to such other assumptions and adjustments as set forth in the notes
accompanying the pro forma condensed consolidated statements of earnings.
Such adjustments do not include any adjustments for the sale of the assets
of MRD. The assets, operating results and sales proceeds of MRD were not
material compared to the overall results of the Company. See "Unaudited Pro
Forma Condensed Consolidated Statements of Earnings" and the notes thereto
and "Consolidated Financial Statements" and the notes thereto included in
this Prospectus.
(2) Charge in 1990 relates to employee severance liability resulting from a
reduction in workforce, loss on sale of a subsidiary and write-down of
assets.
(3) See Note 11 of Notes to Consolidated Financial Statements for information on
unusual items.
11
<PAGE> 14
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
The following unaudited pro forma condensed consolidated statements of
earnings for the year ended December 31, 1994 and for the nine months ended
September 30, 1994 and 1995 give effect to the dispositions of Medical Services
and KCIFS as if such dispositions had occurred on January 1, 1994. The pro forma
information is based on the historical financial statements of the Company,
giving effect to the dispositions and the assumptions and adjustments set forth
in the notes accompanying the unaudited pro forma condensed consolidated
statements of earnings. These unaudited pro forma statements may not be
indicative of the results that actually would have occurred if the dispositions
had occurred during the periods indicated or which may be obtained in the
future. The unaudited pro forma condensed consolidated statements of earnings
should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto included in this Prospectus.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DIVISIONS SOLD
---------------------- PRO FORMA
KINETIC CONCEPTS, INC. MEDICAL --------------------------
AND SUBSIDIARIES SERVICES KCIFS ADJUSTMENTS AS ADJUSTED
---------------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service........... $228,832 $ 34,495 $ -- $ -- $ 194,337
Sales and other.............. 40,814 9,351 3,716 -- 27,747
-------- -------- ------- ------- --------
Total revenue............. 269,646 43,846 3,716 -- 222,084
Rental expenses................ 159,235 24,014 -- -- 135,221
Cost of goods sold............. 19,388 6,814 -- -- 12,574
-------- -------- ------- ------- --------
Gross profit.............. 91,023 13,018 3,716 -- 74,289
Selling, general and
administrative expenses...... 51,813 14,143 2,017 -- 35,653
Unusual items.................. (84,868) (10,121) -- -- (74,747)
-------- -------- ------- ------- --------
Operating earnings........ 124,078 8,996 1,699 -- 113,383
Interest expense (income),
net.......................... 4,528 310 732 (4,695)(4a) (1,209)
-------- -------- ------- ------- --------
Earnings before income
taxes, minority interest
and cumulative effect of
change in accounting
principle............... 119,550 8,686 967 4,695 114,592
Income taxes................... 55,949 12,820 369 1,831(4b) 44,591
-------- -------- ------- ------- --------
Earnings (loss) before
minority interest and
cumulative effect of
change in accounting
principle............... 63,601 (4,134) 598 2,864 70,001
Minority interest.............. 40 -- -- -- 40
Cumulative effect of change in
accounting for inventory..... 742 -- -- -- 742
-------- -------- ------- ------- --------
Net earnings (loss)....... $ 64,383 $ (4,134) $ 598 $ 2,864 $ 70,783
======== ======== ======= ======= ========
Earnings per share........ $ 1.46 $ 1.60
======== ========
Shares used in earnings
per share
computations............ 44,143 44,143
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of earnings.
12
<PAGE> 15
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DIVISIONS SOLD
------------------ PRO FORMA
KINETIC CONCEPTS, INC. MEDICAL ---------------------------
AND SUBSIDIARIES SERVICES KCIFS ADJUSTMENTS AS ADJUSTED
---------------------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service............... $177,790 $ 35,313 $ -- $ -- $ 142,477
Sales and other.................. 32,285 9,296 2,780 -- 20,209
-------- ------- ------- ------- --------
Total revenue............ 210,075 44,609 2,780 -- 162,686
Rental expenses.................... 125,167 24,375 -- -- 100,792
Cost of goods sold................. 16,504 6,751 -- -- 9,753
-------- ------- ------- ------- --------
Gross profit............. 68,404 13,483 2,780 -- 52,141
Selling, general and administrative
expenses......................... 40,874 13,417 1,506 -- 25,951
Unusual items...................... (82,868) (8,121) -- -- (74,747)
-------- ------- ------- ------- --------
Operating earnings....... 110,398 8,187 1,274 -- 100,937
Interest expense (income), net..... 5,477 310 565 (4,587)(4a) 15
-------- ------- ------- ------- --------
Earnings before income
taxes, minority
interest and cumulative
effect of change in
accounting principle... 104,921 7,877 709 4,587 100,922
Income taxes....................... 49,625 12,502 286 1,789(4b) 38,626
-------- ------- ------- ------- --------
Earnings (loss) before
minority interest and
cumulative effect of
change in accounting
principle.............. 55,296 (4,625) 423 2,798 62,296
Minority interest.................. 40 -- -- -- 40
Cumulative effect of change in
accounting for inventory......... 742 -- -- -- 742
-------- ------- ------- ------- --------
Net earnings (loss)...... $ 56,078 $ (4,625) $ 423 $ 2,798 $ 63,078
======== ======= ======= ======= ========
Earnings per share....... $ 1.27 $ 1.43
======== ========
Shares used in earnings
per share
computations........... 44,006 44,006
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of earnings.
13
<PAGE> 16
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DIVISIONS SOLD
------------------ PRO FORMA
KINETIC CONCEPTS, INC. MEDICAL ----------------------------
AND SUBSIDIARIES SERVICES KCIFS ADJUSTMENTS AS ADJUSTED
---------------------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service.............. $152,138 $ -- $ -- $ -- $ 152,138
Sales and other................. 26,285 -- 1,485 -- 24,800
-------- ------- ------- ------- --------
Total revenue........... 178,423 -- 1,485 -- 176,938
Rental expenses................... 102,009 -- -- -- 102,009
Cost of goods sold................ 10,979 -- -- -- 10,979
-------- ------- ------- ------- --------
Gross profit............ 65,435 -- 1,485 -- 63,950
Selling, general and
administrative expenses......... 34,407 -- 3,830 -- 30,577
-------- ------- ------- ------- --------
Operating earnings
(loss)................ 31,028 -- (2,345) -- 33,373
Interest expense (income), net.... (3,496) -- 319 (325)(4a) (4,140)
-------- ------- ------- ------- --------
Earnings (loss) before
income
taxes................. 34,524 -- (2,664) 325 37,513
Income tax expense (benefit)...... 14,175 -- (1,046) 127(4b) 15,348
-------- ------- ------- ------- --------
Net earnings (loss)..... $ 20,349 $ -- $(1,618) $ 198 $ 22,165
======== ======= ======= ======= ========
Earnings per share...... $ 0.45 $ 0.49
======== ========
Shares used in earnings
per share
computations.......... 45,306 45,306
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of earnings.
14
<PAGE> 17
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
NOTE 1. DISPOSITION OF MEDICAL SERVICES
On September 30, 1994, the Company sold certain assets (the "Assets") of
Medical Services to Mediq/PRN Life Support Services-I, Inc. ("Mediq/PRN") under
an Asset Purchase Agreement. Upon consummation of this transaction, Mediq/PRN
acquired the Assets and assumed certain liabilities of Medical Services. The
sales price was approximately $84.1 million. Medical Services was in the
business of renting to providers a portfolio of standard-of-care medical
products such as ventilators, monitors and infusion pumps. In conjunction with
the sale, the Company and its affiliates agreed not to rent similar products
manufactured by third parties for five years.
Gross proceeds included a cash payment of approximately $65.3 million and
promissory notes in the aggregate principal amount of $18.8 million. The net
proceeds of $72.8 million, pre-tax gain of $8.1 million and after-tax net loss
of $2.5 million were calculated as follows (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 65,300
Notes receivable, net of discount and allowance................... 9,852
Fees and commissions.............................................. (2,329)
--------
Net proceeds............................................ 72,823
Equipment and inventory sold...................................... (38,959)
Goodwill.......................................................... (25,778)
Accounts receivable provision..................................... (2,479)
Capital leases assumed............................................ 2,514
--------
Pre-tax gain on disposition at September 30, 1994....... 8,121
Fourth quarter 1994 collection of accounts receivable............. 2,000
--------
Pre-tax gain on disposition at December 31, 1994........ 10,121
Tax expense....................................................... (12,601)
--------
Net loss on disposition................................. $ (2,480)
========
</TABLE>
Tax expense exceeded the pre-tax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill.
During the fourth quarter of 1994, the Company recognized a $2.0 million
pre-tax gain as a result of the collection of Medical Services' accounts
receivable which had not been included in the sale. These receivables had been
reserved at the time of the sale. Partially offsetting this gain, the Company
recorded post closing adjustments of $1.2 million relating to the operations of
Medical Services.
NOTE 2. DISPOSITION OF KCIFS
On June 15, 1995, the Company sold KCIFS to Cura Capital Corporation
("Cura") for cash under a Stock Purchase Agreement. Upon consummation of this
transaction, Cura acquired all of the outstanding capital stock of KCIFS. Total
proceeds from the sale were $7.2 million. This transaction resulted in a pre-tax
loss of $2.9 million which is reflected in historical selling, general and
administrative expenses for the nine months ended September 30, 1995. In
addition, the Company and its affiliates agreed not to provide lease financing
for medical equipment manufactured by third parties for a period of three years.
KCIFS served as the leasing agent for Medical Services, certain assets of which
were sold in September 1994.
NOTE 3. SALE OF MRD
On March 27, 1995, the Company sold the assets of MRD, a subsidiary that
refurbished standard hospital beds and furniture. The assets, operations and
sales proceeds of MRD were immaterial to the overall operations of the Company
and, therefore, the unaudited pro forma condensed consolidated statements of
earnings do not contain any adjustment for MRD. In addition, the Company and its
affiliates agreed not to refurbish certain hospital beds and related furniture
for a period of three years.
NOTE 4. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed consolidated statements of earnings give
effect to the following pro forma adjustments:
(a) To decrease interest expense as a result of the application of proceeds
from the dispositions to the repayment of indebtedness as if such
repayment had occurred on January 1, 1994, and to include interest
income which would have been earned under the notes receivable issued
in connection with the disposition of Medical Services.
(b) To adjust income tax expense used to reflect the consolidated statutory
tax rates.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The health care industry is facing various challenges including increased
pressure on health care providers to control costs, the accelerating migration
of patients from acute care facilities into the extended care (e.g. skilled
nursing facilities and rehabilitation centers) and home care settings, the
consolidation of health care providers and national and regional group
purchasing organizations and the growing demand for clinically proven and cost
effective therapies. The pressure to control health care costs intensified
during 1993 as a result of the health care reform debate and continues as
Congress attempts to slow the rate of growth of federal health care expenditures
as part of its effort to balance the federal budget. While the exact amount and
nature of the federal health care budget cuts are not final, the Company
believes that health care providers will continue to experience increased cost
control pressures. The expected reductions in future hospital payment rates will
increase the cost pressures on hospitals but the Company believes that the
manner in which hospitals are currently reimbursed will not materially change in
the foreseeable future. However, current Congressional proposals would change
the method of reimbursement in the extended and home care settings from
retrospective cost-based systems to prospective payment systems similar to the
system adopted for hospitals in 1983. In a prospective payment system,
reimbursement is based on national averages of costs for the care of a patient
with a specific diagnosis instead of on costs actually incurred and decisions
with respect to the selection of the products and services used in patient care
are based on clinical and cost effectiveness. See "Business -- Reimbursement."
Industry trends including pricing pressures, the consolidation of health
care providers and national and regional group purchasing organizations and a
shift in market demand toward lower-priced products such as mattress overlays
have had the impact of reducing the Company's average daily rental rates on its
products. These industry trends, together with the increasing migration of
patients from acute care settings to extended and home care settings, have had
the effect of reducing the Company's revenue from acute care facilities. The
Company expects these industry trends to continue. In addition, the Company's
revenue from acute care facilities was reduced as a result of its loss of market
share from 1992 through 1994. The Company is addressing this issue by increasing
its marketing efforts beyond its existing base of more than 1000 acute care
hospitals to include an additional 2000 medium to large hospitals in which the
Company has a relatively small presence. The Company further believes that the
introduction of the TriaDyne and BariKare beds will enable it to further
penetrate this market. See "Business -- Market Outlook" and "Business -- Growth
Strategy."
Beginning in 1993, the Company restructured its management and operations
to meet the needs of the changing health care environment. The Company began
assembling a new management team that has concentrated on the Company's core
lines of business, divested three underperforming businesses and implemented
various programs to reduce the Company's operating costs and to improve its
information systems. On September 30, 1994, the Company sold certain assets of
Medical Services which rented movable critical care and life support equipment.
On March 27, 1995, the Company sold the assets of MRD, a subsidiary that
refurbished standard hospital beds and furniture. On June 15, 1995, the Company
sold all of the stock of KCIFS, a medical equipment leasing company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Generally, the Company's customers prefer to rent rather than purchase
patient support surfaces due to such considerations as high initial capital
outlays and unique service requirements. As a result, rental revenues are a high
percentage of the overall revenues of the Company. More recently, sales have
increased as a portion of the Company's revenue. The Company believes this trend
will continue because certain U.S. health care providers are purchasing products
that are less expensive and easier to maintain such as medical devices, mattress
overlays and mattress replacement systems. In addition, international health
care providers tend to purchase products more often than U.S. health care
providers, and the Company's revenue from international operations has
represented an increasing portion of the Company's total revenue. Because of the
cost pressures within the health care industry, patients are leaving the acute
care setting sooner, thereby increasing the demand for the Company's products in
the extended and home care settings. This demand increases the
16
<PAGE> 19
utilization of certain of the Company's products which were originally developed
for acute care settings and provides an additional market for sales of low-cost
products such as mattress overlays and mattress replacement systems.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated and on an
historical and pro forma basis, the percentage of total revenue represented by
certain items in the Company's Consolidated Statements of Earnings. The
unaudited pro forma information is based on the historical financial statements
of the Company, giving effect to the dispositions and the assumptions and
adjustments set forth in the notes accompanying the Unaudited Pro Forma
Condensed Consolidated Statements of Earnings and the Consolidated Financial
Statements and the notes thereto. See "Unaudited Pro Forma Condensed
Consolidated Statements of Earnings" and the notes thereto and "Consolidated
Financial Statements" and the notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, --------------------------------------
----------------------- PRO FORMA PRO FORMA
1992 1993 1994 1994 1995 1994(1) 1995(1)
----- ----- ----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Rental and service................ 87.9% 86.4% 84.9% 84.6% 85.3% 87.6% 86.0%
Sales and other................... 12.1 13.6 15.1 15.4 14.7 12.4 14.0
----- ----- ----- ----- ----- ----- -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Rental expenses(2).................. (56.3) (63.1) (59.1) (59.6) (57.2) (62.0) (57.7)
Cost of goods sold.................. (6.8) (7.0) (7.2) (7.8) (6.1) (6.0) (6.1)
----- ----- ----- ----- ----- ----- -----
Gross profit........................ 36.9 29.9 33.7 32.6 36.7 32.0 36.2
Selling, general and administrative
expenses(2)....................... (17.1) (19.8) (19.2) (19.5) (19.3) (16.0) (17.3)
Unusual items....................... -- (2.5) 31.5 39.4 -- 46.0 --
----- ----- ----- ----- ----- ----- -----
Operating earnings.................. 19.8 7.6 46.0 52.5 17.4 62.0 18.9
Interest (expense) income, net...... (2.6) (2.2) (1.7) (2.6) 1.9 -- 2.3
Income taxes........................ (7.0) (2.6) (20.7) (23.6) (7.9) (23.7) (8.7)
Minority interest................... -- 0.2 -- -- -- -- --
Extraordinary item.................. -- (0.1) -- -- -- -- --
Cumulative effect of changes in
accounting principle.............. -- 0.1 0.3 0.4 -- 0.5 --
----- ----- ----- ----- ----- ----- -----
Net earnings........................ 10.2% 3.0% 23.9% 26.7% 11.4% 38.8% 12.5%
===== ===== ===== ===== ===== ===== =====
Operating earnings, excluding
unusual items..................... 19.8% 10.1% 14.5% 13.1% 17.4% 16.1% 18.9%
===== ===== ===== ===== ===== ===== =====
Net earnings, excluding unusual
items............................. 10.2% 4.5% 8.1% 7.1% 11.4% 10.7% 12.5%
===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) After giving effect to the pro forma adjustments for the sales of certain
assets of Medical Services and all of the capital stock of KCIFS as if such
sales had occurred on January 1, 1994. Does not include any adjustments for
the sale of the assets of MRD. The assets, operating results and sales
proceeds of MRD were not material compared to the overall results of the
Company. See "Unaudited Pro Forma Condensed Consolidated Statements of
Earnings" and the notes thereto and "Consolidated Financial Statements" and
the notes thereto included in this Prospectus.
(2) In 1994, the Company reclassified certain items of rental and selling,
general and administrative expenses. Certain reclassifications of amounts
related to prior years have been made to conform with the 1994 presentation.
See Note 1 of Notes to Consolidated Financial Statements.
17
<PAGE> 20
The Company's revenue is derived from five primary markets. The following
table sets forth, for the periods indicated on an historical basis, the amount
of revenue derived from each of these markets (in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1992 1993 1994 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Acute................................ $139.3 $120.7 $109.1 $ 81.1 $ 81.5
Extended............................. 26.3 29.1 34.5 25.1 27.0
Home................................. 10.2 8.9 14.1 10.2 10.4
International........................ 40.0 39.6 46.4 33.9 44.7
Medical devices...................... 1.7 7.3 13.9 9.8 11.7
Other(1)............................. 61.0 63.3 51.6 50.0 3.1
------ ------ ------ ------ ------
$278.5 $268.9 $269.6 $210.1 $178.4
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Consists of revenue of Medical Services, KCIFS and MRD and other sales.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
Unusual Items. In September 1994, the Company settled a patent infringement
suit against its principal competitor, Support Systems International, Inc.
("SSI"), a predecessor in interest to Hill-Rom, Inc. ("Hill-Rom"), for $84.8
million. In connection with the patent litigation settlement, SSI agreed to
withdraw its high-end specialty bed from the market. The comparability of the
Company's financial results for the nine months ended September 30, 1994 and
1995 is significantly impacted by this settlement and the pre-tax gain of $8.1
million from the sale of certain assets of Medical Services. Partially
offsetting these items were certain miscellaneous unusual items, primarily
dispositions of overstocked inventory and underutilized assets, a write-down of
the carrying value of the assets of MRD and an addition to the Company's reserve
account for product liability claims, which had a negative impact of $6.8
million. The following is a summary of the unusual items recorded in the third
quarter of 1994 (in thousands):
<TABLE>
<S> <C>
SSI patent litigation settlement................................... $84,750
Legal fees related to SSI patent litigation settlement............. (3,154)
Pre-tax gain on sale of Medical Services........................... 8,121
Miscellaneous...................................................... (6,849)
-------
Unusual items in operating earnings................................ $82,868
=======
</TABLE>
Each reference herein to "on a pro forma basis" shall mean that the results
for the period have been adjusted to reflect the sales of certain assets of
Medical Services in September 1994 and all of the capital stock of KCIFS in June
1995 as if such sales had occurred on January 1, 1994. Unless otherwise
indicated, no adjustments have been made in connection with the patent
litigation settlement that occurred in September 1994.
Total Revenue. Total revenue for the first nine months of 1995 was $178.4
million, a decrease of $31.7 million or 15.1% from the same period in 1994. This
decrease was primarily the result of the sale of Medical Services in September
1994. On a pro forma basis, total revenue in the first nine months of 1995 would
have increased by $14.3 million or 8.8% to $176.9 million from $162.7 million in
the first nine months of 1994 primarily as a result of growth in the Company's
international operations combined with smaller increases in each of the
Company's other primary markets. Revenue from acute care facilities was $81.5
million in the first nine months of 1995, an increase of $0.4 million or 0.5%
from the first nine months of 1994 primarily as a result of increased therapy
days in the acute care setting, due partly to the successful introduction of new
products, including the BariKare and the TriaDyne. The increase in therapy days
was partially offset by a continuing shift in product mix toward lower-cost
overlays. Revenue from extended care settings in the first nine months of 1995
was $27.0 million, an increase of $1.9 million or 7.6% from the 1994 period, due
primarily to increased patient days as patients migrated from high-cost, acute
care settings to lower-cost, extended care settings. Revenue from home care
settings in the first nine months of 1995 was
18
<PAGE> 21
$10.4 million, an increase of $0.2 million or 2.0% from the first nine months of
1994, which reflects the Company's shift to an independent dealer network at the
beginning of the year. This network provides easier access to a larger patient
population; however, revenue per therapy day received from dealers, which is net
of dealer service expenses, is less than that which the Company would receive
from direct sales. Revenue from the Company's international operations was $44.7
million in the 1995 period, up $10.8 million or 31.7% from the 1994 period.
Increased market penetration, increased product sales and favorable currency
translations contributed to this higher international revenue. Revenue from
medical device operations was $11.7 million in the 1995 period, an increase of
$1.9 million or 19.6% from the 1994 period, primarily as a result of greater
market penetration of the PlexiPulse.
Rental Expenses. Rental expenses consist largely of personnel costs,
depreciation of the Company's rental equipment and related facility costs.
Rental expenses for the nine months ended September 30, 1995 were $102.0
million, a decrease of $23.2 million or 18.5% over the same period in 1994. This
decrease was a result of the sale of Medical Services in September 1994. On a
pro forma basis, rental expenses for the first nine months of 1995 would have
been $102.0 million, an increase of $1.2 million or 1.2% over the same period in
1994. On a pro forma basis, as a percentage of revenue, rental expenses would
have been 57.7% in the first nine months of 1995 compared to 62.0% in the first
nine months of 1994. This decrease is primarily attributable to the pro forma
increase in revenue, as the majority of rental expenses are relatively fixed,
combined with a reduction in field headcount and depreciation expense.
Gross Profit. Gross profit for the nine months ended September 30, 1995 was
$65.4 million, a decrease of $3.0 million or 4.3% over the same period in 1994,
as a result of the sale of Medical Services in September 1994. On a pro forma
basis, gross profit in the first nine months of 1995 would have been $64.0
million, an increase of $11.8 million or 22.6% from the first nine months of
1994. On a pro forma basis, as a percentage of revenue, gross profit would have
increased to 36.2% in 1995 from 32.0% in 1994 as a result of the increase in
revenue, the relatively fixed nature of the Company's rental expenses and the
reduction in headcount and depreciation expense as discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first nine months of 1995 were $34.4 million, a
decrease of $6.5 million or 15.8% over the same period in 1994 largely as a
result of the sale of Medical Services in September 1994. On a pro forma basis,
selling, general and administrative expenses in the first nine months of 1995
would have been $30.6 million, an increase of $4.6 million or 17.8% from the
first nine months of 1994. On a pro forma basis, as a percentage of revenue,
selling, general, and administrative expenses would have been 17.3% in the first
nine months of 1995 compared to 16.0% in the same 1994 period. These increases
relate primarily to common overhead costs, previously allocated to Medical
Services, which have been fully absorbed by the Company, being partially offset
by the Company's cost reduction efforts.
Operating Earnings. Operating earnings for the nine months ended September
30, 1995 were $31.0 million, a decrease of $79.4 million or 71.9% from the same
period in 1994 primarily as a result of the patent litigation settlement. On a
pro forma basis and excluding the patent litigation settlement and the other
unusual items, operating earnings in the 1995 period would have been $33.4
million, an increase of $7.2 million or 27.4% from the 1994 period. On a pro
forma basis and excluding the patent litigation settlement and the other unusual
items, as a percentage of revenue, operating earnings would have increased to
18.9% for the nine months ended September 30, 1995 from 16.1% in the comparable
1994 period due substantially to the improved gross profit discussed above.
Net Interest Income. Net interest income for the nine months ended
September 30, 1995 was $3.5 million as compared to net interest expense of $5.5
million for the same period in 1994. This change was a result of the repayment
of the Company's outstanding long-term debt at the end of the third quarter of
1994. On a pro forma basis, net interest income for the nine months ended
September 30, 1995 would have been $4.1 million compared to net interest expense
of $0.02 million in the prior-year period. This difference is primarily due to
the fact that the 1995 results include interest income and a reduction in
interest expense resulting from the additional cash provided by the patent
litigation settlement. In addition, interest income for
19
<PAGE> 22
1995 included $1.5 million representing the principal received in excess of the
discounted value of the Mediq/PRN notes.
Income Taxes. The Company's effective income tax rate for the nine months
ended September 30, 1995 was 41.1% compared to 47.3% for the same period in
1994. This decrease is primarily a result of the write-off of goodwill in 1994
related to the disposition of Medical Services and the recognition in 1995 of
certain foreign tax credits.
Change in Accounting Principles. During the first three months of 1994, the
Company also recorded the cumulative effect of a change in its inventory
accounting method. This resulted in a one-time after-tax earnings increase of
$742,000, or $0.02 per share.
Net Earnings. Net earnings for the nine months ended September 30, 1995
were $20.3 million, or $0.45 per share, a decrease of $35.7 million from $56.1
million, or $1.27 per share, in the comparable 1994 period, primarily as a
result of the benefit from the patent litigation settlement in 1994 and the net
loss from the sale of KCIFS in 1995 which were offset in part by the net loss
from the sale of Medical Services in 1994 and other unusual items in 1994. On a
pro forma basis and excluding the effect of the patent litigation settlement and
other unusual items, net earnings would have increased by 27.4% to $22.2
million, or $0.49 per share, in the first nine months of 1995 from $17.4
million, or $0.40 per share, in the first nine months of 1994. On a pro forma
basis and excluding the effect of the patent litigation settlement and other
unusual items, as a percentage of revenue, net earnings would have increased to
12.5% in the 1995 period from 10.7% in the 1994 period, primarily as a result of
additional interest income and the improvement in gross profit discussed above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Unusual Items. The Company's financial results for the year ended December
31, 1994 were impacted by (i) the patent litigation settlement in September 1994
with SSI for $84.8 million and (ii) the disposition of certain assets of Medical
Services on September 30, 1994 for a pre-tax gain of $8.1 million. During the
fourth quarter of 1994, the Company recognized a $2.0 million pre-tax gain as a
result of the collection of Medical Services' accounts receivable which had not
been included in the sale. These receivables had been reserved at the time of
the sale. Partially offsetting these gains were certain other unusual items,
primarily dispositions of overstocked inventories and underutilized rental
assets, a write-down of the carrying value of the assets of MRD and an addition
to the Company's reserve account for product liability claims as a result of one
of the Company's insurers being placed in receivership. Collectively, these
items had a negative pre-tax earnings impact of $6.8 million. A portion of the
proceeds from the patent litigation settlement and the sale of Medical Services
were used to pay associated income taxes and to reduce outstanding debt.
Total Revenue. Total revenue in 1994, including revenue from Medical
Services and KCIFS, increased by less than 1% to $269.6 million from $268.9
million in 1993 due to the increased revenue from several of the Company's
markets being offset by a decrease in acute care revenue. Revenue from acute
care facilities was $109.1 million, a decrease of $11.6 million or 9.6% from
1993. This decrease was a result of the Company's receiving lower average rental
prices for its products due to industry pricing pressures and an increase in the
proportion of rentals of lower-priced products as a percentage of total product
mix. Revenue from extended care settings was $34.5 million, an increase of $5.4
million or 18.7% from 1993 due to a shift in patient therapy days to extended
care settings from acute care settings. Revenue from home care settings was
$14.1 million, an increase of $5.2 million or 59.2% from 1993 caused by the
increased migration of patients to home care settings. Revenue from
international operations increased $6.9 million or 17.4% to $46.4 million in
1994 primarily due to increased market penetration in Germany and Austria.
Revenue from medical devices increased by $6.6 million or 90.8% to $13.9 million
in 1994 primarily as a result of the introduction of the PlexiPulse into new
geographic markets within the United States.
Rental Expenses. Rental expenses for 1994 were $159.2 million, a decrease
of $10.5 million or 6.2% from 1993. As a percentage of revenue, rental expenses
were 59.1% in 1994 compared to 63.1% in 1993. This decrease was a result of the
sale of Medical Services in September 1994, lower depreciation expense and an
overall effort to control costs.
20
<PAGE> 23
Gross Profit. Gross profit increased by 13.0% to $91.0 million in 1994 from
$80.5 million in 1993. As a percentage of revenue, gross profit increased to
33.7% in 1994 from 29.9% in 1993, primarily due to the reduced depreciation
expense and cost control efforts discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.5 million, or 2.8%, to $51.8 million in
1994 from $53.3 million in 1993. As a percentage of revenue, selling, general
and administrative expenses were 19.2% in 1994 compared to 19.8% in 1993. These
decreases primarily relate to lower expenses in the corporate office and field
organizations (primarily from headcount reductions) caused by the sale of
Medical Services in September 1994 and a reduction in bad debt expense.
Operating Earnings. Operating earnings increased $103.6 million to $124.1
million in 1994 from $20.5 million in 1993. This increase was caused primarily
by the patent litigation settlement. Excluding the patent litigation settlement
and the other unusual items, operating earnings would have increased by $12.0
million or 43.9% to $39.2 million in 1994 from $27.2 million in 1993. Excluding
the patent litigation settlement and other unusual items, as a percentage of
revenue, operating earnings would have increased to 14.5% in 1994 from 10.1% in
1993, primarily as a result of the decreased rental expense discussed above and,
to a lesser extent, lower selling, general and administrative expenses.
Net Interest Expense. Net interest expense in 1994 was $4.5 million
compared to $5.9 million in 1993 as a result of the reduction of the Company's
long-term debt at the end of the third quarter of 1994 as well as the interest
earned on the Mediq/PRN notes during the fourth quarter of 1994.
Income Taxes. The Company's effective income tax rate in 1994 was 46.8%
compared to 49.1% in 1993. The decrease is primarily attributable to the fact
that the nondeductibility of goodwill written off in connection with the sale of
Medical Services was offset by the impact of the patent litigation settlement.
The patent litigation settlement contributed approximately 68% of the Company's
pre-tax earnings and was taxed at the full statutory rate.
Other. During 1994, the cumulative losses allocated to the minority
interest holder of MRD exceeded the balance of such holder's investment. As a
result, the Company recognized $3.8 million of losses. These losses and the
diminished opportunities within the refurbishment business contributed towards
the Company's decision to liquidate the assets and discontinue the operations of
MRD. Concurrently, the Company wrote off unamortized goodwill of $1.5 million
and wrote down inventories to net realizable value.
Change in Accounting Principles. During the first quarter of 1994, the
Company recorded the cumulative effect of a change in its inventory accounting
method which resulted in a one-time after-tax earnings increase of $742,000, or
$0.02 per share.
Net Earnings. Net earnings in 1994 were $64.4 million, or $1.46 per share,
an increase of $56.3 million from $8.1 million, or $0.18 per share, in 1993,
primarily as a result of the patent litigation settlement. Excluding the effect
of the patent litigation settlement and the other unusual items, net earnings
would have increased by 80.5% to $22.0 million, or $0.50 per share, in 1994 from
$12.2 million, or $0.27 per share, in 1993. Excluding the effect of the patent
litigation settlement and the other unusual items, as a percentage of revenue,
net earnings would have increased to 8.1% in 1994 from 4.5% in 1993, primarily
as a result of reductions in depreciation expense, selling, general and
administrative expenses and interest expense discussed above.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
Total Revenue. Total revenue in 1993 decreased by 3.5% to $268.9 million
from $278.5 million in 1992 primarily as a result of a decline in revenue from
acute care facilities. Revenue from acute care facilities was $120.7 million, a
decrease of $18.6 million or 13.3% from 1992. This decrease was caused by the
uncertainty created by the health care reform debate, which led to increased
cost control pressures. In addition, the shift in the Company's product mix
toward lower-priced products such as mattress overlays, the increased migration
of patients from acute care settings to extended and home care settings and the
Company's loss of market share in the acute care setting contributed to this
decrease. Revenue from extended care settings was $29.1 million, an increase of
$2.8 million or 10.8% from 1992 as a result of the patient migration discussed
above. Revenue from home care settings was $8.9 million, a decrease of $1.3
million or 13.2% from 1992, due
21
<PAGE> 24
to a significant reduction in reimbursement rates for the HomeKair bed which was
partially offset by increased rentals of this product. Revenue from
international operations in 1993 was $39.6 million, a decrease of $0.4 million
or 1.1% from 1992. Revenue from medical devices increased $5.6 million from $1.7
million in 1992 to $7.3 million in 1993 due to increased market acceptance of
the PlexiPulse. See "Business -- Products -- Medical Devices."
Rental Expenses. Rental expenses for 1993 were $169.7 million, an increase
of $13.0 million or 8.3% from $156.7 million in 1992. As a percentage of
revenue, rental expense was 63.1% in 1993 compared to 56.3% in 1992. The
increase was primarily a result of additional costs incurred related to the
formation of operating divisions by the Company which resulted in additional
sales and service management functions.
Gross Profit. Gross profit decreased by $22.3 million or 21.7% to $80.5
million in 1993 from $102.8 million in 1992. As a percentage of revenue, gross
profit decreased to 29.9% in 1993 from 36.9% in 1992, primarily due to the
decline in revenue and the additional costs incurred resulting from the
formation of operating divisions by the Company discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.6 million or 11.7% to $53.3 million in 1993
from $47.7 million in 1992. As a percentage of revenue, selling, general and
administration expenses were 19.8% in 1993 compared to 17.1% in 1992. These
increases were primarily attributable to the write-off of accounts receivable
and start-up expenses related to the Company's two newest lines of business,
NuTech and MRD.
Unusual Items. During the fourth quarter of 1993, the Company recorded
unusual items of $6.7 million which reduced net earnings by approximately $4.1
million (net of tax benefit of $2.6 million), or $0.09 per share. The Company
recognized charges included in unusual items totaling $4.8 million, primarily
related to dispositions of overstated inventories and underutilized rental
assets. Unusual items also included a provision for anticipated losses of $1.0
million related to product liability claims resulting from one of the Company's
insurance carriers being placed into receivership, and a provision of $0.9
million relating to severance costs and costs anticipated for the relocation of
certain operations.
