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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
------------------------
KINETIC CONCEPTS, INC.
(NAME OF ISSUER)
------------------------
KINETIC CONCEPTS, INC.
FREMONT PURCHASER II, INC.
RCBA PURCHASER I, L.P.
JAMES R. LEININGER, M.D.
(NAME OF PERSON(S) FILING STATEMENT)
------------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS OF SECURITIES)
------------------------
49460W-01-0
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
DENNIS E. NOLL
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
KINETIC CONCEPTS, INC.
8023 VANTAGE DRIVE
SAN ANTONIO, TEXAS 78230
TELEPHONE: (210) 524-9000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
------------------------
WITH COPIES TO:
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<S> <C>
DAVID W. HELENIAK, ESQ. STEPHEN D. SEIDEL, ESQ.
SHEARMAN & STERLING COX & SMITH INCORPORATED
599 LEXINGTON AVENUE 112 E. PECAN STREET, SUITE 1800
NEW YORK, NEW YORK 10022 SAN ANTONIO, TEXAS 78205
(212) 848-4000 (210) 554-5500
</TABLE>
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [X] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
CALCULATION OF FILING FEE
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TRANSACTION VALUATION AMOUNT OF FILING FEE
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$654,293,626.90* $130,858.73
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</TABLE>
* For purposes of calculating fee only. This transaction applies to an aggregate
of 35,440,157 shares (sum of (i) 32,633,971 outstanding shares of common stock
(not including 186,824 treasury shares or 6,064,155, 100,000 and 3,837,890
shares of common stock held by James R. Leininger, M.D., Peter A. Leininger,
M.D. and Richard C. Blum & Associates, L.P., respectively, to remain
outstanding after the Offer) and (ii) 2,806,186 outstanding options to
purchase shares of Common Stock).
Except as otherwise noted, the per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11 is $19.25 per unit.
The per unit price with respect to 723,300 options to purchase shares of
Common Stock is $19.9375 per unit.
The proposed maximum aggregate value of transaction is $654,293,626.90 (sum of
(i) product of 32,633,971 shares of Common Stock and $19.25, (ii) product of
(A) 2,082,886 options to purchase shares of Common Stock and (B) the
difference between $19.25 and the exercise price of such options and (iii)
product of (A) 723,300 options to purchase shares of Common Stock and (B) the
difference between $19.9375 and the exercise price of such options).
The total fee is $130,858.73 paid by wire transfer on October 7, 1997 to the
designated lockbox depository maintained by the Commission at Mellon Bank. The
amount of the filing fee, calculated in accordance with Rule 0-11 promulgated
under the Securities Exchange Act of 1934, as amended, equals 1/50 of one
percent of the Common Stock to be acquired.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
Amount Previously Paid: $130,858.73
Form or Registration No.: SC13E4
Filing Party: Kinetic Concepts, Inc.
Date Filed: October 8, 1997
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INTRODUCTION
This Rule 13e-3 Transaction Statement (the "Statement") on Schedule 13E-3
(the "Schedule 13E-3") is being filed by Kinetic Concepts, Inc., a Texas
corporation (the "Company"), Fremont Purchaser II, Inc. ("F Purchaser"), RCBA
Purchaser I, L.P. ("B Purchaser" and, together with F Purchaser, "Purchasers")
and James R. Leininger, M.D. ("Dr. James Leininger") pursuant to Section 13(e)
of the Securities Exchange Act of 1934, as amended, and Rule 13e-3 thereunder in
connection with the tender offer by the Company for all the issued and
outstanding shares of its common stock, $.001 par value per share (the
"Shares"), upon the terms and subject to the conditions set forth in the Offer
to Purchase dated October 8, 1997 (the "Offer to Purchase") and the related
Letter of Transmittal (which together constitute the "Offer"), copies of which
are filed as Exhibits (d)(1) and (d)(2) hereto, respectively.
The following Cross Reference Sheet, prepared pursuant to General
Instruction F to Schedule 13E-3, shows the location in the Issuer Tender Offer
Statement on Schedule 13E-4 filed by the Company (the "Schedule 13E-4") with the
Securities and Exchange Commission on the date hereof of the information
required to be included in this Schedule 13E-3. The information set forth in the
Schedule 13E-4, including all exhibits thereto, is hereby expressly incorporated
herein by reference as set forth in the Cross Reference Sheet and the responses
in this Schedule 13E-3, and such responses are qualified in their entirety by
reference to the information contained in the Offer to Purchase and the
schedules thereto.
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CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM IN WHERE LOCATED IN
SCHEDULE 13E-3 SCHEDULE 13E-4
---------------- ----------------
<S> <C>
Item 1(a).................................................................... Item 1(a)
Item 1(b).................................................................... Item 1(b)
Item 1(c).................................................................... Item 1(c)
Item 1(d).................................................................... *
Item 1(e).................................................................... *
Item 1(f).................................................................... Item 4
Item 2(a).................................................................... *
Item 2(b).................................................................... *
Item 2(c).................................................................... *
Item 2(d).................................................................... *
Item 2(e).................................................................... *
Item 2(f).................................................................... *
Item 2(g).................................................................... *
Item 3(a).................................................................... *
Item 3(b).................................................................... *
Item 4(a).................................................................... *
Item 4(b).................................................................... *
Item 5(a)-(g)................................................................ Item 3(a)-(j)
Item 6(a).................................................................... Item 2(a)
Item 6(b).................................................................... *
Item 6(c).................................................................... *
Item 6(d).................................................................... *
Item 7(a).................................................................... Item 3
Item 7(b).................................................................... *
Item 7(c).................................................................... *
Item 7(d).................................................................... *
Item 8(a).................................................................... *
Item 8(b).................................................................... *
Item 8(c).................................................................... *
Item 8(d).................................................................... *
Item 8(e).................................................................... *
Item 8(f).................................................................... *
Item 9(a)-(c)................................................................ *
Item 10(a)................................................................... *
Item 10(b)................................................................... Item 4
Item 11...................................................................... Item 5
Item 12(a)................................................................... *
Item 12(b)................................................................... *
Item 13(a)................................................................... *
Item 13(b)................................................................... *
Item 13(c)................................................................... *
Item 14(a)-(b)............................................................... Item 7
Item 15(a)................................................................... *
Item 15(b)................................................................... Item 6
Item 16...................................................................... Item 8(e)
Item 17(a)................................................................... Item 9(b)
Item 17(b)................................................................... *
Item 17(c)................................................................... Item 9(c)
Item 17(d)................................................................... Item 9(a)
Item 17(e)................................................................... *
Item 17(f)................................................................... *
</TABLE>
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* The Item is inapplicable or the answer thereto is negative.
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ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The name of the issuer is Kinetic Concepts, Inc., a Texas corporation,
which has its principal executive offices at 8023 Vantage Drive, San Antonio,
Texas 78230.
(b) This Statement relates to the offer by the Company to purchase all of
the Shares for $19.25 per Share, net to seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase. The information
set forth in the Offer to Purchase under "INTRODUCTION," "THE TENDER OFFER --
Section 6. Price Range of Shares; Dividends" and "SPECIAL FACTORS -- Interests
of Certain Persons in the Transactions" is incorporated herein by reference.
(c) The information set forth in the Offer to Purchase under "INTRODUCTION"
and "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends" is
incorporated herein by reference.
(d) The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 6. Price Range of Shares; Dividends" and "THE TENDER
OFFER -- Section 9. Dividends and Distributions" is incorporated herein by
reference.
(e) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated
herein by reference.
(f) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated
herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
This Statement is being filed by the Company, which is the issuer of the
class of equity securities which is the subject of the Rule 13e-3 transaction
and by Purchasers and Dr. James Leininger, all of whom are affiliates of the
Issuer.
(a) - (d) and (g). The information set forth in the Offer to Purchase
under "THE TENDER OFFER -- Section 7. Certain Information Concerning the
Company," "THE TENDER OFFER -- Section 14. Certain Information Concerning
Purchasers" and "SCHEDULE I. Directors and Executive Officers of the Company" is
incorporated herein by reference.
(e) - (f). Neither the Company, Purchasers, Dr. James Leininger nor any
natural person listed in "SCHEDULE I. Directors and Officers of the Company" or
"THE TENDER OFFER -- Section 14. Certain Information Concerning Purchasers" of
the Offer to Purchase during the past five years, to its knowledge, (i) has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction as a result of which any such
person was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Related Party Transactions" is incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under "INTRODUCTION"
and "SPECIAL FACTORS -- Background of the Transactions" is incorporated herein
by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL
FACTORS -- Rights of the Shareholders in the Transactions", "SPECIAL
FACTORS -- Plans for the Company after the Transactions; Certain Effects of the
Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support
Agreement and the Agreement
4
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Among Bidders," "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration
Date," "THE TENDER OFFER -- Section 2. Acceptance for Payment and Payment for
Shares," "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and
Tendering Shares," "THE TENDER OFFER -- Section 4. Withdrawal Rights," "THE
TENDER OFFER -- Section 8. Financing of the Transactions," "THE TENDER
OFFER -- Section 10. Effect of the Transactions on the Market for Shares;
Exchange Act Registration," "THE TENDER OFFER -- Section 11. Certain Conditions
to the Offer," "THE TENDER OFFER -- Section 12. Certain Legal Matters and
Regulatory Approvals" and "THE TENDER OFFER -- Section 16. Miscellaneous" is
incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Interests of Certain Persons in the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support
Agreement and the Agreement Among Bidders," "SPECIAL FACTORS -- Transactions and
Arrangements Concerning the Shares" and "THE TENDER OFFER -- Section 1. Terms of
the Offer; Expiration Date" is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(g) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions," "SPECIAL FACTORS -- Plans for the Company after the Transactions;
Certain Effects of the Transactions," "SPECIAL FACTORS -- The Transaction
Agreement, the Support Agreement and the Agreement Among Bidders," "THE TENDER
OFFER -- Section 9. Dividends and Distributions" and "THE TENDER
OFFER -- Section 10. Effects of the Transactions on the Market for Shares;
Exchange Act Registration" is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the Offer to Purchase under "INTRODUCTION"
and "THE TENDER OFFER -- Section 8. Financing of the Transactions" is
incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 13. Fees and Expenses" is incorporated herein by reference.
(c) The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 8. Financing of the Transactions" is incorporated herein by
reference.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions" and "SPECIAL FACTORS -- Plans for the Company After the
Transactions; Certain Effects of the Transactions" is incorporated herein by
reference.
(b) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Background of the Transactions" and "SPECIAL
FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness
of the Transactions" is incorporated herein by reference.
(c) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions," "SPECIAL FACTORS -- Position of Purchasers and Dr. James
5
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Leininger Regarding Fairness of the Transactions," and "SPECIAL FACTORS -- Plans
for the Company after the Transactions; Certain Effects of the Transactions," is
incorporated herein by reference.
(d) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Plans for the Company after the
Transactions; Certain Effects of the Transactions," "SPECIAL FACTORS -- Rights
of the Shareholders in the Transactions," "SPECIAL FACTORS -- The Transaction
Agreement, the Support Agreement and the Agreement Among Bidders," "SPECIAL
FACTORS -- Transactions and Arrangements Concerning the Shares," "THE TENDER
OFFER -- Section 5. Certain U.S. Federal Income Tax Consequences," "THE TENDER
OFFER -- Section 8. Financing of the Transactions" and "THE TENDER
OFFER -- Section 10. Effect of the Transactions on the Market for Shares;
Exchange Act Registration" is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) -- (e) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness
of the Transactions," "SPECIAL FACTORS -- Opinion of BT Alex. Brown
Incorporated," "SPECIAL FACTORS -- Position of Purchasers and Dr. James
Leininger Regarding Fairness of the Transactions," "SCHEDULE II. Opinion of BT
Alex. Brown Incorporated" and "SPECIAL FACTORS -- Rights of the Shareholders in
the Transactions" is incorporated herein by reference.
(f) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Background of the Transactions" is incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) -- (c) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness
of the Transactions," "SPECIAL FACTORS -- Opinion of BT Alex. Brown
Incorporated," and "SCHEDULE II -- Fairness Opinion of BT Alex. Brown
Incorporated" is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in the Offer to Purchase under "INTRODUCTION"
and "SPECIAL FACTORS -- Beneficial Ownership of Common Stock" is incorporated
herein by reference.
(b) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement
Among Bidders" and "SPECIAL FACTORS -- Transactions and Arrangements Concerning
the Shares" is incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in the Offer to Purchase under "INTRODUCTION,"
"SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support
Agreement and the Agreement Among Bidders" and "SPECIAL FACTORS -- Transactions
and Arrangements Concerning the Shares" is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) -- (b) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL
FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the
Transactions," "SPECIAL FACTORS -- Interests of Certain Persons in the
Transactions," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the
6
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Shares" "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and
the Agreement Among Bidders," "SPECIAL FACTORS -- Beneficial Ownership of Common
Stock" and "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and
the Board; Fairness of the Transactions" is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Rights of the Shareholders in the
Transactions" and "SCHEDULE III. Articles 5.11 through 5.13 of the Texas
Business Corporation Act" is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 7. Certain Information Concerning the Company" is incorporated
herein by reference. In addition, the Company's audited financial statements for
the fiscal years ended December 31, 1995 and December 31, 1996 and the Company's
unaudited financial statements three-month and six-month periods ended June 30,
1996 and June 30, 1997 are attached to the Offer to Purchase as Schedules IV and
V thereto, respectively.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions" and "SPECIAL
FACTORS -- Interests of Certain Persons in the Transactions" is incorporated
herein by reference.
(b) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Interests of Certain Persons in the
Transactions," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the
Shares" and "THE TENDER OFFER -- Section 13. Fees and Expenses" is incorporated
herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
The information set forth in the Offer to Purchase and the related Letter
of Transmittal, copies of which are attached hereto as Exhibits (d)(1) and
(d)(2), respectively, are incorporated herein by reference in their entirety.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Commitment Letter, dated October 1, 1997, from Bank of America
National Trust and Savings Association, BancAmerica Robertson Stephens, Bankers
Trust Company and BT Alex. Brown Incorporated.
(a)(2) Engagement Letter, dated October 1, 1997, from BT Alex. Brown
Incorporated and BancAmerica Robertson Stephens.
(a)(3) Commitment Letter, dated October 1, 1997, from Bankers Trust New
York Corporation and Bank of America National Trust and Savings Association.
(b)(1) Opinion of BT Alex. Brown Incorporated (included as Schedule II to
the Offer to Purchase filed as Exhibit (d)(1) below).
(b)(2) Presentation of BT Alex. Brown Incorporated, dated October 1, 1997.
(c)(1) Transaction Agreement, dated as of October 2, 1997, among Fremont
Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company.
(c)(2) Shareholder Support Agreement, dated as of October 2, 1997, among F
Purchaser, B Purchaser and Dr. James Leininger.
(c)(3) Agreement Among Bidders, dated as of October 2, 1997, between
Fremont Partners, L.P. and Richard C. Blum & Associates, L.P.
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(c)(4) Kinetic Concepts, Inc. Management Equity Plan.
(c)(5) Form of Stock Retention Agreement.
(c)(6) Management Equity Agreement for Raymond R. Hannigan, dated October
2, 1997.
(c)(7) Guarantee, dated October 2, 1997 by Fremont Partners, L.P.
(d)(1) Offer to Purchase, dated October 8, 1997.
(d)(2) Letter of Transmittal, dated October 8, 1997.
(d)(3) Notice of Guaranteed Delivery, dated October 8, 1997.
(d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees, dated October 8, 1997.
(d)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees, dated October 8, 1997.
(d)(6) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(d)(7) Summary Advertisement as published in The Wall Street Journal on
October 8, 1997.
(d)(8) Press Release issued by the Company on October 3, 1997.
(d)(9) Letter to the Company's Shareholders from Raymond R. Hannigan,
President and Chief Executive Officer of the Company, dated October 8, 1997.
(e) Articles 5.11 through 5.13 of the Texas Business Corporation Act
(included as Schedule III to the Offer to Purchase filed as Exhibit (d)(1)
above).
(f) Not applicable.
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8
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After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
October 8, 1997
Kinetic Concepts, Inc.
By: /s/ DENNIS E. NOLL
------------------------------------
Name: Dennis E. Noll
Title: Senior Vice President
Fremont Purchaser II, Inc.
By: /s/ R.S. KOPF
------------------------------------
Name: R.S. Kopf
Title: General Counsel and Secretary
RCBA Purchaser I, L.P.
By Richard C. Blum & Associates, L.P.,
its General Partner
By: /s/ MURRAY A. INDICK
------------------------------------
Name:
Title:
/s/ JAMES R. LEININGER, M.D.
--------------------------------------
James R. Leininger, M.D.
9
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
(a)(1) Commitment Letter, dated October 1, 1997, from Bank of America National Trust and
Savings Association, BancAmerica Robertson Stephens, Bankers Trust Company and BT
Alex. Brown Incorporated.
(a)(2) Engagement Letter, dated October 1, 1997, from BT Alex. Brown Incorporated and
BancAmerica Robertson Stephens.
(a)(3) Commitment Letter, dated October 1, 1997, from Bankers Trust New York Corporation
and Bank of America National Trust and Savings Association.
(b)(1) Opinion of BT Alex. Brown Incorporated (included as Schedule II to the Offer to
Purchase filed as Exhibit (d)(1) below).
(b)(2) Presentation of BT Alex. Brown Incorporated dated October 1, 1997.
(c)(1) Transaction Agreement, dated as of October 2, 1997, among Fremont Purchaser II,
Inc., RCBA Purchaser I, L.P. and the Company.
(c)(2) Shareholder Support Agreement, dated as of October 2, 1997, among F Purchaser, B
Purchaser and Dr. James Leininger.
(c)(3) Agreement Among Bidders, dated as of October 2, 1997, between Fremont Partners,
L.P. and Richard C. Blum & Associates, L.P.
(c)(4) Kinetic Concepts, Inc. Management Equity Plan.
(c)(5) Form of Stock Retention Agreement.
(c)(6) Management Equity Agreement for Raymond R. Hannigan, dated October 2, 1997.
(c)(7) Guarantee, dated October 2, 1997, by Fremont Partners, L.P.
(d)(1) Offer to Purchase, dated October 8, 1997.
(d)(2) Letter of Transmittal, dated October 8, 1997.
(d)(3) Notice of Guaranteed Delivery, dated October 8, 1997.
(d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees,
dated October 8, 1997.
(d)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees, dated October 8, 1997.
(d)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form
W-9.
(d)(7) Summary Advertisement as published in The Wall Street Journal on October 8, 1997.
(d)(8) Press Release issued by the Company on October 3, 1997.
(d)(9) Letter to the Company's Shareholders from Raymond R. Hannigan, President and Chief
Executive of the Company, dated October 8, 1997.
(e) Articles 5.11 through 5.13 of the Texas Business Corporation Act (included as
Schedule III to the Offer to Purchase filed as Exhibit (d)(1) above).
(f) Not applicable.
</TABLE>
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BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION BANKERS TRUST COMPANY
231 South LaSalle Street 130 Liberty Street
Chicago, Illinois 60697 New York, New York 10006
BANCAMERICA ROBERTSON STEPHENS BT ALEX. BROWN INCORPORATED
231 South LaSalle Street 130 Liberty Street
Chicago, Illinois 60697 New York, New York 10006
October 1, 1997
Senior Credit Facilities
Commitment Letter
Fremont Purchaser II, Corp.
Fifty Fremont Street, Suite 3700
San Francisco, California 94105
Attention: Mr. James T. Farrell
RCBA Purchaser I, L.P.
909 Montgomery Street, Suite 400
San Francisco, California 94105
Attention: Mr. John C. Walker
Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, Texas 78230
Attention: Mr. Raymond R. Hannigan
Ladies and Gentlemen:
You have advised BancAmerica Robertson Stephens ("BRS"), Bank
of America National Trust and Savings Association ("Bank of America"), BT Alex.
Brown Incorporated ("BT Alex. Brown") and Bankers Trust Company ("Bankers
Trust") that Fremont Purchaser II, Corp. ("Fremont"), RCBA Purchaser I, L.P.
("RCBA" and, together with Fremont, the "Sponsors") and Kinetic Concepts, Inc.
(the "Borrower") intend to enter into a transaction agreement (the "Transaction
Agreement") pursuant to which the Sponsors, together with certain of their
affiliates and investors (the Sponsors and such affiliates and investors are
collectively referred to herein as the "New Investor Group"), will participate
and invest in a leveraged recapitalization transaction involving the Borrower
(the "Recapitalization").
<PAGE> 2
2
We understand that the Recapitalization will be accomplished
through the following steps: (a) the Sponsors will purchase for cash from the
Borrower up to $154,700,000 (but not less than $125,000,000) of newly issued
shares of common stock ("Shares") of the Borrower (the "New Investor Shares");
(b) the Borrower will make an all cash tender offer (the "Tender Offer") to
acquire all of its issued and outstanding Shares (and related options), other
than the New Investor Shares, Shares and certain management options (such Shares
and management options, together with the New Investor Shares, the "Rollover
Shares") owned by certain existing stockholders of the Borrower, including
members of the Borrower's Board of Directors and/or management and (the
"Rollover Shareholders" and, together with the New Investor Group, the
"Buyers"), for a maximum aggregate repurchase price not to exceed $655,000,000;
(c) any Shares (and related options) acquired by the Borrower pursuant to the
Tender Offer will immediately be cancelled; (d) any Shares (and related options)
not acquired pursuant to the Tender Offer (other than the Rollover Shares) will
be acquired in a merger in which such Shares will be converted to the right to
receive the consideration paid in the Tender Offer (the "Merger"); and (e)
pursuant to the Merger, the Rollover Shares (which shall have an aggregate value
of at least $355,200,000) shall be converted to shares of the Borrower as the
surviving corporation of the Merger, which shares shall represent all of the
issued and outstanding common stock of the Borrower immediately following the
Merger. References herein to the "Recapitalization" shall include all of the
foregoing transactions and all related financings and other transactions. Upon
consummation of the Recapitalization, the New Investor Group will own at least
66-2/3% of the then outstanding shares of common stock of the Borrower.
You have also advised us that you propose to finance the
Recapitalization (including the refinancing of existing indebtedness) and the
related premiums, fees and expenses from the following sources: (a) the Borrower
will receive at least $125,000,000 in cash proceeds from the sale of the New
Investor Shares prior to the consummation of the Tender Offer on terms to be
agreed upon by you and us; (b) the Borrower will require senior secured credit
facilities (such credit facilities, the "Credit Facilities") comprised of term
loan facilities aggregating $300,000,000 (the "Term Loan Facilities"), a
$130,000,000 tender facility (the "Tender Facility"), a $50,000,000 revolving
credit facility (the "Revolving Credit Facility") and a $50,000,000 acquisition
facility (the "Acquisition Facility"), the proceeds of which will be used to
finance a portion of the Recapitalization and to finance the working capital
requirements and other corporate purposes (including permitted acquisitions) of
the Borrower and its subsidiaries; and (c) the Borrower will, prior to the
consummation of the Merger, require at least $200,000,000 in cash proceeds from
either (i) the issuance of senior subordinated unsecured notes (the "Senior
Subordinated Notes") in a public offering or Rule 144A private placement or (ii)
the proceeds of borrowings under a subordinated bridge facility made available
to the Borrower as interim bridge financing to the Senior Subordinated Notes
(the "Subordinated Facility").
Bank of America and Bankers Trust are each pleased to advise
you of their several commitments to provide one-half of the Credit Facilities.
The Statement of Terms and Conditions attached as Exhibits A and B hereto
(collectively, the "Term Sheet") sets forth the principal terms and conditions
on and subject to which Bank of America and Bankers Trust are willing to make
available their respective portions of the Credit Facilities.
It is agreed that Bank of America will act as the
administrative agent in respect of the Credit Facilities and that Bankers Trust
will act as the syndication agent in respect of the Credit Facilities, and each
will, in such capacities, perform the duties and exercise the authority
customarily performed and exercised by it in such roles in accordance with the
terms of this Commitment Letter. You agree that no other agents, co-agents or
arrangers will be appointed, no other titles will be
<PAGE> 3
3
awarded and no compensation (other than that expressly contemplated by the Term
Sheet and the Fee Letter referred to below) will be paid in connection with the
Credit Facilities unless you and we shall so agree.
We intend to syndicate the Credit Facilities to a group of
financial institutions (together with Bank of America and Bankers Trust, the
"Lenders") identified by us in consultation with you. BRS and BT Alex. Brown
intend to commence syndication efforts promptly, and you agree actively to
assist BRS and BT Alex. Brown in completing a syndication satisfactory to them.
Such assistance shall include (a) your using reasonable efforts to ensure that
the syndication efforts benefit materially from the existing lending
relationships of the Sponsors, the Borrower and the affiliates of the Sponsors
which own a direct or indirect interest in the Borrower, (b) direct contact
between senior management of the Sponsors and the Borrower and the proposed
Lenders, (c) assistance in the preparation of a Confidential Information
Memorandum and other marketing materials to be used in connection with the
syndication and (d) the hosting, with BRS and BT Alex. Brown, of one or more
meetings of prospective Lenders.
BRS and BT Alex. Brown, in consultation with you, will manage
all aspects of the syndication, including decisions as to the selection of
institutions to be approached and when they will be approached, when their
commitments will be accepted, which institutions will participate, the
allocations of the commitments among the Lenders and the amount and distribution
of fees among the Lenders. BRS and BT Alex. Brown will each have syndication
discussions with one-half of the number of invited institutions, except that BRS
will have the exclusive right to have syndication discussions with respect to
the institutions invited to participate in the Tranche B Term Loan Facility and
the Tranche C Term Loan Facility (as such terms are defined in the Term Sheet).