Operating Earnings. Operating earnings decreased by 62.7% to $20.5 million
in 1993 from $55.1 million in 1992. Excluding the effect of the unusual items
referred to above, operating earnings would have decreased by 50.6% to $27.2
million in 1993 from $55.1 million in 1992. Excluding the effect of the unusual
items, as a percentage of revenue, operating earnings would have decreased to
10.1% in 1993 from 19.8% in 1992, primarily as a result of the decline in
revenue, the costs incurred related to the formation of operating divisions by
the Company and the increase in rental and selling, general and administrative
expenses discussed above.
Net Interest Expense. Net interest expense in 1993 was $5.9 million
compared to $7.2 million in 1992 primarily due to a reversal of interest accrued
in prior years related to a contingent liability that was never realized. The
effect of this reversal was partially offset by an increase in the Company's
borrowings under its credit facilities and accrued interest related to prior
year tax liabilities.
Income Taxes. The Company's effective tax rate in 1993 was 49.1%, compared
to 40.5% in 1992. The increase in the effective tax rate was attributable to (i)
an increase in the marginal statutory federal income tax rate from 34% to 35%,
(ii) an increase in international taxable earnings (which are subject to a tax
rate higher than the marginal U.S. statutory rate) as a percentage of taxable
income, (iii) an increase in non-deductible expenses (primarily goodwill
amortization) as a percentage of taxable income and (iv) losses of MRD which
were non-deductible for federal and state tax purposes. The increases were
partially offset by tax benefits related to the recapitalization of the
Company's Canadian and French subsidiaries.
Other. In the fourth quarter of 1993, the Company refinanced its existing
debt facility which resulted in an extraordinary charge of $0.4 million, net of
a $0.3 million tax benefit, or $0.01 per share.
Change in Accounting Principles. During 1993, the Company also recorded the
cumulative effect of a change in accounting principles related to the adoption
of Statement of Financial Accounting Standards No. 109 (FAS 109) "Accounting for
Income Taxes" which resulted in a one-time earnings increase of $450,000 or
$0.01 per share.
22
<PAGE> 25
Net Earnings. Net earnings decreased by 71.7% to $8.1 million, or $0.18 per
share, in 1993 from $28.5 million, or $0.63 per share, in 1992, as a result of
the decline in revenue and increase in rental and selling, general and
administrative expenses discussed above. Excluding the unusual items, net
earnings during 1993 would have been $12.2 million, down 57.2% or $16.3 million,
compared with 1992. This decrease is primarily due to the decline in revenue and
the increase in rental expenses and selling, general and administrative expenses
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had current assets of $130.9 million and
current liabilities of $35.6 million resulting in a working capital surplus of
$95.2 million, compared to a surplus of $90.7 million at December 31, 1994. The
increase in this surplus was due primarily to earnings during the period.
Through the nine months ended September 30, 1995, the Company made capital
expenditures of $25.2 million and expects to make additional capital
expenditures of approximately $7.0 million in the remainder of 1995. The 1995
capital expenditures primarily relate to the Company's new TriaDyne and BariKare
products and the design and development of new management information systems.
See "Business -- Products" and "Business -- Product Support -- The Clinical
Advantage." Other than committed capital expenditures for new rental products
for the last fiscal quarter of 1995 of $1.6 million, the Company has no material
long-term capital commitments. In addition, the Company intends to consider
strategic acquisition opportunities that may arise from time to time.
The Company's Credit Agreement with a syndicate of banks led by Bank of
America permits unsecured borrowings of up to $50.0 million. At September 30,
1995, the entire borrowing base of $50.0 million was available. The interest
rate payable on borrowings under the Credit Agreement is, at the election of the
Company, Bank of America's reference rate or the London interbank offered rate
quoted to Bank of America for one-, two-, three- or six-month Eurodollar
deposits adjusted for appropriate reserves plus 40 basis points. The Credit
Agreement requires that the Company maintain specified ratios and meet certain
financial targets and also contains certain customary covenants. At December 31,
1994 and September 30, 1995, the Company was in compliance with all covenants.
During the year ended December 31, 1992, the Company generated $58.0
million from operating activities primarily resulting from increased net
earnings being adjusted for non-cash expenses such as depreciation and
amortization. Investing activities used $47.2 million relating substantially to
capital additions to property, plant and equipment, primarily its rental fleet.
Financing activities during 1992 used $15.6 million primarily for debt
repayments and dividend payments to shareholders. During the year ended December
31, 1993, the Company generated $56.5 million from operating activities, a
decrease of $1.5 million from the prior year. The decrease was attributable to
lower net earnings, partially offset by increased depreciation and amortization
expenses. Investment activities used $43.6 million, including capital
expenditures of $33.4 million. Financing activities during 1993 used $8.8
million in cash primarily for dividend payments and stock repurchases. During
the year ended December 31, 1994, the Company generated $96.5 million from
operating activities primarily resulting from the settlement of the patent
litigation with SSI. Investment activities generated $47.8 million due to the
sale of the assets of Medical Services which was partially offset by capital
expenditures of $13.8 million primarily for additions to the rental fleet.
Financing activities during 1994 used $112.6 million as the Company paid down
substantially all of its outstanding debt. Operating activities during the nine
months ended September 30, 1995 generated $44.2 million compared to $116.6
million during the same period in 1994. The primary reason for this difference
was the sale of Medical Services and the patent litigation settlement.
Investment activities for the nine months ended September 30, 1995 used $33.7
million including capital expenditures of $25.2 million and a $10 million loan
to James R. Leininger, M.D., Chairman of the Company's Board of Directors. See
"Use of Proceeds". Financing activities for the nine-month period ended
September 30, 1995 used $4.4 million consisting primarily of dividends paid to
shareholders.
Based upon the current level of operations, the Company believes that cash
flow from operations and cash reserves will be adequate to meet its anticipated
requirements for working capital and capital expenditures through 1996.
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<PAGE> 26
INCOME TAXES
The Company recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. The provision for
deferred income taxes is based on the asset and liability method and represents
the change in the deferred income tax accounts during the year. Under the asset
and liability method of FAS 109, deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
During 1994, the net impact of these timing issues resulted in a net
deferred tax asset versus the net deferred tax liability recognized in prior
years. Primary components of these future tax benefits include reserves for
uncollectible accounts receivable and reserves for obsolete inventory. At
September 30, 1995, the Company had a net deferred tax liability of $0.4 million
related primarily to accelerated depreciation on fixed assets and an asset
subject to a leveraged lease.
NEW ACCOUNTING PRONOUNCEMENT -- ACCOUNTING FOR ASSET IMPAIRMENT
During March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt Statement 121 in the fiscal year beginning
January 1, 1996. Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company has not
completed all of the analyses required to estimate the impact of the new
statement; however, the adoption of Statement 121 is not expected to have a
material adverse impact on the Company's financial position or the results of
its operations at the time of adoption.
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<PAGE> 27
SELECTED SUMMARY QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly historical
financial data for the periods indicated. In the opinion of management, the
following unaudited quarterly financial data include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for interim periods are
not necessarily indicative of results to be expected for the full year or for
any future period. The following unaudited quarterly financial data should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and other financial information appearing elsewhere in this Prospectus or
incorporated herein by reference (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(1)(2) (1)(3) (1)(4) (5)(6)(7)
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Total revenue............................... $72,084 $67,751 $70,239 $59,572
Operating earnings.......................... $ 9,161 $ 8,035 $93,202 $13,680
Net earnings................................ $ 4,264 $ 3,173 $48,641 $ 8,305
Earnings per common and common equivalent
share.................................... $0.10 $0.07 $1.10 $0.19
Shares used in earnings per share
calculation.............................. 43,986 43,980 44,053 44,724
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1995
---------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
(5)(8) (5)(9) (10)
------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $57,027 $59,790 $61,606
Operating earnings.......................... $ 9,577 $ 8,717 $12,734
Net earnings................................ $ 6,098 $ 5,716 $ 8,535
Earnings per common and common equivalent
shares................................... $0.14 $0.13 $0.19
Shares used in earnings per share
calculation.............................. 45,115 45,242 45,570
</TABLE>
- ---------------
(1) Includes the results of operations of Medical Services and KCIFS, which
were divested in September 1994 and June 1995, respectively.
(2) After giving effect to the pro forma adjustments for the sales of certain
assets of Medical Services and of all of the capital stock of KCIFS as if
the sales occurred on January 1, 1994, the Company's revenue, operating
earnings, net earnings and earnings per share for the three-month period
would have been $55.1 million, $7.5 million, $4.4 million and $0.10,
respectively.
(3) After giving effect to the pro forma adjustments for the sales of certain
assets of Medical Services and of all of the capital stock of KCIFS as if
the sales occurred on January 1, 1994, the Company's revenue, operating
earnings, net earnings and earnings per share for the three-month period
would have been $52.2 million, $7.8 million, $4.1 million and $0.09,
respectively.
(4) Includes the patent litigation settlement in September 1994 with SSI for
$84.8 million and the disposition of certain assets of Medical Services for
a pre-tax gain of $8.1 million. Partially offsetting these gains were
certain unusual items of $6.8 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations." After giving effect to the pro forma adjustments for the sales
of certain assets of Medical Services and of all of the capital stock of
KCIFS as if the sales occurred on January 1, 1994 and excluding the effect
of the patent litigation settlement, the gain on the disposition of Medical
Services and the other unusual items, the Company's revenue, operating
earnings, net earnings and earnings per share for the three-month period
would have been $55.3 million, $10.9 million, $8.9 million and $0.20,
respectively.
(5) Includes the results from operations of KCIFS, which was divested in June
1995.
(6) Includes an unusual benefit of $2.0 million from the collection of certain
of Medical Services' accounts receivable which had been reserved at the
time of the sale of certain assets of Medical Services, partially offset by
a $1.2 million charge relating to post closing adjustments for the sale.
(7) After giving effect to the pro forma adjustments for the sale of KCIFS
assuming the sale occurred on January 1, 1994, and excluding the impact of
the $2.0 million unusual benefit from the collection of accounts receivable
and a $1.2 million reduction in Medical Services' operating earnings, the
Company's revenue, operating earnings, net earnings and earnings per share
for the three-month period would have been $59.4 million, $12.5 million,
$7.7 million and $0.17, respectively.
(8) After giving effect to the pro forma adjustments for the sale of KCIFS as
if the sale occurred on January 1, 1994, the Company's revenue, operating
earnings, net earnings and earnings per share for the three-month period
would have been $56.2 million, $9.3 million, $6.1 million and $0.14,
respectively.
(9) After giving effect to the pro forma adjustments for the sale of KCIFS as
if the sale occurred on January 1, 1994, the Company's revenue, operating
earnings, net earnings and earnings per share for the three-month period
would have been $59.2 million, $11.4 million, $7.5 million and $0.17,
respectively.
(10) Excluding $1.5 million of additional interest income which represented
principal received in excess of the discounted value of the Mediq/PRN
notes, the Company's net earnings and earnings per share for the
three-month period would have been $7.7 million and $0.17, respectively.
25
<PAGE> 28
BUSINESS
Kinetic Concepts designs, manufactures, markets and distributes therapeutic
products, primarily specialty hospital beds, mattress overlays and mattress
replacement systems, that treat and prevent the complications of immobility. By
preventing these complications or accelerating the healing process, the
Company's products and services can significantly reduce the cost of patient
care while improving clinical outcomes. Because many of its products are used
primarily by the elderly (the fastest growing segment of the U.S. population),
the Company believes that the use of its products and services should grow.
From an initial base of specialty hospital beds designed for and used
almost exclusively in acute care hospitals, the Company has broadened its
existing product line and expanded its distribution network to serve the
extended and home care settings. More recently, Kinetic Concepts has applied its
therapeutic expertise to develop innovative medical devices to treat wounds and
prevent deep vein thrombosis ("DVT"). The Company has also developed a product
line to aid in the care of obese patients.
Founded by James R. Leininger, M.D., an emergency room physician, to
provide better care for his patients, the Company was incorporated in Texas in
1976. The Company's executive offices are located at 8023 Vantage Drive, San
Antonio, Texas 78230, and its telephone number is (210) 524-9000.
BACKGROUND
Movement is essential to normal human physiology. Persons may become
immobilized as a result of surgery, injury or trauma, coronary bypass,
congestive heart failure, respiratory failure, stroke or chronic neurological
disorder. In addition, certain conditions such as coma, severe burns, obesity or
acute illnesses such as cancer and AIDS can cause patients to become unable to
maintain certain physiologic functions which are dependent on mobility.
Prolonged patient immobility can result in a variety of complications, including
(i) skin breakdown (decubitus ulcers or pressure sores), (ii) circulatory
complications such as DVT and edema and (iii) respiratory problems such as
pneumonia.
Kinetic Concepts believes that it has the most complete line of patient
support surfaces in the industry -- its "Continuum of Care." The Company
continues to search for new therapies and technologies to improve patient
outcomes and to reduce the cost of patient care. Since January 1994, the Company
has introduced a number of new products including: the TriaDyne, a multiple
therapy bed; the BariKare, a specialty bed for obese patients; the PlexiPulse
All-in-1 System, a non-invasive vascular assist device; and the Vacuum Assisted
Closure device ("The V.A.C."), a medical device that promotes wound healing. In
addition to internal development programs, the Company evaluates opportunities
to acquire or license patented technologies.
Pressure sores are a common and costly complication of immobility. A
patient on a standard hospital bed has several pressure points on the body that,
without movement, could become pressure sores within hours after the patient
becomes immobile. Once a serious pressure sore develops, treatment can involve
surgery and extensive hospitalization.
Pressure sores occur in approximately 15% of all patients across all care
settings. Industry studies indicate that approximately 525,000 patients suffer
from pressure sores at any given time and that approximately 90% of the patients
with pressure sores are over the age of 65. Moreover, pressure sores and
resulting infections result in about 60,000 deaths per year. The cost of
treating an early stage pressure sore is between $10,000 and $25,000 and can
exceed $75,000 for a severe pressure sore.
The Company's products are effective at treating and preventing pressure
sores. For example, Company-sponsored clinical studies indicate that the KinAir
bed provides more than a threefold improvement in the median rate of healing
pressure sores when compared with standard foam mattresses. A companion cost
effectiveness analysis indicated that the Company's products were more cost
effective in treating these wounds as compared to traditional wound treatment.
The Company's KinAir bed was also found to be clinically efficient and cost
effective in the prevention of pressure ulcers among intensive care unit ("ICU")
patients at risk for pressure ulcer development as compared to those on standard
ICU beds.
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<PAGE> 29
Pulmonary complications are a common cause of death following an
immobilizing injury or illness. Many pulmonary complications arise simply
because the patient cannot turn sufficiently to a lateral position to permit
postural drainage of the lungs and mobilization of the secretions within the
bronchial system. The traditional method for preventing and treating these
complications requires members of the hospital nursing staff to manually turn a
patient every two hours. This treatment regimen has had only limited success in
preventing the development of these complications, is difficult to accomplish,
time consuming, costly to administer and can result in injury to the patient and
nursing staff.
The average incidence of hospital acquired pneumonia in the ICU is
approximately 20%. Development of pneumonia increases both ICU and hospital
length of stay by 25% to 45% and increases the requirement for intubation and
mechanical ventilation by about 40%. These additional complications could add
$12,000 to $15,000 to hospitalization costs. Several Company sponsored clinical
studies of ICU patients showed a 50% reduction in the rate of hospital acquired
pneumonia, a 35% reduction in the use of mechanical ventilation and a 24%
reduction in ICU length of stay in patients treated with the Company's Kinetic
Therapy products. These improved outcomes save money for both the patient and
hospital. The Company's cost effectiveness analyses suggest an average cost
savings of approximately $18,000 per patient when Kinetic Therapy is used
appropriately.
Wounds such as advanced pressure sores, venous stasis ulcers, diabetic
ulcers, surgical wounds and burns are addressed by products manufactured by the
Company. See "Business -- Products". For example, the PlexiPulse treats the
underlying causes of, and helps to heal, diabetic ulcers. The V.A.C., introduced
earlier this year, has been found to heal many types of chronic wounds. It is
estimated that there could be as many as 5.5 million patients per year who
suffer from these wounds in the U.S.
MARKET OUTLOOK
The Company believes that it is well positioned to take advantage of the
following factors affecting the market for health care products and services:
Increased pressure on health care providers to control costs and improve
patient outcomes. The pressure to control health care costs intensified during
1993 as a result of the health care reform debate and continues as Congress
attempts to slow the rate of growth of health care costs as part of an effort to
balance the federal budget. While the exact amount and nature of the health care
budget cuts are not final, the Company believes that health care providers will
continue to experience increased cost control pressures.
Accelerating migration of patients from acute care facilities into extended
and home care settings. Prompted by cost reduction pressures from government
reimbursement programs, private insurers and managed care organizations, health
care is now readily available in a wide variety of settings with a broad variety
of cost structures. The role of traditional hospitals has been somewhat reduced
to specific acute care functions such as emergency and specialty units. Most
rehabilitation now occurs in extended care settings which currently account for
approximately 9% of all U.S. health care expenditures. U.S. expenditures on this
market segment are currently in excess of $85 billion and have grown at an
average rate of approximately 10% per year since 1990.
The home has also gained tremendous importance in health care. Costs
associated with treating a patient in the home are typically 40% to 70% less
than if the patient were treated in a hospital or nursing home. Total U.S.
expenditures on home health care are in excess of $20 billion annually and have
grown at an average rate of approximately 19% per year since 1990. The
accelerating migration of patients from acute care facilities into extended and
home care settings has created demand for products which conform to the physical
constraints of these settings and match the relative acuity levels and cost
structures.
Consolidation of health care providers and national and regional group
purchasing organizations. Consolidation of health care providers and national
and regional group purchasing organizations within the health care industry has
greatly increased the number of patients whose care is covered by a national
organization which, in turn, has resulted in greater purchasing leverage for
national health care provider organizations. In order to minimize costs, these
organizations actively seek to place patients in the most cost
27
<PAGE> 30
effective care setting. Serving a national account generally requires that a
vendor provide goods and services suitable for all care settings across a broad
regional or national area.
Growing demand for clinically proven and cost effective therapies. Cost
containment efforts have spread across all aspects of the health care industry.
Both private and government reimbursement programs are moving toward systems
which feature prospective payments. Under this system, health care providers
receive a payment determined by historical cost to cover all expenses associated
with a specific illness. Expenses that exceed the amount reimbursed must be
borne by the provider. The risk of bearing these expenses has prompted providers
to demand documentation that a product or procedure will deliver the desired
clinical outcome at a cost savings over traditional therapies.
Patient demographics. U.S. Census Bureau statistics indicate that the
65-and-over age group is the fastest growing population segment and is expected
to exceed 40 million by the year 2010. Management of wounds and circulatory
problems is crucial for elderly patients. These patients frequently suffer from
deteriorating physical conditions and their wound problems are often exacerbated
by incontinence and poor nutrition.
Obesity is increasingly being recognized as a serious medical complication.
In 1994, approximately 650,000 patients in U.S. hospitals had a principal or
secondary diagnosis of obesity. Obese patients tend to have limited mobility and
thus are at risk for circulatory problems and skin breakdown. Treating obese
patients is also a significant staffing issue for many health care facilities
and a cause of worker's compensation claims among nurses.
Growth in international markets. Health care systems in established
economies are increasingly seeking methods to provide improved care at a reduced
cost and are thereby becoming aware of the benefits of therapeutic patient
support surfaces. The delivery of improved levels of health care is also growing
in certain emerging economies.
Emergence of disease state niche markets. The industry trend toward
consolidation has yielded additional leverage to national health care provider
networks and these networks are beginning to request packages of products and
services that offer total solutions to specific diseases such as diabetes or
cancer. The process of bundling disease state packages may create niche markets
for providers of specialty products and services. Those providers with the
appropriate logistical capabilities may have the opportunity to serve these
growing niche markets on a national scale.
GROWTH STRATEGY
The Company intends to increase its market share both domestically and
internationally. The Company believes that it is well positioned to accomplish
its growth strategy because of its Continuum of Care product line, its Clinical
Advantage, its extensive distribution network and its strong financial position.
The Company's goal of continued growth and profitability within an evolving
marketplace is based on implementing the following strategies:
- Addressing industry cost control pressures
- Further penetrating the acute care market
- Increasing presence in extended and home care settings
- Expanding international markets
- Capitalizing on industry leadership in clinical research
- Utilizing information programs
- Continuing product innovation
Addressing industry cost control pressures. The Company believes it can
best serve cost conscious health care providers by offering cost effective
therapies. Kinetic Concepts offers a broad line of specialty hospital beds,
mattress overlays, mattress replacement systems and medical devices that help
reduce the overall cost of patient care by allowing health care providers to
match the needs of particular patients with appropriate therapies, whether in a
hospital, an extended care facility or at home. The Company also offers health
care providers a variety of rental, lease and purchase options on most of its
products. Moreover, the Company's
28
<PAGE> 31
national distribution network enables Kinetic Concepts to offer a single source
solution to national and regional purchasing entities.
Further penetrating the acute care market. The Company serves over 1000
medium to large hospitals and is presently focusing its marketing efforts on an
additional 2000 similarly sized hospitals in which the Company has had a
relatively small presence. The Company believes that the recent introduction of
four new technologically advanced products -- the TriaDyne, the BariKare, the
PlexiPulse All-in-1 System and The V.A.C. -- will enable Kinetic Concepts to
further penetrate the acute care market.
Increasing presence in extended and home care settings. One of the effects
of health care reform is a high likelihood that an individual patient will be
treated in several different care settings over the course of a serious illness.
Kinetic Concepts is able to provide therapies to patients across multiple care
settings through its national distribution network and broad product line which
are designed to provide a Continuum of Care. The Company's product line ranges
from specialty beds designed for high acuity settings to overlays designed for
lower acuity settings. The Company's sizable clinical staff also enables it to
make on-site recommendations on appropriate patient surfaces during the
transition between care settings. The Company has recently developed a software
tracking system that enables it to monitor patients' treatments and outcomes
across multiple care settings. Because of the cost pressures within the health
care industry, patients are leaving the acute care setting sooner, thereby
increasing the demand for the Company's products in the extended and home care
settings. This demand increases the utilization of the Company's existing rental
fleet originally developed for the acute care settings and helps increase sales
of low-cost products such as mattress overlays and mattress replacement systems.
Expanding international markets. Health care systems in established
economies are increasingly seeking methods to provide improved care at a reduced
cost and are becoming aware of the benefits of therapeutic patient support
surfaces. The delivery of improved levels of health care is also growing in
certain emerging economies. The Company has expanded to serve the growing
international market by establishing direct operations in ten foreign countries
and by utilizing independent dealers in other selected markets.
Capitalizing on industry leadership in clinical research. Published
clinical studies supporting the efficacy of therapies are crucial in today's
health care market. Kinetic Concepts believes that it maintains the most
extensive collection of published clinical studies in its industry which serves
as the foundation of its marketing program -- The Clinical Advantage. These
studies evaluate the effectiveness of different products in providing a therapy
or delivering an outcome. The studies are sponsored by the Company and are
conducted by independent medical institutions such as teaching hospitals and
universities. These studies support the cost effectiveness of the Company's
products and provide the necessary clinical outcome data demanded by health care
providers. See "Business -- Product Support -- The Clinical Advantage."
Utilizing information programs. The health care industry requires advanced
management information programs to capture cost of service and patient outcome
data. Kinetic Concepts has made substantial investments in its proprietary
information system and several management information programs that collect and
analyze patient data and enable the Company to deliver its products and services
more cost effectively. Two of these proprietary software management programs,
Genesis and Odyssey, enable the Company and its customers to track statistical
patient data, refine treatment protocols and quantify the clinical outcomes of
its therapies. The Company believes that Genesis and Odyssey, combined with the
Company's extensive clinical presence, provide the Company with a significant
advantage over other patient surface suppliers in gathering this essential
information. See "Business -- Product Support -- The Clinical Advantage."
Continuing product innovation. The Company continues to search for new
therapies and technologies to improve patient outcomes and to reduce the cost of
patient care. Since January 1994, Kinetic Concepts has introduced two specialty
beds, the TriaDyne and the BariKare; two medical devices, the PlexiPulse
All-in-1 System and The V.A.C., a product developed from technology licensed to
the Company; and several mattress overlays and mattress replacement systems.
Each of the products reduces the time that the health care staff must devote to
patient treatment. In addition, each of the products was designed in
consultation with nurses and therefore incorporates features and benefits which
enhance the ease of use of the products. In addition to its internal development
programs, the Company evaluates opportunities to acquire or license patented
29
<PAGE> 32
technologies. In addition, the Company intends to consider strategic acquisition
opportunities that may arise from time to time.
PRODUCTS
The Company's "Continuum of Care" provides innovative products and
therapies across multiple care settings. The Company's products include Pressure
Relief/Pressure Reduction products, Kinetic Therapy products, Bariatric Care
products and medical devices.
Pressure Relief/Pressure Reduction. The Company's Pressure Relief products
include a variety of framed beds and overlays such as the KinAir III,
TheraPulse, FluidAir Plus, HomeKair, HomeKair DMS, DynaPulse, FirstStep Plus,
FirstStep Select and AirWorks Plus. The KinAir III has been shown to provide
effective skin care therapy in the treatment of pressure sores, burns and post
operative skin grafts and flaps, and to help prevent the formation of pressure
sores and certain other complications of immobility. The TheraPulse provides
continuous pulsating action which gently massages the skin to help promote
capillary and lymphatic circulation in patients suffering from severe pressure
sores, burns, skin grafts or flaps, swelling or circulation problems. The
FluidAir Plus is an air-fluidized bead bed with a built-in patient weighing
system which supports the patient on a low-pressure surface of air-fluidized
silicon beads providing pressure relief for skin grafts or flaps, burns and
pressure sores. The HomeKair bed and HomeKair DMS overlay are low-cost pressure
relief products designed to be easily transportable directly to a patient's
home. The DynaPulse is a pulsating mattress replacement system that helps
prevent pressure ulcers in patients at high risk for skin breakdown and can also
be used to treat existing pressure ulcers. The FirstStep is an overlay designed
to provide pressure relief and help prevent pressure sores in patients not
normally treated on specialty beds. The First Step Select, an extension of the
Company's low-end product line, offers an expanded selection of overlays with
upgraded design features. AirWorks Plus is a low-cost overlay which provides
pulsating air columns which assist in redistributing pressure for better skin
care.
Kinetic Therapy. The U.S. Center for Disease Control defines Kinetic
Therapy as lateral rotation of at least 40 degrees on each side. The Company
believes Kinetic Therapy is essential to the prevention or effective treatment
of pneumonia in immobile patients. The Company's Kinetic Therapy products
include the TriaDyne, RotoRest, RotoRest Delta, BioDyne II and Q2 Plus. The
TriaDyne, introduced in mid-1995, provides patients in acute care settings with
three distinct therapies on an air suspension surface. The TriaDyne applies
Kinetic Therapy by rotating the patient up to 40 degrees to each side and
provides an industry-first feature of simultaneously turning the patient's torso
and lower body in opposite directions while keeping the patient positioned in
the middle of the bed. The TriaDyne can also provide percussion therapy to the
patient's chest to loosen mucous buildup in the lungs and pulsating therapy to
promote capillary circulation. The TriaDyne is built on Stryker Corporation's
critical care frame, which is narrow and more suited to an ICU environment. The
TriaDyne offers several other novel features not available on other products.
The RotoRest Delta is a specialty bed which can rotate a patient up to a 62
degree angle on each side for the treatment of pulmonary complications and
prevention of pneumonia. The RotoRest has been shown to improve the care of
patients suffering from multiple trauma, spinal cord injury, severe pulmonary
complications, respiratory failure and DVT. The BioDyne II combines many of the
therapeutic benefits of the KinAir III and the RotoRest and is used by patients
suffering from pneumonia, coma, stroke and chronic neurological disorders.
Bariatric Care. The Company markets a line of therapeutic support surfaces
and aids for patients suffering from obesity, a market that had previously been
underserved. These products not only provide the proper support needed by obese
patients, but also enable nurses to care for these patients in a dignified
manner. Moreover, treating obese patients is also a significant staffing issue
for many health care facilities because moving and handling these patients
increases the risk of worker's compensation claims by nurses. The use of the
Company's Bariatric products enables hospital staff to treat and move obese
patients in a safer manner while utilizing fewer hospital personnel. The most
advanced product in this line is the BariKare, which can serve as a chair, bed
or X-ray table. This product is used generally for patients weighing from 300 to
500 pounds but can be used for patients who weigh up to 850 pounds. The Company
believes that the BariKare is the most advanced product of its type available
today.
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Medical Devices. The Company also rents and sells various products
manufactured by the Company other than patient support surfaces. These products
include the PlexiPulse, PlexiPulse All-in-1 System and The V.A.C.
The PlexiPulse and PlexiPulse All-in-1 System are non-invasive vascular
assist devices that aid venous return by pumping blood from the lower
extremities to help prevent DVT and reestablish microcirculation. The pumping
action is created by compressing specific parts of the foot or calf with
specially designed inflatable cuffs that are connected to a separate pump unit.
The cuffs are wrapped around the foot and/or calf and are inflated in timed
increments by the pump. The inflation compresses a group of veins in the lower
limbs and boosts the velocity of blood flowing back toward the heart. This
increased velocity has been proven to significantly decrease formation of DVT in
non-ambulatory post-surgical and post-trauma patients. The PlexiPulse is
effective in preventing DVT, reducing edema and improving lower limb blood
circulation.
The Company also markets The V.A.C., a non-invasive, active wound closure
therapy that utilizes negative pressure. The V.A.C. promotes healing in wounds,
pressure ulcers and grafts that frequently do not respond to conventional
treatment. Treatment protocols with The V.A.C. call for a proprietary foam
material to be fitted and placed in or on top of a wound and covered with an
airtight, occlusive dressing. The foam is attached to a separate vacuum pump.
When activated, the vacuum pump creates a negative pressure in the wound that
draws the tissue together. This vacuum action stimulates blood flow on the
surface of the wound, reduces edema and decreases bacterial colonization, all of
which stimulate healing. The dressing material is replaced every 48 hours and
fitted to accommodate the decreasing size of the wound over time. This is a
significant improvement over the traditional method for treating wounds which
requires the nursing staff to clean and dress the wound every 8 to 12 hours.
The Company manufactures and sells The V.A.C. pursuant to a License
Agreement (the "License Agreement") with Wake Forest University, which owns the
wound treatment technology used by The V.A.C. Under the terms of the License
Agreement, the Company has an exclusive worldwide license to use the wound
treatment technology (and any subsequent improvements) throughout the period
during which U.S. or foreign patent rights exist or are pending for this
technology. In exchange for the right to use the wound treatment technology, the
Company has agreed to pay a royalty to Wake Forest University of 8% to 10% of
net sales (as defined in the License Agreement), and for the first five years
after the first sale in the U.S., the Company has agreed to pay an annual
minimum royalty equal to 25% of the projected royalty payments for each year
during such five-year period, but not less than $25,000 paid semi-annually. The
Company also has agreed to reimburse Wake Forest University for certain costs
incurred to defend and maintain any U.S. patent rights, and to prepare, file,
defend and maintain any foreign patent rights with respect to this technology.
In the event that the Company fails to make a required royalty payment
(including the minimum royalty payment) within 30 days after such royalty
payment is due, then Wake Forest University shall have the right to terminate
the License Agreement, or convert the License Agreement into a non-exclusive
license.
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<PAGE> 34
PRINCIPAL PRODUCTS
<TABLE>
<CAPTION>
HOSPITAL BEDS, MATTRESS OVERLAYS AND
MATTRESS REPLACEMENT SYSTEMS MEDICAL DEVICES
---------------------------------------------------------------------------- -------------------
PRESSURE
RELIEF/REDUCTION KINETIC THERAPY BARIATRIC SUPPORT CIRCULATION THERAPY
---------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
PRODUCTS FRAMED PRODUCTS FRAMED PRODUCTS FRAMED PRODUCTS
TriaDyne TriaDyne BariKare PlexiPulse
BioDyne RotoRest Delta Bari-800i PlexiPulse All-in-1
FluidAir BioDyne Burke System
TheraPulse RotoRest
KinAir
HomeKair
OVERLAYS OVERLAY
First Step Q2 Plus OVERLAY
DynaPulse First Step HD
AirWorks Plus
TheraRest
HomeKair DMS
PATIENTS Elderly patients Trauma victims Obese patients Post-surgical
Immobile patients Head/spinal cord injury patients
Post operative patients patients Diabetic patients
Cancer, AIDS patients Pneumonia patients Edema patients
Burn victims Quadriplegics
Immobilized patients
MEDICAL Treats and prevents Treats and prevents Assists in patient Prevents DVT
BENEFITS pressure ulcers hospital-acquired management Increases lower limb
Reduces chronic pain pneumonia Provides proper support in circulation
Enhances skin Prevents skin breakdown sitting and reclining Reduces edema
microculture Improves ventilation positions Enhances wound
Improves oxygenation Assists ambulation healing
Reduces skin breakdown
CARE Acute Acute Acute Acute
SETTINGS Extended Extended Extended Extended
Home Home
ECONOMIC Decreases healing time Reduces onset of hospital Reduces nursing time Prevents DVT
BENEFITS Prevents development of acquired pneumonia in Reduces workers' Speeds healing
expensive pressure the ICU by 50%. compensation risk process
sores Reduces inventory
Permits recovery in lower requirements
cost settings
<CAPTION>
MEDICAL DEVICES
---------------
WOUND THERAPY
-------------
<S> <C>
PRODUCTS
The V.A.C.
PATIENTS Pressure sore patients
Diabetic patients
Amputees
MEDICAL Heals wounds
BENEFITS Promotes post amputation
closure
CARE Acute
SETTINGS Extended
Home
ECONOMIC Speeds healing process
BENEFITS Reduces demands on
nursing staff
</TABLE>
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<PAGE> 35
PRODUCT SUPPORT -- THE CLINICAL ADVANTAGE
Kinetic Concepts believes that it has a clinical advantage in the patient
support surface market. The Company's Clinical Advantage program includes a
variety of support services and a growing database of clinical and patient
outcome studies. Clinical service to acute care and extended care facilities
begins with the placement of the patient on a Company product. Trained Company
clinicians make more than 150,000 regular patient contacts annually. This staff
is comprised of over 250 employees with medical or clinical backgrounds; the
sole responsibility of approximately 130 of these clinicians is making patient
rounds and participating in treatment protocols. The Company's clinical staff
also offers comprehensive product training and education to nurses. This direct
patient and nurse contact enables the Company to assist the hospital in
collecting valuable data. In order to effectively collect and process the data,
the Company has developed Odyssey and Genesis, two proprietary software
programs.
Odyssey is sold to hospitals to enable them to standardize the information
collected on wound treatment protocols. With Odyssey, health care providers can
institute a comprehensive wound care management system within their facility.
Facilities use Odyssey to collect data on their wound patients and periodically
send statistical information to Kinetic Concepts for processing. When processed
and returned to the facility, Odyssey can generate reports comparing each
individual patient's healing progress with those of similar patients on an
internal, regional or national basis. This information enables each facility to
tailor the protocols of its wound management system to the specific needs of its
patients.
Genesis is being developed and will be implemented so that the Company's
staff clinicians can assist customers in tracking patient outcomes. The
Company's clinicians make regular rounds to evaluate patients being treated with
Kinetic Concepts' products. At the hospital's direction, information related to
the use of the Company's products will be entered into a central database on a
daily basis. Information in the database can then be analyzed to determine the
effectiveness of specific treatment protocols when compared against a larger
sample. When sufficient statistical data is collected, the database will assist
physicians in determining treatment protocols based upon the range of outcome
for certain patient conditions.
The Company also has an active program of sponsoring independent clinical
research. The Company believes that it has the most comprehensive collection of
clinical research supporting the medical efficacy of its products of any company
in its industry. These studies support the cost-effectiveness of the Company's
products and provide the necessary clinical outcome data demanded by today's
health care providers.
The Company believes that the evolving health care marketplace is moving
toward a prospective reimbursement system which will require actuarial
information to predict patient outcomes in order to develop appropriate pricing
structures. This valuable patient data and clinical research is central to the
Company's marketing effort of demonstrating patient outcomes.
DISTRIBUTION NETWORK
The Company distributes its specialty patient support products to acute and
extended care facilities through a worldwide network of 147 domestic service
centers and 47 international centers. Each center has an inventory of beds and
overlays which are delivered to the individual hospitals on an as-needed basis.
The service personnel also assist in the placement of the patient on a support
surface and in the pick-up and maintenance of the beds, overlays, sheets and
accessories.
The Company contracts with both proprietary and voluntary group purchasing
organizations ("GPOs"). Proprietary GPOs own all of the hospitals which they
represent and, as a result, can insure complete compliance with an executed
national agreement. Voluntary GPOs negotiate contracts on behalf of member
hospital organizations but cannot insure that their members will comply with the
terms of an executed national agreement. Approximately 46% of the Company's
total revenue during the first nine months of 1995 was generated under national
agreements with GPOs. The Company's GPO contracts include contracts with the
Voluntary Hospital Association of America and the American Healthcare Systems,
which represent approximately 13.7% and 5.5%, respectively, of the Company's
total revenue during the first nine months of 1995.
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<PAGE> 36
Re-engineering of Service Delivery and Fulfillment Process. Since 1993,
Kinetic Concepts has re-engineered its process of collecting customer requests,
dispatching appropriate resources and satisfying customer needs. It has replaced
many procedures, modified job descriptions and decreased the number of service
vehicles and personnel it utilizes. Much of the re-engineering effort has
focused on automating the service process, including the compilation of clinical
information. See "Business -- Product Support -- The Clinical Advantage." The
goal of these changes is to reduce costs, reduce cycle time and improve customer
responsiveness and satisfaction. The Company believes that, as a result of this
effort, it can more effectively manage its cost structure and distribute its
products and services to meet the demands of increasingly sophisticated
customers.
The Company is organized into four operating divisions: KCI Therapeutic
Services, Inc. ("KCI Therapeutic Services" or "KCTS"), KCI Home Care, KCI
International, Inc. ("KCI International") and KCI New Technologies, Inc.
("NuTech").
KCI Therapeutic Services. KCI Therapeutic Services provides a complete line
of therapeutic specialty support surfaces to patients in acute and sub-acute
facilities as well as extended-care settings. This division consists of
approximately 1000 personnel, many of which have a medical or clinical
background. Sales are generated by a sales force of more than 250 individuals
who are responsible for new accounts in addition to the management and expansion
of existing accounts. A portion of this sales force is focused exclusively on
either the extended care market or the acute care market although the majority
of the sales force is responsible for sales across both settings.
KCI Therapeutic Services has a national 24-hour customer service
communications system which enhances its ability to quickly and efficiently
respond to its customers' needs 24 hours-a-day, seven days-a-week. Operations
for KCI Therapeutic Services are conducted from the service centers indicated in
the map below. The Company's services centers are organized as profit centers
and the general managers who supervise the service centers are responsible for
both sales and service operations.
MAP
The Company's sales and support staff is comprised of over 250 employees
with medical or clinical backgrounds. The principal responsibility of
approximately 130 of these clinicians is making product rounds
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<PAGE> 37
and participating in treatment protocols. These clinicians educate the hospital
staff on issues related to patient treatment, assist in the establishment of
protocols and accumulate outcome data related to the treatment of the patient.
The clinical staff makes approximately 150,000 patient rounds annually.
KCI Home Care. KCI Home Care rents and sells products that address the
unique demands of the home health care market. In January 1995, KCI Home Care
started a transition from a combined direct/dealer distribution system to
distributing its products exclusively through independent dealers. The Company
believes that selling through independent dealers gives it easier access to a
larger patient population and improves the overall contribution from this
business segment despite a reduction in per patient revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Nine Months Ended September 30, 1995
Compared to Nine Months Ended September 30, 1994."
KCI International. KCI International offers the Company's complete product
line in ten foreign countries including Germany, Austria, the United Kingdom,
Canada, France, the Netherlands, Switzerland, Australia, Italy and Sweden. In
1996, the Swedish offices will be expanded to serve all of Scandinavia. In
addition, relationships with independent distributors in Latin America, the
Middle East, Asia and Eastern Europe allow KCI International to serve the
demands of a growing global market.
NuTech. NuTech manufactures and markets the PlexiPulse and PlexiPulse
All-in-1 System through an independent sales representative network and is in
the process of developing a dedicated sales force.
COMPETITION
The Company believes that the principal competitive factors within the
patient support surfaces marketplace are product efficacy, clinical outcomes,
service and price. The Company believes that a national presence with full
distribution capabilities is important to serve large, sophisticated national
and regional health care GPOs and providers.
The Company competes on a national level with Hill-Rom and on a regional
and local level with numerous other companies. In certain international markets,
the Company competes principally with Hill-Rom. NuTech competes primarily with
Kendall International in the foot and leg compression market.
RESEARCH AND DEVELOPMENT
The focus of the Company's research and development program has been to
develop new products and make technological improvements to existing products.
Since January 1994, the Company has introduced a number of new products
including: the TriaDyne, the BariKare, the PlexiPulse All-in-1 System and The
V.A.C., a product developed from technology licensed to the Company.
Expenditures for research and development represented approximately 2% of the
Company's total expenditures in 1994. The Company intends to continue to expand
its research and development efforts.
MANUFACTURING
The Company's manufacturing processes for its specialty beds, mattress
overlays, mattress replacement systems and medical devices include the
manufacture of certain components, the purchase of certain other components from
suppliers and the assembly of these components into a completed product.
Mechanical components such as blower units, electrical displays and air flow
controls consist of a variety of customized subassemblies which are purchased
from suppliers and assembled by the Company. The Company believes it has an
adequate source of supply for each of the components used to manufacture its
products.
PATENTS AND TRADEMARKS
The Company seeks patent protection in the United States and abroad. As of
December 27, 1995, the Company had 36 issued U.S. patents relating to its
specialized beds, mattresses and related products. The Company also has 18
pending U.S. Patent applications. During 1994, the Company successfully sought
protection of three of its patents in litigation against SSI. The jury in this
case found that three of the
35
<PAGE> 38
Company's patents on the BioDyne and TheraPulse beds were valid and that SSI had
willfully infringed those patents. The case was settled prior to the damages
phase of the trial when SSI agreed to pay the Company damages of $84.75 million
and remove its Restcue bed from the U.S. market.
Many of the Company's specialized beds, products and services are offered
under trademarks and service marks. The Company has 25 registered trademarks and
service marks in the United States Patent and Trademark Office.
EMPLOYEES
As of September 30, 1995, the Company had approximately 2000 employees. The
Company's employees are not represented by labor unions and the Company
considers its employee relations to be good.
PROPERTIES
The Company's corporate headquarters are currently located in a 170,000
square foot building in San Antonio, Texas which was purchased by the Company in
January 1992. The Company utilizes 84,000 square feet of the building with the
remaining space being leased to unrelated entities.
The Company conducts its manufacturing, shipping, receiving and storage
activities in a 153,000 square foot facility in San Antonio, Texas, which was
purchased by the Company in January 1988. In 1989, the Company completed the
construction of a 17,000 square foot addition to the facility which is utilized
as office space. The Company also owns a 37,000 square foot building in San
Antonio, Texas which houses the Company's engineering center. In 1992, the
Company purchased a 35,000 square foot facility in San Antonio, Texas which is
used for storage. The Company maintains additional storage at two leased
facilities in San Antonio, Texas. In 1994, the Company purchased a facility in
San Antonio, Texas which will be used to provide housing for families of cancer
patients. The facility is built on 6.7 acres and consist of a 15,000 square foot
building and 2,500 square foot house.
The Company leases approximately 150 domestic distribution centers,
including each of its eight regional headquarters, which range in size from 600
to 19,600 square feet.
GOVERNMENT REGULATION
United States. The Company's products are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic
Act, and the regulations promulgated thereunder, the FDA regulates the clinical
testing, manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals, and criminal prosecution. The FDA also has the authority to
request repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification, and
adherence to GMPs) and Class II devices are subject to general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those devices
which must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices). All of the Company's current products have been
classified as Class I or Class II devices. Before a new device can be introduced
in the market, the manufacturer must generally file an application for and
obtain FDA clearance of a 510(k) notification or approval of a Premarket
Approval ("PMA") Application. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to
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<PAGE> 39
certain Class III devices. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence than in the past.
It generally takes from four to 12 months from submission to obtain 510(k)
premarket clearance, but may take longer. The FDA may determine that a proposed
device is not substantially equivalent to a legally marketed device, or that
additional information is needed before a substantial equivalence determination
can be made. A "not substantially equivalent" determination or a request for
additional information could prevent or delay the market introduction of new
products that fall into this category and could have a material adverse effect
on the Company's business, financial condition and results of operations. For
any of the Company's devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness of the device or that constitute a major change to the intended
use of the device will require a new 510(k) submission.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive
testing and manufacturing information, including preclinical and clinical trial
data, to demonstrate the safety and effectiveness of the device. The FDA's
review of a PMA application generally takes one to two years from the date the
PMA is accepted for filing, but it may take significantly longer.
If human clinical trials of a device are required, and the device presents
a "significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an Investigational Device Exemption
("IDE") application prior to commencing human clinical trials. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
Institutional Review Boards ("IRBs") without the need for FDA approval. Sponsors
of clinical trials are permitted to sell investigational devices distributed in
the course of the study provided such compensation does not exceed recovery of
the costs of manufacture, research, development and handling.
In 1995, the Company submitted three 510(k) notices for new devices which
are currently pending FDA review. The Company also has several 510(k)
notifications pending for modifications to certain of its currently marketed
products. Because the determination of whether a new 510(k) notification must be
submitted for a device modification is subjective, companies sometimes provide
information to the FDA to update their 510(k) files without formally submitting
a premarket notification. In certain circumstances, the FDA allows continued
marketing of a modified device while a 510(k) is pending. There can be no
assurance, however, that the FDA will allow the Company to continue to market
any of these devices pending marketing clearance from the FDA or that the
Company will obtain 510(k) clearance for these devices on a timely basis, if at
all. The FDA's failure to grant any necessary regulatory clearances or approvals
or to allow continued marketing of devices pending clearance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has also made other modifications to its devices which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations and would not require the Company to submit a new 510(k) notice
for any of the changes made to the Company's devices. If the FDA requires the
Company to submit a new 510(k) notice for any device modification, the Company
may be prohibited from marketing the modified device until the 510(k) notice is
cleared by the FDA. There can be no assurance that the Company will obtain
premarket clearance or approval on a timely basis, if at all, for any device for
which it has filed or may in the future file a submission.
The Company is sponsoring several clinical trials which have been
determined by IRBs at the participating institutions to be "nonsignificant risk"
studies. There can be no assurance, however, that the FDA would agree with these
determinations and not require the Company to obtain the FDA approval of the
IDEs before continuing the studies.
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All devices manufactured or distributed by the Company are subject to
pervasive and continuing regulation by the FDA and certain state agencies,
including record keeping requirements and mandatory reporting of certain adverse
experiences resulting from use of the devices. Labeling and promotional
activities are subject to scrutiny by the FDA and, in certain circumstances, by
the Federal Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed current Good
Manufacturing Practice ("GMP") requirements, which include testing, control and
documentation requirements. Manufacturers must also comply with MDR requirements
that a company report certain device-related incidents to the FDA. The Company
is subject to routine inspection by the FDA and certain state agencies for
compliance with GMP requirements, MDR requirements and other applicable
regulations. The FDA has proposed changes to the GMP regulations which will
likely increase the cost of compliance with GMP requirements. Changes in
existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition, and results of
operations. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations.
In August 1995, the FDA issued a Warning Letter to the Company following a
June 1995 inspection, in which the FDA asserted certain alleged violations of
GMP and MDR requirements. In the Warning Letter, the FDA notified the Company
that (i) no premarket submissions for the Company's products to which the
alleged GMP deficiencies are "reasonably related" will be cleared "until the
violations have been corrected," (ii) the FDA will not grant requests by the
Company for Certificates for Products for Export until the alleged "violations
related to the subject devices" have been corrected, and (iii) Federal agencies
will be advised of the issuance of the Warning Letter and may take the
information into account when considering the award of Federal contracts to the
Company.
In September 1995, the Company submitted a written response to the Warning
Letter. On November 21, 1995, the FDA responded to the Company and stated that
the Company's response to the GMP deficiencies addressed most of the FDA's
concerns. While the FDA agreed with the Company that all but three events
mentioned in its August 1995 letter did not require the filing of MDRs by the
Company, the FDA maintained its request for the filing of MDRs for three events,
which the Company has submitted to the FDA. The FDA advised the Company that in
future inspections, the agency will closely examine the Company's policies
regarding reportable events and failure investigations. In a letter dated
December 21, 1995, the FDA reiterated that the Company's responses appear to be
adequate, but requested further verification that the proposed corrections set
forth in the Company's responses are being implemented. At the FDA's suggestion,
the Company intends to engage an independent consultant to verify that the
Company is implementing the proposed changes and to certify to the FDA that the
Company is in compliance with GMPs.
Fraud and Abuse Laws. The Company is subject to federal and state laws
pertaining to health care fraud and abuse. In particular, certain federal and
state laws prohibit manufacturers, suppliers, and providers from giving or
receiving kickbacks or other remuneration in connection with the purchase or
rental of health care items and services. The federal Medicare and Medicaid
anti-kickback statute provides both civil and criminal penalties for, among
other things, offering or paying any remuneration to induce someone to refer
patients to for, or to purchase, lease, or order (or arrange for or recommend
the purchase, lease, or order of), any item or service for which payment may be
made by Medicare or certain federally-funded state health care programs (e.g.,
Medicaid). This statute also prohibits soliciting or receiving any remuneration
in exchange for engaging in any of these activities. The prohibition applies
whether the remuneration is provided directly or indirectly, overtly or
covertly, in cash or in kind. Violations of the law can result in numerous
sanctions, including criminal fines, imprisonment, and exclusion from
participation in the Medicare and Medicaid programs.
These provisions have been broadly interpreted to apply to certain
relationships between manufacturers/suppliers, such as the Company, and
hospitals, skilled nursing facilities ("SNFs"), and other potential purchasers
or sources of referral. Under current law, courts and the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services
("HHS") have stated, among other things, that
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the law is violated where even one purpose (as opposed to a primary or sole
purpose) of a particular arrangement is to induce purchases or patient
referrals.
The OIG has taken recent actions which suggest that relationships between
manufacturers/suppliers of DME or medical supplies and SNFs (or other providers)
currently may be under scrutiny. In May 1995, the OIG announced an enforcement
initiative, "Operation Restore Trust," that targeted investigation of fraud and
abuse in a number of states (i.e., California, Florida, Illinois, New York, and
Texas), focusing specifically on the long-term care, home health, and DME
industries. Furthermore, in August 1995, the OIG issued a Special Fraud Alert
describing certain relationships between SNFs and suppliers that the OIG viewed
as abusive under the statute.
Several states also have anti-remuneration or other similar laws that may
restrict the payment or receipt of remuneration in connection with the purchase
or rental of medical supplies. State laws vary in scope and have been
infrequently interpreted by courts and regulatory agencies, but may apply
regardless of whether Medicaid or Medicaid funds are involved.
The Company is also subject to federal and state laws prohibiting the
presentation (or the causing to be presented) of claims for payment (by
Medicare, Medicaid, or other third party payers) that are determined to be
false, fraudulent, or for an item or service that was not provided as claimed.
In one recent case, a major DME manufacturer paid more than $4 million to settle
allegations that it had "caused to be presented" false Medicare claims through
advice that its sales force allegedly gave to customers concerning the
appropriate reimbursement coding for its products.
Other Laws. The Company also is subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations in the future or that such laws or regulations will not
have a material adverse effect upon the Company's ability to do business.
International. Sales of medical devices outside of the United States are
subject to regulatory requirements that vary widely from country to country.
Premarket clearance or approval of medical devices is required by certain
countries. The time required to obtain clearance or approval for sale in a
foreign country may be longer or shorter than that required for clearance or
approval by the FDA and the requirements may vary. Failure to comply with
applicable regulatory requirements can result in loss of previously received
approvals and other sanctions and could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that the FDA's failure to grant requests for Certificates for
Products for Export pending a satisfactory resolution of the Warning Letter will
not have a material adverse effect upon the Company's ability to export its
products.
REIMBURSEMENT
The Company's products are rented and sold principally to hospitals, SNFs
and DME suppliers who receive reimbursement for the products and services they
provide from various public and private third-party payors, including the
Medicare and Medicaid programs and private insurance plans. As a result, demand
for the Company's products is dependent in part on the reimbursement policies of
these payors. The manner in which reimbursement is sought and obtained for any
of the Company's products varies based upon the type of payor involved and the
setting in which the product is furnished and utilized by patients.
Medicare. Medicare is a federally-funded program that reimburses the costs
of health care furnished primarily to the elderly and disabled. Medicare is
composed of two parts: Part A and Part B. The Medicare program has established
guidelines for the coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by Medicare, a health
care item or service furnished to a Medicare beneficiary must be reasonable and
necessary for the diagnosis or treatment of an illness or injury or to improve
the functioning of a malformed body part. This has been interpreted to mean that
the item or service must be safe and effective, not experimental or
investigational (except under certain limited circumstances involving devices
furnished pursuant to an FDA-approved clinical trial), and appropriate. Specific
Medicare guidelines have not been established addressing under what
circumstances, if any, Medicare coverage would be provided for the use of the
PlexiPulse or The V.A.C.
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The methodology for determining the amount of Medicare reimbursement of the
Company's products varies based upon, among other things, the setting in which a
Medicare beneficiary receives health care items and services. Most of the
Company's products are furnished in a hospital, SNF or the beneficiary's home.
Hospital Setting. With the establishment of the prospective payment system
in 1983, acute care hospitals are now generally reimbursed by Medicare for
inpatient operating costs based upon prospectively determined rates. Under the
prospective payment system, acute care hospitals receive a predetermined payment
rate based upon the Diagnosis-Related Group ("DRG") which is assigned to each
Medicare beneficiary who is a hospital inpatient, regardless of the actual cost
of the services provided. Certain additional or "outlier" payments may be made
to a hospital for cases involving unusually long lengths of stay or high costs.
However, outlier payments based upon length of stay are gradually being phased
out and will be eliminated effective with fiscal year 1998. Furthermore,
pursuant to regulations issued in 1991, and subject to a ten-year transition
period, the capital costs of acute care hospitals (such as the cost of
purchasing or renting the Company's specialty beds) are also reimbursed by
Medicare pursuant to an add-on to the DRG-based payment amount. Accordingly,
acute care hospitals generally do not receive direct Medicare reimbursement
under PPS for the distinct costs incurred in purchasing or renting the Company's
products. Rather, reimbursement for these costs is deemed to be included within
the DRG-based payments made to hospitals for the treatment of Medicare-eligible
inpatients who utilize the products. Since PPS rates are predetermined, and
generally paid irrespective of a hospital's actual costs in furnishing care,
acute care hospitals have incentives to lower their inpatient operating costs by
utilizing equipment and supplies that will reduce the length of inpatient stays,
decrease labor, or otherwise lower their costs.
Certain specialty hospitals (e.g., long-term care, rehabilitation and
childrens hospitals) also use the Company's products. Such specialty hospitals
currently are exempt from the prospective payment system and, subject to certain
cost ceilings, are reimbursed by Medicare on a reasonable cost basis for
inpatient operating and capital costs incurred in treating Medicare
beneficiaries. Consequently, long-term care hospitals may receive separate
Medicare reimbursement for reasonable costs incurred in purchasing or renting
the Company's products.
Skilled Nursing Facility Setting. SNFs which purchase or rent the Company's
products may be reimbursed directly under Medicare Part A for some portion of
their incurred costs. Generally speaking, only the costs of treatment during the
first 100 days of a qualifying spell of illness are subject to Medicare
reimbursement. The costs incurred by SNFs in furnishing care to Medicare
beneficiaries are categorized as either routine costs or ancillary costs.
Routine costs are those costs which are incurred for items and services
routinely furnished to all patients (e.g., general nursing services, items
stocked in gross supply). Ancillary costs are considered those costs which are
incurred for items or services ordered to treat a condition of a specific
patient and which are not generally furnished to most patients. Ancillary costs
are not subject to the routine cost limits. Given the current routine cost
limits, SNFs may be more inclined to purchase or rent products which are
reimbursed by Medicare as ancillary items or services than if these products
were reimbursed as routine items or services. At present, the Company's
specialty beds are classified under Medicare Part A as ancillary items. HCFA
currently interprets the definition of ancillary items to include certain
support surfaces such as low air loss mattress replacements, bed overlay systems
and air fluidized therapy. Neither The V.A.C. nor the PlexiPulse have yet been
classified as ancillary items when furnished in a SNF setting.
Home Setting. The Company's products are also furnished to Medicare
beneficiaries in the home settings. Medicare reimburses beneficiaries, or
suppliers accepting assignment, for the purchase or rental of DME for use in the
beneficiary's home or a home for the aged (as opposed to use in a hospital or
skilled nursing facility setting). Provided that various Medicare coverage
criteria are met, certain of the Company's products, including air fluidized
beds, powered flotation beds and alternating air mattresses, are reimbursed in
the home setting under the DME category known as "Capped Rental Items." Pursuant
to the fee schedule payment methodology for this category, Medicare pays a
monthly rental fee (for a period not to exceed fifteen months) equal to 80% of
the lesser of the supplier's actual rental charge or the established fee
schedule amount for the item. Guidelines concerning under what circumstances, if
any, The V.A.C. or the PlexiPulse will be covered and reimbursed by DME have not
been established.
40
<PAGE> 43
Medicaid. The Medicaid program is a cooperative federal/state program that
provides medical assistance benefits to qualifying low income and
medically-needy persons. State participation in Medicaid is optional and each
state is given discretion in developing and administering its own Medicaid
program, subject to certain federal requirements pertaining to payment levels,
eligibility criteria and minimum categories of services. The Medicaid program
finances approximately 50% of all care provided in skilled nursing facilities
nationwide. The Company sells or rents its products to SNFs for use in
furnishing care to Medicaid recipients. SNFs, or the Company, may seek and
receive Medicaid reimbursement directly from states for the incurred costs.
However, the method and level of reimbursement, which generally reflects
regionalized average cost structures and other factors, varies from state to
state.
Private Payors. Many private payors, including indemnity insurers, employer
group health insurance programs and managed care plans, presently provide
coverage for the purchase and rental of the Company's products. The scope of
coverage and payment policies varies among private payors. Furthermore, many
such payors are investigating or implementing methods for reducing health care
costs, such as the establishment of capitated or prospective payment systems.
Uncertainty of Health Care Reform. There are widespread efforts to control
health care costs in the U.S. and worldwide. Various federal and state
legislative initiatives regarding health care reform and similar issues continue
to be at the forefront of social and political discussion. For example, the
United States Congress is currently considering various legislative proposals to
reform the Medicare and Medicaid programs. Some current proposals call for
reduced payments to hospitals under the prospective payment system, limitations
on payment for and recognition of ancillary items or services, establishment of
a prospective payment system for Medicare reimbursement of SNF costs, freezes in
DME fee schedule payment amounts, and the establishment of a "block grant"
program that would give states greater discretion in designing and administering
state Medicaid programs. If enacted into law, any of these proposals could
affect future demand for and reimbursement of the Company's products. The
Company believes that government and private efforts to contain or reduce health
care costs are likely to continue. These trends may lead third-party payors to
deny or limit reimbursement for the Company's products, which could negatively
impact the pricing and profitability of, or demand for, the Company's products.
LEGAL PROCEEDINGS
On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit
against the Company in the United States District Court for the Western District
of Texas. Novamedix holds the patent rights to the principal product which
directly competes with the PlexiPulse. The suit alleges that the PlexiPulse
infringes several patents held by Novamedix, that the Company breached a
confidential relationship with Novamedix and a variety of ancillary claims.
Novamedix seeks injunctive relief and monetary damages. Discovery in this case
has been substantially completed. Although it is not possible to predict the
outcome of this litigation or the damages which could be awarded, the Company
believes that its defenses to these claims are meritorious.
On August 16, 1995, the Company filed a civil antitrust lawsuit against
Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom. The suit was
filed in the United States District Court for the Western District of Texas. The
suit alleges that Hill-Rom used its monopoly power in the standard hospital bed
business to gain an unfair advantage in the specialty hospital bed business.
Specifically, the allegations set forth in the suit include a claim that
Hill-Rom required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products over which
they have monopoly power -- hospital beds and head wall units. The suit further
alleges that Hill-Rom engaged in activities which constitute predatory pricing
and refusals to deal. Hill-Rom has filed an answer denying the allegations in
the suit. Although discovery is just beginning and it is not possible to predict
the outcome of this litigation or the damages which might be awarded, the
Company believes that its claims are meritorious.
The Company is a party to several lawsuits arising in the ordinary course
of its business and is contesting adjustments proposed by the Internal Revenue
Service to prior years' tax returns. Provisions have been made in the Company's
financial statements for estimated exposures related to these lawsuits and
adjustments. See "Consolidated Financial Statements." In the opinion of
management, the disposition of these matters will not have a material adverse
effect on the Company's business, financial condition or results of operations.
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<PAGE> 44
The manufacturing and marketing of medical products necessarily entails an
inherent risk of product liability claims. The Company currently has certain
product liability claims pending for which provision has been made in the
Company's financial statements. Management believes that resolution of these
claims will not have a material adverse effect on the Company's business,
financial condition or results of operations. The Company has not experienced
any significant losses due to product liability claims and currently maintains
umbrella liability insurance coverage.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
In 1993, the Company began assembling a new management team to restructure
its management and operations to meet the needs of a changing health care
environment. In July 1995, the Board of Directors of the Company determined that
the interests of the executive officers of the Company should be more closely
aligned with those of the shareholders. In order to further this goal, the Board
adopted a policy requiring certain executive officers to own, by no later than
January 1, 1999, a number of shares of Common Stock with a market value equal to
his or her annual salary. During each year between the adoption of this policy
and January 1, 1999, these executive officers are required to purchase no less
than 25% of the required total. The Company has also agreed to make loans to
executive officers to enable them to purchase the required shares. These loans
will be made at the federal funds rate and will have a term of five years. In
addition, in October 1995, the Board preliminarily approved the terms of the
1995 Senior Executive Stock Option Plan and reserved an aggregate of 1,400,000
shares of Common Stock which the Board of Directors intends to grant to certain
executive officers of the Company. This plan is subject to final approval of the
Company's Board of Directors and shareholders.
The directors and executive officers of the Company and their ages and
positions as of December 15, 1995 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------
<S> <C> <C>
James R. Leininger, M.D.(3)(4)....... 51 Chairman of the Board of Directors
Raymond R. Hannigan.................. 56 Director, President and Chief Executive Officer
Peter A. Leininger, M.D.(4).......... 53 Director and Executive Vice President
Bianca A. Rhodes..................... 37 Senior Vice President, Finance and Chief
Financial Officer
Dennis E. Noll....................... 41 Senior Vice President, General Counsel and
Secretary
John H. Vrzalik, Sr.................. 53 Vice President, Engineering
Michael J. Burke..................... 48 Vice President, Manufacturing
Martin J. Landon..................... 36 Vice President, Accounting and Corporate
Controller
Frank DiLazzaro...................... 37 President, KCI International
Christopher M. Fashek................ 46 President, KCTS
Daniel R. Puchek..................... 43 President, NuTech
Joshua H. Levine..................... 37 Vice President and General Manager, KCI Home
Care
Sam A. Brooks(1)(4).................. 56 Director
Frank A. Ehmann(1)(2)(3)(4).......... 62 Director
Bernhard T. Mittemeyer,
M.D.(1)(2)(3)...................... 65 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Stock Option Committee
(4) Member of Nominating Committee
James R. Leininger, M.D., is the founder of the Company and has served as
Chairman of the Board of Directors since 1976. From January 1990 to November
1994, Dr. Leininger served as President and Chief Executive Officer of the
Company. From 1975 until October 1986, Dr. Leininger was also the Chairman of
the Emergency Department of the Baptist Hospital System in San Antonio, Texas.
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<PAGE> 45
Raymond R. Hannigan joined the Company as its President and Chief Executive
Officer in November 1994 and has served as a director of the Company since 1994.
From January 1991 to November 1994, Mr. Hannigan was the President of the
International Division of Sterling Winthrop Consumer Health Group (a
pharmaceutical company with operations in over 40 countries), a wholly-owned
subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr. Hannigan was the
President of Sterling Drug International.
Peter A. Leininger, M.D., joined the Company as its Vice President, Medical
in 1978, became Chief Administrative Officer and Senior Vice President of the
Company in January 1994 and was named Executive Vice President in September
1995. Dr. Peter Leininger became a member of the Company's Board of Directors in
1980. Prior to 1978, Dr. Peter Leininger maintained a private medical practice
and functioned as the southeast regional distributor for the Company's products.
Peter A. Leininger, M.D. is the brother of James R. Leininger, M.D.
Bianca A. Rhodes joined the Company as its Senior Vice President, Finance
and Chief Financial Officer in September 1993. From July 1992 to April 1993, Ms.
Rhodes served as Senior Vice President, Finance, Chief Financial Officer and
Corporate Treasurer of Intelogic Trace, Inc. (a national computer services
company). From 1990 to June 1992, Ms. Rhodes served as Vice President, Finance
and Corporate Treasurer of Intelogic Trace, Inc. and prior to 1990, Ms. Rhodes
served as Corporate Treasurer of Intelogic Trace, Inc.
Dennis E. Noll joined the Company in February 1992 as its Senior Corporate
Counsel and was appointed Vice President, General Counsel and Secretary in
January 1993. Mr. Noll was promoted to Senior Vice President in September 1995.
Prior to joining the Company in February 1992, Mr. Noll was a shareholder of the
law firm of Cox & Smith Incorporated.
John H. Vrzalik, Sr. joined the Company in 1977, was promoted to Vice
President, Engineering in 1979 and has served in that position since that time.
Michael J. Burke joined the Company in September 1995 as Vice President,
Manufacturing. Prior to joining the Company, Mr. Burke worked for Sterling
Winthrop, Inc., a Division of Eastman Kodak Company, for 25 years, most recently
serving as General Manager, Sterling Health HK/China since 1992.
Martin J. Landon joined the Company in May 1994 as Senior Director of
Corporate Development and was promoted to Vice President, Accounting and
Corporate Controller in October 1994. From 1987 to May 1994, Mr. Landon worked
for Intelogic Trace, Inc., most recently serving as Vice President, Chief
Financial Officer.
Frank DiLazzaro joined the Company in 1988 as General Manager, KCI Medical
Canada. Mr. DiLazzaro served as Vice President, KCI International, Inc. from
June 1989 to December 1992. Mr. DiLazzaro has served as President, KCI
International, Inc. since January 1993 and was Vice President, Marketing from
April 1993 to September 1995.
Christopher M. Fashek joined the Company in February 1995 as President,
KCTS. Prior to joining the Company, he served as General Manager, Sterling
Winthrop, New Zealand since February 1993, and served as Vice President Sales of
Sterling Health USA from 1989 until February 1993.
Daniel R. Puchek joined the Company as its Vice President, KCI
International in 1987 and became Vice President, Corporate Development in
February 1991. In August 1991, Mr. Puchek began serving as President, NuTech.
Joshua H. Levine joined the Company in November 1992, as Senior Director,
was promoted to National Sales Manager, Home Care Business in November 1993, and
became Vice President and General Manager, KCI Home Care in July 1994. From
April 1991 to November 1992, Mr. Levine served as Area Business Development
Manager, Oncology Division for CareMark, Inc. (a home infusion company). Prior
to April 1991, Mr. Levine was a District Manager of the Company.
Sam A. Brooks has served as a Director of the Company since 1987. Mr.