To assist BRS and BT Alex. Brown in their syndication efforts, you agree
promptly to prepare and provide to us all information with respect to the
Borrower and its respective subsidiaries, the Recapitalization and the other
transactions contemplated hereby, including all financial information and
projections (the "Projections"), as we may reasonably request in connection with
the arrangement and syndication of the Credit Facilities. You hereby represent
and covenant that (a) all information other than the Projections (the
"Information") that has been or will be made available to any of us by you or
any of your representatives (in each case, with respect to Information furnished
to any of us prior to the date of commencement of the syndication of the Credit
Facilities, as supplemented from time to time prior to such date) is or will be,
to the best of your knowledge, complete and correct in all material respects and
does not or will not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained
therein not materially misleading in light of the circumstances under which such
statements are made and (b) the Projections that have been or will be made
available to any of us by you or any of your representatives have been or will
be prepared in good faith based upon assumptions you believe to be reasonable
(it being understood that the Projections are subject to significant
uncertainties and contingencies, many of which are beyond your control, and that
no assurance can be given that such Projections will be realized). You
understand that in arranging and syndicating the Credit Facilities we may use
and rely on the Information and Projections without independent verification
thereof.
As consideration for Bank of America's and Bankers Trust's
commitments hereunder and BRS's and BT Alex. Brown's agreements to perform the
services described herein, you agree to pay, or to cause the Borrower to pay, to
Bank of America and Bankers Trust the nonrefundable fees set forth in the Term
Sheet and in the fee letter dated the date hereof and delivered herewith (the
"Fee Letter").
<PAGE> 4
4
We shall be entitled, with your consent (which shall not be
unreasonably withheld), to change the structure or amount of, or to eliminate,
any of the Credit Facilities if we determine that such changes are advisable in
order to ensure a successful syndication or an optimal credit structure and if
the aggregate amount of the Credit Facilities shall remain unchanged and the
amount of the Tender Facility shall not be increased.
Bank of America's and Bankers Trust's commitments hereunder
and BRS's and BT Alex. Brown's agreements to perform the services described
herein are subject to (a) our completion of and satisfaction in all respects
with our continuing legal and environmental due diligence investigation of the
Borrower and its subsidiaries, (b) there not occurring or becoming known to us
any change, occurrence or development that would reasonably be expected to have
a material adverse effect on the business, assets, liabilities, condition
(financial or otherwise) or results of operations of the Borrower and its
subsidiaries, taken as a whole, (c) our not becoming aware after the date hereof
of any material negative information or other matter affecting the Borrower and
its subsidiaries, taken as a whole, or the transactions contemplated hereby
which is inconsistent in a material and adverse manner with any such information
or other matter disclosed to us prior to the date hereof, (d) there not having
occurred and being continuing a material disruption of or material adverse
change in the financial, banking or capital markets generally affecting credit
facilities similar to the Credit Facilities which, in our reasonable judgment,
could reasonably be expected to materially impair the syndication of the Credit
Facilities, (e) our satisfaction that prior to and during the syndication of the
Credit Facilities there shall be no competing offering, placement or arrangement
of any debt securities (other than the Senior Subordinated Notes) or bank
financing by or on behalf of the Borrower or any of its affiliates, (f) the
negotiation, execution and delivery on or before January 31, 1998 of customary
definitive documentation with respect to the Credit Facilities satisfactory to
Bank of America, Bankers Trust and their counsel, and (g) the other conditions
set forth or referred to in the Term Sheet.
You agree (a) to indemnify and hold harmless Bank of America,
Bankers Trust, BRS, BT Alex. Brown, their affiliates and their respective
officers, directors, employees, advisors, and agents (each, an "indemnified
person") from and against any and all losses, claims, damages and liabilities to
which any such indemnified person may become subject arising out of or in
connection with this Commitment Letter, the Credit Facilities, the use of the
proceeds thereof, the Recapitalization or any related transaction or any claim,
litigation, investigation or proceeding relating to any of the foregoing,
regardless of whether any indemnified person is a party thereto, and to
reimburse each indemnified person upon demand for any legal or other expenses
incurred in connection with investigating or defending any of the foregoing,
provided that the foregoing indemnity will not, as to any indemnified person,
apply to losses, claims, damages, liabilities or related expenses to the extent
they are determined by a final judgment of a court of competent jurisdiction to
arise from the willful misconduct or gross negligence of such indemnified
person, and (b) to reimburse Bank of America, Bankers Trust, BRS, BT Alex. Brown
and their affiliates on demand for all reasonable out-of-pocket expenses
(including due diligence expenses, syndication expenses, consultant's fees and
expenses, travel expenses, and reasonable fees, charges and disbursements of
counsel (including, without duplication of effort, allocated costs of internal
counsel)) incurred in connection with the Credit Facilities and any related
documentation (including this Commitment Letter, the Term Sheet, the Fee Letter
and the definitive financing documentation) or the administration, amendment,
modification or waiver thereof. No indemnified person shall be liable for any
indirect or consequential damages in connection with its activities related to
the Credit Facilities.
This Commitment Letter shall not be assignable by you without
the prior written consent of Bank of America, Bankers Trust, BRS and BT Alex.
Brown (and any purported assignment without such consent shall be null and
void), is intended to be solely for the benefit of the parties
<PAGE> 5
5
hereto and is not intended to confer any benefits upon, or create any rights in
favor of, any person other than the parties hereto, provided that each of
Fremont and RCBA may assign its rights and obligations under this Commitment
Letter and the Fee Letter to any other affiliate of Fremont Partners, L.L.C. or
Richard C. Blum & Associates, L.P., respectively, in connection with the
assignment by Fremont or RCBA, as the case may be, to such affiliate of all of
its Shares and all of its rights and obligations under the Transaction Agreement
and the other Recapitalization Documentation (as defined in Exhibit A). This
Commitment Letter may not be amended or waived except by an instrument in
writing signed by each of you, Bank of America, Bankers Trust, BRS and BT Alex.
Brown. This Commitment Letter may be executed in any number of counterparts,
each of which shall be an original, and all of which, when taken together, shall
constitute one agreement. Delivery of an executed signature page of this
Commitment Letter by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof. This Commitment Letter, together with the
Term Sheet and the Fee Letter are the only agreements that have been entered
into among us with respect to the Credit Facilities and set forth the entire
understanding of the parties with respect thereto. This Commitment Letter shall
be governed by, and construed in accordance with, the laws of the State of New
York. All of your obligations under this Commitment Letter and the Fee Letter
shall be joint and several obligations.
This Commitment Letter is delivered to you on the
understanding that neither this Commitment Letter, the Term Sheet or the Fee
Letter nor any of their terms or substance shall be disclosed, directly or
indirectly, to any other person except (a) to the officers, agents and advisors
of the Sponsors and the Borrower who are directly involved in the consideration
of this matter or (b) as may be compelled in a judicial or administrative
proceeding or as otherwise required by law (in which case you agree to inform us
promptly thereof), provided, that the foregoing restrictions shall cease to
apply (except in respect of the Fee Letter and its terms and substance) after
this Commitment Letter has been accepted by you.
The compensation, reimbursement, indemnification and
confidentiality provisions contained herein and in the Fee Letter shall remain
in full force and effect regardless of whether definitive financing
documentation shall be executed and delivered and notwithstanding the
termination of this Commitment Letter or Bank of America's and Bankers Trust's
commitments hereunder; provided, that your obligations under this Commitment
Letter, other than those arising under the sixth and thirteenth paragraphs
hereof, shall automatically terminate and be superseded by the provisions of the
definitive documentation relating to the Credit Facilities upon the consummation
of the Recapitalization, and you shall automatically be released from all
liability in connection therewith at such time.
If the foregoing correctly sets forth our agreement, please
indicate your acceptance of the terms hereof and of the Term Sheet and the Fee
Letter by returning to us executed counterparts hereof and of the Fee Letter,
not later than 5:00 p.m., Chicago time, on October 3, 1997. Bank of America's
and Bankers Trust's commitments and BRS's and BT Alex. Brown's agreements herein
will expire at such time in the event Bank of America and Bankers Trust have not
received such executed counterparts in accordance with the immediately preceding
sentence.
<PAGE> 6
6
We are pleased to have been given the opportunity to assist
you in connection with this important financing.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Kevin Morrison
____________________________
Name: Kevin Morrison
Title: Vice President
BANCAMERICA ROBERTSON STEPHENS
By: /s/ Mark Lies
____________________________
Name: Mark Lies
Title: Managing Director
BANKERS TRUST COMPANY
By: /s/ Victoria T. Page
____________________________
Name: Victoria T. Page
Title: Managing Director
BT ALEX. BROWN INCORPORATED
By: /s/ Kate W. Cook
____________________________
Name: Kate W. Cook
Title: Managing Director
Accepted and agreed to as of
the date first written above by:
FREMONT PURCHASER II, INC.
By: /s/ R.S. Kopf
____________________________
Name: R.S. Kopf
Title: General Counsel and Secretary
<PAGE> 7
7
RCBA PURCHASER I, L.P.
By:/s/ N. Colin Lind
_____________________________
Name: N. Colin Lind
Title: Managing Director
KINETIC CONCEPTS, INC.
By:/s/ Raymond R. Hannigan
____________________________
Name: Raymong R. Hannigan
Title: President and Chief Executive Officer
<PAGE> 8
EXHIBIT A
SENIOR CREDIT FACILITIES
Statement of Terms and Conditions
---------------------------
Fremont Purchaser II, Corp. ("Fremont"), RCBA Purchaser I,
L.P. ("RCBA" and, together with Fremont, the "Sponsors") and Kinetic Concepts,
Inc. (the "Borrower") have entered into a transaction agreement (the
"Transaction Agreement") pursuant to which the Sponsors, together with certain
of their affiliates and investors (the Sponsors and such affiliates and
investors are collectively referred to herein as the "New Investor Group"), will
participate and invest in a leveraged recapitalization transaction involving the
Borrower (the "Recapitalization"). The Recapitalization will be accomplished
through the following steps: (a) the Sponsors will purchase for cash from the
Borrower up to $154,700,000 (but not less than $125,000,000) of newly issued
shares of common stock ("Shares") of the Borrower (the "New Investor Shares");
(b) the Borrower will make an all cash tender offer (the "Tender Offer") to
acquire all of its issued and outstanding Shares (and related options), other
than the New Investor Shares and Shares and certain management options (such
Shares and management options, together with the New Investor Shares, the
"Rollover Shares") owned by certain existing stockholders of the Borrower,
including members of the Borrower's Board of Directors and/or management (the
"Rollover Shareholders" and, together with the New Investor Group, the
"Buyers"), for a maximum aggregate repurchase price not to exceed $655,000,000;
(c) any Shares (and related options) acquired by the Borrower pursuant to the
Tender Offer will immediately be cancelled; (d) any Shares (and related options)
not acquired pursuant to the Tender Offer (other than the Rollover Shares) will
be acquired in a merger in which such Shares will be converted to the right to
receive the consideration paid in the Tender Offer (the "Merger"); and (e)
pursuant to the Merger, the Rollover Shares (which shall have an aggregate value
of at least $355,200,000) shall be converted to newly issued shares of the
Borrower as the surviving corporation of the Merger, which newly issued shares
shall represent all of the issued and outstanding common stock of the Borrower
immediately following the Merger. References herein to the "Recapitalization"
shall include all of the foregoing transactions and all related financings and
other transactions. Upon consummation of the Recapitalization, the New Investor
Group will own at least 66-2/3% of the then outstanding shares of common stock
of the Borrower. Set forth below is a statement of the terms and conditions for
the Senior Merger Facilities:
I. Parties
Borrower: Kinetic Concepts, Inc. (the "Borrower").
Guarantors: Each of the Borrower's direct and indirect
domestic subsidiaries (collectively, the
"Guarantors"). In addition, the holding company
parent of the Borrower ("Holdings"), if any such
holding company exists, shall also be a
"Guarantor."
Administrative Agent: Bank of America National Trust and Savings
Association ("Bank of America" and, in such
capacity, the "Administrative Agent").
<PAGE> 9
2
Syndication Agent: Bankers Trust Company ("Bankers Trust" and, in
such capacity, the "Syndication Agent"; together
with the Administrative Agent, the "Agents").
Lenders: A syndicate of banks, financial institutions and
other entities, including Bank of America or one
of its affiliates and Bankers Trust, arranged by
the Agents in consultation with the Borrower
(collectively, the "Lenders").