Brooks also serves on the Board of Directors of Nationwide Health Properties,
Inc. (a real estate investment trust), Quorum Health Group, Inc. (a hospital
management company) and PhyCor, Inc. (a physician management company). Mr.
Brooks
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<PAGE> 46
has served as the Chairman of the Board of National Imaging Affiliates, Inc. (an
operator of magnetic resonance imaging centers) since 1992 and President of
MedCare Investment Corp. (the general partner of a medical venture capital fund)
since April 1991. From 1986 to October 1989, he was President of Nationwide
Health Properties, Inc. and prior to 1986, Mr. Brooks served as Executive Vice
President and Chief Financial Officer of Hospital Corporation of America (a
hospital management company).
Frank A. Ehmann has served as a Director of the Company since 1987. He is
also a member of the Board of Directors of Genderm Inc. (a pharmaceutical
company), SPX Corporation (a machinery manufacturer), American Health Corp.,
Inc. (a diabetes treatment provider) and AHA Investment Funds, Inc. (an
investment advisory company). Mr. Ehmann was President and Chief Operating
Officer of United Stationers, Inc. (an office products company) from March 1986
to October 1989. Prior to December 1985, Mr. Ehmann was an Executive Vice
President and Co-Chief Operating Officer of Baxter Travenol Laboratories, Inc.
(a medical products company).
Bernhard T. Mittemeyer, M.D., has served on the Board of Directors of the
Company since 1987. Dr. Mittemeyer has served as Executive Vice President and
Provost of the Texas Tech University Health Science Center since 1986. Dr.
Mittemeyer also served as Interim Dean of the Texas Tech School of Medicine from
November 1988 until August 1990. From March 1985 until October 1986, Dr.
Mittemeyer served as the Senior Vice President and Corporate Medical Director of
Whittaker Health Services (a health maintenance organization). Prior to March
1985, Dr. Mittemeyer served for 28 years as a career officer in the United
States Army which culminated in his service as the Surgeon General of the United
States Army from October 1981 to February 1985.
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<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
Based upon information received upon request from the persons concerned (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each of the directors, (iii) each of the
executive officers, (iv) the Selling Shareholders and (v) all directors and
executive officers of the Company as a group, owned beneficially as of December
15, 1995, the number and percentage of outstanding shares of Common Stock
indicated in the following table. Except as noted below, each of the persons
listed below has sole investment and voting power with respect to the shares
indicated.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------- -------------------------
NUMBER OF PERCENT OF SHARES BEING NUMBER OF PERCENT OF
SHARES CLASS OFFERED(1) SHARES CLASS
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
James R. Leininger,
M.D.(2)(4)(5)(6)(7)(8)........ 29,583,250 66.73% 6,132,499 23,450,751 52.90%
8023 Vantage Drive
San Antonio, Texas
Peter A. Leininger,
M.D.(3)(4)(7)(8).............. 2,690,541 6.07 1,170,017 1,520,524 3.43
8023 Vantage Drive
San Antonio, Texas
Raymond R. Hannigan(10)......... 582,400 1.31 -- 582,400 1.31
Sam A. Brooks(5)(11)............ 174,000 * -- 174,000 *
Frank A. Ehmann(11)............. 25,000 * -- 25,000 *
Bernard T. Mittemeyer,
M.D.(11)...................... 25,200 * -- 25,200 *
Bianca A. Rhodes(12)............ 69,576 * -- 69,576 *
Dennis E. Noll(13).............. 59,740 * -- 59,740 *
John H. Vrzalik, Sr.(13)........ 52,736 * -- 52,736 *
Michael J. Burke(13)............ 11,500 * -- 11,500 *
Martin J. Landon(13)............ 1,400 * -- 1,400 *
Frank DiLazzaro(13)............. 66,518 * -- 66,518 *
Christopher M. Fashek........... 16,600 * -- 16,600 *
Daniel R. Puchek(13)............ 40,699 * -- 40,699 *
Joshua H. Levine................ 5,300 * -- 5,300 *
John H. Leininger,
O.D.(4)(8)(9)................. 1,420,500 3.20 940,000 480,500 1.08
Daniel E. Leininger(4)(8)(14)... 363,000 * 175,000 188,000 *
Covenant Foundation,
Inc.(6)(15)................... 840,000 1.89 420,000 420,000 *
Kinetic Concepts
Foundation(7)(15)............. 130,000 * 65,000 65,000 *
The PAL Foundation(8)(15)....... 115,000 * 100,000 15,000 *
Mercy International(9)(15)...... 91,500 * 80,000 11,500 *
The Miami Project(15)........... 133,333 * 133,333 -- --
All directors and executive
officers as a group (15
persons)(16).................. 31,522,960 70.18 7,137,516 24,385,444 54.29
</TABLE>
- ---------------
* less than one percent (1%)
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) The shares shown for Dr. James R. Leininger include beneficial ownership of
347,383 shares of Common Stock held by Dr. Leininger as trustee for the
children of Peter A. Leininger, M.D., of which
45
<PAGE> 48
297,499 shares will be sold in this offering. Dr. Leininger disclaims
beneficial ownership of the aforesaid shares. The shares shown also include
an aggregate of 1,886,500 shares with respect to which Dr. Leininger has
granted stock options to certain persons, approximately 1,744,583 of which
are currently exercisable.
(3) The shares shown for Dr. Peter A. Leininger include beneficial ownership of
540,800 shares of Common Stock held by Dr. Leininger as trustee for certain
of his nieces and nephews, of which 325,900 shares will be sold in this
offering. Dr. Leininger disclaims beneficial ownership of the aforesaid
shares. The shares shown also include 1,200,000 shares of Common Stock
which he has the right to acquire upon the exercise of a stock option
granted to him by James R. Leininger, M.D., and 25,624 shares of Common
Stock that Dr. Leininger has the right to acquire under stock options
granted by the Company which are exercisable prior to February 15, 1996.
(4) The following Selling Shareholders are brothers: James R. Leininger, M.D.,
Peter A. Leininger, M.D., John H. Leininger, O.D. and Daniel E. Leininger.
John H. Leininger, O.D., and Daniel E. Leininger are not officers,
employees or otherwise affiliated with the Company.
(5) The board of directors of Children's Covenant Foundation, Inc., which
consists of Dr. James R. Leininger, Cecelia A. Leininger (Dr. James R.
Leininger's wife), Sam A. Brooks and Dan A. Brooks, has voting and
dispositive power over the shares of Common Stock owned by this charitable
foundation. The shares shown for Dr. James R. Leininger and Sam A. Brooks
include the 40,000 shares of Common Stock owned by Children's Covenant
Foundation, Inc. Dr. Leininger and Sam A. Brooks disclaim beneficial
ownership of the aforesaid shares.
(6) The board of directors of Covenant Foundation, Inc., which consists of Dr.
James R. Leininger, Cecelia A. Leininger and Charles A. Staffel, has voting
and dispositive power over the shares of Common Stock owned by this
charitable foundation. The shares shown for Dr. James R. Leininger include
the 840,000 shares of Common Stock owned by Covenant Foundation, Inc. Dr.
Leininger disclaims beneficial ownership of the aforesaid shares.
(7) The board of directors of Kinetic Concepts Foundation, which consists of
Dr. James R. Leininger, Cecelia A. Leininger, Dr. Peter A. Leininger and
Thomas W. Lyles, Jr., has voting and dispositive power over the shares of
Common Stock owned by this charitable foundation. The shares shown for Dr.
James R. Leininger and Dr. Peter A. Leininger include the 130,000 shares of
Common Stock owned by Kinetic Concepts Foundation, of which 65,000 shares
will be sold in the offering. Dr. James R. Leininger and Dr. Peter A.
Leininger disclaim beneficial ownership of the aforesaid shares.
(8) The board of directors of The PAL Foundation, which consists of Dr. James
R. Leininger, Dr. Peter A. Leininger, Dr. John H. Leininger and Daniel E.
Leininger, has voting and dispositive power over the shares of Common Stock
owned by this charitable foundation. The shares shown for Dr. James R.
Leininger, Dr. Peter A. Leininger, Dr. John H. Leininger and Daniel E.
Leininger include 115,000 shares of Common Stock owned by The PAL
Foundation, of which 100,000 shares will be sold in this offering. Each of
them disclaim beneficial ownership of the aforesaid shares.
(9) The board of directors of Mercy International, which consists of Dr. John
H. Leininger, Diane J. Leininger (Dr. John H. Leininger's wife) and Jeffrey
E. Leininger, has voting and dispositive power over the shares of Common
Stock owned by this charitable foundation. The shares shown for Dr. John H.
Leininger include the 91,500 shares of Common Stock owned by Mercy
International, of which 80,000 shares will be sold in the offering. Dr.
Leininger disclaims beneficial ownership of the aforesaid shares.
(10) The shares shown for Mr. Hannigan include 396,500 shares of Common Stock
which he has the right to acquire upon the exercise of a stock option
granted to him by Dr. James R. Leininger. The shares shown also include
142,400 shares of Common Stock that Mr. Hannigan has the right to acquire
under stock options which are exercisable prior to February 15, 1996.
(11) The shares shown for Messrs. Brooks, Ehmann and Mittemeyer include 105,000,
20,000 and 20,000 shares of Common Stock, respectively, which they have the
right to acquire under stock options granted by the Company which are
exercisable prior to February 15, 1996. Mr. Ehmann's stock options are held
in the name of The Frank Ehmann Trust.
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<PAGE> 49
(12) The shares shown for Ms. Rhodes include 64,576 shares of Common Stock which
she has the right to acquire under stock options granted by the Company
which are exercisable prior to February 15, 1996.
(13) The shares shown for Messrs. Noll, Vrzalik, Burke, Landon, DiLazzaro and
Puchek include 51,140, 42,336, 10,000, 900, 66,518 and 36,099 shares of
Common Stock, respectively, which they have the right to acquire under
stock options granted by the Company which are exercisable prior to
February 15, 1996.
(14) The shares shown for Daniel E. Leininger include 100,000 shares of Common
Stock which he has the right to acquire under stock options granted to him
by Dr. James R. Leininger.
(15) Except as otherwise noted in footnotes (6), (7), (8) and (9) above, none of
the charitable foundations selling shares in this offering is otherwise
affiliated with the Company.
(16) The shares shown include 584,593 shares of Common Stock which the directors
and executive officers have the right to acquire under stock options
granted by the Company which are exercisable prior to February 15, 1996.
With respect to the 1,596,500 shares of Common Stock which certain
directors and officers have the right to acquire under currently
exercisable stock options granted by Dr. James R. Leininger and 285,000
shares of Common Stock owned by charitable foundations of which Dr. James
R. Leininger and either Peter A. Leininger or Sam A. Brooks are directors,
such shares are only counted once for the purpose of determining the shares
beneficially owned by all directors and executive officers as a group. See
footnotes (2), (3), (7), (8) and (10) above.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized Common Stock of the Company consists of 100 million shares
of Common Stock, par value $0.001 per share. As of December 15, 1995, there were
44,332,778 shares of the Company's Common Stock outstanding held by 473 holders
of record.
The holders of the Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. Upon liquidation or
dissolution of the Company, the holders of Common Stock are entitled to receive
pro rata all assets available for distribution to shareholders. The Common Stock
has no preemptive or other subscription rights and there are no conversion
rights or redemption or sinking fund provisions with respect to such shares. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders. The holders of Common Stock
do not have cumulative voting rights in the election of directors. All of the
shares of Common Stock to be outstanding upon completion of this offering will
be fully paid and nonassessable. All shares of the Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to 20
million shares of Preferred Stock, par value $0.001 per share, in one or more
series. The Board of Directors is authorized, without any further action by the
shareholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of Preferred Stock, the number of shares constituting any such series
and the designation thereof. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
Preferred Stock that may be issued in the future. Such Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring,
control of the Company. The issuance of Preferred Stock in certain circumstances
may have the effect of delaying or preventing a change of control of the
Company. There are no shares of Preferred Stock outstanding and the Company has
no present plans to issue any shares of Preferred Stock.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Articles of Incorporation provide that, to the fullest extent
permitted by Texas law, no director of the Company shall be liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty of
care as a director. Texas law does not permit the elimination of liability, and
the directors will be liable to the Company, for (i) any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) any act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of law, (iii) any transaction from which the director derived an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the directors office or (iv) any action or omission for
which the liability of a director is expressly provide for by statute. The
effect of this provision in the Articles of Incorporation is to eliminate the
right of the Company and its shareholders (through shareholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. These provisions will not alter the liability of
directors under federal securities laws.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
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<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 44,332,778 shares
of Common Stock outstanding (assuming no exercise of outstanding options or
warrants after October 31, 1995). Of these shares, the 20,531,927 shares held by
persons who are not "affiliates" of the Company, as that term is defined in Rule
144 of the Securities Act ("Rule 144"), will be freely tradeable without
restriction under the Securities Act. The remaining 23,800,851 shares held by
the affiliates of the Company are either registered securities, or restricted
securities (as that term is defined in Rule 144), that have been held by such
affiliate for a period of two years, and are eligible for resale in the public
market in reliance on Rule 144.
In general, under Rule 144, any non-affiliate who has beneficially owned
restricted securities for at least three years may resale such restricted
securities in the public market without restriction under Rule 144. Under Rule
144, any person who has beneficially owned restricted securities for at least
two years, and any affiliate of the Company who owns unrestricted securities, is
entitled to sell, within any three-month period, a number of such securities
that does not exceed the greater of 1% of the then outstanding shares of the
Company's Common Stock (approximately 443,328 shares immediately after this
offering) or the average weekly trading volume during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied.
The Selling Shareholders, who will hold an aggregate of 24,164,151 shares
after the offering, and the Company have agreed with the Underwriters not to
sell, directly or indirectly, any shares owned by them except those arising out
of the exercise of options granted prior to the date of this Prospectus, for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriters. In addition, the certain other officers and
directors of the Company, who will hold an aggregate of 135,200 shares after the
offering, have agreed with the Underwriters not to sell, directly or indirectly,
any shares owned by them for a period of 90 days after the date of this
Prospectus without the prior written consent of the Underwriters. Upon the
expiration of the 180-day period or 90-day period, as the case may be (or
earlier upon the prior written consent of the Underwriters), all of these shares
(plus shares issuable upon exercise of then-vested outstanding options) will
become eligible for sale subject to the restrictions of Rule 144. Dr. James R.
Leininger has granted options to certain persons to purchase an aggregate of
1,886,500 shares of Common Stock, 1,744,583 of which are exercisable as of
December 15, 1995. Of such shares subject to options granted by Dr. Leininger,
1,200,000 are subject to the 180-day lock-up agreement and 396,500 are subject
to the 90-day lock-up agreement.
The Company has filed, or with respect to the 1995 Senior Executive Stock
Option Plan intends to file, registration statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
the Company's 1987 Key Contributor Stock Option Plan, the 1988 Kinetic Concepts,
Inc. Director Stock Option Plan and 1995 Senior Executive Stock Option Plan,
thus permitting the resale of shares issued under those plans by nonaffiliates
in the public market without restriction under the Securities Act. The
registration statement for the shares issuable under the 1995 Senior Executive
Stock Option Plan will become effective immediately upon filing. As of December
15, 1995, options granted under stock option plans to purchase 2,855,333 shares
of Common Stock were outstanding, 1,330,656 of which are held by officers and
directors of the Company. At the time of the expiration of the 180- and 90-day
lock-up agreements, options granted by the Company to the directors and officers
under stock option plans to purchase approximately 32,628 shares and 538,969
shares, respectively, will be vested. In addition, certain directors hold
presently exercisable options granted directly by the Company to purchase an
aggregate of 20,000 shares. The shares received upon exercise of these options
will be restricted securities. See "Risk Factors -- Shares Eligible for Future
Sale," "Management" and "Principal and Selling Shareholders."
In April 1993, the Company issued a warrant to AmHS Purchasing Partners,
L.P. ("AmHS") exercisable any time on or after April 13, 1996 into 150,000
shares of Common Stock at an exercise price of $6.625 per share. The warrant
terminates on the earlier of (i) termination of the Rental/Purchasing Agreement
between the Company and American Healthcare Systems or (ii) April 13, 1998. The
Company has also agreed to grant to AmHS warrants (the "Additional Warrants") to
purchase up to an additional 150,000 shares of the Company's Common Stock at an
exercise price equal to the fair market value of the Company's Common Stock on
the date of such grants. The number of shares subject to the Additional Warrants
is based upon the net sales by the Company to certain AmHS member health care
facilities over a four-year period beginning April 1, 1994 and certain other
criteria. To date, the Company is obligated to grant AmHS an Additional Warrant
to purchase 250 shares of the Company's Common Stock. Pursuant to the
49
<PAGE> 52
terms of the Common Stock Warrant Agreement, the shares issuable upon exercise
of the Warrant and the Additional Warrants are subject to certain registration
rights and, accordingly, upon the effectiveness of a registration statement
covering such shares, will be eligible for resale in the public market without
restriction under the Securities Act.
UNDERWRITING
The Underwriters named below, for whom Bear, Stearns & Co. Inc. and Alex.
Brown & Sons Incorporated are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part), to purchase from the Selling
Shareholders the aggregate number of shares of Common Stock set forth opposite
their names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Bear, Stearns & Co. Inc...................................................
Alex. Brown & Sons Incorporated...........................................
---
Total...........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that, if any of the
foregoing shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares must be so purchased. The Company
and the Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Selling Shareholders have been advised that the Underwriters propose to
offer the shares of Common Stock to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers (who may include the Underwriters) at such public offering price less a
concession not to exceed $ per share. The selected dealers may re-allow a
concession to certain other dealers not to exceed $ per share. After the
initial offering to the public, the concession to selected dealers and the
re-allowance to other dealers may be changed by the Representatives.
In general, the rules of the Commission prohibit the Underwriters from
making a market in the Common Stock during the "cooling off" period immediately
preceding the commencement of sales in the offering. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an Underwriter to continue to make
a market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, certain Underwriters may engage in passive market making in the
Common Stock during the cooling off period.
Certain Selling Shareholders have granted to the Underwriters an option to
purchase up to 1,227,877 additional shares of Common Stock at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus, solely to cover over-allotments, if any. This option may be
exercised at any time on or before the 30th day after the date of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase a
number of additional shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
In connection with the Offering, the Company and the Selling Shareholders
have agreed that they will not sell, contract to sell or otherwise dispose of
any shares of Common Stock of the Company for a period of 180 days after the
date of this Prospectus without the prior written consent of the Underwriters,
except for the
50
<PAGE> 53
shares offered hereby and issuances by the Company or sale by Dr. James R.
Leininger upon the exercise of outstanding stock options or warrants granted by
each prior to the date of this Prospectus. In addition, each of the Company's
other directors and executive officers have agreed that they will not sell,
contract to sell or otherwise dispose of any shares of Common Stock of the
Company for a period of 90 days after the date of this Prospectus without the
prior written consent of the Underwriters.
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company and the Selling Shareholders by Cox &
Smith Incorporated, San Antonio, Texas. Certain legal matters will be passed
upon for the Underwriters by Latham & Watkins, Los Angeles, California, and
Wolin, Fuller, Ridley & Miller LLP, Dallas, Texas.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1993, and the related consolidated statements of earnings, capital accounts, and
cash flows for each of the years in the three-year period ended December 31,
1994 included or incorporated by reference herein and elsewhere in the
Registration Statement (as defined under "Additional Information"), have been
included or incorporated by reference herein and in the Registration Statement
in reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1994
financial statements refers to a change in the method of accounting for income
taxes in 1993 and a change in the method of applying overhead to inventory in
1994.
With respect to the unaudited interim financial information for the
nine-month periods ended September 30, 1995 and 1994, the six-month periods
ended June 30, 1995 and 1994 and the three-month periods ended March 31, 1995
and 1994 incorporated by reference herein and in the Registration Statement,
KPMG Peat Marwick LLP has reported that they applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate reports included in the Company's Quarterly Reports on
Form 10-Q for the quarters ended September 30, 1995, June 30, 1995, and March
31, 1995 incorporated by reference herein state that they did not audit and they
do not express an opinion on that interim financial information. Accordingly,
the degree of reliance on their reports on such information should be restricted
in light of the limited nature of the review procedures applied. The accountants
are not subject to the liability provisions of Section 11 of the Securities Act
for their reports on the unaudited interim financial information because that
report is not a "report" or a "part" of the Registration Statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: The Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and the New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048, at
prescribed rates. Such reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
51
<PAGE> 54
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 under the
Securities Act with respect to the Common Stock offered hereby (together with
all amendments, the "Registration Statement") with the Commission. This
Prospectus, filed as part of the Registration Statement, constitutes a part of
the Registration Statement and does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of the
Commission. In addition, certain documents filed by the Company with the
Commission have been incorporated herein by reference. See "Documents
Incorporated by Reference." Such additional information can be obtained from the
Commission's principal office in Washington, D.C. Statements in this Prospectus
concerning provisions of documents filed with the Registration Statement as
exhibits are necessarily summaries of such documents and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents or portions thereof filed by the Company are hereby
incorporated by reference in this Prospectus:
(i) The Company's Annual Report on Form 10-K for the year ended
December 31, 1994;
(ii) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995;
(iii) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995;
(iv) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995; and
(v) The description of the Company's Common Stock as set forth in the
Company's Registration Statement on Form 8-A, as amended.
In addition, all documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of Common Stock made
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein, or in any
subsequently filed document which is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus is delivered, upon oral or written request of such
person, a copy of any and all of the documents incorporated by reference herein
(other than exhibits and schedules to such documents, unless such exhibits or
schedules are specifically incorporated by reference into such documents). Such
requests should be directed to John S. Hastings, Senior Manager of Investor
Relations, Kinetic Concepts, Inc., 8023 Vantage Drive, San Antonio, Texas 78230
or by telephone at (210) 524-9000.
52
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Earnings For the Years Ended December 31, 1992, 1993 and
1994 and For the Nine Months Ended September 30, 1994 and 1995...................... F-3
Consolidated Balance Sheets at December 31, 1993 and 1994 and September 30, 1995...... F-4
Consolidated Statements of Cash Flows For the Years Ended December 31, 1992, 1993 and
1994 and For the Nine Months Ended September 30, 1994 and 1995...................... F-5
Consolidated Statements of Capital Accounts at December 31, 1991, 1992, 1993 and 1994
and at September 30, 1995........................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheets of Kinetic
Concepts, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, cash flows and capital accounts for
each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kinetic
Concepts, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 8 to the Consolidated Financial Statements, the
Company changed its method of accounting for income taxes in 1993, and its
method of applying overhead to inventory in 1994.
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 14, 1995
F-2
<PAGE> 57
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------------
1992 1993 1994 1994 1995
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service............................. $244,905 $232,250 $228,832 $ 177,790 $ 152,138
Sales and other................................ 33,586 36,622 40,814 32,285 26,285
-------- -------- -------- ---------- ----------
Total revenue........................... 278,491 268,872 269,646 210,075 178,423
-------- -------- -------- ---------- ----------
Rental expenses.................................. 156,682 169,687 159,235 125,167 102,009
Cost of goods sold............................... 18,987 18,666 19,388 16,504 10,979
-------- -------- -------- ---------- ----------
Gross profit............................ 102,822 80,519 91,023 68,404 65,435
Selling, general and administrative expenses..... 47,710 53,279 51,813 40,874 34,407
Unusual items.................................... -- 6,705 (84,868) (82,868) --
-------- -------- -------- ---------- ----------
Operating earnings...................... 55,112 20,535 124,078 110,398 31,028
Interest expense (income), net................... 7,195 5,908 4,528 5,477 (3,496)
-------- -------- -------- ---------- ----------
Earnings before income taxes, minority
interest, extraordinary item and
cumulative effect of changes in
accounting principle.................. 47,917 14,627 119,550 104,921 34,524
Income taxes..................................... 19,405 7,175 55,949 49,625 14,175
-------- -------- -------- ---------- ----------
Earnings before minority interest,
extraordinary item and cumulative
effect of changes in accounting
principle............................. 28,512 7,452 63,601 55,296 20,349
-------- -------- -------- ---------- ----------
Minority interest in subsidiary loss............. -- 560 40 40 --
Extraordinary item -- debt extinguishment, net... -- (400) -- -- --
Cumulative effect of change in accounting for
inventory...................................... -- -- 742 742 --
Cumulative effect of change in accounting for
income taxes................................... -- 450 -- -- --
-------- -------- -------- ---------- ----------
Net earnings............................ $ 28,512 $ 8,062 $ 64,383 $ 56,078 $ 20,349
======== ======== ======== ========== ==========
Earnings per common and common equivalent share:
Earnings before extraordinary item and
cumulative effect of changes in accounting
principle.................................... $ 0.63 $ 0.18 $ 1.44 $ 1.25 $ 0.45
Extraordinary item............................. -- (0.01) -- -- --
Cumulative effect of change in accounting for
inventory.................................... -- 0.02 0.02 --
Cumulative effect of change in accounting for
income taxes................................. -- 0.01 -- -- --
-------- -------- -------- ---------- ----------
Earnings per share...................... $ 0.63 $ 0.18 $ 1.46 $ 1.27 $ 0.45
======== ======== ======== ========== ==========
Shares used in earnings per share computations... 45,060 44,627 44,143 44,006 45,306
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 58
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 10,280 $ 43,241 $ 49,853
Accounts receivable, net............................... 63,872 55,456 52,193
Finance lease receivables, current..................... 6,659 8,051 --
Inventories............................................ 20,902 18,167 22,662
Note receivable, current, net.......................... -- 6,014 671
Prepaid expenses and other............................. 8,421 4,474 5,491
-------- -------- --------
Total current assets........................... 110,134 135,403 130,870
-------- -------- --------
Net property, plant and equipment........................ 113,602 51,357 60,830
Finance lease receivables, net of current................ 7,073 7,242 --
Note receivable from principal shareholder............... -- -- 10,000
Other notes receivable, net of current and allowance..... -- 3,187 3,276
Goodwill, less accumulated amortization of $10,826 in
1993, $9,105 in 1994 and $10,268 at September 30,
1995................................................... 44,859 15,476 14,312
Other assets, less accumulated amortization of $7,602 in
1993,
$8,012 in 1994 and $5,538 at September 30, 1995........ 8,905 15,989 19,960
Deferred income tax benefit, net......................... -- 4,077 --
-------- -------- --------
$284,573 $232,731 $ 239,248
======== ======== ========
LIABILITIES AND CAPITAL ACCOUNTS
Current liabilities:
Note payable........................................... $ 2,144 $ 1,878 $ --
Current installments of long-term obligations.......... 8,872 3,410 --
Current installments of capital lease obligations...... 2,955 -- --
Current installments of ESOP loan...................... 359 -- --
Accounts payable....................................... 7,751 4,079 4,567
Accrued expenses....................................... 24,499 27,280 27,544
Income tax payable..................................... 2,647 8,025 3,583
-------- -------- --------
Total current liabilities...................... 49,227 44,672 35,694
-------- -------- --------
Long-term obligations, excluding current installments.... 99,533 2,636 --
Capital lease obligations, excluding current
installments........................................... 2,060 -- --
ESOP loan, excluding current installments................ 296 -- --
Deferred income taxes, net............................... 7,710 -- 392
-------- -------- --------
158,826 47,308 36,086
-------- -------- --------
Commitments and contingencies (Note 10)
Minority interest........................................ 40 -- --
Common stock; issued and outstanding 45,501 in 1993,
43,921 in 1994 and 44,269 at September 30, 1995........ 46 44 44
Additional paid-in capital............................... 18,803 10,053 11,700
Retained earnings........................................ 117,685 175,480 190,858
Cumulative foreign currency translation adjustment....... (1,602) (154) 750
Treasury stock, at cost, 1,542 shares in 1993............ (8,510) -- --
Loan to ESOP............................................. (655) -- --
Notes receivable from officers........................... (60) -- (190)
-------- -------- --------
125,707 185,423 203,162
-------- -------- --------
$284,573 $232,731 $ 239,248
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 59
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------------
1992 1993 1994 1994 1995
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................................... $ 28,512 $ 8,062 $ 64,383 $ 56,078 $ 20,349
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization....................... 44,495 47,884 38,795 31,833 16,803
Provision for uncollectible accounts receivable..... 5,335 5,330 1,100 284 1,025
Noncash portion of unusual items.................... -- 4,832 4,797 32,616 --
Loss (gain) on KCIFS and Medical Services
dispositions..................................... -- -- (10,121) (8,757) 2,933
Change in assets and liabilities net of effects from
purchase of subsidiaries and unusual items:
Decrease (increase) in accounts receivable, net..... (15,340) (2,481) 7,316 (49) 2,001
Decrease (increase) in notes receivable............. -- -- (9,201) 12 5,343
Decrease (increase) in inventory.................... (1,578) (1,326) 2,735 (1,648) (4,800)
Decrease (increase) in prepaid and other assets..... (609) (5,437) 3,947 3,373 (1,219)
Increase (decrease) in accounts payable............. (1,695) 666 (3,672) (2,521) 1,163
Increase in accrued expenses........................ 1,388 3,930 2,781 7,009 526
Increase (decrease) in income taxes payable......... (73) (2,889) 5,378 (21,574) (4,442)
Increase (decrease) in deferred income taxes........ (2,428) (2,033) (11,787) 19,971 4,469
-------- -------- -------- --------- ---------
Net cash provided by operating activities... 58,007 56,538 96,451 116,627 44,151
-------- -------- -------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.......... (43,317) (33,402) (13,814) (10,706) (25,190)
Decrease (increase) in inventory to be converted
into equipment for short-term rental............. 500 (3,865) 4,250 3,650 (2,250)
Dispositions of property, plant and equipment....... 2,207 2,773 2,869 3,652 516
Businesses acquired in purchase transactions, net of
cash acquired.................................... (2,909) (4,240) -- -- --
Proceeds from sale of KCIFS and Medical Services.... -- -- 65,300 65,300 7,182
Decrease (increase) in finance lease receivables,
net.............................................. (4,239) (419) (1,561) 1,044 339
Note received from principal shareholder............ -- -- -- -- (10,000)
Decrease (increase) in other assets................. 600 (4,412) (9,230) (966) (4,333)
-------- -------- -------- --------- ---------
Net cash provided (used) by investing
activities................................ (47,158) (43,565) 47,814 61,974 (33,736)
-------- -------- -------- --------- ---------
Cash flows from financing activities:
Borrowings (repayments) of notes payable and
long-term obligations............................ (7,012) 7,277 (102,625) (102,244) (800)
Repayments of capital lease obligations............. (4,549) (3,526) (2,382) (2,347) (60)
Proceeds from the exercise of stock options......... 2,144 632 915 22 2,708
Payments for retirement of preferred stock.......... -- (3,452) -- -- --
Purchase and retirement of treasury stock........... (65) (2,951) (1,157) (477) (1,251)
Cash dividends paid to shareholders................. (6,326) (6,664) (6,588) (4,938) (4,971)
Other............................................... 236 (101) (791) (792) --
-------- -------- -------- --------- ---------
Net cash used by financing activities................. (15,572) (8,785) (112,628) (110,776) (4,374)
-------- -------- -------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents......................................... (505) (871) 1,324 377 571
-------- -------- -------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (5,228) 3,317 32,961 68,202 6,612
Cash and cash equivalents, beginning of period........ 12,191 6,963 10,280 10,280 43,241
-------- -------- -------- --------- ---------
Cash and cash equivalents, end of period.............. $ 6,963 $ 10,280 $ 43,241 $ 78,482 $ 49,853
======== ======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 60
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES
CUMULATIVE RECEIVABLE
FOREIGN FROM OFFICERS
ADDITIONAL CURRENCY FOR EXERCISE
PREFERRED COMMON PAID-IN RETAINED TRANSLATION TREASURY LOAN TO OF STOCK
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT STOCK ESOP OPTIONS
--------- ------ ---------- -------- ---------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991...... $ 3,034 $ 45 $ 11,589 $94,519 $ 491 $(5,494) $(1,683) $(285)
Net earnings..................... -- -- -- 28,512 -- -- -- --
Exercise of stock options........ -- -- 2,144 -- -- -- -- --
Tax benefit realized from stock
option plan.................... -- -- 1,291 -- -- -- -- --
Accretion of preferred stock..... 273 -- -- (273) -- -- -- --
Treasury stock purchased......... -- -- -- -- -- (65) -- --
Cash dividends on common and
preferred stock --
$.1425 per share............... -- -- -- (6,326) -- -- -- --
Payments on loan to ESOP......... -- -- -- -- -- -- 502 --
Foreign currency translation
adjustment..................... -- -- -- -- (1,154) -- -- --
------- --- ------- -------- ------- ------- ------- -----
Balances at December 31, 1992...... 3,307 45 15,024 116,432 (663) (5,559) (1,181) (285)
Net earnings..................... -- -- -- 8,062 -- -- -- --
Exercise of stock options........ -- 1 631 -- -- -- -- --
Forgiveness of officer
receivable..................... -- -- -- -- -- -- -- 225
Tax benefit realized from stock
option plan.................... -- -- 3,148 -- -- -- -- --
Accretion of preferred stock..... 145 -- -- (145) -- -- -- --
Treasury stock purchased......... -- -- -- -- -- (2,951) -- --
Cash dividends on common and
preferred stock --
$.15 per share................. -- -- -- (6,664) -- -- -- --
Payments on loan to ESOP......... -- -- -- -- -- -- 526 --
Purchase and retirement of
preferred stock................ (3,452) -- -- -- -- -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- (939) -- -- --
------- --- ------- -------- ------- ------- ------- -----
Balances at December 31, 1993...... -- 46 18,803 117,685 (1,602) (8,510) (655) (60)
Net earnings..................... -- -- -- 64,383 -- -- -- --
Exercise of stock options........ -- -- 803 -- -- -- -- --
Forgiveness of officer
receivable..................... -- -- -- -- -- -- -- 60
Tax benefit realized from stock
option plan.................... -- -- 112 -- -- -- -- --
Treasury stock purchased......... -- -- -- -- -- (1,157) -- --
Treasury stock retired........... -- (2) (9,665) -- -- 9,667 -- --
Cash dividends on common and
preferred stock --
$.15 per share................. -- -- -- (6,588) -- -- -- --
Payments on loan to ESOP......... -- -- -- -- -- -- 655 --
Foreign currency translation
adjustment..................... -- -- -- -- 1,448 -- -- --
------- --- ------- -------- ------- ------- ------- -----
Balances at December 31, 1994...... -- 44 10,053 175,480 (154) -- -- --
Net earnings..................... -- -- -- 20,349 -- -- -- --
Exercise of stock options........ -- -- 2,119 -- -- -- -- (190)
Tax benefit realized from stock
option plan.................... -- -- 779 -- -- -- -- --
Treasury stock purchased......... -- -- -- -- -- (1,251) -- --
Treasury stock retired........... -- -- (1,251) -- -- 1,251 -- --
Cash dividends on common and
preferred stock --
$.1125 per share............... -- -- -- (4,971) -- -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- 904 -- -- --
------- --- ------- -------- ------- ------- ------- -----
Balances at September 30, 1995..... $ -- $ 44 $ 11,700 $190,858 $ 750 $ -- $ -- $(190)
======= === ======= ======== ======= ======= ======= =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 61
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Kinetic
Concepts, Inc. ("KCI") and all subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications of amounts related to prior years have
been made to conform with the 1994 presentation, principally reclassifications
of rental and selling, general and administrative expenses.
The Company designs, manufactures, markets and distributes therapeutic
products, primarily specialized hospital beds, mattress overlays and mattress
replacement systems, that treat and prevent the complications of immobility.
Most of the Company's customers are health care providers, primarily hospitals
and extended care facilities throughout the U.S. and certain international
markets. Receivables from these entities are unsecured.
The Company operates in nine foreign countries including Germany, Austria,
United Kingdom, Canada, France, the Netherlands, Switzerland, Australia and
Italy. (see Note 12).
(b) Revenue Recognition
Service and rental revenue are recognized as services are rendered. Sales
and other revenue are recognized when products are shipped. Through June 15,
1995, the Company leased certain medical equipment under long-term lease
agreements which were accounted for as direct financing leases. Unearned
interest was amortized to income over the term of the lease using the interest
method.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value). Costs include material, labor and manufacturing overhead
costs. Inventory expected to be converted into equipment for short-term rental
has been reclassified to property, plant and equipment.
On January 1, 1994, the Company changed its method of applying overhead to
inventory. Historically, a single labor overhead rate and a single materials
overhead rate were used in valuing ending inventory. Labor overhead was applied
as labor was incurred while materials overhead was applied at the time of
shipping. During 1993, the Company completed a study to more precisely determine
the labor overhead which should be applied to specific products, parts and
accessories which resulted in the adoption of four separate labor overhead pools
and the application of materials overhead upon the receipt of materials.
The Company believes that the change in the application of this accounting
principle is preferable because it more accurately assigns overhead costs to the
products, parts and accessories which benefit from the related activities and
thus improves the matching of costs with revenues in reporting operating
results.
The change in the application of this accounting principle resulted in an
increase in net earnings of $742,000 (after reduction of income taxes of
$455,000, or $0.02 per share), which reflects the cumulative effect of this
change for the periods prior to January 1, 1994. The pro forma effects of the
retroactive application of the change in accounting principle have not been
disclosed because the effects cannot be reasonably estimated. The effect of the
change for the period ended December 31, 1994 on the results of operations
before the cumulative effect of the change is not material.
F-7
<PAGE> 62
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments which extend
the useful life of the equipment are capitalized.
(f) Depreciation and Amortization
Depreciation on property, plant and equipment is calculated on the
straight-line method over the estimated useful lives (thirty to forty years for
the buildings and between three and ten years for most of the Company's other
property and equipment) of the assets.
(g) Goodwill
Goodwill represents the excess purchase price over the fair value of net
assets acquired and is amortized over five to thirty-five years from the date of
acquisition using the straight-line method.
The carrying value of goodwill is based on management's current assessment
of recoverability. Management evaluates recoverability using both objective and
subjective factors. Objective factors include management's best estimates of
projected future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis, technological
advantage or disadvantage, and the Company's strategic focus.
(h) Other Assets
Other assets consist principally of patents, trademarks, cash and
investments restricted for use by the Company's captive insurance company, and
the estimated residual value of an asset subject to a leveraged lease. Patents
and trademarks are amortized over the estimated useful life of the respective
asset using the straight-line method.
(i) Income Taxes
The Company recognizes certain transactions in different time periods for
financial reporting and income tax purposes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The provision for deferred income
taxes represents the change in deferred income tax accounts during the year.
(j) Common Stock and Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed by dividing
net earnings (after deducting preferred stock dividends and accretion) by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options (using the treasury stock method). Earnings per share computed on
a fully diluted basis is not presented as it is not significantly different from
earnings per share computed on a primary basis.
(k) Insurance Programs
In 1993, the Company established the KCI Employee Benefits Trust (the
"Trust") as a self-insurer for certain risks related to the Company's U.S.
employee health plan and certain other benefits. The Company funds the Trust
based on the value of expected future payments, including claims incurred but
not reported. The Company has purchased insurance which limits the Trust's
liability under the benefit plans.
During 1993, the Company formed a wholly-owned captive insurance company,
KCI Insurance Company, Ltd. (the "Captive"). The Captive reinsures the primary
layer of commercial general liability,
F-8
<PAGE> 63
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
workers compensation and auto liability insurance for certain operating
subsidiaries of the Company. Provisions for losses expected under these programs
are recorded based upon the Company's estimates of the aggregate liability for
claims incurred based on actuarial reviews. The Company has obtained insurance
coverage for catastrophic exposures as well as those risks required to be
insured by law or contract.
(l) Foreign Currency Translation
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The translation of the applicable
foreign currencies into U.S. dollars is performed for balance sheet accounts
using the exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
(m) New Pronouncement -- Accounting for Asset Impairment
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt Statement 121 in the fiscal year beginning
January 1, 1996. Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company has not
completed all of the analysis required to estimate the impact of the new
statement; however, the adoption of Statement 121 is not expected to have a
material adverse impact on the Company's financial position or the results of
its operations at the time of adoption.
(n) Unaudited Information
The financial statements as of September 30, 1995 and for the nine months
ended September 30, 1994 and September 30, 1995, and related footnote
disclosures to the extent they relate to such periods, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and are unaudited. Accordingly, such data does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 1995 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
On September 30, 1994, the Company sold certain assets (the "Assets") used
exclusively by Medical Services to Mediq/PRN under an Asset Purchase Agreement.
Upon consummation of this transaction, Mediq/PRN acquired the Assets and assumed
certain liabilities of Medical Services. The sales price was approximately $84.1
million. In conjunction with the sale, the Company and its affiliates agreed not
to rent or distribute a portfolio of critical care and life support equipment
for five years.
F-9
<PAGE> 64
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross proceeds included a cash payment of approximately $65.3 million and
promissory notes in the aggregate principal amount of $18.8 million. The net
proceeds of $72.8 million, pre-tax gain of $10.1 million, and after-tax net loss
of $2.5 million were calculated, as follows (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 65,300
Notes receivable (See Note (3))................................... 9,852
Fees and commissions.............................................. (2,329)
--------
Net proceeds............................................ 72,823
Equipment and inventory sold...................................... (38,959)
Goodwill.......................................................... (25,778)
Accounts receivable provision..................................... (479)
Capital leases assumed............................................ 2,514
--------
Pre-tax gain on disposition............................. 10,121
--------
Tax expense....................................................... (12,601)
--------
Net loss on disposition................................. $ (2,480)
========
</TABLE>
Tax expense exceeded the pre-tax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill. In addition, the Asset Purchase Agreement
includes a provision for a post-closing adjustment which may result in a
reimbursement to the Buyer for a portion of the purchase price. The adjustment
occurs if actual inventory or equipment levels are found to be lower than levels
specified in the Asset Purchase Agreement. Interest accrues at the rate of 8% on
any required payment.
Assuming the sale was consummated as of the beginning of the current and
prior fiscal year and excluding the after-tax loss on disposition, pro forma
operating results of the Company would be as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1993 1994
-------- --------
<S> <C> <C>
Revenue........................................................ $212,882 $225,800
Net earnings................................................... $ 8,064 $ 71,116
Earnings per share............................................. $ 0.18 $ 1.61
Shares used.................................................... 44,627 44,143
</TABLE>
In June 1993, the Company acquired the operating assets of Clinical
Systems, Inc. ("CSI"), a provider of intravenous services and supplies to the
home health care market, from a bank for $4.2 million, including direct
acquisition costs. The Company recognized the excess cost of the assets acquired
over the estimated fair value of such assets ("goodwill") of $1.4 million which
was being amortized over 15 years. The net assets of CSI were sold as part of
the sale of Medical Services and the unamortized goodwill was written off.
In December 1992, the Company acquired the assets of Medical Retro Design,
Inc. ("MRD"), a hospital bed refurbishment company for $1.1 million plus a
continuing ten percent (10%) equity interest in the operations. The equity
interest was subject to a put option for $1 million. In June 1993, the put
option was exercised by its holder. In 1994, as a result of the Company's
adoption of a plan to liquidate the assets of this subsidiary, goodwill of $1.5
million associated with MRD was written off. This write-off was treated as an
unusual item.
On April 23, 1993, KCI sold a 33% interest in MRD for $600,000. The
purchaser's investment, net of its interest in operating loss, has been reported
on the balance sheet as minority interest.
F-10
<PAGE> 65
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Detail of businesses acquired in purchase transactions is as follows (in
thousands):
<TABLE>
<CAPTION>
1992 1993
------ ------
<S> <C> <C>
Fair value of assets acquired, including goodwill.................. $2,849 $5,103
Liabilities assumed................................................ (27) (863)
Minority interest.................................................. (990) --
Amounts paid in 1992 for 1991 acquisitions......................... 1,077 --
------ ------
Net cash paid for acquisitions..................................... $2,909 $4,240
====== ======
</TABLE>
These acquisitions have been accounted for under the purchase method and
results of operations are included in the Company's results of operations from
the date of acquisition.
On June 15, 1995, the Company sold KCIFS to Cura Capital Corporation
("Cura") for cash under a Stock Purchase Agreement. Upon consummation of this
transaction, Cura acquired all of the outstanding capital stock of KCIFS. Total
proceeds from the sale were $7.2 million. This transaction resulted in a pre-tax
loss of $2.9 million which is reflected in selling, general and administrative
expenses for the nine months ended September 30, 1995. In addition, the Company
and its affiliates agreed not to provide lease financing for medical equipment
manufactured by third parties for a period of three years. KCIFS served as the
leasing agent for Medical Services, certain assets of which were sold in
September 1994. The operating results of KCIFS for 1995 and 1994 were not
material as compared to the overall results of the Company.
NOTE 3. NOTES RECEIVABLE
Notes receivable at December 31, 1994, consist of notes received from
Mediq/PRN as part of the proceeds on the sale of Medical Services effective
September 30, 1994. The values of the various notes receivable described below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
---------------------------
PRINCIPAL STATED
BALANCE INTEREST RATE
--------- ---------------
<S> <C> <C>
Note from Mediq/PRN due in 10 equal monthly installments
beginning December, 1994..................................... $ 5,404 --
Notes from PRN Holding, Inc. with interest accruing from March
1996, payable quarterly, and principal due September, 1999... 10,000 10%
Note from Mediq/PRN due in 12 equal monthly installments
beginning December, 1994..................................... 2,734 8%
Miscellaneous.................................................. 4 --
-------
Total.......................................................... 18,142
Less discount and valuation allowance.......................... (8,941)
Less amounts classified as current............................. (6,014)
-------
Notes receivable, noncurrent................................... $ 3,187
=======
</TABLE>
At the time of the sale, the Company received an opinion from an
independent investment banker on the notes receivable which was used to arrive
at the carrying values. The Company believes that the carrying amounts for notes
receivable are reasonable estimates of the related fair values.
In August 1995, the Company loaned $10.0 million to James R. Leininger,
M.D., the principal shareholder and chairman of the Company's board of
directors. The note is secured by a Stock Pledge Agreement covering one million
shares of common stock in Kinetic Concepts, Inc. Interest is payable in annual
installments at the rate of 7.94%. Any portion of the note may be prepaid.
Otherwise, the note matures
F-11
<PAGE> 66
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on August 21, 1997, at which date the unpaid principal balance is due and
payable. If prior to maturity, any of the shares of stock securing the note are
disposed of, 25% of the gross proceeds must be used to prepay the note.
NOTE 4. SUPPLEMENTAL BALANCE SHEET DATA
A summary of accounts receivable follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
-------- ------- -------------
<S> <C> <C> <C>
Trade accounts receivable......................... $ 69,284 $61,722 $56,012
Employee and other receivables.................... 2,088 2,334 1,984
-------- ------- -------
71,372 64,056 57,996
Less allowance for doubtful receivables........... 7,500 8,600 5,803
-------- ------- -------
$ 63,872 $55,456 $52,193
======== ======= =======
</TABLE>
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1993 1994 1995
-------- ------- -------------
<S> <C> <C> <C>
Finished goods.................................... $ 5,902 $ 3,086 $ 3,605
Work in process................................... 1,546 1,642 2,885
Raw materials, supplies and parts................. 21,954 17,689 22,672
-------- ------- -------
29,402 22,417 29,162
Less amounts expected to be converted into
equipment for short-term rental................. 8,500 4,250 6,500
-------- ------- -------
$ 20,902 $18,167 $22,662
======== ======= =======
</TABLE>
Net property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
<S> <C> <C> <C>
Land............................................. $ 752 $ 742 $ 742
Buildings........................................ 10,016 9,882 11,085
Equipment for short-term rental.................. 199,561 117,745 111,546
Machinery, equipment and furniture............... 27,380 29,041 31,717
Leasehold improvements........................... 635 633 708
Inventory to be converted into equipment......... 8,500 4,250 6,500
-------- -------- ---------
246,844 162,293 162,297
Less accumulated depreciation and amortization... 133,242 110,936 101,467
-------- -------- ---------
$113,602 $ 51,357 $ 60,830
======== ======== =========
</TABLE>
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
<S> <C> <C> <C>
Payroll, commissions and related taxes............. $ 7,875 $11,450 $11,464
Insurance accruals................................. 3,530 4,143 4,336
Accruals related to disposition of Medical
Services......................................... -- 1,524 777
Other accrued expenses (Note (11))................. 13,094 10,163 10,967
------- ------- -------
$24,499 $27,280 $27,544
======= ======= =======
</TABLE>
F-12
<PAGE> 67
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of financial instruments in current assets and current
liabilities approximate fair value because of the short maturity of these
instruments.
NOTE 5. EQUIPMENT LEASES
Through June 1995, the Company leased medical equipment to hospitals,
nursing homes, doctors and others through KCIFS. Equipment leases that met the
criteria for direct financing leases were carried at the gross investment in the
lease less unearned income. Any equipment which did not meet the criteria for a
direct financing lease was accounted for as an operating lease. Operating leases
are usually for one to three year periods. The medical devices under the
operating leases are included with property, plant and equipment in the
accompanying December 31, 1994 and 1993 balance sheets at a cost of
approximately $3.4 million and $5.4 million and accumulated depreciation of
approximately $1.2 million and $2.1 million, respectively.
Future minimum lease receivables under noncancelable leasing arrangements
as of December 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
FINANCE OPERATING
LEASE LEASE
RECEIVABLES RECEIVABLES
----------- -----------
<S> <C> <C>
Year Ended
1995......................................................... $ 8,766 $ 1,041
1996......................................................... 5,032 624
1997......................................................... 2,537 340
1998......................................................... 1,000 66
1999......................................................... 521 --
----------- -----------
Minimum lease payment receivables.............................. 17,856 $ 2,071
========
Estimated residual value of leased property.................... 519
Less unearned income........................................... (2,773)
Less allowance for doubtful accounts........................... (309)
-----------
Net investment in finance lease receivables.................... 15,293
Less current portion........................................... (8,051)
-----------
Long-term portion.............................................. $ 7,242
========
</TABLE>
The carrying amounts of these leases approximate their fair market value.
At September 30, 1995, there were no remaining finance or operating lease
receivables (see Note 2).
NOTE 6. NOTE PAYABLE AND LONG-TERM OBLIGATIONS
At December 31, 1994, KCIFS, had a note payable which provided for
borrowings up to a maximum of $5.0 million with a bank. At December 31, 1994 and
1993, $1.9 million and $2.1 million, respectively, were outstanding and due on
demand on the note payable. The term loan portion of this obligation is included
in long-term obligations below. Interest on the note payable is at the bank's
base lending rate plus one-half of one percent (9.0% at December 31, 1994).
F-13
<PAGE> 68
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of long-term obligations follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
-------- ------
<S> <C> <C>
Term loan due in semiannual principal installments through
August 1996.................................................... $ 50,000 $ --
Revolving credit facility due February 1997...................... 51,000 --
Nonrecourse notes payable to financial institutions, interest
rates ranging from 10.5% to 13.5%, payable through October
1998........................................................... 2,560 891
Other notes...................................................... 4,845 5,155
-------- ------
108,405 6,046
Less current installments........................................ 8,872 3,410
-------- ------
Long-term obligations, excluding current installments............ $ 99,533 $2,636
======== ======
</TABLE>
On December 17, 1993, the Company entered into a revolving credit and term
loan agreement (the "Credit Agreement") with a bank as agent for itself and
certain other financial institutions. The Credit Agreement was subsequently
amended on May 8, 1995 and provides for a $50 million one-year revolving credit
facility with a two-year renewal option. Any advances under the Credit Agreement
are due at the end of the period covered by the Credit Agreement. At September
30, 1995, the entire $50 million was available.
The interest rate payable on borrowings under the Credit Agreement is at
the election of the Company: (i) the Bank's reference rate (the "Reference
Rate") or (ii) the London interbank offered rate quoted to the Bank, for one,
two, three or six month Eurodollar deposits adjusted for appropriate reserves
("LIBOR") plus 40 basis points.
The Credit Agreement requires that the Company maintain specified ratios
and meet certain financial targets. The Credit Agreement also contains certain
events of default, includes certain provisions governing a change in control of
the Company and establishes various fees to be paid by the Company. At December
31, 1994 and September 30, 1995, the Company was in compliance with all
covenants.
In the fourth quarter of 1993, the Company recorded an extraordinary item
of $400,000, net of a $267,000 tax benefit, or $0.01 per share related to the
refinancing of its existing debt facility.
The maturities of long-term obligations as of December 31, 1994 were as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1995.............................................................. $3,410
1996.............................................................. 1,701
1997.............................................................. 815
1998.............................................................. 120
------
$6,046
======
</TABLE>
The carrying value of the Company's long-term obligations approximates
their fair value based on current rates for similar types of debt.
Interest paid on debt during 1994, 1993 and 1992 amounted to $5.4 million,
$7.0 million and $6.7 million, respectively.
NOTE 7. LEASING OBLIGATIONS
At December 31, 1993, the gross amount of rental equipment under capital
leases totaled $13.0 million and related accumulated depreciation totaled $7.7
million, respectively.
F-14
<PAGE> 69
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases service vehicles, office space, various storage
spaces and manufacturing facilities under noncancelable operating leases which
expire at various dates over the next six years. Total rental expense for
operating leases, net of sublease payments received, was $10.9 million, $11.1
million and $11.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1994
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1995............................................................... $ 5,921
1996............................................................... 3,324
1997............................................................... 1,478
1998............................................................... 721
1999............................................................... 319
Later years........................................................ 16
-------
Total minimum lease payments....................................... $11,779
=======
</TABLE>
NOTE 8. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" as of January 1, 1993. The cumulative effect of
this change in accounting for income taxes of $450,000 was determined as of
January 1, 1993, and is reported separately in the consolidated statement of
earnings for the year ended December 31, 1993. The 1992 financial statements
have not been restated to apply the provisions of Statement 109.
Earnings before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994
------- ------- --------
<S> <C> <C> <C>
Domestic..................................... $41,270 $10,022 $110,287
Foreign...................................... 6,647 4,605 9,263
------- ------- --------
$47,917 $14,627 $119,550
======= ======= ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal...................................... $56,697 $(11,031) $45,666
State........................................ 8,212 (756) 7,456
International................................ 3,282 -- 3,282
------- -------- -------
$68,191 $(11,787) $56,404
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
--------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal...................................... $ 4,483 $ (1,071) $ 3,412
State........................................ 1,565 (574) 991
International................................ 2,710 62 2,772
------- -------- -------
$ 8,758 $ (1,583) $ 7,175
======= ======== =======
</TABLE>
F-15
<PAGE> 70
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
--------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal...................................... $15,391 $ (1,492) $13,899
State........................................ 3,216 (1,019) 2,197
International................................ 3,309 -- 3,309
------- -------- -------
$21,916 $ (2,511) $19,405
======= ======== =======
</TABLE>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the statutory tax rate of 35
percent in 1994 and 1993, and 34 percent in 1992 to pretax income from
continuing operations as a result of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Computed "expected tax" expense....................... $16,292 $ 5,119 $41,843
Goodwill.............................................. 787 824 9,307
State income taxes, net of Federal benefit............ 1,449 644 4,846
Loss in majority-owned subsidiary..................... -- 802 --
Effect of change in tax rates on temporary
differences......................................... -- 250 --
Foreign income taxed at other than U.S. rates......... 528 1,159 350
Utilization of foreign net operating loss
carryforwards....................................... -- (1,319) (814)
Nonconsolidated foreign net operating loss............ -- -- 566
Foreign, other........................................ 250 (135) 271
Effect of change in inventory accounting method....... -- -- 455
Other, net............................................ 99 (169) (420)
------- ------- -------
$19,405 $ 7,175 $56,404
======= ======= =======
</TABLE>
F-16
<PAGE> 71
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 and December 31, 1993 are presented below (in thousands):
<TABLE>
<CAPTION>
1993 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts...................................................... $ 2,133 $ 3,083
Intangible assets, deducted for book purposes but capitalized
and amortized for tax purposes................................ 429 51
Net operating loss carryforwards................................ 1,316 1,193
Inventories, principally due to additional costs capitalized for
tax purposes pursuant to the Tax Reform Act of 1986........... 31 1,064
Notes receivable, basis difference.............................. -- 679
Nondeductible loss in subsidiary................................ 628 --
Legal fees, capitalized and amortized for tax purposes.......... -- 672
Other........................................................... 122 139
------- -------
Total gross deferred tax assets............................... 4,659 6,881
Less valuation allowance...................................... (1,944) (1,193)
------- -------
Net deferred tax assets....................................... 2,715 5,688
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation and basis........................................ (8,978) (1,032)
Accrued liabilities, not currently deductible for tax
purposes...................................................... (463) (256)
Deferred state tax liability.................................... (900) (144)
Other........................................................... (84) (179)
------- -------
Total gross deferred tax liabilities.......................... (10,425) (1,611)
------- -------
Net deferred tax asset (liability)............................ $ (7,710) $ 4,077
======= =======
</TABLE>
At December 31, 1994, the Company had $1.6 million of operating loss
carryforwards available to reduce future taxable income of certain international
subsidiaries. These loss carryforwards must be utilized within the applicable
carryforward periods. A valuation allowance has been provided for the deferred
tax assets related to loss carryforwards. Carryforwards of $600,000 can be used
indefinitely and the remainder expire between 1995 and 2000.
The Company anticipates that the reversal of existing taxable temporary
differences and future taxable income will provide sufficient taxable income to
realize the tax benefit of the remaining deferred tax assets.
Income taxes paid during 1994, 1993, and 1992 were $57.3 million, $13.3
million and $20.5 million, respectively.
NOTE 9. SHAREHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock
The Company is authorized to issue 100 million shares of Common Stock,
$.001 par value (the "Common Stock"). The number of shares of Common Stock
issued and outstanding at September 30, 1995, December 31, 1994 and December 31,
1993 was 44,269,000, 43,921,000 and 45,501,000, respectively.
Treasury Stock
In February 1993, the Company's Board of Directors approved a program to
repurchase up to three million shares of its Common Stock. The Company
repurchased 237,000 shares during 1994 and
F-17
<PAGE> 72
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
582,000 shares during 1993. In 1994, the Company's Board of Directors adopted a
resolution to return all repurchased shares to the status of authorized but
unissued shares. In accordance with this resolution, the Company retired
1,779,000 treasury shares during 1994.
Preferred Stock
The Company is authorized to issue up to 20 million shares of preferred
stock, par value $0.001 per share, in one or more series. As of December 31,
1994 and December 31, 1993, none were outstanding.
Options
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the "Key
Contributor Stock Option Plan") covers up to an aggregate of 5,750,000 shares of
the Company's Common Stock. Options may be granted under the Key Contributor
Stock Option Plan to employees (including officers), non-employee directors and
consultants of the Company. The exercise price of the options is determined by a
committee of the Board of Directors of the Company. The Key Contributor Stock
Option Plan permits the Board of Directors to declare the terms for payment when
such options are exercised. Options may be granted with a term not exceeding ten
years.
The following table summarizes the activity in the Company's Key
Contributor Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ ------------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1992.......................... 2,122 $2.75 to $10.00
Granted............................................... 515 $8.1875 to $8.625
Canceled.............................................. (204) $3.50 to $10.00
Exercised............................................. (631) $2.75 to $5.75
------
Outstanding, December 31, 1992........................ 1,802 $3.00 to $8.625
Granted............................................... 1,212 $3.75 to $7.625
Canceled.............................................. (346) $3.50 to $8.1875
Exercised............................................. (62) $3.50 to $5.75
------
Outstanding, December 31, 1993........................ 2,606 $3.00 to $8.625
Granted............................................... 2,116 $3.375 to $6.00
Canceled.............................................. (1,556) $3.50 to $8.625
Exercised............................................. (199) $3.50 to $5.75
------
Outstanding, December 31, 1994........................ 2,967 $3.00 to $8.625
======
</TABLE>
As of December 31, 1994 and 1993, 1.1 million and 819,000 options were
exercisable and 1.4 million and 733,000 shares were available for future grants,
respectively.
F-18
<PAGE> 73
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the "Directors
Stock Option Plan") covers an aggregate of 300,000 shares of the Company's
Common Stock and may be granted to non-employee directors of the Company. The
exercise price of options granted under the Directors Stock Option Plan shall be
the fair market value of the shares of the Company's Common Stock on the date
that such option is granted. The following table summarizes the activity in the
Directors Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ -----------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1992........................... 126 $4.125 to $13.25
Granted................................................ 8 $8.75 to $9.375
Exercised.............................................. (15) $7.00
------
Outstanding, December 31, 1992......................... 119 $4.125 to $13.25
Granted................................................ 8 $4.50
Exercised.............................................. (57) $7.00
Lapsed................................................. (8) $13.125 to $13.25
------
Outstanding, December 31, 1993......................... 62 $4.125 to $9.375
Granted................................................ 8 $3.75 to $4.50
Exercised.............................................. -- --
Lapsed................................................. (8) $5.00 to $5.25
------
Outstanding, December 31, 1994......................... 62 $3.75 to $9.375
=====
</TABLE>
In July 1991, the Company granted options to three non-employee directors
of the Company to acquire a total of 30,000 shares of the Company's Common Stock
at $5.00 per share (the fair market value at date of grant). At December 31,
1994, 20,000 options are exercisable and expire ten years from the grant date.
In addition, in April 1993, the Company granted a warrant to the Medical
Retro Design minority interest holder to acquire 150,000 shares of the Company's
common stock at $6.625 per share (the fair market value at date of grant). The
Company has also agreed to grant warrants to purchase up to an additional
150,000 shares of the Company's Common Stock at an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant. The number
of shares subject to such additional warrants is based upon performance and
certain other criteria. These warrants are exercisable and expire over a
five-year period from the date of such grants.
During 1994, the Chairman of the Board issued options for 440,000 of his
shares at fair market value of $5.74 to the newly appointed Chief Executive
Officer.
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the "ESOP")
covering employees of the Company who meet minimum age and length of service
requirements. The ESOP enables eligible employees to acquire a proprietary
interest in the Company. As of December 31, 1994, and December 31, 1993, 500,000
and 400,000 shares, respectively, of the stock owned by the ESOP were allocated
to employees. Based on the number of shares planned to be allocated for the
year, ESOP expense recorded during 1994, 1993, and 1992 amounted to $476,000,
$594,000 and $590,000, including $5,000, $55,000 and $90,000 of interest expense
related to a loan agreement with a bank, respectively.
Investment Plan
The Company has an Investment Plan intended to qualify as a deferred
compensation plan under Section 401(k) of the Internal Revenue Code of 1986. The
Investment Plan is available to all domestic employees and the Company matches
employee contributions up to a specified limit. In 1994, 1993 and 1992,
$314,000, $308,000 and $318,000, respectively, was charged to expense for
matching contributions.
F-19
<PAGE> 74
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. COMMITMENTS AND CONTINGENCIES
On February 21, 1992, Novamedix Limited filed a lawsuit against the Company
in the United States District Court for the Western District of Texas. Novamedix
holds the patent rights to the principal product which directly competes with
the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents
held by Novamedix, that the Company breached a confidential relationship with
Novamedix and a variety of subsidiary claims. Novamedix seeks injunctive relief
and monetary damages. Discovery in this case has been substantially completed.
Although it is not possible to predict the outcome of this litigation or the
damages which could be awarded, the Company believes that its defenses to these
claims are meritorious and that the litigation will not have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company is party to several lawsuits arising in the ordinary course of
business, including product liability claims and is contesting certain
adjustments proposed by the Internal Revenue Service to prior years' tax
returns. Provisions have been made in the accompanying financial statements for
estimated exposures related to these lawsuits and adjustments. In the opinion of
management, the disposition of these items will not have a material effect on
the Company's business, financial condition or results of operations.
See discussion of self-insurance program at Note 1 and lease commitments at
Note 7.
NOTE 11. UNUSUAL ITEMS
During the third quarter of 1994, the Company recorded a gain from the
settlement of a patent infringement lawsuit brought against SSI. The settlement
was $84.8 million. Net of legal expenses, this transaction added $81.6 million
of pretax income to the 1994 results. In addition, a $10.1 million pre-tax gain
from the sale of Medical Services was recognized. The Company recorded certain
other unusual items, primarily planned dispositions of underutilized rental
assets and overstocked inventories of $6.8 million.
A summary of unusual items follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
SSI settlement, net of legal fees......................... $ -- $81,596
Gain from Medical Services sale (Note 2).................. -- 10,121
Equipment and inventory write-downs....................... (4,850) (4,045)
Other charges............................................. (1,855) (2,804)
------ -------
Unusual items in operating earnings............. $(6,705) $84,868
====== =======
</TABLE>
During the fourth quarter of 1993, the Company recorded unusual items of
$6.7 million. Adjustments to the carrying values of assets and liabilities,
primarily related to planned dispositions of underutilized rental assets and
overstocked inventories, totaling $4.8 million were charged to unusual items.
Unusual items also includes provisions of $900,000 relating to losses
anticipated for the relocation of certain operations as well as certain other
severance costs. A provision for anticipated losses of $1 million related to
product liability claims was also charged to unusual items when one of the
Company's former insurance carriers was placed into receivership.
F-20
<PAGE> 75
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one industry segment: the distribution of
specialty therapeutic beds and rental medical devices to select health care
providers.
A summary of financial information by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers.................. $223,202 $46,444 $ -- $269,646
Intercompany transfers.................. 5,489 -- (5,489) --
-------- ------- -------- --------
Total........................... $228,691 $46,444 $ (5,489) $269,646
======== ======= ======== ========
Operating earnings........................ $117,368 $ 7,737 $ (1,027) $124,078
======== ======= ======== ========
Total assets:
Identifiable assets..................... $156,248 $41,756 $ (8,514) $189,490
======== ======= ========
Corporate assets 43,241
--------
Total assets.................... $232,731
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers.................. $229,301 $39,571 $ -- $268,872
Intercompany transfers.................. 3,644 -- (3,644) --
-------- ------- -------- --------
Total........................... $232,945 $39,571 $ (3,644) $268,872
======== ======= ======== ========
Operating earnings........................ $ 14,941 $ 6,073 $ (479) $ 20,535
======== ======= ======== ========
Total assets:
Identifiable assets..................... $244,495 $37,285 $ (7,487) $274,293
======== ======= ========
Corporate assets........................ 10,280
--------
Total assets.................... $284,573
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers.................. $238,464 $40,027 $ -- $278,491
Intercompany transfers.................. 3,891 -- (3,891) --
-------- ------- -------- --------
Total........................... $242,355 $40,027 $ (3,891) $278,491
======== ======= ======== ========
Operating earnings........................ $ 49,222 $ 6,728 $ (838) $ 55,112
======== ======= ======== ========
Total assets:
Identifiable assets..................... $246,949 $43,294 $(10,291) $279,952
======== ======= ========
Corporate assets........................ 6,963
--------
Total assets.................... $286,915
========
</TABLE>
Domestic intercompany transfers primarily represent shipments of equipment
and parts to international subsidiaries. These intercompany shipments are made
at transfer prices which approximate prices charged to
F-21
<PAGE> 76
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unaffiliated customers and have been eliminated from consolidated net revenues.
Corporate assets consist primarily of cash and cash equivalents.
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated results of operations by quarter are summarized
below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue........................................ $72,084 $67,751 $70,239 $59,572(a)
Operating earnings............................. $ 9,161 $ 8,035 $93,202 $13,680(b)
Net earnings................................... $ 4,264 $ 3,173 $48,641 $ 8,305(b)
Earnings per common and common
equivalent share............................. $0.10 $0.07 $1.10 $0.19(b)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue........................................ $69,963 $63,594 $67,803 $67,512
Operating earnings(loss)....................... $11,345 $ 4,671 $ 5,305 $ (786)(b)
Net earnings (loss)............................ $ 6,192 $ 1,503 $ 1,324 $ (957)(b)
Earnings (loss) per common and common
equivalent share............................. $0.14 $0.03 $0.03 $(0.02)(b)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue........................................ $69,280 $66,818 $70,282 $72,111
Operating earnings............................. $14,257 $12,659 $13,951 $14,245
Net earnings................................... $ 7,208 $ 6,320 $ 7,305 $ 7,679
Earnings per common and common
equivalent share............................. $0.16 $0.14 $0.16 $0.17
</TABLE>
- ---------------
(a) See discussion of acquisitions/dispositions at Note 2.