II. Types and Amounts of Senior Merger Facilities
A. Term Loan Facilities
Types and Amounts of
Facilities: Term loan facilities ("Term Loan Facilities") in
an aggregate amount of $300,000,000 (the loans
thereunder, the "Term Loans") comprised of the
following:
Tranche A Term Loan Facility: A six year term
loan facility (the "Tranche A Term Loan
Facility") in an aggregate principal amount equal
to $120,000,000 (the loans thereunder, the
"Tranche A Term Loans"). The Tranche A Term Loans
shall be repayable in quarterly installments
payable at the end of March, June, September and
December of each year, commencing March 31, 1998,
with the aggregate amount payable in each year
equal to the amount set forth below opposite such
year (and the installments in each year being
equal);
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 3,000,000
1999 7,000,000
2000 15,000,000
2001 30,000,000
2002 30,000,000
2003 35,000,000
</TABLE>
Tranche B Term Loan Facility: A seven year term
loan facility (the "Tranche B Term Loan
Facility") in an aggregate principal amount equal
to $90,000,000 (the loans thereunder, the
"Tranche B Term Loans"). The Tranche B Term Loans
shall be repayable in quarterly installments
payable at the end of March, June, September and
December of each year, commencing March 31, 1998,
with the aggregate amount payable in each year
equal to the amount set forth below opposite such
year (and the installments in each year being
equal, except that the first three installments
in 2004 shall be equal to $225,000 and the final
installment shall be equal to $83,925,000):
<PAGE> 10
3
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 900,000
1999 900,000
2000 900,000
2001 900,000
2002 900,000
2003 900,000
2004 84,600,000
</TABLE>
Tranche C Term Loan Facility: An eight year term
loan facility (the "Tranche C Term Loan
Facility") in an aggregate principal amount equal
to $90,000,000 (the loans thereunder, the
"Tranche C Term Loans"). The Tranche C Term Loans
shall be repayable in quarterly installments
payable at the end of March, June, September and
December of each year, commencing March 31, 1998,
with the aggregate amount payable in each year
equal to the amount set forth below opposite such
year (and the installments in each year being
equal, except that the first three installments
in 2005 shall be equal to $225,000 and the final
installment shall be equal to $83,025,000):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 900,000
1999 900,000
2000 900,000
2001 900,000
2002 900,000
2003 900,000
2004 900,000
2005 83,700,000
</TABLE>
On the basis of market reception during the
syndication process, the Agents may determine,
with the consent of the Borrower (which consent
shall not be unreasonably withheld), to increase
or decrease the amount of the Tranche B Term Loan
Facility, and to correspondingly decrease or
increase the amount of the Tranche C Term Loan
Facility, provided that the aggregate amount of
the Term Loan Facilities will equal $300,000,000.
Availability: The Term Loans shall be made in a single drawing
on the Closing Date (as defined in Exhibit B).
Purpose: The proceeds of the Term Loans shall be used to
finance a portion of the Recapitalization and to
pay related fees and expenses.
<PAGE> 11
4
B. Tender Facility
Type and Amount of
Facility: Tender facility ("Tender Facility") in the amount
of $130,000,000 (the loans thereunder, the
"Tender Loans").
Availability: The Tender Loans shall be made in a single
drawing on the Closing Date.
Amortization: The Tender Loans will be repayable in full on the
day which is three weeks after the Closing Date
(the "Maturity Date").
Purpose: The proceeds of the Tender Loans shall be used to
finance (a) the purchase of outstanding shares of
common stock of the Borrower pursuant to the
Tender Offer and (b) the payment of interest,
fees and other expenses incurred in connection
with the Tender Offer.
C. Revolving Credit Facility
Type and Amount of
Facility: Six year revolving credit facility ("Revolving
Credit Facility") in the amount of $50,000,000
(or the equivalent thereof in foreign currencies
under the multi-currency subfacility described
below) at any one time outstanding (the loans
thereunder, the "Revolving Credit Loans").
Availability: The Revolving Credit Facility shall be available
on a revolving basis during the period commencing
on the Closing Date and ending on December 31,
2003 (the "Revolving Credit Termination Date").
Letters of Credit: A portion of the Revolving Credit Facility not in
excess of an amount to be agreed upon shall be
available for the issuance of letters of credit
(the "Letters of Credit") by Bank of America or
one of its affiliates (in such capacity, the
"Issuing Lender"). No Letter of Credit shall have
an expiration date after the earlier of (a) one
year after the date of issuance thereof and (b)
thirty days prior to the Revolving Credit
Termination Date, provided that any Letter of
Credit with a one-year tenor may provide for the
renewal thereof for additional one-year periods
(which shall in no event extend beyond the date
referred to in clause (b) above).
Drawings under any Letter of Credit shall be
reimbursed by the Borrower (whether with its own
funds or with the proceeds of Revolving Credit
Loans) on the same business day. To the extent
that the Borrower does not so reimburse the
Issuing Lender, the Lenders under the Revolving
Credit Facility shall be irrevocably and
unconditionally obligated to reimburse the
Issuing Lender on a pro rata basis.
<PAGE> 12
5
Multi-Currency
Subfacility: A portion of the Revolving Credit Facility not in
excess of an amount to be agreed upon shall be
available directly to certain foreign
subsidiaries of the Borrower. Loans under the
Multi-Currency Subfacility ("Multi-Currency
Loans") shall be available in foreign currencies
to be agreed, subject to sub-limits for each such
currency to be agreed. The structure of the
Multi-currency Subfacility (for example, as to
which Lenders shall provide the loans thereunder)
shall be determined by the Administrative Agent
after consultation with the Borrower, but it is
the intention of the Administrative Agent that
all the Lenders shall share the risk on a pro
rata basis. If one Lender fronts for the other
Lenders in respect of a Multi-Currency Loan, such
fronting Lender shall receive from the Borrower a
fronting fee in respect thereof in an amount to
be determined.
Maturity: The Revolving Credit Termination Date.
Purpose: The proceeds of the Revolving Credit Loans shall
be used to finance a portion of the
Recapitalization and related fees and expenses
and to finance the working capital needs and
general corporate purposes of the Borrower and
its subsidiaries in the ordinary course of
business, including to finance Permitted
Acquisitions (as defined below).
D. Acquisition Facility
Type and Amount of
Facility: Six year acquisition facility ("Acquisition
Facility" and, together with the Term Loan
Facilities, the Tender Facility and the Revolving
Credit Facility, the "Credit Facilities") in the
amount of $50,000,000 (the loans thereunder, the
"Acquisition Loans" and, together with the Term
Loans, the Tender Loans and the Revolving Credit
Loans, the "Loans").
Availability: The Acquisition Loans will be available in one or
more drawings during the period commencing on the
Closing Date and ending on December 31, 2000 (the
"Acquisition Facility Termination Date").
Acquisition Loans may not be repaid and
reborrowed, except that Acquisition Loans made to
finance the Recapitalization may be repaid on or
prior to the date of the Merger as described
under "Mandatory Prepayments and Commitments
Reductions" below and reborrowed after the date
of such repayment to finance Permitted
Acquisitions and to pay related fees and
expenses.
Maturity: The aggregate principal amount of Acquisition
Loans outstanding on the Acquisition Facility
Termination Date shall be repayable in twelve
equal quarterly installments payable at the end
of March, June, September and December of each
year, commencing March 31, 2001.
<PAGE> 13
6
Purpose: The proceeds of the Acquisition Loans shall be
used to finance, the Recapitalization, Permitted
Acquisitions and related fees and expenses.
III. Certain Payment Provisions
Fees and Interest Rates: As set forth on Annex I.
Optional Prepayments and
Commitment Reductions: Loans (including the Tender Loans) may be prepaid
and commitments may be reduced by the Borrower in
minimum amounts to be agreed upon. No prepayment
of Term Loans shall be permitted if any Tender
Loans are outstanding. Optional prepayments of
the Term Loans and Acquisition Loans shall be
applied pro rata to the Tranche A Term Loans, the
Tranche B Term Loans, the Tranche C Term Loans
and the Acquisition Loans, and ratably to the
remaining installments thereof. Notwithstanding
the foregoing, in the case of any optional
prepayment to be applied to the Tranche B Term
Loans and the Tranche C Term Loans, the Borrower
may (at its option) offer the holders of such
Tranche B Term Loans and Tranche C Term Loans the
opportunity to waive the right to receive the
amount of such optional prepayment. In the event
such holders elect to waive such right, the
amount that would otherwise have been applied as
such optional prepayment of the applicable
Tranche B Term Loans and/or Tranche C Term Loans
shall be applied to prepay the Tranche A Term
Loans and Acquisition Loans pro rata and, after
the Tranche A Term Loans and Acquisition Loans
have been paid in full, any remaining amount
shall be applied to the prepayment of the other
Tranche B Term Loans and Tranche C Term Loans pro
rata. Optional prepayments of the Term Loans and
(except as otherwise provided under "Acquisition
Facility -- Availability" above) Acquisition
Loans may not be reborrowed.
Mandatory Prepayments and
Commitment Reductions: The following amounts shall be applied to prepay
the Tender Loans, the Term Loans and/or
Acquisition Loans and/or reduce the commitments
under the Acquisition Facility and/or the
Revolving Credit Facility:
(a) subject to exceptions to be agreed, 50% of
the net proceeds of the sale or issuance of
equity (other than (i) any sale or issuance of
equity the proceeds of which are used to
refinance the Subordinated Facility and (ii) up
to $25,000,000 of equity contributed by the
Buyers to the Borrower, the proceeds of which are
used to fund Permitted Acquisitions) and 100% of
the net proceeds of the incurrence of certain
indebtedness after the Closing Date by the
Borrower or any of its subsidiaries (other than
proceeds of the Senior Subordinated Notes and the
<PAGE> 14
7
Subordinated Facility and any proceeds of any
other subordinated debt to the extent applied to
repay the Subordinated Facility);
(b) subject to exceptions to be agreed, 100% of
the net proceeds of any sale or other disposition
(including as a result of casualty or
condemnation) by the Borrower or any of its
subsidiaries of any assets, except for the sale
of inventory or obsolete or worn-out property in
the ordinary course of business and subject to
certain other customary exceptions (including a
basket and capacity for reinvestment) to be
agreed upon; and
(c) 50% of excess cash flow (to be defined in a
mutually satisfactory manner) for each fiscal
year of the Borrower (commencing with the 1998
fiscal year) payable within 90 days after the
relevant fiscal year-end. Step-downs in the
percentage of excess cash flow resulting in
prepayments and commitment reductions will be
made following reductions of leverage below
levels to be negotiated.
All such mandatory prepayments of Loans and/or
reductions of commitments shall be applied first
to prepay any outstanding Tender Loans. After the
Tender Loans shall have been repaid in full, the
Term Loans and Acquisition Loans shall be prepaid
or reduced, as the case may be. Mandatory
prepayments of the Term Loans and Acquisition
Loans shall be applied pro rata to the Tranche A
Term Loans, the Tranche B Term Loans, the Tranche
C Term Loans and the Acquisition Loans, and
ratably to the remaining installments thereof.
After the Term Loans and Acquisition Loans have
been repaid in full, the commitments under the
Revolving Credit Facility and the unused
commitments under the Acquisition Facility and
shall be permanently reduced on a ratable basis.
Notwithstanding the foregoing, in the case of any
mandatory prepayment to be applied to the Tranche
B Term Loans and the Tranche C Term Loans, the
Borrower may (at its option) offer the holders of
such Tranche B Term Loans and Tranche C Term
Loans the opportunity to waive the right to
receive the amount of such mandatory prepayment.
In the event such holders elect to waive such
right, the amount that would otherwise have been
applied as such mandatory prepayment of the
applicable Tranche B Term Loans and/or Tranche C
Term Loans shall be applied to prepay the Tranche
A Term Loans and Acquisition Loans pro rata and,
after the Tranche A Term Loans and Acquisition
Loans have been paid in full, any remaining
amount shall be applied to the prepayment of the
other Tranche B Term Loans and Tranche C Term
Loans pro rata. Mandatory prepayments of the Term
Loans and Acquisition Loans may not be
reborrowed.
Proceeds of the Senior Subordinated Notes and the
Subordinated Facility (other than proceeds of
Senior Subordinated Notes and
<PAGE> 15
8
other subordinated debt to the extent applied to
repay the Subordinated Facility) shall be applied
as follows: first, the outstanding Tender Loans
shall be repaid in full, second, an amount (the
"Escrow Amount") equal to the amount required to
purchase any Shares (and related options) not
acquired pursuant to the Tender Offer (other than
the Rollover Shares) shall be deposited in escrow
pending purchase of such Shares on terms and
conditions satisfactory to the Administrative
Agent, third (a) in the event the RIK Acquisition
is not consummated prior to the receipt of such
proceeds, the outstanding Acquisition Loans shall
be repaid in full, or (b) in the event the RIK
Acquisition is consummated prior to receipt of
such proceeds, the Acquisition Loans shall be
repaid to the extent the aggregate outstanding
principal amount thereof exceeds $23,000,000, and
fourth any remaining proceeds shall be applied to
repay any outstanding Revolving Credit Loans (but
shall not reduce any commitments under the
Revolving Credit Facility). As used herein, "RIK
Acquisition" means the acquisition by the
Borrower of the assets of RIK Medical, L.L.C. and
RIK Medical East, L.L.C.
IV. Collateral The obligations of each of the Borrower and each
Guarantor (collectively, the "Credit Parties") in
respect of the Credit Facilities and any interest
rate or foreign currency protection agreements in
respect thereof provided by any Lender (or any
affiliate of a Lender) shall be secured by a
perfected first priority security interest in all
of its tangible and intangible assets (including,
without limitation, intellectual property, real
property (other than leasehold interest which are
not material), all of the capital stock of the
Borrower's direct and indirect subsidiaries
(limited to 65% of such capital stock in the case
of foreign subsidiaries), and, if any holding
company parent of the Borrower exists, all of the
capital stock of the Borrower, and rights under
the Recapitalization Documentation (as defined in
Exhibit B)), except for those assets as to which
the Administrative Agent shall determine in its
sole discretion that the costs of obtaining such
a security interest are excessive in relation to
the value of the security to be afforded thereby.
V. Certain Conditions
Initial Conditions: The availability of the Credit Facilities shall
be conditioned upon the completion and/or
satisfaction on or before January 31, 1998, of
the applicable conditions set forth in Exhibit B
and other customary corporate and document
delivery requirements.