(b) See discussion of unusual items at Note 11 and extraordinary item at Note 6.
F-22
<PAGE> 77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOR CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFERS OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF THE
TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 9
Price Range of Common Stock.......... 9
Dividend Policy...................... 9
Capitalization....................... 10
Selected Consolidated Financial
Data............................... 11
Unaudited Pro Forma Condensed
Consolidated Statements of
Earnings........................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................. 26
Management........................... 42
Principal and Selling Shareholders... 45
Description of Capital Stock......... 48
Shares Eligible for Future Sale...... 49
Underwriting......................... 50
Legal Matters........................ 51
Experts.............................. 51
Available Information................ 51
Additional Information............... 52
Documents Incorporated by
Reference.......................... 52
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
KINETIC CONCEPTS, INC.
8,185,849 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS
INCORPORATED
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the issuance and distribution of the securities described in this
registration statement, other than underwriting discounts and commissions. The
Company and the Selling Shareholders will pay all such expenses.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 37,100
Blue sky fees and expenses................................................ 15,000
NASD fees................................................................. 11,400
Accounting fees and expenses.............................................. 125,000
Legal fees and expenses................................................... 175,000
Fees of Transfer Agent and Registrar...................................... 2,000
Printing and engraving fees and expenses.................................. 150,000
Miscellaneous............................................................. 10,000
--------
Total........................................................... $525,500
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act (the "Act") empowers a
Texas corporation to indemnify any person who was, is, or is threatened to be
made, a named defendant or respondent to any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such action, suit or proceeding,
and any inquiry or investigation that could lead to such an action, suit or
proceeding, because the person is or was a director of such corporation, and any
person who, while serving as a director of such corporation, was serving at the
request of such corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
corporation or enterprise. This indemnity may include judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable expenses
actually incurred by such person in connection with such action, suit or
proceeding, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnification of a director is not permitted
if the person is found liable for willful and intentional misconduct in the
performance of his duty to the corporation, is found to be liable on the basis
of the receipt of an improper benefit or is found liable to the corporation. A
Texas corporation is also permitted to indemnify and advance expenses to
officers, employees and agents who are not directors to such extent as may be
provided by its articles of incorporation, bylaws, action of board of directors,
a contract or required by common law. No indemnification shall be permitted if
the person shall have been found liable for willful or intentional misconduct in
the performance of his duty to the corporation. A Texas corporation is required
to indemnify a director or officer against reasonable expenses incurred by him
in connection with a proceeding in which he is named as a defendant or
respondent because he is or was a director or officer if he has been wholly
successful, on the merits or otherwise, in defense of the proceeding.
Article VIII of the Bylaws of the Company provides for indemnification of
the directors and officers of the Company to the fullest extent permitted by
law, as now in effect or later amended. Article VIII, Section I of the Bylaws
provides that expenses incurred by a director or officer in defending a suit or
other similar proceeding will be paid by the Company upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it is ultimately determined that such director or officer is not entitled to be
indemnified by the Company.
The Company also has provided liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Company.
II-1
<PAGE> 79
Additionally, Article Seven of the Company's Restated Articles of
Incorporation limits the liability of the Company's directors under certain
circumstances. Article Seven states:
A Director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for an act or
omission in the Director's capacity as a director, except for liability
for (a) a breach of the Director's duty of loyalty to the Corporation or
its shareholders, (b) an act or omission not in good faith or that
involves intentional misconduct or a knowing violation of the law, (c) a
transaction from which the Director received an improper benefit,
whether or not the benefit resulted from an action taken within the
scope of the Director's office, (d) an act or omission for which the
liability of the Director is expressly provided for by statute, or (e)
an act related to an unlawful stock repurchase or payment of a dividend.
If the Act hereafter is amended to authorize further elimination of the
liability of directors, then the liability of a director of the Corporation, in
addition to the limitation on the personal liability provided herein, shall be
limited to the fullest extent permitted by the Act as amended. Any repeal or
modification of this Article Seven by the shareholders of the Corporation shall
be prospective only, and shall not adversely affect any limitation on the
personal liability of a Director at the time of such repeal or modification.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
*1.1 -- Form of Underwriting Agreement
4.1 -- Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (Registration No. 33-21353),
as amended, and incorporated herein by reference)
4.2 -- Restated By-Laws of the Registrant (filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-21353), as amended, and
incorporated herein by reference)
*5.1 -- Opinion of Cox & Smith Incorporated
*15.1 -- Letter of KPMG Peat Marwick LLP dated December 27, 1995
*23.1 -- Consent of KPMG Peat Marwick LLP
*23.3 -- Consent of Cox & Smith Incorporated included in Exhibit 5.1.
**24.1 -- Powers of Attorney appear on Page II-4.
**27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
** Previously filed with the Registration Statement.
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 80
B. The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement or in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceedings) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, and State of Texas, on the 27th day of
December, 1995.
KINETIC CONCEPTS, INC.
By: /s/ RAYMOND R. HANNIGAN
-----------------------------
Raymond R. Hannigan,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond R. Hannigan, Bianca A. Rhodes and Dennis
E. Noll, and each of them, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the foregoing, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE NAME AND TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<S> <C> <C>
* Chairman of the Board of December 27, 1995
- --------------------------------------------- Directors
James R. Leininger, M.D.
/s/ RAYMOND R. HANNIGAN Director, President and December 27, 1995
- --------------------------------------------- Chief Executive Officer
Raymond R. Hannigan (Principal Executive
Officer)
/s/ BIANCA A. RHODES Senior Vice President, December 27, 1995
- --------------------------------------------- Finance and Chief
Bianca A. Rhodes Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
* Director December 27, 1995
- ---------------------------------------------
Peter A. Leininger, M.D.
* Director December 27, 1995
- ---------------------------------------------
Sam A. Brooks
* Director December 27, 1995
- ---------------------------------------------
Frank A. Ehmann
* Director December 27, 1995
- ---------------------------------------------
Bernhard T. Mittemeyer, M.D.
*By: /s/ RAYMOND R. HANNIGAN
-------------------------------
Raymond R. Hannigan
Attorney-in-fact
</TABLE>
II-4
<PAGE> 82
Appendix A
Captions for Inside Front Cover of KCI Prospectus
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TriaDyne | RotoRest Delta | BioDyne II
Acute care specialty bed | Lateral rotation Kinetic Therapy bed | Air suspension kinetic therapy bed
- ----------------------------------------|----------------------------------------|-----------------------------------------
KinAir III | DynaPulse Plus | FirstStep Plus
Air suspension bed | Air suspension bed | Mattress replacement system
- ----------------------------------------|----------------------------------------|-----------------------------------------
HomeKair | HomeKair DMS | AirWorks Plus
Framed home care bed | Home mattress replacement system | Mattress overlay
- ----------------------------------------|----------------------------------------|-----------------------------------------
BariKare | FirstStep HD | Baritric Bundle
Bed/chair system for obese patients | Mattress overlay for BariKare | Assorted products for obese patients
- ----------------------------------------|----------------------------------------|-----------------------------------------
The V.A.C. | PlexiPulse | PlexiPulse All-in-1 System
Pump unit of wound closure medical | Mechanical foor compression device | Calf application of foot and calf
device | | compression device
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Captions for Inside Back Cover of KCI Prospectus
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TriaDyne | BariKare
Acute care specialty bed | Bed/chair system for obese patients
- ---------------------------------------------------------------|-----------------------------------------------------------
PlexiPulse All-in-1 System | The V.A.C.
Calf application of foot and calf compression device | Pump unit of wound closure medical device
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ---------- ----------- -----------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement
4.1 -- Restated Articles of Incorporation of the Registrant (filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(Registration No. 33-21353), as amended, and incorporated herein by
reference)
4.2 -- Restated By-Laws of the Registrant (filed as Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (Registration No.
33-21353), as amended, and incorporated herein by reference)
*5.1 -- Opinion of Cox & Smith Incorporated
*15.1 -- Letter of KPMG Peat Marwick LLP dated December 27, 1995
*23.1 -- Consent of KPMG Peat Marwick LLP
*23.3 -- Consent of Cox & Smith Incorporated included in Exhibit 5.1
**24.1 -- Powers of Attorney appear on Page II-4.
**27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
** Previously filed with the Registration Statement
<PAGE> 1
EXHIBIT 1.1
FORM OF UNDERWRITING AGREEMENT
8,185,849 Shares of Common Stock
KINETIC CONCEPTS, INC.
UNDERWRITING AGREEMENT
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS INCORPORATED
As Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Ladies and Gentlemen:
The undersigned selling shareholders (the "Selling Shareholders") of
Kinetic Concepts, Inc., a Texas corporation (the "Company"), propose to sell to
the several Underwriters named in Schedule I hereto (the "Underwriters"),
8,500,000 shares (the "Firm Shares") of Common Stock, par value $0.001 per
share (the "Common Stock"), of the Company. In addition, for the sole purpose
of over-allotments in connection with the sale of the Firm Shares, James R.
Leininger, M.D., Peter A. Leininger, M.D., Daniel E. Leininger and John H.
Leininger, O.D. (together, the "Principal Selling Shareholders"), propose to
sell to the Underwriters, at the option of the Underwriters, up to an
additional 1,227,877 shares (the "Additional Shares") of Common Stock. The
Firm Shares and any Additional Shares purchased by the Underwriters are herein
referred to as the "Shares". The Shares are more fully described in the
Registration Statement referred to below.
1. Representations and Warranties of the Company and the Selling
Shareholders.
A. The Company represents and warrants to, and agrees
with, the several Underwriters that:
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and
may have filed an amendment or amendments thereto, on Form S-3 (No.
33-63957), for the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"). Such registration statement,
including the prospectus, financial statements, and supporting
schedules thereto, exhibits and all other documents filed as a part
thereof, when it shall become effective pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations under the Act (the
"Regulations"), is herein called the "Registration Statement" and the
prospectus, in the
<PAGE> 2
form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, or filed as part of the Registration Statement at the
time of effectiveness if no 424(b) filing is required, is herein
called the "Prospectus". The term "preliminary prospectus" as used
herein means any preliminary prospectus as described in Rule 430 of
the Regulations. Any reference herein to the Registration Statement,
any preliminary prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 which were filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), on or before
the effective date of the Registration Statement, the date of such
preliminary prospectus or the date of the Prospectus, as the case may
be, and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to
and include (i) the filing of any document under the Exchange Act
after the effective date of the Registration Statement, the date of
such preliminary prospectus or the date of the Prospectus, as the case
may be, which is incorporated therein by reference, and (ii) any such
document so filed.
(b) When the Registration Statement shall become
effective, when any amendment to the Registration Statement becomes
effective, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) of the Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission, and at the
Closing Date and the Additional Closing Date, if any (each as
hereinafter defined), the Registration Statement and the Prospectus,
and any amendments thereof and supplements thereto, will comply in all
material respects with the applicable provisions of the Act and the
Exchange Act and the respective rules and regulations thereunder and
does not or will not contain an untrue statement of a material fact
and does not or will not omit to state any material fact required to
be stated therein or necessary in order to make the statements
therein: (i) in the case of the Registration Statement, not
misleading, and (ii) in the case of the Prospectus, in light of the
circumstances under which they were made, not misleading. When any
related preliminary prospectus was first filed with the Commission
(whether filed as part of the Registration Statement for the
registration of the Shares or any amendment thereto or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
preliminary prospectus and any amendments thereof and supplements
thereto complied in all material respects with the applicable
provisions of the Act and the Exchange Act and the respective rules
and regulations thereunder and did not contain an untrue statement of
a material fact and did not omit to state any material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. No representation and warranty is made in this subsection
(b), however, with respect to any information contained in or omitted
from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto
in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through you
as herein stated or by or on behalf of any Selling Shareholder insofar
as it relates to such Selling Shareholder, in each case expressly for
use in connection with the preparation thereof.
2
<PAGE> 3
(c) The documents incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in
all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission under the Exchange Act, no
such document when it was or is filed, and, when read together with
the other information in the Prospectus, at the time the Registration
Statements and any amendments thereto became effective and at the
Closing Date and the Additional Closing Date, if any, did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) KPMG Peat Marwick LLP, who have certified the
financial statements and supporting schedules thereto included in the
Registration Statement, and whose report is filed with the Commission
as a part of the Registration Statement, are independent public
accountants with regard to the Company as required by the Act and the
Regulations.
(e) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as set forth in the Registration Statement and the Prospectus,
there has not been any material adverse change or any development
involving a prospective material adverse change in the business,
prospects, properties, operations, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the ordinary
course of business, and since the date of the latest balance sheet in
the Registration Statement and the Prospectus, none of the Company or
any of its subsidiaries has incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company
and its subsidiaries taken as a whole, except for liabilities or
obligations which were incurred or undertaken in the ordinary course
of business or are reflected in the Registration Statement and the
Prospectus. Subsequent to the dates as of which information is given
in the Registration Statement and the Prospectus, except as disclosed
therein, there has not been any material adverse change, or any
development involving a prospective material adverse change, in the
capital stock or the long-term indebtedness of the Company, or any
material increase in short-term indebtedness of the Company or any of
its subsidiaries or any payment of or declaration to pay any dividends
or any other distribution with respect to the capital stock of the
Company.
(f) The Company has the requisite corporate power and
authority necessary to enter into and perform its obligations under
this Agreement. This Agreement and the transactions contemplated
hereby have been duly and validly authorized by the Company, and this
Agreement has been duly and validly executed and delivered by the
Company and, assuming the execution and delivery by the other parties
hereto, is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or
affecting creditor's rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law) and as limited by the unenforceability
under certain circumstances under law or court decisions of provisions
providing for the indemnification of or contribution to a party with
respect to a liability where such indemnification or contribution is
contrary to public policy.
3
<PAGE> 4
(g) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not (i) conflict with or result in a breach of any of the terms
and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) or
require consent under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or any of its subsidiaries pursuant to the terms of, any agreement,
instrument, franchise, license or permit to which the Company or any
of its subsidiaries is a party or by which any of such corporations or
their respective properties or assets may be bound, except for any
such conflict, breach, default, event, lien, charge or encumbrance
which, either individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the business, prospects,
properties, operations, condition (financial or otherwise) or results
of operations of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect"), (ii) violate or conflict with any
provision of any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body,
including without limitation, the United States Food and Drug
Administration (the "FDA") and the United States Health Care Financing
Administration (the "HCFA"), having jurisdiction over the Company or
any of its subsidiaries or any of their respective properties or
assets, or (iii) violate or conflict with any provision of the
articles of incorporation or bylaws of the Company or the articles or
certificate of incorporation, bylaws or other organizational document
of any of its subsidiaries, except with respect to any of the
violations or conflicts listed in clauses (i) and (ii) any such
violation or conflict which, either individually or in the aggregate,
could not reasonably expected to result in a Material Adverse Effect.
No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body including, without
limitation, the FDA and the HCFA, having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby, including the sale and delivery of the Shares to be sold and
delivered by the Selling Shareholders hereunder, except (i) the
registration under the Act of the Shares, (ii) such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, and (iii) for those
failures to so obtain or make which could not reasonably be expected,
either individually or in the aggregate, to have a Material Adverse
Effect.
(h) All of the outstanding shares of Common Stock of the
Company are duly and validly authorized and issued, fully paid and
nonassessable and were not issued in violation of or subject to any
preemptive or similar rights. The Company had, at September 30, 1995,
an authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus. The Common Stock, the Firm
Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration
4
<PAGE> 5
Statement and the Prospectus. Except as set forth in the Prospectus,
there are no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of, any shares of
capital stock or other equity interest in the Company or any of its
subsidiaries.
(i) All of the Company's direct and indirect subsidiaries
are listed in Exhibit 21 to the Registration Statement. Each of the
Company and its subsidiaries has been duly organized and is validly
existing as a corporation or limited liability company, as the case
may be, in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and its subsidiaries is duly
qualified and in good standing as a foreign corporation or limited
liability company, as the case may be, in each jurisdiction in which
the character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified
or in good standing which are not, either individually or in the
aggregate, reasonably expected to have a Material Adverse Effect.
Each of the Company and its subsidiaries has all requisite power and
authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and
from all public, regulatory or governmental agencies and bodies
including, without limitation, the FDA and the HCFA, to own, lease and
operate its properties and conduct its business as now being conducted
as described in the Registration Statement and the Prospectus, except
for those failures to so obtain which could not reasonably be
expected, either individually or in the aggregate, to have a Material
Adverse Effect, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus.
(j) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company or any of
its subsidiaries is a party or to which any property of the Company or
any of its subsidiaries is subject or which is pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries which, either individually or in the aggregate, is
reasonably expected to have a Material Adverse Effect or which is
required to be disclosed in the Registration Statement and the
Prospectus.
(k) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation (in each case as such terms are defined
in the Exchange Act and the rules and regulations promulgated
thereunder) of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares. Except as permitted by the Act, the
Company has not distributed any Registration Statement, preliminary
prospectus, Prospectus or other offering material in connection with
the offering and sale of the Shares.
(l) The financial statements, including the notes
thereto, and supporting schedules included in or incorporated by
reference into the Registration Statement and
5
<PAGE> 6
the Prospectus present fairly the consolidated financial position of
the Company and its subsidiaries as of the dates indicated and the
consolidated results of operations for the periods specified; except
as otherwise stated in the Registration Statement, said financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis, and the
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein.
(m) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration
Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(n) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration
as an "investment company" under the Investment Company Act of 1940.
(o) Except for the delinquent filing of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994, the conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied. The Company has contacted
the Commission with respect to such delinquent filing and, based upon
discussions with staff members of the Commission, the Company has no
reason to believe that, as a result of such delinquent filing, the
Commission would require the Company to use any form other than Form
S-3 in connection with the sale of the Shares pursuant to this
Agreement.
(p) No stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of any
preliminary prospectus or Prospectus has been issued and no
proceedings for that purpose have been commenced or are pending before
or to the knowledge of the Company are contemplated by the Commission.
No stop order suspending the sale of the Shares in any jurisdiction
designated by the Underwriters has been issued and no proceedings for
that purpose have been commenced or are pending or to the knowledge of
the Company are contemplated.
(q) There are no contracts, indentures, mortgages, loan
agreements, leases or other instruments or documents of the Company or
any of its subsidiaries that are required to be described or referred
to in the Registration Statement or to be filed as exhibits thereto or
in or to any of the documents incorporated by reference therein by the
Act, the Exchange Act or by the rules and regulations thereunder,
other than those described or referred to therein or filed as exhibits
thereto.
(r) The financial information of the Company and its
subsidiaries set forth in the Prospectus under the captions
"Prospectus Summary -- Summary Historical and Pro Forma Consolidated
Financial Data", "Capitalization", "Selected Consolidated Financial
Data", and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" has been fairly stated in all
material respects in relation to the relevant
6
<PAGE> 7
financial statements of the Company and its subsidiaries from which
such information has been derived.
(s) The pro forma financial information and the related
notes thereto included in the Registration Statement have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled
on the pro forma bases described therein and, in the opinion of the
Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are reasonable and
appropriate to give effect to the transactions and circumstances
referred to therein.
(t) All of the issued and outstanding shares of capital
stock of or other ownership interest in each subsidiary of the Company
have been duly authorized and validly issued are fully paid and
nonassessable and were not issued in violation of or subject to any
preemptive or similar rights and are owned by the Company directly or
through its subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or other restriction on
transferability or voting or other defects of title whatsoever and
except as set forth in the Prospectus there are no outstanding rights,
warrants or options to acquire, or instruments convertible into or
exchangeable for or agreements or understandings with respect to the
sale of or issuance of any shares of capital stock or other equity
interest in any such subsidiary.
(u) None of the Company or any of its subsidiaries is in
violation of its charter or bylaws or is in default in any respect in
the performance of any obligation, agreement or condition contained in
any bond, debenture, note or any other evidence of indebtedness or in
any indenture, mortgage, deed of trust or any other agreement or
instrument to which the Company or any of its subsidiaries or their
respective properties or assets are subject and which default, either
individually or in the aggregate, is reasonably expected to have a
Material Adverse Effect or which is required to be disclosed in the
Registration Statement and the Prospectus. There exists no condition
that with notice, the passage of time or otherwise, would constitute a
default under any such document or instrument and which, either
individually or in the aggregate, is reasonably expected to have a
Material Adverse Effect or which is required to be disclosed in the
Registration Statement and the Prospectus. Each of the Company and
its subsidiaries is in compliance with all local, state and federal
laws, ordinances and regulations (including environmental laws)
applicable to its properties (whether owned or leased) and its
business including, without limitation, those relating to
reimbursement by government agencies and fraudulent or wrongful
billings, except for such instances of non-compliance which, either
individually or in the aggregate, are not reasonably expected to have
a Material Adverse Effect.
(v) Each of the Company and its subsidiaries possesses
such certificates, authorizations, licenses or permits issued by the
appropriate local, state, federal or foreign regulatory agencies or
bodies including, without limitation, the FDA and the HCFA, as are
material to, or legally required for, the operation of its business.
None the Company or any of its subsidiaries has received any notice of
proceedings relating
7
<PAGE> 8
to, or otherwise has knowledge that any governmental body or agency,
including, without limitation, the FDA and the HCFA, is considering,
limiting, suspending, modifying or revoking any such certificate
authority, license or permit. The descriptions in the Registration
Statement and the Prospectus of local, state, federal or foreign
statutes, laws, ordinances and regulations governing the Company and
its subsidiaries and their businesses, including any proposed
amendments or additions to any such statutes, laws, ordinances or
regulations including, without limitation, those administered or
promulgated by the FDA and the HCFA, are accurate in all material
respects and fairly present the information required to be shown
therein. None of the Company or any of its subsidiaries has received
any notice of or otherwise has knowledge that any governmental body or
agency is considering enacting, amending or repealing any such
statutes, laws, ordinances or regulations required to be described in
the Registration Statement and the Prospectus that are not so
described as required.
(w) Except as set forth in the Prospectus, each of the
Company and its subsidiaries is in compliance with, and has and will
have all necessary permits or authorizations to conduct is business as
required under, all applicable existing federal, state and local laws
and regulations relating to protection of human health or the
environment or imposing liability or standards of conduct concerning
any Hazardous Material ("Environmental Laws"), except for such
instances of noncompliance which, either individually or in the
aggregate, are not reasonably expected to have a Material Adverse
Effect. The term "Hazardous Material" means (a) any "hazardous
substance" as defined by the comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, (b) any "hazardous
waste" as defined by the Resource Conservation and Recovery Act, as
amended, (c) any petroleum or petroleum fraction or product, (d) any
polychlorinated biphenyl and (e) any pollutant or contaminant or
hazardous, dangerous or toxic chemical, material, waste or substance
regulated under or within the meaning of any Environmental Law.
(x) Except as set forth in the Prospectus, there is no
alleged liability, or to the knowledge of the Company, potential
liability (including, without limitation, alleged or potential
liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal
injuries or penalties) of the Company or any of its subsidiaries
arising out of, based upon or resulting from (i) the presence or
release into the environment of any Hazardous Material at any
location, whether or not owned by the Company or any of its
subsidiaries, or (ii) any violation or alleged violation of any
Environmental Law (A) which alleged or potential liability is required
to be disclosed in the Registration Statement or the Prospectus, other
than as disclosed, therein, or (B) which alleged or potential
liability, either individually or in the aggregate, is reasonably
expected to have a Material Adverse Effect.
(y) None of the Company or any of its subsidiaries is
involved in any material labor dispute or, to the knowledge of the
Company, is any such dispute threatened.
(z) Except as described in the Prospectus, each of the
Company and its subsidiaries own, have the right to use or possess the
material patents, patent rights,
8
<PAGE> 9
licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names (collectively, the "Intellectual Property") presently
employed by them in connection with the business now operated by them
and none of the Company or any of its subsidiaries has received any
notice of infringement of or conflict with asserted rights of others
with respect to the foregoing which, either individually or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could reasonably be expected to have a Material Adverse
Effect. The use of such Intellectual Property in connection with the
business and operations of the Company and its subsidiaries does not
infringe on the rights of any person which could in any such
circumstance reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect.
(aa) There are no material Medicare, Medicaid or any other
managed care recoupment or recoupments of any third-party payor being
sought, requested, claimed or, to the knowledge of the Company,
threatened, against the Company or any of its subsidiaries.
(ab) The Common Stock currently outstanding is listed on
the National Association of Securities Dealers, Inc. Automated
Quotation National Market System ("NASDAQ").
B. Each Selling Shareholder severally represents and
warrants to, and agrees with, the several Underwriters that:
(a) Each Selling Shareholder has (i) caused a certificate
or certificates for the number of Shares to be sold by each Selling
Shareholder hereunder to be delivered to Dennis E. Noll, Esq. in his
capacity as custodian (the "Custodian") under the Custody Agreement (as
defined below), endorsed in blank or with blank stock powers duly
executed and with signatures appropriately guaranteed by a member firm
of the New York Stock Exchange or commercial bank, such certificate or
certificates to be held in the custody of the Custodian in accordance
with the terms of the Custody Agreement for delivery pursuant to the
provisions hereof on the Closing Date or the Additional Closing Date,
if any, as the case may be, and (ii) granted an irrevocable power of
attorney to James R. Leininger, M.D., as such Selling Shareholder's
attorney-in-fact (the "Attorney-In-Fact") in the form attached hereto
as Exhibit A (the "Power of Attorney", and together with the Power of
Attorney executed by each other Selling Shareholder and the Custody
Agreement in the form attached hereto as Exhibit B, the "Custody
Agreement").
(b) The execution, delivery and performance of this
Agreement and the Custody Agreement on behalf of each Selling
Shareholder and the consummation of the transactions contemplated
hereby and thereby will not (i) conflict with or result in the breach
of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a
default) or require consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of such Selling Shareholder pursuant to the terms of, any
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<PAGE> 10
agreement, instrument, franchise, license or permit to which such
Selling Shareholder is a party or by which such Selling Shareholder or
any of such Selling Shareholder's property or assets may be bound,
including, without limitation, the terms of any trust or similar
agreement under which any such Selling Shareholder was formed, or (ii)
violate or conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over such Selling Shareholder or
such Selling Shareholder's properties or assets.
(c) Each Selling Shareholder has, and at the time of
delivery of the Shares to be sold by such Selling Shareholder such
Selling Shareholder will have, full legal right, power, authority and
capacity, and, except as required under the Act and state securities
and Blue Sky laws, all necessary consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits
of and from all public, regulatory or governmental agencies and
bodies, as are required for the execution, delivery and performance of
this Agreement, the Custody Agreement, and the consummation of the
transactions contemplated hereby and thereby, including the sale,
assignment, transfer and delivery of the Shares to be sold, assigned,
transferred and delivered by such Selling Shareholder hereunder.
(d) This Agreement and the Custody Agreement have been
duly and validly authorized, executed and delivered by such Selling
Shareholder and, assuming the execution and delivery by the other
parties hereto and thereto, are valid and binding obligations of such
Selling Shareholder, enforceable against such Selling Shareholder in
accordance with its respective terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditor's rights
generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and
as limited by the unenforceability under certain circumstances under
law or court decisions of provisions providing for the indemnification
of or contribution to a party with respect to a liability where such
indemnification or contribution is contrary to public policy.
(e) Each Selling Shareholder has good, valid and
marketable title to the Shares to be sold by such Selling Shareholder
pursuant to this Agreement, free and clear of all liens, encumbrances,
adverse claims, security interests, restrictions on transfer,
shareholders' agreements, voting trusts, options and other defects in
title whatsoever, with full power to deliver such Shares hereunder,
and, upon the delivery of and payment for such Shares as herein
contemplated, each of the Underwriters will receive good, valid and
marketable title to the Shares purchased by it from such Selling
Shareholder, free and clear of all liens, encumbrances, adverse
claims, security interests, restrictions on transfer, shareholders'
agreements, voting trusts, options and other defects in title
whatsoever.
(f) Each Selling Shareholder has not taken and will not
take, directly or indirectly, any action which has constituted or
which was designed to constitute or which might be reasonably expected
to cause or result in stabilization or manipulation (in each case as
such terms are defined in the Exchange Act and the rules and
regulations promulgated thereunder) of the price of the shares of
Common Stock.
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<PAGE> 11
(g) When the Registration Statement shall become
effective, when any amendment to the Registration Statement becomes
effective, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) of the Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission, and at the
Closing Date or the Additional Closing Date, if any, such parts of the
Registration Statement and the Prospectus and any amendments thereof
and supplements thereto as relate to such Selling Shareholder and are
based upon information furnished in writing to the Company by or on
behalf of such Selling Shareholder expressly for use therein will not
contain an untrue statement of a material fact and will not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein: (i) in the case of the
Registration Statement, not misleading, and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made,
not misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the Registration
Statement for the registration of the Shares or any amendment thereto
or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission,
such parts of such preliminary prospectus and any amendments thereof
and supplements thereto as relate to such Selling Shareholder and are
based on information furnished in writing to the Company by or on
behalf of such Selling Shareholder expressly for use therein did not
contain an untrue statement of a material fact and did not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(h) Except as described in the Registration Statement and
the Prospectus, each Selling Shareholder (i) does not have any
preemptive right, co-sale right or right of first refusal or other
similar right to purchase any of the Shares that are to be sold by any
of the other Selling Shareholders to the Underwriters pursuant to this
Agreement, and (ii) does not own any warrants, options or similar
rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other
securities from the Company.
(i) Except as described in the Registration Statement and
the Prospectus, each Selling Shareholder does not possess any
registration rights with respect to any securities of the Company.
2. Purchase, Sale and Delivery of the Shares. On the basis of
the representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Selling Shareholders
agree to sell to the several Underwriters, and the Underwriters, severally and
not jointly, agree to purchase from the Selling Shareholders, at $___________
per share, the number of Firm Shares set forth opposite the respective names of
the Underwriters in Schedule I hereto. The number of Firm Shares to be sold by
each Selling Shareholder to each Underwriter shall be the number which bears
the same proportion to the total number of Firm Shares to be sold by such
Selling Shareholder, as specified in Schedule II hereto, as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I bears to
the total number of Firm Shares to be sold by the Selling Shareholders,
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<PAGE> 12
subject to such adjustments to eliminate any fractional shares as you in your
sole discretion shall make. The Selling Shareholders will have no obligation
to sell to the Underwriters any of the Firm Shares hereunder unless the
Underwriters purchase all of the Firm Shares hereunder. None of the Selling
Shareholders shall be obligated to deliver any of the Shares except upon
payment for all of the Shares then to be purchased hereunder or as hereinafter
provided.
Delivery of certificates and payment of the purchase price for the
Firm Shares shall be made at the offices of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, or such other location as may be mutually
acceptable. Such delivery and payment shall be made at 10:00 A.M., New York
time, on the fourth full business day following the determination of the
purchase price pursuant to this Section 2 (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof), or at such
other time as shall be agreed upon by you and the Company. The time and date
of such delivery and payment are herein called the "Closing Date". Delivery of
the certificates for the Firm Shares shall be made to you for the respective
accounts of the several Underwriters against payment by the several
Underwriters through Bear, Stearns & Co. Inc. ("Bear Stearns") and Alex. Brown
& Sons Incorporated, as representatives for the several Underwriters (together,
the "Representatives"), of the purchase price for the Firm Shares to the order
of the Custodian by certified or official bank checks, payable in New York
Clearing House funds or similar next day funds.
Certificates for the Firm Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Selling
Shareholders shall permit you to examine and package such certificates for
delivery at least one full business day prior to the Closing Date.
In addition, the Principal Selling Shareholders hereby grant to the
several Underwriters the option to purchase up to 1,275,000 Additional Shares
at the same purchase price per share to be paid by the several Underwriters to
the Selling Shareholders for the Firm Shares as set forth in this Section 2,
for the sole purpose of covering over- allotments in the sale of Firm Shares by
the several Underwriters. This option may be exercised at any time (but not
more than once) on or before the thirtieth day following the effective date of
the Registration Statement, by written notice by you to the Custodian. Such
notice shall set forth the aggregate number of Additional Shares as to which
the option is being exercised and the date and time, as reasonably determined
by you, when the Additional Shares are to be delivered (such date and time
being herein sometimes referred to as the "Additional Closing Date"); provided,
however, that the Additional Closing Date shall not be earlier than the Closing
Date or earlier than the second full business day after the date on which the
option shall have been exercised nor later than the eighth full business day
after the date on which the option shall have been exercised (unless such time
and date are postponed in accordance with the provisions of Section 9 hereof).
Certificates for the Additional Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Additional Closing Date. The
Principal Selling Shareholders will permit you to examine and package such
certificates for delivery at least one full business day prior to the
Additional Closing Date.
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<PAGE> 13
The number of Additional Shares to be sold by each Principal Selling
Shareholder to each Underwriter shall be the number which bears the same
proportion to the total number of Additional Shares being sold by such
Principal Selling Shareholder, as specified in Schedule II hereto, as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number increased as set forth in Section 9 hereof)
bears to the total number of Firm Shares to be sold by the Selling
Shareholders, subject to such adjustments to eliminate any fractional shares as
you in your sole discretion shall make.
Payment for the Additional Shares shall be made by certified or
official bank checks in New York Clearing House or similar next day funds,
payable to the order of the Custodian, at the offices of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, or such other location as may
be mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. Offering. It is understood that after the Registration
Statement becomes effective, the several Underwriters propose to offer the
Shares for sale to the public as set forth in the Prospectus.