On-Going Conditions: The making of each extension of credit shall be
conditioned upon (a) the accuracy of all
representations and warranties in the
documentation (the "Credit Documentation") with
respect to the Credit Facilities (including,
without limitation, the material adverse change
and litigation representations) and (b) there
being
<PAGE> 16
9
no default or event of default in existence at
the time of, or after giving effect to the making
of, such extension of credit. As used herein and
in the Credit Documentation a "material adverse
change" shall mean any event, development or
circumstance that has had or would be reasonably
likely to have a material adverse effect on (a)
the Recapitalization, (b) the business, assets,
property, condition (financial or otherwise) or
prospects of the Borrower and its subsidiaries,
taken as a whole, or (c) the validity or
enforceability of any of the Credit Documentation
or the rights and remedies of the Administrative
Agent and the Lenders thereunder.
VI. Certain Documentation Matters
The Credit Documentation shall contain
representations, warranties, covenants and events
of default customary for financings of this type
and other terms deemed appropriate by the
Lenders, including, without limitation:
Representations and
Warranties: Financial statements (including pro forma
financial statements); absence of undisclosed
liabilities; no material adverse change;
corporate existence; compliance with law;
corporate power and authority; enforceability of
Credit Documentation; no conflict with law or
contractual obligations; no material litigation;
no default; ownership of property; liens;
intellectual property; no burdensome
restrictions; taxes; Federal Reserve regulations;
ERISA; Investment Company Act; subsidiaries;
environmental matters; solvency; labor matters;
accuracy of disclosure; Recapitalization
Documentation; creation and perfection of
security interests; and status of Credit
Facilities as senior debt.
Affirmative Covenants: Delivery of financial statements, reports,
accountants' letters, projections, officers'
certificates and other information requested by
the Lenders; payment of other obligations;
continuation of business and maintenance of
existence and material rights and privileges;
compliance with laws and material contractual
obligations; maintenance of property and
insurance; maintenance of books and records;
right of the Lenders to inspect property and
books and records; notices of defaults,
litigation and other material events; compliance
with environmental laws; further assurances
(including, without limitation, with respect to
security interests in after-acquired property);
deposit of the Escrow Amount in escrow pending
consummation of the Merger on terms and
conditions reasonably satisfactory to the
Administrative Agent; and agreement to obtain
within 90 days after the Closing Date interest
rate protection in an amount equal to 50% of the
principal amount of the Term Loans for a period
of three years in a manner satisfactory to the
Administrative Agent.
<PAGE> 17
10
Financial Covenants: To include minimum EBITDA, minimum interest
coverage ratio and maximum leverage ratio.
Negative Covenants: Limitations on: indebtedness; liens; guarantee
obligations; mergers, consolidations,
liquidations and dissolutions; sales of assets;
leases; dividends and other payments in respect
of capital stock and payments in respect of
subordinated debt; capital expenditures;
investments, loans and advances; optional
payments and modifications of subordinated and
other debt instruments; transactions with
affiliates; sale-leasebacks; changes in fiscal
year; negative pledge clauses and clauses
restricting subsidiary distributions; changes in
lines of business; annual management fees and
corporate allocations (not to exceed specified
amounts); amendments to Recapitalization
Documentation; and, if there is a holding company
parent of the Borrower, changes in the passive
holding company status of Holdings.
Acquisitions will be permitted subject to the
following conditions:
(a) The Borrower satisfies, and will continue
to satisfy, after giving effect (on a pro
forma basis) to the relevant acquisition
and any debt incurred in connection
therewith, all financial covenants, and
such acquisition is consummated on a
"friendly" basis;
(b) No default or event of default has then
occurred and is continuing or would result
therefrom;
(c) The purchase price (including assumed
indebtedness and the fair market value of
any non-cash consideration) of the relevant
acquisition does not exceed $25,000,000
individually and the purchase price of all
such acquisitions since the Merger Closing
Date does not exceed $70,000,000 in the
aggregate (provided that such aggregate
limitation may be increased by an aggregate
amount of up to $25,000,000 of any equity
infusions from the Buyers after the Merger
Closing Date which are used to fund
Permitted Acquisitions); and
(d) An amount at least equal to $15,000,000 is
available to be borrowed under the
Revolving Credit Facility after giving
effect to the relevant acquisition.
Any acquisition which satisfies the foregoing
conditions is referred to herein as a "Permitted
Acquisition".
Events of Default: Nonpayment of principal when due; nonpayment of
interest, fees or other amounts after a grace
period to be agreed upon; material inaccuracy of
representations and warranties; violation of
covenants (subject, in the case of certain
affirmative covenants, to
<PAGE> 18
11
a grace period to be agreed upon); cross-default;
bankruptcy events; certain ERISA events; material
judgments; actual or asserted invalidity of any
guarantee, security document, security interest
or subordination provision; failure to consummate
the Merger; and a change of control (the
definition of which is to be agreed).
Voting: Amendments and waivers with respect to the Credit
Documentation shall require the approval of
Lenders holding not less than 51% of the
aggregate amount of the Credit Facilities except
that (a) the consent of each Lender directly
affected thereby shall be required with respect
to (i) reductions in the amount of any Loan or
extensions of the final date of amortization or
maturity of any Loan, (ii) reductions in the rate
of interest or any fee or extensions of any due
date thereof and (iii) increases in the amount or
extensions of the expiry date of any Lender's
commitment, (b) the consent of 100% of the
Lenders shall be required with respect to (i)
modifications to any of the voting percentages
and (ii) releases of significant Guarantors or
all or substantially all of the collateral and
(c) subject to clause (a)(i) above, the consent
of 66-2/3% of the Lenders shall be required to
change the scheduled amortization of the Loans.
In addition, the consent of Lenders holding a
majority of the aggregate principal amount of
each of the Tranche B Term Loans and the Tranche
C Term Loans shall be required with respect to
certain modifications affecting prepayment of the
Term Loan Facilities.
Assignments
and Participations: The Lenders shall be permitted to assign and sell
participations in their Loans and commitments,
subject, in the case of assignments (other than
to another Lender or to an affiliate of a
Lender), to the consent of the Administrative
Agent and (so long as no event of default has
occurred and is continuing) the Borrower (which
consent in each case shall not be unreasonably
withheld). Non-pro rata assignments shall be
permitted. In the case of partial assignments
(other than to another Lender or to an affiliate
of a Lender), the minimum assignment amount shall
be $5,000,000 and, after giving effect thereto,
the assigning Lender shall have commitments and
Loans aggregating at least $5,000,000 in each
case unless otherwise agreed by the Borrower and
the Administrative Agent. Participants shall have
the same benefits as the Lenders with respect to
yield protection and increased cost provisions.
Voting rights of participants shall be limited to
those matters set forth in clause (a) above with
respect to which the affirmative vote of the
Lender from which it purchased its participation
would be required as described under "Voting"
above and those matters set forth in clause (b)
above. Pledges of Loans in accordance with
applicable law shall be permitted without
restriction.
<PAGE> 19
12
Yield Protection: The Credit Documentation shall contain customary
provisions (a) protecting the Lenders against
increased costs or loss of yield resulting from
changes in reserve, tax, capital adequacy and
other requirements of law and from the imposition
of or changes in withholding or other taxes and
(b) indemnifying the Lenders for "breakage costs"
incurred in connection with, among other things,
any prepayment of a Eurodollar Loan (as defined
in Annex I) on a day other than the last day of
an interest period with respect thereto.
Expenses and
Indemnification: The Borrower shall pay (a) all reasonable
out-of-pocket expenses of the Agents, BancAmerica
Robertson Stephens ("BRS") and BT Alex. Brown
Incorporated ("BT Alex. Brown") associated with
the syndication of the Credit Facilities and the
preparation, execution, delivery and
administration of the Credit Documentation and
any amendment or waiver with respect thereto
(including the reasonable fees, disbursements and
other charges of counsel (including the allocated
costs of internal counsel)) and (b) all out-
of-pocket expenses of the Administrative Agent
and the Lenders (including the fees,
disbursements and other charges of counsel
(including the allocated costs of internal
counsel)) in connection with the enforcement of
the Credit Documentation.
The Agents, BRS, BT Alex. Brown and the Lenders
(and their affiliates and their respective
officers, directors, employees, advisors and
agents) will have no liability for, and will be
indemnified and held harmless against, any loss,
liability, cost or expense incurred in respect of
the financing contemplated hereby or the use or
the proposed use of proceeds thereof (except to
the extent resulting from the gross negligence or
willful misconduct of the indemnified party).
Governing Law and Forum: State of New York.
Counsel to the
Administrative Agent: Simpson Thacher & Bartlett.
<PAGE> 20
Annex I
to Exhibit A
Interest and Certain Fees
Interest Rate Options: The Borrower may elect that the Loans comprising
each borrowing bear interest at a rate per annum
equal to:
the Base Rate plus the Applicable Margin; or
the Eurodollar Rate plus the Applicable
Margin.
provided that all Multi-Currency Loans shall bear
interest as described below.
As used herein:
"Base Rate" means the highest of (i) the rate of
interest publicly announced by Bank of America as
its "reference rate" (the "Reference Rate"), and
(ii) the federal funds effective rate from time
to time plus 0.5%.
"Applicable Margin" means:
(a) in the case of the Revolving Credit
Loans, Tender Loans, Tranche A Term Loans
and Acquisition Loans, (i) 1.25%, in the
case of Base Rate Loans (as defined below)
and (ii) 2.25%, in the case of Eurodollar
Loans (as defined below);
(b) in the case of the Tranche B Term Loans,
(i) 1.50% in the case of Base Rate Loans and
(ii) 2.50% in the case of Eurodollar Loans;
and
(c) in the case of Tranche C Term Loans, (i)
1.75% in the case of Base Rate Loans and
(ii) 2.75% in the case of Eurodollar Loans.
The foregoing margins applicable to Revolving
Credit Loans and Tranche A Term Loans shall be
subject to reduction after the end of the second
full fiscal quarter after the Closing Date by
amounts to be agreed upon based on the
achievement of performance targets to be
determined and provided that no event of default
has occurred and is continuing.
"Eurodollar Rate" means the rate (adjusted for
statutory reserve requirements for eurocurrency
liabilities) at which eurodollar deposits for
one, two, three or six months (as selected by the
<PAGE> 21
2
Borrower) are offered to Bank of America in the
interbank eurodollar market, provided that, so
long as any Tender Loans are outstanding, the
Borrower will be permitted to select interest
periods of one week with respect to Tender Loans
and any Acquisition Loans and Revolving Credit
Loans made on the Closing Date.
Interest Payment Dates: In the case of Loans bearing interest based upon
the Base Rate ("Base Rate Loans"), quarterly in
arrears.
In the case of Loans bearing interest based upon
the Eurodollar Rate ("Eurodollar Loans"), on the
last day of each relevant interest period and, in
the case of any interest period longer than three
months, on each successive date three months
after the first day of such interest period.
Commitment Fees: The Borrower shall pay a commitment fee
calculated at the rate of 0.50% per annum on the
average daily unused portion of each of the
Revolving Credit Facility and the Acquisition
Facility, payable quarterly in arrears.
The foregoing commitment fee shall be subject to
reduction after the end of the second full fiscal
quarter after the Closing Date by amounts to be
agreed upon based on the achievement of
performance targets to be determined and provided
that no event of default has occurred and is
continuing.
Letter of Credit Fees: The Borrower shall pay a commission on all
outstanding Letters of Credit at a per annum rate
equal to the Applicable Margin then in effect
with respect to Eurodollar Loans that are
Revolving Credit Loans on the face amount of each
such Letter of Credit. Such commission shall be
shared ratably among the Lenders participating in
the Revolving Credit Facility and shall be
payable quarterly in arrears.
A fronting fee equal to 0.25% per annum on the
face amount of each Letter of Credit shall be
payable quarterly in arrears to the Issuing
Lender for its own account. In addition,
customary administrative, issuance, amendment,
payment and negotiation charges shall be payable
to the Issuing Lender for its own account.
Multi-Currency Loan
Interest and Fees: In the event that Multi-Currency Loans in a
foreign currency are made available by all the
Lenders, such Multi-Currency Loans shall bear
interest at the applicable local base rate for
such Multi-Currency Loans as determined by the
Administrative Agent plus the Applicable Margin
then in effect for Eurodollar Loans. In the event
that Multi-Currency Loans in a foreign currency
are fronted by a Lender, (a) such Multi-Currency
Loans shall bear interest at
<PAGE> 22
3
the applicable local base rate for such
Multi-Currency Loans as determined by the
relevant fronting Lender, (b) the Borrower shall
pay a commission on such Multi-Currency Loans at
a per annum rate equal to the Applicable Margin
then in effect with respect to Eurodollar Loans
on the face amount of each such Loan and (c) a
fronting fee equal to an amount to be determined
per annum on the face amount of each such
Multi-Currency Loan shall be payable quarterly in
arrears to the relevant fronting Lender for its
own account. The commission payable pursuant to
clause (b) of the immediately preceding sentence
shall be shared ratably among the Lenders
participating in the Revolving Credit Facility
and shall be payable quarterly in arrears.
Default Rate: At any time when the Borrower is in default in
the payment of any amount due under the Credit
Facilities, all Loans shall bear interest at 2%
above the rate otherwise applicable thereto.
Overdue interest, fees and other amounts shall
bear interest at 2% above the rate applicable to
the relevant Base Rate Loans.
Rate and Fee Basis: All per annum rates shall be calculated on the
basis of a year of 360 days (or 365/366 days, in
the case of Base Rate Loans the interest rate
payable on which is then based on the Reference
Rate) for actual days elapsed.
<PAGE> 23
EXHIBIT B
The availability of the Credit Facilities, in addition to the
conditions set forth in Exhibit A, shall be subject to the satisfaction of the
following conditions (the date upon which such conditions are satisfied is
referred to as the "Closing Date"). Capitalized terms used but not defined
herein have the meanings given in said Exhibit.
(a) Each Credit Party shall have executed and
delivered satisfactory definitive Credit
Documentation and all conditions to the initial
borrowings thereunder shall have been satisfied.
(b) The Borrower shall have received at least
$125,000,000 in cash proceeds from the sale of
the New Investor Shares prior to the consummation
of the Tender Offer on satisfactory terms and
conditions.
(c) The Tender Offer shall have been consummated
in accordance with applicable law and on
satisfactory terms and all conditions to the
Tender Offer contained in the Transaction
Agreement shall have been satisfied or complied
substantially on the terms set forth therein and
not waived without the Administrative Agent's
consent (which shall not be unreasonably
withheld). The Transaction Agreement and other
documentation (collectively, the
"Recapitalization Documentation") relating to the
Recapitalization shall have satisfactory terms
and conditions, shall be in full force and effect
and no provision of such documentation shall have
been waived, amended, supplemented or otherwise
modified in any material respect. Without
limiting the foregoing, the Transaction Agreement
shall provide that, pursuant to the Merger, the
Rollover Shares (which shall have an aggregate
value of at least $355,200,000) shall be
converted to newly issued shares of the Borrower
as the surviving corporation of the Merger, which
newly issued shares shall represent all of the
issued and outstanding common stock of the
Borrower immediately following the Merger.
(d) (i) (A) The Borrower shall have entered into
a loan or credit agreement with financial
institutions satisfactory to the Lenders pursuant
to which such financial institutions shall have
agreed to provide to the Borrower a $200,000,000
subordinated bridge facility to the Borrower as
interim bridge financing to the Senior
Subordinated Notes (as defined below) on terms
and conditions satisfactory to the Lenders (the
"Subordinated Facility"), (B) all conditions
precedent to the effectiveness of such loan or
credit agreement shall have been satisfied and
(C) the Borrower shall have engaged one or more
financial institutions satisfactory to the
Lenders to publicly sell or privately place at
least $200,000,000 of senior subordinated
unsecured notes (the "Senior Subordinated Notes")
in a public offering or Rule 144A private
placement on
<PAGE> 24
2
terms and conditions satisfactory to the Lenders
or (ii) the Borrower shall have received the
proceeds from the issuance of $200,000,000 of
Senior Subordinated Notes.
(e) At least 27,000,000 of the issued and
outstanding Shares (other than the Rollover
Shares) shall have validly tendered and accepted
for payment pursuant to the Tender Offer. All
documents and materials filed publicly by the
Buyers in connection with the Tender Offer and
the Merger shall have been furnished to the
Lenders and shall be satisfactory in from and
substance to the Lenders. In addition, after
giving effect to the Tender Offer and the
cancellation of the Shares purchased pursuant to
the Tender Offer, the New Investor Group shall
control (by direct ownership or contractual
undertakings) at least 66-2/3% (or such greater
percentage as shall be required to approve the
Merger), on a fully diluted basis, of the
aggregate voting power of the Shares which may be
voted in connection with the approval of the
Merger.
(f) The Lender shall have received evidence
satisfactory to them that (i) the aggregate
purchase price for all of the issued and
outstanding Shares and related options shall not
exceed $855,000,000 and (ii) the aggregate fees
and expenses with respect to the Recapitalization
shall not exceed $44,000,000.
(g) Substantially all of the existing
indebtedness of the Borrower and its subsidiaries
shall have been repaid on satisfactory terms. The
capitalization and structure of each Credit Party
after the Recapitalization shall be reasonably
satisfactory in all respects. The Administrative
Agent shall be satisfied with senior management
and their employment contracts and proposed
ownership interests in the Borrower.
(h) The Lenders, the Agents, BRS and BT Alex.
Brown shall have received all fees required to be
paid, and all expenses for which invoices have
been presented, on or before the Closing Date.
(i) All governmental and third party approvals
necessary in connection with the Recapitalization
(other than with respect to the Merger), the
financing contemplated hereby and the continuing
operations of the Borrower and its subsidiaries
shall have been obtained on terms reasonably
satisfactory to the Administrative Agent and
shall be in full force and effect, and all
applicable waiting periods shall have expired
without any action being taken or threatened by
any competent authority which would restrain,
prevent or otherwise impose adverse conditions on
the Recapitalization or the financing thereof,
except for such governmental and third party
approvals the failure to obtain which could not,
individually or in the aggregate, reasonably be
expected
<PAGE> 25
3
to have a material adverse effect on the
condition (financial or otherwise), business,
assets, liabilities, properties, results of
operations or prospects of the Borrower and its
subsidiaries, taken as a whole.
(j) The Lenders shall have received (i) audited
financial statements of the Borrower for the
fiscal years ending in 1994, 1995 and 1996 and
(ii) unaudited interim consolidated financial
statements of the Borrower for each fiscal month
and quarterly period ended after the latest
fiscal year referred to in clause (i) above as to
which such financial statements are available and
such financial statements shall not, in the
reasonable judgment of the Lenders, reflect any
material adverse change in the consolidated
financial condition of the Borrower and its
subsidiaries, from what was reflected in the
financial statements or projections previously
furnished to the Lenders.
(k) The Lenders shall have received a pro forma
consolidated balance sheet of the Borrower and
its subsidiaries as at the date of the most
recent consolidated balance sheet delivered
pursuant to the preceding paragraph, adjusted to
give effect to the consummation of the
Recapitalization and the financings contemplated
hereby as if such transactions had occurred on
such date prepared in accordance with Regulation
S-X under the Securities Act and consistent in
all material respects with the sources and uses
of cash for the Recapitalization as previously
described to the Lenders and the forecasts
previously provided to the Lenders.
(l) The Lenders shall have received the results
of a recent lien search in each relevant
jurisdiction with respect to the Borrower and its
subsidiaries, and such search shall reveal no
liens on any of the assets of the Borrower and
its subsidiaries except for liens permitted by
the Credit Documentation.
(m) All documents and instruments required to
perfect the Administrative Agent's security
interest in the collateral under the Credit
Facilities shall have been executed and be in
proper form for filing, and, in connection with
the real estate collateral, the Administrative
Agent shall have received title insurance
policies, surveys, permits, certificates of
occupancy and other customary documentation to
the extent reasonably determined to be required
by the Administrative Agent.
(n) The Administrative Agent shall be reasonably
satisfied with the insurance program to be
maintained by the Borrower and its subsidiaries
after the Tender Offer.
(o) The Lenders shall have received a
satisfactory solvency certificate of management
of the Borrower and a satisfactory
<PAGE> 26
4
solvency opinion from Houlihan Lokey Howard &
Zukin, in each case which shall document the
solvency of the Borrower and its subsidiaries
after giving effect to the Recapitalization and
the other transactions contemplated hereby.
(p) The Lenders shall have received a reasonably
satisfactory environmental audit with respect to
certain real property owned or leased by the
Borrower and its subsidiaries.
(q) Neither the Borrower nor any Buyer shall be
in breach or violation of any of its obligations
under the documentation relating to the
Recapitalization or the financing thereof.
(r) Neither the Borrower nor any of its
affiliates and subsidiaries shall be subject to
material contractual or other material
restrictions that would be violated by the
Recapitalization.
(s) The Lenders shall have received such legal
opinions (including opinions (i) from counsel to
the Borrower and its subsidiaries, (ii) if
reasonably available, delivered pursuant to the
Recapitalization Documentation, accompanied by
reliance letters in favor of the Lenders and
(iii) from such special and local counsel as may
be required by the Administrative Agent),
documents and other instruments as are customary
for transactions of this type or as they may
reasonably request.
(t) The Lenders shall be satisfied that the
making of the Loans will not violate Regulation
G, T, U or X of the Board of Governors of the
Federal Reserve.
(u) (i) As a condition to the making of the
Tender Loans, the Term Loan Facilities shall have
been fully drawn and (ii) as a condition to the
making of Acquisition Loans to finance the
Recapitalization, the Tender Facility shall have
been fully drawn.
(v) All representations and warranties of the
Borrower and its subsidiaries under the Credit
Documentation shall be true and correct and no
default or event of default under the Credit
Documentation shall have occurred and be
continuing.
<PAGE> 1
BT ALEX. BROWN INCORPORATED BANCAMERICA ROBERTSON STEPHENS
130 LIBERTY STREET 231 SOUTH LASALLE STREET
NEW YORK, NY 10006 CHICAGO, ILLINOIS 60697
October 1, 1997
RCBA Purchaser I, L.P.
909 Montgomery Street
Suite 400
San Francisco, CA 94133
Attention: John C. Walker,
Managing Director
Fremont Purchaser II, Corp.
50 Fremont Street
Suite 3700
San Francisco, CA 94105
Attention: James T. Farrell,
President
Kinetic Concepts, Inc.
8023 Vantage Drive
P.O. Box 659508
San Antonio, TX 78285-9508
Attention: Mr. Raymond R. Hannigan
Re: Kinetic Concepts, Inc.
Ladies and Gentlemen:
You have advised BT Alex. Brown Incorporated ("BT Alex. Brown") and
BancAmerica Robertson Stephens ("BRS") that RCBA Purchaser I, L.P. ("RCBA") and
Fremont Purchaser II, Corp. ("Fremont"), together with certain other investors
satisfactory to us (RCBA, Fremont and such other investors being herein
collectively referred to as the "New Investor Group"), intend to invest in a
leveraged recapitalization transaction (the "Recapitalization") involving
Kinetic Concepts, Inc. (the "Company"). We understand that the Recapitalization
will be accomplished through the repurchase by the Company of all of its shares
of common stock (including certain options) other than at least $200.5 million
of shares of common stock and options (the "Rollover Shares") to be retained by
certain existing stockholders of the Company, including members of the Com-
<PAGE> 2
-2-
pany's Board of Directors and/or management (the "Rollover Shareholders" and,
together with the New Investor Group, the "Buyers"), for a maximum aggregate
repurchase price not to exceed $655.0 million (the "Repurchase Shares"), and
through the investment of not less than $355.2 million in equity in the Company
(the "Equity Financing"), including the contribution of at least $200.1 million
of Rollover Shares by the Rollover Shareholders and the purchase by the New
Investor Group of not less than $155.1 million of shares of the Company's common
stock directly from the Company (the "Equity Securities"); provided, that to the
extent the Buyers increase the amount of Rollover Shares above $200.1 million
after the date hereof, the amount of Rollover Shares shall be increased and the
amount of Repurchase Shares and Equity Securities shall be decreased by the same
amount; provided that in no event shall the Equity Securities be less than $125
million. In addition, in connection with the Recapitalization and related
transactions, fees and expenses of up to $44 million will be paid. Upon
consummation of the Recapitalization, the Buyers will own at least 66 2/3% of
the then outstanding shares of Company common stock.
You have advised BT Alex. Brown and BRS that the Recapitalization
would be accomplished through a tender offer (the "Tender Offer") followed by a
merger of corporations or other legal entities newly formed by the New Investor
Group with the Company (the "Merger") pursuant to which all shares of common
stock not tendered (in each case, other than Rollover Shares) will be cashed
out. It is expected that the Tender Offer will be financed through (i)
borrowings of up to $530 million under a senior secured credit facility to be
provided to the Company (the "Credit Facility"), of which $300.0 million will be
available to the Company under term loan facilities (the "Term Loans"), up to
$130.0 million will be available to the Company under a tender facility, up to
$50.0 million will be available to the Company under a revolving credit facility
(the "Revolving Loans") and up to $50.0 million will be available to the Company
under an acquisition facility (the "Acquisition Loans"), (ii) cash equity
investments from the New Investor Group of the Equity Securities, but in no
event shall the Equity Securities be less than $125 million, and (iii) cash on
hand of the Company of $23.0 million or in lieu thereof ownership of RIK
Medical, L.L.C. and RIK Medical East L.L.C. (collectively "RIK Medical").
You have further advised us that the amount of funds necessary to
refinance a portion of the Credit Facility on the date which is twenty one days
after the closing of the Credit Facility will be provided through the proceeds
from the sale of
<PAGE> 3
-3-
not less than $200.0 million of senior subordinated notes (the "Securities")
(which Securities may be issued with an equity component depending upon market
conditions) to be issued by the Company (or, in lieu thereof, not less than
$200.0 million of certain subordinated bridge financing made available to the
Company (the "Bridge Financing")). You have further advised us that the
Revolving Loans and Acquisition Loans will also be used to provide for working
capital purposes, letters of credit and other corporate purposes, including
permitted acquisitions, of the Company and its subsidiaries upon consummation of
the Recapitalization; provided that no more than $25.0 million of Revolving
Loans and Acquisition Loans shall be drawn on the closing date of the Merger
(the "Closing Date") ($48.0 million if the acquisition of Rik Medical has been
consummated prior to the Closing Date). Upon consummation of the
Recapitalization, the Company and its subsidiaries will have no indebtedness
other than the Credit Facility and the Securities (or, in lieu thereof, the
Bridge Financing). To the extent the Securities are placed on or prior to the
date which is twenty one days after the closing of the Credit Facility, the
Credit Facility will be refinanced at such time. The Recapitalization, together
with the issuance of the Securities (or, in lieu thereof, the Bridge Financing),
the issuance of the Equity Securities, and the transactions contemplated by the
definitive documents evidencing the Credit Facility and all related collateral
and guarantees (collectively, the "Bank Documents"), are hereinafter referred to
as the "Transactions."