4. Covenants of the Company and the Selling Shareholders.
A. The Company covenants and agrees with the several Underwriters
that:
(a) If the Registration Statement has not yet been
declared effective, the Company will use its reasonable best efforts
to cause the Registration Statement and any amendment thereof to
become effective as promptly as possible, and if Rule 430A is used or
the filing of the Prospectus is otherwise required under Rule 424(b),
the Company will file the Prospectus (properly completed if Rule 430A
has been used) pursuant to Rule 424(b) within the prescribed time
period and will provide evidence satisfactory to you of such timely
filing. The Company will notify you promptly (i) when, prior to the
termination of the offering of the Shares, the Registration Statement
and any amendments thereto become effective, (ii) of any request by
the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for any additional information, (iii)
of the mailing or the delivery to the Commission for filing of any
amendment of or supplement to the Registration Statement or the
Prospectus, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the
threatening, of any proceedings therefor, (v) of the receipt of any
comments from the Commission, and (vi) of the receipt by the Company
of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or any
notification of the initiation or threatening of any proceeding for
that purpose. If the Commission shall propose or enter a stop order
at any time, the Company will make every reasonable effort to prevent
the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file
any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be
filed pursuant to Rule 424(b)) before or after the effective date of
the Registration Statement or file any document under the
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<PAGE> 14
Exchange Act if such document would be deemed to be incorporated by
reference into the Prospectus to which you shall reasonably object in
writing after being timely furnished in advance a copy thereof;
provided, however, that if the Company is advised in writing by its
counsel or its independent auditors that, in the opinion of such
advisor, such amendment is required under applicable law, the Company
may file such amendment notwithstanding the reasonable objection of
the Underwriters.
(b) If at any time when a prospectus relating to the
Shares is required to be delivered under the Act any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be
necessary at any time to amend or supplement the Prospectus or
Registration Statement to comply with the Act or the Regulations, or
to file under the Exchange Act so as to comply therewith and the rules
and regulations thereunder any document incorporated by reference in
the Registration Statement or the Prospectus or in any amendment
thereof or supplement thereto, the Company will notify you promptly
and prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to you) which will
correct such statement or omission or which will effect such
compliance and the Company will use its reasonable best efforts to
have any amendment to the Registration Statement declared effective as
soon as possible.
(c) The Company will promptly deliver to you two signed
copies of the Registration Statement, including exhibits and all
documents incorporated by reference therein and all amendments
thereto, and the Company will promptly deliver to each of the several
Underwriters such number of copies of any preliminary prospectus, the
Prospectus, the Registration Statement, all amendments of and
supplements to such documents, if any, and all documents incorporated
by reference in the Registration Statement and Prospectus or any
amendment thereof or supplement thereto, without exhibits, as you may
reasonably request.
(d) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time the Registration
Statement becomes effective, to qualify the Shares for offering and
sale under the securities laws relating to the offering or sale of the
Shares of such jurisdictions as you may designate and to maintain such
qualification in effect for so long as required for the distribution
thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute
a general consent to service of process in any such jurisdiction.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
you as soon as practicable, but not later than 45 days after the end
of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement occurs, an earnings
statement (which need not be audited but which shall satisfy the
provisions of Rule 158 of the Regulations)
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<PAGE> 15
covering a period of at least twelve consecutive months beginning
after the effective date of the Registration Statement.
(f) During a period of 180 days from the date of the
Prospectus, the Company will not, without your prior written consent,
issue, sell, offer or agree to sell, or otherwise dispose of, directly
or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), except for the
Company's issuance of Common Stock upon the exercise of presently
outstanding stock options or warrants, and the Company will obtain the
undertaking of each of its executive officers and directors (other
than executive officers and directors who are Selling Shareholders and
thus subject to the provisions of Section 4.B. below), not to engage
in any of the aforementioned transactions on their own behalf for a
period of 90 days after the date of the Prospectus, without your prior
written consent.
(g) During a period of three years from the effective
date of the Registration Statement, the Company will furnish to the
Representatives copies of (i) all reports to its shareholders and (ii)
all reports, financial statements and proxy or information statements
filed by the Company with the Commission, the National Association of
Securities Dealers, Inc. (the "NASD"), or any national securities
exchange.
(h) The Company, during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act, will file
all documents required to be filed with the Commission pursuant to
Sections 13, 14 and 15 of the Exchange Act and the rules and
regulations thereunder within the time periods required by the
Exchange Act and the rules and regulations thereunder.
B. Each Selling Shareholder covenants and agrees with the several
Underwriters that during a period of 180 days from the date of the Prospectus,
such Selling Shareholder will not, without your prior written consent, sell,
offer or agree to sell, or otherwise dispose of, directly or indirectly, any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock), except for the Shares offered pursuant to this
Agreement and the sale of Common Stock by James R. Leininger, M.D. upon the
exercise of presently outstanding stock options granted by him.
5. Payment of Expense. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated:
(a) the Company hereby agrees to pay all costs and expenses
incident to the performance of the obligations of the Selling
Shareholders hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the
Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments thereof or supplements thereto, the
underwriting documents (including this Agreement, the Master Agreement
Among Underwriters by and among Bear Stearns and the other parties
thereto (the "Agreement Among Underwriters"), and the Master Selling
Agreement by and among Bear Stearns and the other Parties thereto (the
"Selling Agreement")) and all
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<PAGE> 16
other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as
hereinabove stated), other than, except as provided in clause (iii)
below, the fees and expenses of counsel to the Underwriters and the
Selling Shareholders, (ii) the issuance, transfer and delivery of the
Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing
and mailing a preliminary and final "Blue Sky Survey" and the fees of
counsel for the Underwriters and such counsel's disbursements in
relation thereto, and (iv) the review of the terms of the public
offering of the Shares by the NASD.
(b) Dr. James R. Leininger, M.D. hereby agrees to pay all
fees and expenses of counsel to the Company and the Selling
Shareholders incident to the performance of the obligations of the
Selling Shareholders hereunder, including in connection with (i)
preparing, printing, duplicating, filing and distributing the
Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments thereof or supplements thereto, the
underwriting documents (including this Agreement, the Master Agreement
Among Underwriters by and among Bear Stearns and the other parties
thereto and the Master Selling Agreement by and among Bear Stearns and
the other parties thereto) and all other documents related to the
public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated).
6. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Firm Shares and the
Additional Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
herein contained, as of the date hereof and as of the Closing Date (or in the
case of the Additional Shares as of the Additional Closing Date), to the
absence from any certificates, opinions, written statements or letters
furnished to you or to Latham & Watkins and Wolin, Fuller, Ridley & Miller LLP
(together, "Underwriters' Counsel"), pursuant to this Section 6 of any
misstatement or omission, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 P.M., New York time, on the date of this
Agreement or at such later time and date as shall have been consented
to in writing by you, and, at or prior to the Closing Date and
Additional Closing Date, if any, as the case may be; if the Company
shall have elected to rely on Rule 430A of the Regulations, the
Prospectus shall have been filed with the Commission in a timely
fashion in accordance with Section 4(a) hereof; and no stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the
Commission.
(b) At the Closing Date and the Additional Closing Date,
if any, as the case may be, you shall have received the opinion of Cox
& Smith Incorporated, counsel for
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<PAGE> 17
the Company, or such other counsel as may be acceptable to the
Representatives, dated the Closing Date or the Additional Closing
Date, as the case may be, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect
that:
(i) Each of the Company, its significant
subsidiaries (as such term is defined in Rule 1-02 of
Regulation S-X) and such other of its subsidiaries as
identified by the Underwrtiers has been duly organized and is
validly existing as a corporation or limited liability company,
as the case may be, in good standing under the laws of its
jurisdiction of incorporation or organization. Each of the
Company, its significant subsidiaries and such other of its
subsidiaries as identified by the Underwriters is duly
qualified and in good standing as a foreign corporation or
limited liability company, as the case may be, in each
jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct
of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which
will not in the aggregate have a Material Adverse Effect on the
Company and its subsidiaries taken as a whole. Each of the
Company, its significant subsidiaries and such other of its
subsidiaries as identified by the Underwriters has all
requisite corporate authority to own, lease and license its
respective properties and conduct its business as now being
conducted and as described in the Registration Statement and
the Prospectus. All of the issued and outstanding capital
stock of each significant subsidiary of the Company and such
other of its subsidiaries as identified by the Underwriters has
been duly and validly issued and is fully paid and
nonassessable and free of preemptive or similar rights and, to
the best knowledge of such counsel, is owned directly or
indirectly by the Company, free and clear of any lien,
encumbrance, adverse claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect
of title whatsoever.
(ii) The Company has authorized capital stock as
set forth in the Registration Statement and the Prospectus.
All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable
and were not issued in violation of or subject to any
preemptive or similar rights. The Common Stock, the Firm
Shares and the Additional Shares conform to the descriptions
thereof contained in the Registration Statement and the
Prospectus.
(iii) The Common Stock currently outstanding,
including without limitation the Shares, is listed on NASDAQ.
(iv) This Agreement has been duly and validly
authorized, executed and delivered by the Company and is a
valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
or affecting creditor's rights generally, by general equitable
principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and as limited
by the unenforceability under certain circumstances under law
or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a
liability where such indemnification or contribution is
contrary to public policy.
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<PAGE> 18
(v) To the knowledge of such counsel, there is no
litigation or governmental or other action, suit, proceeding
or investigation before any court or before or by any public,
regulatory or governmental agency or body including, without
limitation, the FDA and the HCFA, pending or threatened
against, or involving the properties or business of, the
Company or any of its subsidiaries, which, if resolved against
the Company or such subsidiary, individually or, to the extent
involving related claims or issues, in the aggregate, is of a
character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly
disclosed therein.
(vi) The execution, delivery, and performance of
this Agreement and the consummation of the transactions
contemplated hereby by the Company will not (A) conflict with
or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of
time, or both, would constitute a default) or require consent
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company, any of its significant subsidiaries or any of its
other subsidiaries as identified by the Underwriters pursuant
to the terms of, any agreement, instrument, franchise, license
or permit known to such counsel to which the Company, any of
its significant subsidiaries or any of its other subsidiaries
as identified by the Underwriters is a party or by which the
Company, any of its significant subsidiaries or any of its
other subsidiaries as identified by the Underwriters, or their
respective properties or assets may be bound or (B) violate or
conflict with any provision of the certificate of incorporation
or bylaws of the Company, any of its significant subsidiaries,
or any of its other subsidiaries as identified by the
Underwriters or, to the knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body
including, without limitation, the FDA and the HCFA, having
jurisdiction over the Company, any of its significant
subsidiaries or any of its other subsidiaries as identified by
the Underwriters, or any of their respective properties or
assets. To the knowledge of such counsel, no consent,
approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body including,
without limitation, the FDA and the HCFA, having jurisdiction
over the Company, any of its significant subsidiaries or any of
its other subsidiaries as identified by the Underwriters, or
any of their respective properties or assets is required for
the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby,
except for (1) such as may be required under state securities
or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which
such counsel need express no opinion) and (2) such as have been
made or obtained under the Act.
(vii) The Registration Statement and the Prospectus
and any amendments thereof or supplements thereto (other than
the financial statements and schedules and other financial and
statistical data included or incorporated by reference
therein, as to which no opinion need be rendered) when they
became effective or were filed with the Commission, as the
case may be, complied as to form in all material respects with
the requirements of the Act and the Regulations. The
documents filed under the Exchange Act and incorporated by
reference in the Registration Statement and the Prospectus and
in any amendment thereof or supplement thereto (other than the
financial statements and schedules and other
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<PAGE> 19
financial and statistical data included or incorporated by
reference therein, as to which no opinion need be rendered)
when they became effective or were filed with the Commission,
as the case may be, complied as to form in all material
respects with the Exchange Act and the rules and regulations
thereunder.
(viii) The Registration Statement is effective under
the Act, and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or
any post-effective amendment thereof has been issued and no
proceedings therefor have been initiated or threatened by the
Commission and all filings required by Rule 424(b) of the
Regulations have been made.
(ix) The statements in the Prospectus under the
caption "Business -- Government Regulation" and "--
Reimbursement," insofar as such statements constitute a
summary of the matters referred to therein, fairly present the
information required to be presented by the Act or the
Regulations.
In addition, such opinion shall also contain a
statement that such counsel has participated in conferences
with officers and representatives of the Company,
representatives of the independent public accountants for the
Company and its subsidiaries, and the Underwriters at which the
contents of the Prospectus and related matters were discussed
and that, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or
fairness of the Registration Statement and the Prospectus, and
any amendment thereof or supplement thereto made prior to the
Closing Date or the Additional Closing Date, if any, as the
case may be, except as specifically stated in such counsel's
opinion, on the basis of the foregoing (relying as to
materiality to a large extent upon the factual information
provided by the officers and other representatives of the
Company), no facts have come to the attention of such counsel
which would lead such counsel to believe that either the
Registration Statement at the time it became effective
(including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable) (or any amendment thereof made
prior to the Closing Date or the Additional Closing Date, if
any, as the case may be, as of the date of such amendment)
contained an untrue statement of a material fact or omitted to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that
the Prospectus as of the date thereof (or any amendment thereof
or supplement thereto made prior to the Closing Date or the
Additional Closing Date, as the case may be, as of the date of
such amendment or supplement) and of the Closing Date and the
Additional Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading (it being understood
that such counsel need express no belief or opinion with
respect to the financial statements and schedules and other
financial and statistical data included or incorporated by
reference therein).
In rendering such opinion, such counsel may rely (A)
as to matters involving the application of laws other than the
laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable
to Underwriters' Counsel, familiar with the applicable laws
and (B) as to matters of fact, to the extent they deem proper,
on
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<PAGE> 20
certificates of responsible officers of the Company and
certificates or other written statements of officers of
departments of various jurisdictions having custody of
documents respecting the corporate or limited liability
company existence, as the case may be, or good standing of the
Company and its subsidiaries, provided, that copies of any
such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and, in their opinion,
you and they are justified in relying thereon.
(c) You shall have received, with respect to the Selling
Shareholders, at the Closing Date and, with respect to the Principal
Selling Shareholders, the Additional Closing Date, if any, as the case
may be, the opinion of Cox & Smith Incorporated, counsel for the
Selling Shareholders, dated the Closing Date or the Additional Closing
Date, as the case may be, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect
that:
(i) This Agreement and the Custody Agreement have
been duly and validly authorized, executed and delivered by or
on behalf of each Selling Shareholder or Principal Selling
Shareholder, as the case may be, and is a valid and binding
obligation of each Selling Shareholder or Principal Selling
Shareholder, as the case may be, enforceable against such
Selling Shareholder or Principal Selling Shareholder, as the
case may be, in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
or affecting creditor's rights generally, by general equitable
principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and as limited
by the unenforceability under certain circumstances under law
or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a
liability where such indemnification or contribution is
contrary to public policy.
(ii) To the knowledge of such counsel, each
Selling Shareholder or Principal Selling Shareholder, as the
case may be, has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits
of and from all courts and all public, governmental or
regulatory agencies and bodies as are required for the
execution, delivery and performance of this Agreement and the
Custody Agreement and the consummation of the transactions
contemplated hereby and thereby, except for (1) such as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters (as to which such counsel need express no
opinion) and (2) such as have been made or obtained under the
Act.
(iii) To the knowledge of such counsel, upon the
delivery of and payment for the Shares to be sold by the
Selling Shareholders or Principal Selling Shareholders, as the
case may be, pursuant to this Agreement as herein
contemplated, each of the Underwriters who is not aware of any
adverse claim
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<PAGE> 21
with respect thereto and who is otherwise a bona fide
purchaser of the Shares subject to and within the meaning of
Section 8-306 of the [Texas] Uniform Commercial Code as in
effect on the date hereof, will receive all rights and
interests in and to the Shares purchased by it from the
Selling Shareholders or Principal Selling Shareholders, as the
case may be, free of any adverse claim.
(iv) The execution, delivery and performance of
this Agreement and the Custody Agreement by the Selling
Shareholders or Principal Selling Shareholders, as the case
may be, and the consummation of the transactions contemplated
hereby and thereby will not violate or conflict with, to the
knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction
over any of the Selling Shareholders or Principal Selling
Shareholders, as the case may be, or any of their respective
properties or assets.
(v) The statements in the Prospectus under the
caption "Principal and Selling Shareholders," insofar as such
statements constitute a summary of the matters referred to
therein, fairly present the information required to be
presented therein by the Act or the Regulations in all
material respects.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws and (B) as to matters of fact, to the extent they deem
proper, on certificates of, or certificates of responsible officers
of, the Selling Shareholders or Principal Selling Shareholders, as the
case may be, provided, that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The
opinions of such counsel for the Selling Shareholders or Principal
Selling Shareholders, as the case may be, shall state that the opinion
of any such other counsel is in form satisfactory to such counsel and,
in their opinion, you and they are justified in relying thereon.
(d) All proceedings taken in connection with the sale of
the Firm Shares and the Additional Shares as herein contemplated shall
be satisfactory in form and substance to you and to Underwriters'
Counsel, and the Underwriters shall have received from each
Underwriters' Counsel an opinion, dated as of the Closing Date and the
Additional Closing Date, if any, as the case may be, with respect to
the sale of the Shares, the Registration Statement and the Prospectus
and such other related matters as you may reasonably require, and the
Company and the Selling Shareholders or Principal Selling
Shareholders, as the case may be, shall have furnished to
Underwriters' Counsel such documents as they request for the purpose
of enabling them to pass upon such matters.
(e) At the Closing Date and Additional Closing Date, if
any, you shall have received a certificate of the President and Chief
Executive Officer, and the Senior Vice
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<PAGE> 22
President and Chief Financial Officer of the Company, dated the
Closing Date or Additional Closing Date, as the case may be, to the
effect that the condition set forth in subsection (a) of this Section
6 has been satisfied, that as of the date hereof and as of the Closing
Date or Additional Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 1
hereof are accurate, and that as of the Closing Date or the Additional
Closing Date, as the case may be, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed and
that subsequent to the respective dates as to which information is
given in the Registration Statement and the Prospectus, the Company
and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a material adverse change in the business
prospects, properties, operations, condition (financial or otherwise),
or results of operations of the Company and its subsidiaries taken as
a whole, or that is reasonably expected to have a Material Adverse
Effect, except in each case as described in or contemplated by the
Prospectus.
(f) At the Closing Date, you shall have received
certificates executed by each of the Principal Selling Shareholders
and the Attorney-in-Fact on behalf of each other Selling Shareholder,
dated the Closing Date, to the effect that, to the best knowledge of
such Principal Selling Shareholders and the Attorney-in- Fact, as
applicable, the representations and warranties of such Selling
Shareholder set forth in Section 1 hereof are accurate, and that as of
the Closing Date, the obligations of such Selling Shareholder to be
performed hereunder on or prior thereto have been duly performed.
(g) At the Additional Closing Date, if any, you shall
have received a certificate executed by each Principal Selling
Shareholder, dated the Additional Closing Date, to the effect that the
representations and warranties of such Principal Selling Shareholder
set forth in Section 1 hereof are accurate, and that as of the
Additional Closing Date, the obligations of such Principal Selling
Shareholder to be performed hereunder on or prior thereto have been
duly performed.
(h) At the time this Agreement is executed and at the
Closing Date and Additional Closing Date, if any, as the case may be,
you shall have received a letter, from KPMG Peat Marwick LLP,
independent public accountants for the Company, dated, respectively,
as of the date of this Agreement and as of the Closing Date or
Additional Closing Date, as the case may be, or addressed to the
Underwriters and in form and substance satisfactory to you, to the
effect that: (i) they are independent certified public accountants
with respect to the Company within the meaning of the Act and the
Regulations and stating that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) stating that,
in their opinion, the financial statements and schedules of the
Company included or incorporated by reference in the Registration
Statement, the preliminary prospectus and the Prospectus and covered
by their opinion therein comply as to form in all material respects
with the applicable accounting requirements of the Act and the
Regulations, and the Exchange Act and the
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<PAGE> 23
applicable published rules and regulations thereunder; (iii) on the
basis of procedures (but not an examination made in accordance with
generally accepted auditing standards) consisting of a review of the
latest available unaudited interim consolidated financial statements
of the Company and its subsidiaries in accordance with professional
standards for a review of the unaudited consolidated financial
statements of the Company, a reading of the minutes of meetings and
consents of the shareholders and boards of directors of the Company
and its subsidiaries and the committees of such boards subsequent to
December 31, 1994, to inquiries of officers and other employees of the
Company and its subsidiaries who have responsibility for financial and
accounting matters of the Company and its subsidiaries with respect to
transactions and events subsequent to December 31, 1994, and other
specified procedures and inquiries to a date not more than five days
prior to the date of such letter, nothing has come to their attention
that would cause them to believe that (A) the unaudited consolidated
financial statements and schedules of the Company included or
incorporated by reference in the Registration Statement, the
preliminary prospectus and the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Regulations, and the Exchange Act and the applicable
published rules and regulations thereunder or that such unaudited
consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited consolidated
financial statements included and incorporated by reference in the
Registration Statement, the preliminary prospectus and the Prospectus,
(B) with respect to the period subsequent to December 31, 1994 there
were, as of the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and
as of a specified date not more than five days prior to the date of
such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net current assets
or stockholders' equity of the Company, in each case as compared with
the amounts shown in the most recent balance sheet included and
incorporated by reference in the Registration Statement, the
preliminary prospectus and the Prospectus, except for changes or
decreases which the Registration Statement, the preliminary prospectus
and the Prospectus disclose have occurred or may occur or which are
set forth in such letter or (C) that during the period from the date
of the most recent balance sheet of the Company included in the
Registration Statement, the preliminary prospectus and the Prospectus
to the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and
to a specified date not more than five days prior to the date of such
letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or total or per
share net income, except for decreases which the Registration
Statement, the preliminary prospectus and the Prospectus disclose have
occurred or may occur or which are set forth in such letter; and (iv)
stating that they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, and other financial
information pertaining to the Company and its subsidiaries set forth
in the Registration Statement, the preliminary prospectus and the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial
records of the Company and its subsidiaries or from schedules
furnished by the Company, and
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<PAGE> 24
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter, and
found them to be in agreement.
(i) You shall have received from each person who is a
director or executive officer of the Company the "lock-up" agreements
described in Sections 4.A.(f) and 4.B hereof.
(j) Prior to the Closing Date and the Additional Closing
Date, if any, as the case may be, the Company and the Selling
Shareholders and the Principal Selling Shareholders, as the case may
be, shall have furnished to you such further information, certificates
and documents as you may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date, if
any. Notice of such cancellation shall be given to the Company and the Selling
Shareholders and the Principal Selling Shareholders, as the case may be, in
writing, or by telephone and confirmed in writing.
7. Indemnification.
(a) The Company and James R. Leininger, M.D. (the
"Indemnifying Selling Shareholder") jointly and severally agree to
indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter, within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims and any and all expense whatsoever (including but
not limited to reasonable attorneys' fees and any and all expense
whatsoever as incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading;
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<PAGE> 25
provided, however, that the Company and the Indemnifying Selling
Shareholder will not be liable in any such case to the extent, but only
to the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through you expressly
for use therein; and provided, further, that with respect to any untrue
statement or omission or alleged untrue statement or omission made in
any preliminary prospectus, the indemnity contained in this Section
7(a) shall not inure to the benefit of any such indemnified
Underwriter, and the Company and the Indemnifying Selling Shareholder
shall not be liable to any such indemnified Underwriter, from whom the
person asserting any such losses, liabilities, claims, damages or
expenses purchased the Shares concerned to the extent that any such
losses, liabilities, claims, damages, or expenses of such indemnified
Underwriter results from the fact that there was not sent or given to
such person, at or prior to the written confirmation of the sale of
such Shares to such person, a copy of the Prospectus, as the same may
be amended or supplemented, within the time required by the Act (if
required thereby), and the untrue statements or the alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact in such preliminary prospectus was corrected in the
Prospectus, unless such failure to deliver the Prospectus was a result
of noncompliance by the Company with its obligations under Section
4.A(c) hereof. In addition, the Company and each Selling Shareholder
severally, and not jointly, agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter,
within the meaning of Section 15 under the Act or Section 20(a) of the
Exchange Act, as provided above, or arise out of or are based in whole
or in part on any inaccuracy in their respective representations and
warranties contained herein or any failure of the Company or any of the
Selling Shareholders to perform their respective obligations hereunder
or under applicable law, but, in the case of any such loss, liability,
claim, damage or expense which arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged
omission, only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance
and in conformity with written information furnished in writing to the
Company by or on behalf of such Selling Shareholder expressly for use
in the Registration Statement, as originally filed or any amendment
thereof, or any related preliminary prospectus or the Prospectus, or in
any supplement thereto or amendment thereof. Notwithstanding any
provisions in this Agreement to the contrary, no Selling Shareholder
shall be required to provide indemnification hereunder for any losses,
liabilities, claims, damages or expenses arising solely out of, or
based in whole or in part solely on, any breach by the Company or any
other Selling Shareholder of the Company's or such other Selling
Shareholder's representations, warranties and covenants under this
Agreement. This indemnification obligation of the Indemnifying Selling
Shareholder and the other Selling Shareholders shall be limited to the
net proceeds received by the Indemnifying Selling Shareholder or other
Selling Shareholder (before deducting expenses) from the sale of the
Indemnifying Selling Shareholder's or other Selling Shareholders' Firm
Shares and, in the case of the Indemnifying Selling
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<PAGE> 26
Shareholder, the Indemnifying Selling Shareholder's Additional Shares.
This indemnity agreement will be in addition to any liability which
the Company, the Indemnifying Selling Shareholder and the other
Selling Shareholders may otherwise have to any Underwriter including
under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees
to indemnify and hold harmless the Company, each Selling Shareholder,
each of the directors of the Company, each of the officers of the
Company who shall have signed the Registration Statement, and each
other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to reasonable attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any
claim or litigation), joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
any such loss, liability, claim, damage or expense arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein;
provided, however, that in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder.
This indemnity will be in addition to any liability which any
Underwriter may otherwise have to the Company or any Selling
Shareholder including under this Agreement. The Company and each
Selling Shareholder acknowledge that the statements set forth in the
last paragraph of the cover page and in the first and third paragraphs
under the caption "Underwriting" in the Prospectus constitute the only
information furnished in writing by or on behalf of any Underwriter
expressly for use in the Registration Statement relating to the Shares
as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof
or supplement thereto, as the case may be, and the Underwriters
represent that such statements are true and correct in all material
respects as of the date hereof.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection,
notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it
may have under this Section 7 except to the extent
26
<PAGE> 27
that it has been actually prejudiced in any material respect by such
failure or from any liability which it may have otherwise). In case
any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the
extent it may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel
satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to
employ its or their own counsel in any such case, provided, that the
fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to have charge of
the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties
shall have reasonably concluded that there may be defenses available
to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one such counsel and one local
counsel for each jurisdiction as considered necessary by the
indemnified parties in their reasonable judgment or as advised by
counsel shall be borne by the indemnifying parties. Anything in this
subsection to the contrary notwithstanding, an indemnifying party
shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent
shall not be unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7(a) hereof
is for any reason held to be unavailable from the Company or any Selling
Shareholder or is insufficient to hold harmless a party indemnified thereunder,
the Company, the Selling Shareholders and the Underwriters shall contribute to
the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provisions (including any investigation,
reasonable legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting in the case of losses, claims, damages, liabilities and
expenses suffered by the Company and any Selling Shareholder any contribution
received by the Company or such Selling Shareholder from persons, other than
the Underwriters, who may also be liable for contribution, including persons
who control the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) to which the Company, one or more of
the Selling Shareholders and one or more of the Underwriters may be subject, in
such proportion as is appropriate to reflect the relative benefits received by
the Company, the Selling Shareholders and the Underwriters from the offering of
the Shares or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as
is appropriate to reflect not only the relative benefits referred to above but
also the relative fault of the Company, the Selling Shareholders and the
Underwriters in connection with the untrue or alleged untrue statements or
omissions or alleged omissions which resulted in such losses,
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<PAGE> 28
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion as (x) in the case of the Company and the Selling Shareholders, the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Selling Shareholders and (y) in
the case of the Underwriters, the underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company, the Selling
Shareholders and of the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Shareholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above. The Company and the
Indemnifying Selling Shareholder shall be jointly and severally liable, and
each of the other Selling Shareholders shall be severally liable in the same
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by such
Selling Shareholder bears to such total offering proceeds received by all
Selling Shareholders (other than the Indemnifying Selling Shareholder), for the
amounts to be contributed by any of them pursuant to the provisions of this
Section 8. Notwithstanding the provisions of this Section 8, (i) in no case
shall any Underwriter (except as may be provided in the Agreement Among
Underwriters) be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, each person, if any, who controls a
Selling Shareholder within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Selling Shareholder, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 8, notify such party or parties from whom contribution may
be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have under this Section
28
<PAGE> 29
8 or otherwise. No party shall be liable for contribution with respect to any
action or claim settled without its consent; provided, however, that such
consent shall not be unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in
its or their obligation to purchase Firm Shares or Additional Shares
hereunder, and if the Firm Shares or Additional Shares with respect to
which such default relates do not (after giving effect to
arrangements, if any, made by you pursuant to subsection (b) below)
exceed in the aggregate 10% of the number of shares of Firm Shares or
Additional Shares, as the case may be, which all Underwriters have
agreed to purchase hereunder, then such Firm Shares or Additional
Shares to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their
respective names in Schedule I hereto bear to the aggregate number of
Firm Shares set forth opposite the names of the nondefaulting
Underwriters.
(b) In the event that such default relates to more than
10% of the Firm Shares or Additional Shares, as the case may be, you
may in your discretion arrange for yourself or for another party or
parties (including any non-defaulting Underwriter or Underwriters who
so agree) to purchase such Firm Shares or Additional Shares, as the
case may be, to which such default relates on the terms contained
herein. In the event that within 5 calendar days after such a default
you do not arrange for the purchase of the Firm Shares or Additional
Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with
respect to the Additional Shares, the obligations of the Underwriters
to purchase and of the Principal Selling Shareholders to sell the
Additional Shares shall, thereupon terminate, without liability on the
part of the Company or the Selling Shareholders with respect thereto
(except in each case as provided in Sections 5, 7(a) and (c) and 8
hereof) or the several Underwriters, but nothing in this Agreement
shall relieve a defaulting Underwriter or Underwriters of its or their
liability, if any, to the other several Underwriters, the Company and
the Selling Shareholders for damages occasioned by its or their
default hereunder.
(c) In the event that the Firm Shares or Additional
Shares to which the default relates are to be purchased by the
non-defaulting Underwriters, or are to be purchased by another party
or parties as aforesaid, you or the Company shall have the right to
postpone the Closing Date or Additional Closing Date, if any, as the
case may be, for a period, not exceeding five business days, in order
to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in
the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall
include any party substituted under this
29
<PAGE> 30
Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Underwriters,
the Selling Shareholders and the Company contained in this Agreement, including
the agreements contained in Section 5, the indemnity agreements contained in
Section 7 and the contribution agreements contained in Section 8, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company, any of its officers and directors or any Selling
Shareholder or any controlling person thereof, and shall survive delivery of
and payment for the Shares to and by the several Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement
including pursuant to Sections 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective at such time
after notification of the effectiveness of the Registration Statement
as you, the Company and the Selling Shareholders shall agree upon the
purchase price per Share. If the purchase price per Share has not
been agreed upon prior to 5:00 P.M., New York time, on the seventh
full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability
to the Company, the Selling Shareholders or the Underwriters except as
herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you and
the Selling Shareholders or the Attorney-in-Fact, or by joint action
only of all the Selling Shareholders directly or the Attorney-in-Fact
on behalf of all the Selling Shareholders by notifying the Company and
you, or by you notifying the Company and the Selling Shareholders or
the Attorney-in- Fact. Notwithstanding the foregoing, the provisions
of this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all
times be in full force and effect.
(b) You shall have the right to terminate this Agreement
at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to
the Additional Closing Date, if any, as the case may be, if any
domestic or international event or act or occurrence has materially
disrupted, or in your opinion will in the immediate future materially
disrupt, securities markets; or if trading on the New York or American
Stock Exchanges shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on the New York or American
Stock Exchanges by the New York or American Stock Exchanges or by
order of the Commission or any other governmental authority having
jurisdiction; or if the United States shall have become involved in a
war or major hostilities; or there is an escalation of hostilities
involving the United States or there is a declaration of a national
emergency or war by the United States; or if any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating-organization" (as defined for purposes of Rule
30
<PAGE> 31
436(g) under the Regulations); or if a banking moratorium has been
declared by a state or federal authority, or if a moratorium in
foreign exchange trading by major international banks or persons has
been declared; or if any new restriction materially adversely
affecting the distribution of the Firm Shares or the Additional
Shares, as the case may be, shall have become effective; or if there
shall have been such change in the market for the Company's securities
or securities in general or in political, financial or economic
conditions as in your judgment makes it impractical or inadvisable to
proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by
the Prospectus.
(c) Any notice of termination pursuant to this Section 11
shall be by telephone or facsimile transmission, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to any
of the provisions hereof (otherwise than pursuant to (i) notification
by you as provided in Section 11(a) hereof or (ii) Sections 9(b) or
11(b) hereof), or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the several
Underwriters set forth herein is not satisfied or because of any
refusal, inability or failure on the part of the Company or any
Selling Shareholder to perform any agreement herein or comply with any
provision hereof, the Company and the Selling Shareholders jointly and
severally agree subject to demand by you, to reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
expenses of their counsel), incurred by the several Underwriters in
connection herewith.
12. Notice. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or facsimile transmission and
confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, NY 10167, Attention: _______________; if sent to the
Company or any Selling Shareholder, shall be mailed, delivered, or facsimile
transmission and confirmed in writing, in the case of the Company, to the
Company, 8023 Vantage Drive, San Antonio, Texas 78230, Attention: Dennis E.
Noll, Esq., Senior Vice President and General Counsel, and in the case of any
Selling Shareholder, to the Attorney-in-Fact, 8023 Vantage Drive, San Antonio,
Texas 78230, Attention: James R. Leininger, M.D.
13. Parties. You represent that you are authorized to act on
behalf of the several Underwriters named in Schedule I hereto, and the Company
and the Selling Shareholders shall be entitled to act and rely on any request,
notice, consent, waiver or agreement purportedly given on behalf of the
Underwriters when the same shall have been given by you on such behalf. This
Agreement shall inure solely to the benefit of, and shall be binding upon, the
several Underwriters, the Selling Shareholders and the Company and the
controlling persons, directors, officers, employees and agents referred to in
Sections 7 and 8, and their respective successors and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision
herein contained. The term "successors and assigns" shall not include a
purchaser, in its capacity as such, of Shares from any of the Underwriters.
31
<PAGE> 32
14. Construction. This Agreement shall be construed in accordance
with the internal laws of the State of New York.
[signature page follows]
32
<PAGE> 33
If the foregoing correctly sets forth the understanding among you, the
Company and the Selling Shareholders, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
KINETIC CONCEPTS, INC.
By:
------------------------------------
Raymond R. Hannigan, President and
Chief Executive Officer
SELLING SHAREHOLDERS
[LIST ALL]
By:
------------------------------------
Attorney-in-Fact for the Selling
Shareholders named in Schedule II
AGREED and ACCEPTED as of the date
first above written.
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS INCORPORATED
On behalf of themselves and the other several
Underwriters named in Schedule I hereto.
By: Bear, Stearns & Co. Inc.
By:
---------------------------
Name:
Managing Director
33
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of Additional
Shares Which Number of Firm
May Be Purchased from Shares to be
the Principal Purchased from the
Name of Underwriter Selling Shareholders Selling Shareholders
- ------------------- -------------------- --------------------
<S> <C> <C>
Bear, Stearns & Co. Inc.
Alex. Brown & Sons Incorporated
Total........
============= =============
</TABLE>
34
<PAGE> 35
SCHEDULE II
<TABLE>
<CAPTION>
Number of Number of
Additional Shares Firm Shares Which
Name of Selling Shareholder To Be Sold May Be Sold
- --------------------------- ----------- -----------
<S> <C> <C>
James R. Leininger, M.D.
Peter A. Leininger, M.D.
Daniel E. Leininger
John H. Leininger, O.D.
[Leininger Family Trusts]
[Miami Project]
Total........
============ =============
</TABLE>
35
<PAGE> 36
EXHIBIT A
KINETIC CONCEPTS, INC.
POWER OF ATTORNEY
WHEREAS, the undersigned (the "Undersigned") owns shares of
Common Stock, $.001 par value (the "Common Stock"), of Kinetic Concepts, Inc.,
a Texas corporation (the "Company"); and
WHEREAS, the Undersigned, subject to the terms and conditions
stated herein, desires to sell the number of shares of Common Stock set forth
below the Undersigned's name on the signature page hereof (the "Shares"); and
WHEREAS, the Undersigned proposes to sell the Shares to the
several underwriters (the "Underwriters") named in Schedule I to the
Underwriting Agreement to be entered into by and among the Company, the
Undersigned, the other selling shareholders named therein (the "Other Selling
Shareholders", and together with the Undersigned, the "Selling Shareholders")
and the Underwriters, substantially in the form attached hereto as Exhibit A
with such changes, including additions, deletions and amendments thereto, as
the Attorney-in-Fact (as defined below) may deem necessary or advisable (the
"Underwriting Agreement");
NOW, THEREFORE, as an inducement to the Underwriters and the
Company to execute the Underwriting Agreement in such form as may be entered
into, executed and delivered by the Attorney-in-Fact as hereinafter provided,
and in order to secure the performance of the Underwriting Agreement upon its
execution, the Undersigned agrees, for the benefit of the Underwriters and the
Company as follows:
1. Delivery of Certificates; Appointment of Attorney-in-Fact;
Grant of Authority. The undersigned is delivering herewith, for deposit with
Dennis E. Noll, Esq., in his capacity as custodian (the "Custodian"), a
certificate or certificates that represent the number of share of issued and
outstanding Common Stock set below the Undersigned's signature on the signature
page hereof, that are registered in the name of the Undersigned or in the name
of a nominee which holds such certificates for the account of the Undersigned.
The Undersigned hereby makes, constitutes and appoints, irrevocably, subject to
the terms hereof, James R. Leininger, M.D. as the true and lawful
attorney-in-fact (the "Attorney-in-Fact") of the Undersigned, with full power
and authority, for and in the name, place and stead of the Undersigned:
(a) To negotiate and agree with the Underwriters on the
per share price at which the Shares are to be sold by the Undersigned
to the Underwriters, which purchase price shall be the same price per
share to be paid by the Underwriters to the Other Selling Shareholders
and to sell up to such number of Shares at such price as shall be
determined by the Attorney-in-Fact executing the Underwriting
Agreement, acting in his sole discretion, it being understood and
agreed that:
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<PAGE> 37
i. not more than the aggregate number of Shares
set forth below the Undersigned's name on the signature page
hereof shall be sold by the Undersigned to the Underwriters
pursuant to the Underwriting Agreement; and
ii. the reoffering of the Shares by the
Underwriters shall be by a public offering registered under
the Securities Act of 1933, as amended (the "Act").
(b) To make the representations and warranties and enter
into the agreements on behalf of the Undersigned contained in the
Underwriting Agreement, to execute and deliver the Underwriting
Agreement on behalf of the Undersigned with full power to make such
changes including additions, deletions and amendments thereto as the
Attorney-in-Fact shall deem necessary or advisable, in his sole
discretion, and to consummate the transactions contemplated thereby.
(c) To arrange for, prepare or cause to be prepared a
registration statement, and all amendments thereto, under the Act
covering the offering and sale of the Shares by the Undersigned and
the Other Selling Shareholders (collectively, the "Registration
Statement"), and to take all necessary action with respect to such
Registration Statement as the Attorney-in-Fact shall deem necessary or
advisable, in his sole discretion, subject, however, to the
Undersigned's rights under the Underwriting Agreement.
(d) To take any and all steps that the Attorney-in-Fact
shall deem necessary or advisable, in his sole discretion, in
connection with the registration of the Shares under the Act and under
the securities or Blue Sky laws of any jurisdiction, including the
preparation of the Registration Statement, the making of any
undertakings or representations (but only to the extent contained in
or consistent with the representations of the Selling Shareholders set
forth in the Underwriting Agreement), the execution and filing of
letters and other communications to the Securities and Exchange
Commission (the "Commission") regarding the Registration Statement and
the performance of any such other acts as the Attorney-in-Fact shall
deem necessary or advisable, in his sole discretion.
To the extent such actions, letters and communications relate
to the Undersigned, they will be based upon written information
furnished and provided by or on behalf of the Undersigned, provided
that the Attorney- in-Fact reasonably believes that such information
is true and correct.
(e) To execute, acknowledge and deliver the Custody
Agreement, substantially in the form attached hereto as Exhibit B (the
"Custody Agreement"), with full power to make such changes, including
additions, deletions and amendments thereto, as the Attorney-in-Fact
shall deem necessary or advisable, in his sole discretion, pursuant to
which the certificates representing the Undersigned's Shares will be
held by the Custodian for sale as contemplated by the Underwriting
Agreement, to deliver the certificate or certificates representing the
Shares to the Custodian, to instruct the Custodian with respect to the
number of Shares to be sold, and to consummate the transactions
contemplated by the Custody Agreement.
2
<PAGE> 38
(f) To do all things and to perform all acts required to
be performed on the part of the Undersigned in connection with the
sale by the Undersigned of the Undersigned's Shares, including, but
not limited to, (i) the transfer of the Shares of the Undersigned on
the books of the Company in order to effect their sale, (ii) the
endorsement and execution and delivery of all stock certificates,
stock powers, certificates, receipts, instructions to transfer agents
and registrars, and any other document and paper required,
contemplated by, or deemed necessary or advisable by the
Attorney-in-Fact, in his sole discretion, in connection with, the
performance of the Underwriting Agreement, the Custody Agreement, the
registration of the Shares pursuant to the Act, and the exemption,
qualification or registration of the Shares under the securities or
Blue Sky laws of any state or jurisdiction, (iii) the authorization
for payment by the Custodian out of the net proceeds of any sale to
the Underwriters, or the withholding by Bear, Stearns & Co. Inc. and
Alex. Brown & Sons Incorporated, as representatives of the
Underwriters (the "Representatives") from such proceeds, of the
Undersigned's necessary transfer taxes in connection with the sale and
delivery to the Underwriters of the Shares sold by the Undersigned,
(iv) the retention of one legal counsel in connection with all matters
referred to herein (which counsel may, but need not be, counsel for
the Company), (v) the return to the Undersigned of certificates
representing the number of Shares (if any) received by the Custodian
but not sold by the Undersigned to the Underwriters, (vi) instructing
the Custodian as to the number of Shares to be sold by the Undersigned
and (vii) to otherwise act for, in the name of and on behalf of the
Undersigned with respect to the transactions described in the
Underwriting Agreement and the Custody Agreement, as fully as the
Undersigned could if then personally present and acting.
The Undersigned recognizes that the number of Shares that the
Underwriters will purchase from the Selling Shareholders (the "Underwritten
Shares") may be less than the number of Shares desired to be sold by any or all
Selling Shareholders. In the event the number of Underwritten Shares is less
than the aggregate number of Shares desired to be sold by any or all Selling
Shareholders, the Attorney-in-Fact is authorized and directed to determine that
portion of the Shares that the Undersigned is entitled to sell, if any, on a
pro rata basis among each of the Other Selling Shareholders and any such
determination by the Attorney-in-Fact shall be final and binding upon the
undersigned.
The Attorney-in-Fact shall be entitled to act and rely upon
any statement, notice or instruction received by the Undersigned in writing or
by facsimile transmission.
2. Irrevocability. All authority conferred hereby shall be
deemed granted and conferred in contemplation and furtherance of the interests
of the Underwriters and the Company, and this Power of Attorney is irrevocable
and is coupled with an interest, subject to the provisions of Section 4 hereof.
The obligations and authorizations of the Undersigned hereunder shall not be
terminated by operation of law or the occurrence of any event whatsoever,
including, but not limited to, the merger, consolidation, reorganization,
liquidation, dissolution, bankruptcy, insolvency, death or incapacity of the
Undersigned or the occurrence of any other similar event; and if, after the
execution of this Power of Attorney and before the completion of the
transactions contemplated by the Underwriting Agreement, the Undersigned
merges, consolidates, liquidates, reorganizes, enters bankruptcy, becomes
insolvent, dissolves,
3
<PAGE> 39
dies or becomes incapacitated or any other similar event occurs, the
Attorney-in-Fact is nevertheless authorized and directed to complete all such
transactions, including the delivery of the certificates for the Shares to be
sold to the Underwriters, as if such merger, consolidation, reorganization,
liquidation, dissolution, bankruptcy, insolvency, death, incapacity or other
similar event had not occurred, regardless of whether or not the
Attorney-in-Fact shall have received notice thereof.
3. Representations and Warranties.
(a) The Undersigned represents and warrants to the
Attorney-in-Fact, to the Company, to each of the Underwriters and to legal
counsel for the Company and the Undersigned, that (i) the Undersigned has, and
at and as of the date the Underwriting Agreement is executed and at the Closing
Date and any Additional Closing Date (each as defined in the Underwriting
Agreement) will have, full right, power and authority and all authorizations
and approvals required by law or otherwise to enter into this Power of
Attorney, the Custody Agreement and Underwriting Agreement and (ii) the
consummation of the transactions contemplated hereby and thereby and the
fulfillment of the terms hereof and thereof will not conflict with or
constitute a breach of, or default under, any bond, debenture, note or any
other evidence of indebtedness or in any indenture or other material agreement
to which the Undersigned is a party or by which it is bound or to which any of
its properties is subject, or any law, statute, rule, regulation, judgment or
court decree applicable to the Undersigned.
(b) The Undersigned hereby represents and warrants to the
Attorney-in-Fact, the Company, the Underwriters and to legal counsel for the
Company and the Undersigned, that the Undersigned has carefully reviewed the
representations, warranties, statements and agreements to be made by the
Undersigned as a Selling Shareholder pursuant to the Underwriting Agreement,
including, without limitation, those contained in Section 1.B of the
Underwriting Agreement and the indemnity and contribution agreements contained
in Sections 7 and 8 of the Underwriting Agreement (and such representations and
warranties are incorporated herein by reference), and hereby certifies,
represents and warrants to the Attorney-in-Fact, the Company, each of the
Underwriters and to legal counsel for the Company and the Undersigned, that the
representations and warranties to be made by the Undersigned in Section 1.B of
the Underwriting Agreement are true and correct on the date hereof and will be
true and correct at and as of the date such Underwriting Agreement is executed
and at and as of the Closing Date and any Additional Closing Date, and that
such agreements, insofar as they relate to the Undersigned, have been complied
with as of the date hereof and will be complied with on and after the Closing
Date and any Additional Closing Date.
(c) For purposes of delivering any certificate on behalf
of the Undersigned which may be required pursuant to the Underwriting Agreement
or by counsel to the Company and the Undersigned, the Attorney-in-Fact may rely
on the representations and warranties of the Undersigned set forth herein and
in the Underwriting Agreement as if said representations and warranties had
been set forth in a separate certificate directed to the Attorney-in-Fact at
and as of the Closing Date or any Additional Closing Date, provided the
Attorney-in-Fact is not in receipt of written notice from or on behalf of the
Undersigned or otherwise does not reasonably believe that any such
representation or warranty is not true and correct at and as of the Closing
Date or any Additional Closing Date.
4
<PAGE> 40
(d) The Undersigned will immediately notify the Company,
the Attorney-in-Fact, each of the Underwriters and legal counsel for the
Company and the Undersigned of the occurrence of any event which shall cause
the representations and warranties set forth herein or incorporated herein by
reference not to be true and correct during the period of the public offering
of the Shares or at any time of delivery of the Shares pursuant to the
Underwriting Agreement.
(e) All of the information heretofore, now or hereafter
furnished by the Undersigned to the Company, the Attorney-in-Fact, each of the
Underwriters and legal counsel for the Company and the Undersigned in
connection with the offering and sale of the Shares is accurate and complete.
The maximum number of shares of Common Stock to be sold by the Undersigned to
the Underwriters is accurately stated below the Undersigned's name on the
signature page hereof.
(f) If the Undersigned has a spouse, such spouse has
joined in the execution and delivery of this Power of Attorney for all
purposes, and all references to "the Undersigned" shall mean both the Selling
Shareholder who is a signatory to this Power of Attorney and to such spouse
just as if such spouse were also a Selling Shareholder. The joinder of such
spouse, however, has been made without regard to the ownership of the Shares to
which this Power of Attorney relates.
(g) If the Undersigned is a trust and the shares held by
such trust are held by a nominee which holds such shares for the account of the
Undersigned, such nominee has joined in the execution and delivery of this
Power of Attorney for all purposes and all references to "the Undersigned"
shall mean both the Undersigned and the nominee which holds the Shares for the
account of the Undersigned as if both the Undersigned and the nominee which
holds the Shares for the account of the Undersigned were Selling Shareholders.
(h) If the Undersigned is a partnership, corporation,
limited liability company or trust, the person signing on behalf of the
Undersigned is duly authorized to execute and deliver these documents for and
on behalf of such partnership, corporation or trust.
(i) The Undersigned has received a copy of Amendment No.
___ to the Registration Statement filed by the Company with the Commission on
December ___, 1995. The information relating to the Undersigned set forth
under the captions Principal and Selling Shareholders commencing on page ___ of
the preliminary prospectus forming a part of the Registration Statement, is
true and correct in all respects.
4. Expenses. In addition to the expenses, if any, to be paid
by the Undersigned as set forth in the Underwriting Agreement, the Undersigned
shall pay all reasonable out-of-pocket costs and expenses incurred by the
Attorney-in-Fact in the discharge of their responsibilities hereunder, provided
that the Attorney-in-Fact shall serve without compensation.
5. Termination. If the Underwriting Agreement shall not be
entered into on behalf of the Undersigned, or if it shall not become effective
pursuant to its terms, or if it shall be terminated pursuant to its terms, or
if the Closing Date shall not have occurred on or before _________, 1996, or if
no Additional Closing Date shall occur before ________, 1996, then
5
<PAGE> 41
after such date the Undersigned shall have the power, on written notice to the
Attorney-in-Fact, to terminate this Power of Attorney, subject, however, (i) to
any action to be taken pursuant to the Custody Agreement and (ii) to all lawful
action of the Attorney-in-Fact done or performed pursuant hereto prior to
actual receipt of such notice, and thereafter the Attorney-in-Fact shall have
no further responsibilities or liabilities to the Undersigned.
6. Ownership of Stock. Subject to the terms of the Custody
Agreement, until payment of the purchase price for the Shares being sold by the
Undersigned pursuant to the Underwriting Agreement has been made by or for the
account of the Underwriters, the Undersigned shall remain the legal and
beneficial owner of the Shares deposited with the Custodian pursuant to the
Custody Agreement and shall have the right to vote such Shares and to receive
all dividends and distributions thereon. However, until such payment in full
has been made or until the Underwriting Agreement has been terminated, the
Undersigned agrees not to give, sell, pledge, hypothecate, grant any lien on or
security interest in, transfer, deal with or contract with respect to the
Shares to be sold by the Undersigned pursuant to the Underwriting Agreement or
any interest therein, except in accordance with the Underwriting Agreement, or
as otherwise agreed in writing by the Underwriters.
7. Indemnification. The Undersigned hereby agrees to
indemnify and hold harmless the Attorney-in-Fact against any and all expenses,
losses, claims, damages or liabilities, joint or several, to which the
Attorney-in-Fact may become subject insofar as such expenses, losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any action taken or omitted to be taken by the Attorney-in-Fact
pursuant hereto, other than those expenses, losses, claims, damages or
liabilities which result from the negligence or bad faith of the
Attorney-in-Fact. The Attorney-in-Fact assumes no responsibility or liability
to any person other than in the discharge of his responsibility hereunder.
8. Power of Substitution. The Attorney-in-Fact is hereby
granted and shall have full power of substitution hereunder. Such substitution
shall be effected by notice thereof to the Undersigned, signed by the
Attorney-in-Fact who is being substituted for as well as by his successor
Attorney-in-Fact.
9. Governing Law. This Power of Attorney for all purposes
shall be governed by and construed in accordance with the internal laws of the
State of New York.
10. Notice. Any notice required to be given pursuant to this
Power of Attorney shall be deemed given if in writing and delivered in person,
or if given by telephone or facsimile if subsequently confirmed in writing, (i)
to the Attorney-in-Fact, 8023 Vantage Drive, San Antonio, Texas 78230,
Attention: James R. Leininger, M.D. (facsimile no.: (210) 308-3993), or (ii)
to the Undersigned at the address or facsimile number set forth on the
signature page hereof. The Attorney-in-Fact agrees to forward copies of any
and all notices received by him to the Undersigned at the address and facsimile
number set forth on the signature page hereof.
IN WITNESS WHEREOF, the Undersigned has executed this Power of
Attorney this ___ day of ______________, 199__.
6
<PAGE> 42
(To be signed exactly as name appears
on Certificate(s) representing the
Shares)
---------------------------------------
Print name, address and facsimile
number:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Number of Shares to be sold:______________________
NOTE: ALL SIGNATURES ON THIS POWER OF ATTORNEY MUST BE GUARANTEED BY A
PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Signature(s) guaranteed by:
- -------------------------------
Name:
7
<PAGE> 43
INDIVIDUAL ACKNOWLEDGMENT
STATE OF ____________ )
) ss.:
COUNTY OF ___________ )
On this __ day of _______________, 1995, before me personally
came ___________________, to me known to be the individual described in and who
executed the foregoing Power of Attorney and acknowledged that he executed the
same.
--------------------------------------
Notary Public
8
<PAGE> 44
If the Selling Shareholder is an individual, check whether married [ ] or not
married [ ]. If married and spouse has not signed above as a Selling
Shareholder because spouse is not a registered owner of the deposited stock
certificates, spouse must consent by signing below and having signature
guaranteed:
Selling Shareholder Spouse
--------------------------------------
Name:
NOTE: ALL SIGNATURES ON THIS POWER OF ATTORNEY MUST BE GUARANTEED BY A
PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Signature(s) guaranteed by:
- --------------------------------
Name:
9
<PAGE> 45
Acceptance by the Attorney-In-Fact
James R. Leininger, M.D. hereby accepts his appointment as
attorney-in-fact pursuant to the foregoing Power of Attorney and agrees to
abide by and act in accordance with the terms of said agreement.
--------------------------------------
James R. Leininger, M.D.
10
<PAGE> 46
EXHIBIT A TO POWER OF ATTORNEY
FORM OF UNDERWRITING AGREEMENT
11
<PAGE> 47
EXHIBIT B TO POWER OF ATTORNEY
KINETIC CONCEPTS, INC.
CUSTODY AGREEMENT
Dennis E. Noll, Esq.
Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, TX 78230
The Undersigned have delivered to you certificates (the
"Certificates") in negotiable form representing ____________ shares of the
issued and outstanding common stock, par value $.001 per share (the "Common
Stock"), of Kinetic Concepts, Inc., a Texas corporation (the "Company"),
together with any executed stock powers required to transfer such certificates
in accordance with the terms hereof and the Underwriting Agreement (as defined
below). The Certificates are to be held by you as custodian hereunder for the
account of the selling shareholders listed in Exhibit I hereto (collectively,
the "Selling Shareholders") and are to be disposed of in accordance with the
following instructions:
1. The Undersigned has been appointed attorney-in-fact
("Attorney-in-Fact") for each of the Selling Shareholders pursuant to the power
of attorney executed by each such Selling Shareholder (collectively, the "Power
of Attorney"), and is authorized, subject to certain terms and conditions set
forth in the Power of Attorney, to execute and deliver on behalf of the Selling
Shareholders an Underwriting Agreement (the "Underwriting Agreement"),
substantially in the form attached hereto as Exhibit II, by and among the
Selling Shareholders, the Company, and the Underwriters named in Schedule I
thereof (the "Underwriters"), pursuant to which the Selling Shareholders will
agree to sell, and the Underwriters will severally agree to purchase, subject
to the terms and conditions therein set forth, an aggregate of 8,500,000 shares
of Common Stock (the "Firm Shares") at the price set forth in the Underwriting
Agreement. In addition, James R. Leininger, M.D., Peter A. Leininger, M.D.,
Daniel E. Leininger and John H. Leininger, O.D. (together, the "Principal
Selling Shareholders") will grant to Bear, Stearns & Co. Inc. and Alex. Brown &
Sons Incorporated, as representatives of the Underwriters (the
"Representatives"), solely for the purpose of covering over- allotments, an
option to purchase, subject to the terms and conditions set forth in the
Underwriting Agreement, up to an additional 1,275,000 shares of Common Stock
(the "Additional Shares" and, together with the Firm Shares, the "Shares").
2. You are hereby authorized and directed to hold the
Certificates for the Shares and, subject to the Underwriters having
concurrently provided you with a counterpart of the Underwriting Agreement that
has been executed by or on behalf of the Selling Shareholders and all other
parties thereto (i) on the Closing Date and any Additional Closing Date (each
as defined in the Underwriting Agreement), to cause to be delivered to the
Underwriters for their
1
<PAGE> 48
respective accounts, against payment therefor in full of the purchase price per
Share determined in accordance with the terms of the Underwriting Agreement,
one or more certificates (each, an "Omnibus Certificate") representing the
number of Firm Shares to be sold on the Closing Date or the number of
Additional Shares to be sold on any Additional Closing Date, as the case may
be; (ii) to obtain an Omnibus Certificate upon transfer of or in exchange for
the certificates deposited with you hereunder; (iii) to have separate
certificates for the aggregate number of shares represented by any Omnibus
Certificate registered in such names and denominations as the Underwriters
shall have requested at least two full business days prior to the Closing Date,
or any Additional Closing Date, as the case may be, prepared and available for
checking and packaging by the Underwriters at a location in New York, New York
at least one full business day prior to the Closing Date, or any Additional
Closing Date, as the case may be, for delivery to the Underwriters upon
cancellation of such Omnibus Certificate. You shall not be regarded as making
any representations as to the validity, sufficiency, value or genuineness of
any of the Certificates or of any other documents surrendered to you or as to
the validity or genuineness of any signatures on any letters of transmittal,
facsimiles or other documents delivered to you in connection herewith. You may
rely on the instructions of the Undersigned, or any substitute Attorney-in-Fact
under the Power of Attorney, with respect to any discrepancies in the form of
the Certificates or accompanying documents.
3. You are authorized, for and on behalf of the Selling
Shareholders, to accept and acknowledge receipt from the Underwriters for their
respective accounts of payment for all Shares sold and delivered by the Selling
Shareholders to the respective Underwriters. The payment received by you for
the account of the Selling Shareholders shall, upon order, in accordance with
the instructions, of the Undersigned, be paid by you, in immediately available
funds, to the Selling Shareholders, less such amount, if any, as necessary to
provide for each Selling Shareholder's proportionate share of all expenses, if
any, of the Selling Shareholders as provided in the Underwriting Agreement,
including all necessary transfer taxes in connection with the sale and delivery
to the Underwriters of the Shares sold by the Selling Shareholders, such amount
to be delivered to the Company or as shall be specified by the Undersigned.
4. If the Underwriting Agreement shall not be executed,
or shall not become effective pursuant to its terms, or shall be terminated
pursuant to the provisions thereof, or the Closing Date shall not have occurred
on or before _________, 1996, or if the Additional Shares represented by the
certificates deposited with you hereunder are not taken up and paid for by the
respective Underwriters by __________, 1996 in accordance with the provisions
of the Underwriting Agreement, you are authorized and directed to exchange the
Omnibus Certificate obtained pursuant to paragraph 2 above, if any, for
certificates denominated as necessary to return to the Selling Shareholders
Shares equal to the Shares deposited with you hereunder, and to return to the
Selling Shareholders such certificates together with any stock powers, and you
shall have no further responsibility hereunder. The Undersigned shall notify
you promptly of the execution of the Underwriting Agreement. In addition, you
shall also, as instructed by the Attorney-in-Fact, return to each of the
Selling Shareholders certificates representing the number of Shares of such
Selling Shareholders that are held by you in excess of the number of Shares
sold by such Selling Shareholders pursuant to the Underwriting Agreement.
5. It is understood that until delivery by you of the
certificates deposited with you hereunder has been made in accordance with the
Underwriting Agreement and payment in
2
<PAGE> 49
full for the Shares represented by such certificates has been made by or for
the account of the respective Underwriters, the Selling Shareholders shall
remain the legal and beneficial owners of such Shares and shall have the right
to vote such Shares and to receive all dividends and distributions thereon.
6. Under the terms of the Underwriting Agreement, the
Undersigned agrees that the Shares represented by the certificates held in
custody for the Selling Shareholders under this Custody Agreement are subject
to the interest of the respective Underwriters under the Underwriting
Agreement, that the arrangements made by the Selling Shareholders for such
custodianship are to that extent irrevocable and that the obligations of the
Selling Shareholders under the Underwriting Agreement shall not be terminated
by operation of law or by the occurrence of any event whatsoever, including,
but not limited to, the merger, consolidation, reorganization, liquidation,
dissolution, bankruptcy, insolvency, death, incapacity or similar event of one
or more of the Selling Shareholders. If one or more of the Selling
Shareholders should merge, consolidate, reorganize, liquidate, dissolve, enter
bankruptcy, become insolvent, die or become incapacitated, or if any other such
similar event shall occur before the termination of this Custody Agreement, you
are nevertheless authorized and directed to deal with the certificates
deposited hereunder and with the terms and conditions hereof as if such merger,
consolidation, reorganization, liquidation, dissolution, bankruptcy,
insolvency, death, incapacity or similar event had not occurred, regardless of
whether or not you shall have received notice of such merger, consolidation,
reorganization, liquidation, dissolution, bankruptcy, insolvency, death,
incapacity or similar event.
7. It is understood that you are authorized to accept
this Custody Agreement and to take any and all actions hereunder as you shall,
in your discretion, determine to be necessary to consummate the transactions
contemplated hereby and by the Underwriting Agreement, and that you assume no
responsibility or liability to the Selling Shareholders or to any person other
than to deal with the certificates and the cash held and received by you
pursuant to the terms of this Custody Agreement in accordance with the
provisions hereof, and the Selling Shareholders agree to indemnify and hold you
harmless with respect to anything done by you in good faith in any and all
matters covered by this Custody Agreement in accordance with the foregoing
instructions.
8. In taking any of the actions described herein on
behalf of the Selling Shareholders, you are authorized and shall be entitled to
ask for and act and rely upon instructions, any request made, or notices,
information or assurances of fact given in writing to you by the Undersigned,
or any substitute attorney-in-fact appointed under the Power of Attorney;
provided, however, that you shall not be entitled to act on any statement or
notice to you with respect to the noneffectiveness or termination of the
Underwriting Agreement, or advice that the Underwriting Agreement has not been
executed and delivered, unless such statement, notice or advice shall have been
confirmed in writing to you by one of the Representatives.
9. It is agreed that your duties are only such as are
herein specifically provided, being purely ministerial in nature, and that you
shall incur no liability whatever except for liabilities resulting from your
actions taken or omitted to be taken by you in bad faith.
3
<PAGE> 50
10. You shall be under no responsibility in respect of
any of the items deposited with you hereunder other than to follow in good
faith the instructions by the Attorney-in-Fact or otherwise herein contained.
You may consult with counsel (which may be counsel to the Company) and shall be
fully protected in any action taken in good faith, in accordance with such
advice. You shall not be required to defend any legal proceedings which may be
instituted unless requested to do so by the Selling Shareholders and unless you
are indemnified to your satisfaction against the cost and expense of such
defense. You shall not be required to institute legal proceedings of any kind.
You shall have no responsibility for the genuineness or validity of any
document or other item deposited with you hereunder and you shall be fully
protected in acting in accordance with any written instructions given to you
hereunder and believed by you to have been signed by the Undersigned.
11. The Undersigned hereby represents and warrants that
the Undersigned has full right, power and authority to enter into this Custody
Agreement and the Underwriting Agreement on behalf of the Selling Shareholders
to sell, assign, transfer and deliver the Shares deposited hereunder and to be
sold pursuant to the Underwriting Agreement and, upon delivery and payment for
said Shares pursuant to the Underwriting Agreement, unencumbered title to such
Shares shall be acquired by the respective Underwriters.
12. Your acceptance hereof by the execution of this
Custody Agreement shall constitute an acknowledgment by you of receipt of the
certificates hereinbefore referred to and the acceptance by you of the
authorizations herein conferred and shall evidence your agreement to carry out
and perform this Custody Agreement in accordance with its terms.
13. This Custody Agreement shall for all purposes be
governed by and construed in accordance with the internal laws of the State of
New York.
IN WITNESS WHEREOF, this Custody Agreement is executed this
___ day of ______________, 199__.
Very truly yours,
SELLING SHAREHOLDERS
[LIST ALL]
By:
------------------------------------
James R. Leininger, M.D., as
Attorney-in-Fact for
the Selling Shareholders
AGREED and ACCEPTED as of this
__ day of ___________, 1995 by:
4
<PAGE> 51
CUSTODIAN
Dennis E. Noll, Esq., as Custodian
By:
---------------------------------
Name: Dennis E. Noll, Esq.
5
<PAGE> 52
EXHIBIT I TO CUSTODY AGREEMENT
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Firm Number of Additional
Name Shares To Be Sold Shares Available for Sale
---- ----------------- -------------------------
<S> <C> <C>
</TABLE>
6
<PAGE> 53
EXHIBIT II TO CUSTODY AGREEMENT
FORM OF UNDERWRITING AGREEMENT
7
<PAGE> 1
EXHIBIT 5.1
COX & SMITH
I N C O R P O R A T E D
ATTORNEYS COUNSELORS
112 East Pecan Street
Suite 1800
San Antonio, Texas 78205-1521
(210) 554-5500
Fax (210) 226-8395
Writer's Direct Number
(210) 554-5257
December 28, 1995
Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, Texas 78230
Re: Registration Statement No. 33-63957 on Form S-3
filed by Kinetic Concepts, Inc.
Dear Sirs:
We have acted as counsel for Kinetic Concepts, Inc., a Texas corporation
(the "Company"), in connection with the registration under the Securities Act
of 1933, as amended, pursuant to Registration Statement No. 33-63957 on Form
S-3 (the "Registration Statement"), of an aggregate of 8,185,849 shares of
Common Stock, par value $.001 per share (the "Common Stock"), of the Company.
We have examined and are familiar with originals or copies, the
authenticity of which has been established to our satisfaction, of all such
documents, corporate records, certificates of officers of the Company and public
officials, and other instruments as we have deemed necessary to express the
opinion hereinafter set forth. In expressing our opinion as to the valid
issuance of shares of the Common Stock, we express no opinion as to compliance
with federal and state securities laws.
Based upon the foregoing, it is our opinion that the shares of Common
Stock of the Company to be sold as described in the Registration Statement
have been duly and validly authorized and issued and, when so sold and when
delivered to the Underwriters in accordance with the Underwriting Agreement
described in the Registration Statement, will be validly issued, fully paid
and nonassessable.
<PAGE> 2
Cox & Smith
I N C O R P O R A T E D
ATTORNEYS COUNSELORS
December 28, 1995
Page 2
We hereby consent to the use of our name in the Registration Statement as
counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Common Stock of the Company (including
specifically the reference contained under the caption "Legal Matters") and to
the use of this opinion as an exhibit to the Registration Statement.
Yours very truly,
COX & SMITH INCORPORATED
By: /s/ STEPHEN D. SEIDEL
---------------------
Stephen D. Seidel
For the Firm
SDS/Irk/0108123.01
<PAGE> 1
EXHIBIT 15.1
Kinetic Concepts, Inc.
San Antonio, Texas
Ladies and Gentlemen:
With respect to the registration statement on Form S-3 to be filed by the
Company, we acknowledge our awareness of the use therein of our reports dated
April 21, 1995, July 18, 1995 and October 17, 1995 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are
not considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
December 27, 1995
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kinetic Concepts, Inc.:
We consent to the use of our audit reports dated February 14, 1995 on the
consolidated financial statements of Kinetic Concepts, Inc. and subsidiaries as
of December 31, 1994 and 1993, and for each of the years in the three-year
period then ended included herein and incorporated by reference from the
Company's annual report on Form 10-K and to the reference to our firm under the
heading "Experts" in the prospectus.
Our reports refer to a change in the method of accounting for income taxes
in 1993 and the method of applying overhead to inventory in 1994.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Antonio, Texas
December 27, 1995