You have asked BT Alex. Brown and BRS to assist you, as exclusive
underwriters or exclusive placement agents, in raising a portion of the funds
required to consummate the Recapitalization through the sale or placement of the
Securities.
The purpose of this engagement letter (this "Engagement Letter") is
to confirm the engagement by you of BT Alex. Brown and BRS as exclusive
underwriters or placement agents in connection with the issuance or sale
(whether pursuant to a public offering or a private placement) of the Securities
for cash in connection with the Recapitalization.
1. Retention. You hereby retain BT Alex. Brown and BRS on an
exclusive basis, and BT Alex. Brown and BRS agree to act, as exclusive joint
co-lead managing underwriters or placement agents (with BT Alex. Brown as book
running manager) in connection with the issuance or sale of $200.0 million of
senior subordinated notes of the Company for cash in connection with the
financing of the Recapitalization. Consistent with such appointments and subject
to the last sentence of this Sec-
<PAGE> 4
-4-
tion 1, BT Alex. Brown and BRS will act as the Company's exclusive underwriters
or placement agents with regard to each such proposed issuance pursuant to the
terms of an underwriting or placement agreement and related transaction
documents (collectively, the "Purchase Agreement"). The Purchase Agreement shall
set forth the terms and conditions, including the discounts, commissions and
fees, applicable to the respective transaction (and shall not be inconsistent
with the terms of this Engagement Letter). Neither you nor the Company shall,
directly or indirectly (except through BT Alex. Brown and BRS or as otherwise
approved by BT Alex. Brown and BRS), sell or offer to sell any equity or debt
security for cash or property in connection with the financing of the
Recapitalization or any related refinancings (other than (a) loans incurred
under and pursuant to the Credit Facility, (b) the Equity Securities and (c) any
bridge loans incurred by the Company pursuant to the Bridge Financing (the
foregoing, collectively, the "Permitted Dispositions")) during the term of this
Engagement Letter. Any such offer, sale or other disposition of any equity or
debt security for cash or property (other than a Permitted Disposition) during
the term of this Engagement Letter will be treated for purposes of Section 2 as
if such sale or disposition were undertaken by BT Alex. Brown and BRS directly.
Notwithstanding anything to the contrary contained herein or any oral
representations or assurances previously or subsequently made by the parties,
this Engagement Letter is not intended to be and does not constitute a
commitment or obligation by BT Alex. Brown or BRS to act as an underwriter or
placement agent in connection with any offering or sale of securities; and no
liability or obligation on the part of BT Alex. Brown or BRS to proceed with or
participate in an offering of securities by the Company shall be created or
exist unless or until BT Alex. Brown or BRS have executed and delivered a
Purchase Agreement and then only in accordance with the terms and conditions set
forth therein.
2. Fees. As compensation for the services of BT Alex. Brown and BRS
hereunder, you shall pay to BT Alex. Brown and BRS the following non-refundable
fees:
(a) an underwriting or placement fee of 3.0% of the gross proceeds
from the issuance of the Securities and any securities related to the
Securities included within the engagement described in Section 1, payable
50% to BT Alex. Brown and 50% to BRS at the closing of such issuance; and
(b) all reasonable legal and out-of-pocket expenses (including
allocated internal legal expenses)
<PAGE> 5
-5-
incurred by BT Alex. Brown or BRS in connection with the contemplated
transaction.
To the extent BT Alex. Brown or BRS performs services other than the
services specified in Section 1, each of you shall jointly and severally pay, or
cause to be paid, to BT Alex. Brown or BRS, as the case may be, additional fees
and/or commissions customary under the circumstances, to be agreed upon in
writing by each of you and BT Alex. Brown or BRS, as the case may be, in advance
of the performance thereof.
3. Other Agreements.
(a) Term. The engagement of BT Alex. Brown and BRS hereunder may be
terminated (i) by either BT Alex. Brown or BRS at any time, or (ii)
by you after the earliest to occur of (1) the termination of the
Recapitalization Agreement in accordance with its terms, (2) the use
of the proceeds of the sale of the Securities contemplated by this
Engagement Letter or (3) the second anniversary after the
consummation of the Recapitalization, by prior written notice
thereof to BT Alex. Brown and BRS; provided, however, that the
provisions of Sections 2 (with respect to any fees earned prior to
the date of such termination) and 3 shall survive such termination
with respect to the Company only and RCBA and Fremont shall be
released from all obligations hereunder and under the Indemnity
Letter described in Section 3(c).
(b) Information. During the course of the term of this Engagement
Letter, you shall furnish BT Alex. Brown and BRS with such
information about the Company as BT Alex. Brown and BRS reasonably
request to be included in a private placement memorandum, offering
circular or other disclosure document ("Company Information"). You
represent and warrant to BT Alex. Brown and BRS that all Company
Information included in the private placement memorandum will be
complete and correct in all material respects and will not contain
any untrue statements of a material fact or omit to state a material
fact necessary to make the statements contained therein, in light of
<PAGE> 6
-6-
the circumstances under which such statements are made, not
materially misleading, in each case as of the date of such
memorandum. You agree to advise BT Alex. Brown and BRS during the
period of the engagement of all developments known to you materially
affecting the Company or the accuracy of Company Information
previously furnished to BT Alex. Brown, BRS or prospective
purchasers of Securities. In addition, any representations and
warranties made by the Company to purchasers of the Securities shall
be deemed to be incorporated into this Engagement Letter and any
opinions delivered by or on behalf of the Company to the purchasers
of any Securities shall expressly provide that BT Alex. Brown and
BRS may rely upon such opinions. You acknowledge that BT Alex.
Brown, BRS and their affiliates may share with each other, any
information related to you or your respective affiliates (including
information relating to creditworthiness), or the Recapitalization
or the financing thereof, provided that BT Alex. Brown, BRS and such
affiliates agree to hold any non-public information confidential in
accordance with their respective customary policies. You acknowledge
that BT Alex. Brown, BRS and their affiliates may share with each
other, any information related to you or the Company and your and
their respective affiliates (including information relating to
creditworthiness), or the Recapitalization or the Transactions,
provided that BT Alex. Brown, BRS and such affiliates agree to hold
any non-public information confidential in accordance with their
respective customary policies related to non-public information.
(c) Indemnification. Each of you, on behalf of yourself and the Company,
jointly and severally agree to indemnify BT Alex. Brown, BRS and
their affiliates and each person in control of BT Alex. Brown, BRS
and their affiliates and their respective officers, directors,
employees, agents and representatives and their respective
affiliates and control persons, in accordance with the Indemnity
<PAGE> 7
-7-
Letter dated the date hereof and attached hereto.
(d) Other Services. You acknowledge and agree that BT Alex. Brown and/or
BRS and/or their affiliates may be requested to provide additional
services with respect to you and/or the Company, the
Recapitalization or other matters contemplated hereby. Any such
services will be set out in and governed by a separate agreement(s)
(containing terms relating, without limitation, to services, fees
and indemnification) in form and substance satisfactory to you and
BT Alex. Brown or BRS (or any such affiliate). Nothing in this
Engagement Letter is intended to obligate or commit BT Alex. Brown
or BRS or any of their affiliates to provide any services or
financing other than as set out herein.
(e) No Shareholder Rights. You acknowledge and agree that BT Alex. Brown
and BRS have been retained only by you and that your engagement of
BT Alex. Brown and BRS is not deemed to be on behalf of and is not
intended to confer rights upon any shareholder, owner or partner of
you or any other person not a party hereto (other than the Company)
as against BT Alex. Brown or BRS or any of their affiliates or the
respective directors, officers, employees, agents and
representatives of BT Alex. Brown or BRS and their affiliates.
Unless otherwise expressly agreed, no person or entity other than
you, the Company and any parent holding company of Company is
authorized to rely upon your engagement of BT Alex. Brown and BRS or
any statements, advice, opinions, or conduct by BT Alex. Brown or
BRS.
(f) Tombstone, Etc. Upon consummation of the transactions contemplated
hereby, BT Alex. Brown and BRS may place the customary "tombstone"
advertisement(s) in publication(s) of its choice at its own expense.
You confirm that you and the Company will rely on your respective
counsel, accountants and other similar expert advisors for legal,
<PAGE> 8
-8-
accounting, tax and other similar expert advice.
(g) Miscellaneous. This Engagement Letter may be executed in two or more
counterparts, all of which together shall be considered a single
instrument. The term "affiliate" as used herein shall have the
meaning ascribed to such term in the rules and regulations
promulgated under the Securities Exchange Act of 1934, as amended.
This Engagement Letter constitutes the entire agreement among the
parties with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter hereof
and cannot be amended or otherwise modified except in writing
executed by the parties hereof.
(h) Successors and Assigns. The provisions of this Engagement Letter
shall inure to the benefit of and be binding upon the successors and
assignees of RCBA, Fremont, the Company, BT Alex. Brown and BRS. BT
Alex. Brown or BRS may transfer or assign, in whole or from time to
time in part, to one or more of their affiliates, their rights and
obligations hereunder, but no such transfer or assignment will
relieve BT Alex. Brown or BRS of their obligations hereunder without
your prior written consent. By your acceptance hereof, each of you
agrees to undertake the obligations described herein on your own
behalf and on behalf of the Company, all such obligations to be
joint and several, except that following the consummation of the
Recapitalization all obligations of RCBA and Fremont shall be solely
the obligations of the Company, and RCBA and Fremont shall be
released from all such obligations.
(i) GOVERNING LAW. THIS ENGAGEMENT LETTER SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF. ANY RIGHT
TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION
<PAGE> 9
-9-
ARISING OUT OF THIS ENGAGEMENT LETTER OR CONDUCT IN CONNECTION WITH
THIS ENGAGEMENT IS HEREBY WAIVED. YOU HEREBY SUBMIT TO THE
NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS
LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE
RELATED TO THIS ENGAGEMENT LETTER OR ANY OF THE MATTERS CONTEMPLATED
HEREBY.
[Remainder of page intentionally left blank]
<PAGE> 10
-10-
We are delighted to accept this engagement and look forward to
working with you on this assignment. Please confirm that the foregoing is in
accordance with your understanding by signing and returning to us the enclosed
duplicate of this letter.
Very truly yours,
BT ALEX. BROWN INCORPORATED
By: /s/ Kate W. Cook
__________________________
Name: Kate W. Cook
_____________________
Title: Managing Director
____________________
BANCAMERICA ROBERTSON STEPHENS
By: /s/ Bruce R. Thompson
__________________________
Name: Bruce R. Thompson
_____________________
Title: Managing Director
____________________
AGREED AND ACCEPTED this 1st day of October, 1997:
RCBA PURCHASER I, L.P.
By: /s/ N. Colin Lind
______________________________________
Name: N. Colin Lind
______________________________
Title: A General Partner
FREMONT PURCHASER II, INC.
By: /s/ R.S. Kopf
_______________________________________
Name: R.S. Kopf
_______________________________
Title: General Counsel and Secretary
______________________________
KINETIC CONCEPTS, INC.
By: /s/ Raymond R. Hanningan
_______________________________________
Name: Raymond R. Hanningan
_______________________________
Title: President and Chief Executive
Officer
<PAGE> 1
BANKERS TRUST NEW YORK BANK OF AMERICA NATIONAL TRUST
CORPORATION AND SAVINGS ASSOCIATION
130 LIBERTY STREET 231 SOUTH LASALLE STREET
NEW YORK, NY 10006 CHICAGO, ILLINOIS 60697
October 1, 1997
RCBA Purchaser I, L.P.
909 Montgomery Street
Suite 400
San Francisco, CA 94133
Attention: John C. Walker, Managing Director
Fremont Purchaser II, Corp.
50 Fremont Street
Suite 3700
San Francisco, CA 94105
Attention: James T. Farrell, President
Kinetic Concepts, Inc.
8023 Vantage Drive
P.O. Box 659508
San Antonio, TX 78285-9508
Attention: Mr. Raymond R. Hannigan
Re: Financing Letter (Bridge Financing)
Ladies and Gentlemen:
You have advised Bankers Trust New York Corporation and Bank
of America National Trust and Savings Association (the "Lenders") that RCBA
Purchaser I, L.P. ("RCBA") and Fremont Purchaser II, Corp. ("Fremont"), together
with certain other investors satisfactory to us (RCBA, Fremont and such other
investors being herein collectively referred to as the "New Investor Group"),
intend to invest in a leveraged recapitalization transaction (the
"Recapitalization") involving Kinetic Concepts, Inc. (the "Company"). We
understand that the Recapitalization will be accomplished through the repurchase
by the Company of all of its shares of common stock (including certain options)
other than at least $200.5 million of shares of common stock and options (the
"Rollover Shares") to be retained by certain existing stockholders of the
Company, including members of the Company's Board of Directors and/or management
(the "Rollover Shareholders" and, together with the New Investor Group, the
"Buyers"), for a maximum aggregate repurchase price
<PAGE> 2
-2-
not to exceed $655.0 million (the "Repurchase Shares"), and through the
investment of not less than $355.2 million in equity in the Company (the "Equity
Financing"), including the contribution of at least $200.5 million of Rollover
Shares by the Rollover Shareholders and the purchase by the New Investor Group
of not less than $154.7 million of shares of the Company's common stock directly
from the Company (the "Equity Securities"); provided, that to the extent the
Buyers increase the amount of Rollover Shares above $200.5 million after the
date hereof, the amount of Rollover Shares shall be increased and the amount of
Repurchase Shares and Equity Securities shall be decreased by the same amount;
provided that in no event shall the Equity Securities be less than $125 million.
In addition, in connection with the Recapitalization and related transactions,
fees and expenses of approximately $44 million will be paid. Upon consummation
of the Recapitalization, the Buyers will own at least 66 2/3% of the then
outstanding shares of Company common stock.
You have advised the Lenders that the Recapitalization would
be accomplished through a tender offer (the "Tender Offer") followed by a merger
of corporations or other legal entities newly formed by the New Investor Group
with the Company (the "Merger") pursuant to which all shares of common stock not
tendered (in each case, other than Rollover Shares) will be cashed out. It is
expected that the Tender Offer will be financed through (i) borrowings of up to
$530 million under a senior secured credit facility to be provided to the
Company (the "Credit Facility"), of which $300.0 million will be available to
the Company under term loan facilities (the "Term Loans"), $130.0 million will
be available to the Company under a tender facility, $50.0 million will be
available to the Company under a revolving credit facility (the "Revolving
Loans") and up to $50.0 million will be available to the Company under an
acquisition facility (the "Acquisition Loans"), (ii) cash equity investments
from the New Investor Group of the Equity Securities, but in no event shall the
Equity Securities be less than $125 million, and (iii) cash on hand of the
Company of $23.0 million or in lieu thereof ownership of RIK Medical, L.L.C. and
RIK Medical East, L.L.C. (collectively "RIK Medical").
You have further advised us that the amount of funds necessary
to refinance a portion of the Credit Facility on the date which is twenty one
days after the closing of the Credit Facility will be provided through the
proceeds from the sale of not less than $200.0 million of senior subordinated
notes (the "Securities") (which Securities may be issued with an equity
<PAGE> 3
-3-
component depending upon market conditions) to be issued by the Company (or, in
lieu thereof, not less than $200.0 million of certain subordinated bridge
financing made available to the Company (the "Bridge Financing")). You have
further advised us that the Revolving Loans and Acquisition Loans will also be
used to provide for working capital purposes, letters of credit and other
corporate purposes, including permitted acquisitions, of the Company and its
subsidiaries upon consummation of the Merger; provided that no more than $25.0
million of Revolving Loans and Acquisition Loans shall be drawn on the closing
date of the Merger (the "Merger Date") ($48.0 million if the acquisition of Rik
Medical has been consummated prior to the Merger Date). Upon consummation of the
Merger, the Company and its subsidiaries will have no indebtedness other than
the Credit Facility and the Securities (or, in lieu thereof, the Bridge
Financing). The Recapitalization (including the Tender Offer and the Merger),
together with the issuance of the Securities (or, in lieu thereof, the Bridge
Financing), the issuance of the Equity Securities, and the transactions
contemplated by the definitive documents evidencing the Credit Facility and all
related collateral and guarantees (collectively, the "Bank Documents"), are
hereinafter referred to as the "Transactions."
You have requested the Lenders to commit to provide to Company
funds in an amount of $200.0 million in the form of an unsecured senior
subordinated bridge loan to be made available on the date (the "Closing Date")
which is the earlier of (i) 21 calendar days after the closing of the Credit
Facility and (ii) after the closing of the Credit Facility, the date which is 2
business days after written notice from Company to Lenders that the senior
subordinated bridge loan will be drawn.
Accordingly, subject to the terms and conditions set forth or
referred to in this letter and in reliance upon your representations, warranties
and advice set forth or referred to in this letter, the Lenders agree with you
as follows:
1. Senior Subordinated Bridge Loan. The Lenders hereby
severally commit, subject to the terms and conditions contained herein, to
provide to Company, and Company hereby engages the Lenders as the exclusive
provider of, $100.0 million each of an unsecured senior subordinated bridge loan
(the "Bridge Loan") in an aggregate principal amount of $200.0 million. The
proceeds of the Bridge Loan shall be used to refinance the Credit Facility. The
principal terms of the Bridge Loan are summarized in the term sheet attached
hereto as Exhibit 1 (the "Term Sheet").
<PAGE> 4
-4-
This letter is not meant to be, nor shall it be construed as,
an attempt to define all of the terms and conditions of the transactions
involved in the Bridge Loan. Rather, it is intended only to outline certain
basic points of business understanding around which the legal documentation is
to be structured. Further negotiations within the general scope of these major
terms shall not be precluded by the issuance of this letter and its acceptance
by you.
Unless the Lenders' commitment hereunder shall have been
terminated pursuant to Section 7, the Lenders shall have the exclusive right to
provide the Bridge Loan required in connection with the Transactions.
Representatives of the Lenders and their affiliates have
reviewed certain historical and pro forma financial statements of Company and
its subsidiaries and have met with your respective representatives and certain
members of the management of Company regarding the transactions contemplated
hereby, and we are pleased to advise you that the results of such investigation
of Company and its subsidiaries to date are satisfactory. However, neither we
nor our counsel have had the opportunity to complete our legal and environmental
due diligence. Accordingly, the Lenders' commitment to provide the financings
described in this letter is subject to our satisfaction of such legal and
environmental due diligence. In the event that, prior to the funding of the
Credit Facility, our continuing review of Company and its subsidiaries discloses
information relating to conditions or events not previously disclosed to us or
relating to new information or additional developments concerning conditions or
events previously disclosed to us which we believe may have a material adverse
effect on the business, results of operations, properties, assets, liabilities
or condition (financial or otherwise) of Company and its subsidiaries, we may,
in our sole discretion, suggest alternative financing amounts or structures that
ensure adequate protection for the Lenders or decline to participate in the
proposed financing. In addition, the Lenders' commitment is subject to the
accuracy and completeness of the Information and the Projections described in
the immediately succeeding paragraph, our satisfaction with the structure of the
Recapitalization, and the satisfaction of the conditions to be set forth in the
definitive documentation relating to the Credit Facility, including without
limitation those conditions set forth in the Term Sheet.
You hereby represent that, based on your review and analysis,
to your knowledge (a) all information other than the
<PAGE> 5
-5-
Projections (as defined below), which has been taken or is hereafter made
available to the Lenders by the New Investor Group or Company or any of your or
their respective representatives in connection with the transactions
contemplated hereby (the "Information") has been reviewed and analyzed by you in
connection with the performance of your own due diligence and is now, and as
supplemented by you prior to the funding of the Credit Facility, will be as of
the funding of the Credit Facility, complete and correct in all material
respects and does not now, and as supplemented by you prior to the funding of
the Credit Facility, will not on the funding of the Credit Facility, contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained therein, in light of the circumstances under
which such statements were or are made, not materially misleading and (b) all
financial projections concerning Company that have been or are hereafter made
available to the Lenders by the New Investor Group or Company or any of your or
their respective representatives prior to the funding of the Credit Facility in
connection with the transactions contemplated hereby (the "Projections") have
been or, in the case of such Projections made available after the date hereof,
will be, prepared in good faith based upon reasonable assumptions, which
assumptions are, or in the case of Projections made available after the date
hereof will be, set forth therein (it being understood that the Projections are
subject to significant uncertainties and contingencies, many of which are beyond
the control of Company and that no assurance can be given that such projections
will be realized). You agree to supplement the Information and the Projections
from time to time until the funding of the Credit Facility so that the
representation and warranty in the preceding sentence is correct on the funding
of the Credit Facility. In arranging and syndicating the Bridge Loan, the
Lenders will be using and relying on the Information and the Projections,
without independent verification thereof. The representations and covenants
contained in this paragraph shall remain effective until definitive Financing
Documentation (as defined below) is executed and thereafter the disclosure
representations and covenants contained herein shall be superseded by those
contained in such definitive Financing Documentation.
2. Financing Documentation. The making of the Bridge Loan will
be governed by definitive loan and related agreements and documentation
(collectively, the "Financing Documentation") prepared by special counsel to the
Lenders. The Financing Documentation shall contain such covenants, terms and
conditions as are consistent with this letter, will have the principal economic
terms set forth in the Term Sheet and
<PAGE> 6
-6-
shall otherwise be satisfactory to the Lenders; it being understood that such
terms and provisions may require the approval of the Lenders under the Bank
Documents.
3. Conditions. The obligation of the Lenders under Section 1
of this letter to provide the Bridge Loan is subject to fulfillment of customary
and appropriate conditions precedent, including, without limitation, the
following:
A. Recapitalization Agreement; Documentation. At the time of
funding the Credit Facility, the structure of the Recapitalization
shall be substantially similar to that previously described or
otherwise satisfactory to the Lenders, and the definitive agreements
relating to the Recapitalization, including, but not limited to, the
Tender Offer and Merger (collectively, the "Recapitalization
Agreement") shall be in form and substance satisfactory to the Lenders,
shall be in full force and effect and shall not have been amended
without the Lenders' consent, which consent shall not be unreasonably
withheld. All conditions to the Tender Offer contained in the
Recapitalization Agreement shall have been performed or complied with
substantially on the terms set forth therein and not waived without the
Lenders' consent, which consent shall not be unreasonably withheld.
B. Financing Documentation. At the time of funding the Credit
Facility, Company and the Lenders shall have entered into the Financing
Documentation relating to the Bridge Loan and the transactions
contemplated thereby. At the time of funding the Credit Facility, all
documents required to be delivered under the Financing Documentation
(other than those required to be delivered at the time of funding of
the Bridge Loan), including any guarantees described in the Term Sheet,
customary legal opinions, independent third party reports, corporate
records and documents from public officials and officers' certificates,
shall have been delivered.
C. Due Diligence. At the time of funding the Credit Facility,
the Lenders shall have completed their legal and environmental due
diligence investigations of Company. The Lenders' commitment to provide
the financing described in this letter is conditioned upon the results
of such investigations being satisfactory to the Lenders prior to the
funding of the Credit Facility.
<PAGE> 7
-7-
D. No Adverse Change or Development. (i) At the time of
funding the Credit Facility, since December 31, 1996 there shall not
have been, in the reasonable judgment of the Lenders, any material
adverse change, or any development involving (or which may reasonably
be expected to involve) a prospective material adverse change, in the
condition (financial or other), business, assets, liabilities,
properties or results of operations of Company; the Lenders shall have
been promptly notified of any conditions or events not previously
disclosed to the Lenders and of any new information or additional
developments concerning conditions or events previously disclosed to
the Lenders in each case which may have a material adverse effect on
the condition (financial or otherwise), business, assets, liabilities,
properties or results of operations of Company ("Material Adverse
Effect"); (ii) prior to the funding of the Credit Facility, trading in
securities generally on the New York or American Stock Exchange shall
not have been suspended and minimum or maximum prices shall not have
been established on any such exchange; (iii) prior to the funding of
the Credit Facility, a banking moratorium shall not have been declared
by New York or United States federal banking authorities; (iv) prior to
the funding of the Credit Facility, there shall not have been (A) an
outbreak or escalation of hostilities between the United States and any
other power, or (B) an outbreak or escalation of any other incurrection
or armed conflict involving the United States or any other national or
international calamity or emergency, or (C) any material change in, or
development with respect to, the financial markets of the United States
or elsewhere which, in the reasonable judgment of the Lenders, makes it
impracticable or inadvisable to proceed with the consummation of the
Transactions or the Bridge Loan or any of the other transactions
contemplated hereby or that would materially adversely affect the
ability to sell or syndicate the Bridge Loan or sell or place the
Securities, in each case, on the terms contemplated hereby; and (v)
there shall be no issues of debt securities or commercial bank
facilities (other than the Securities, the Bridge Loan and the Credit
Facility) of Company being offered, placed or arranged that would, in
the reasonable judgment of the Lenders, adversely affect the sale or
syndication of the Bridge Loan or the sale or placement of the
Securities.
E. Capital Structure; Management. The pro forma consolidated
capital structure of Company and its subsidiaries, after giving effect
to the Transactions and the
<PAGE> 8
-8-
consummation of all other financial transactions relating to the
transactions contemplated by this letter, shall be consistent with the
capital structure contemplated herein, or otherwise satisfactory to the
Lenders in their discretion. Prior to the funding of the Credit
Facility, the Lenders shall be satisfied with senior management and
their employment contracts, if any, and proposed ownership interests in
Company, and such contracts, if any, and ownership interests shall be
in full force and effect on the Closing Date.
F. Solvency Opinion. Prior to the funding of the Credit
Facility, the Lenders shall have received a solvency certificate of
management of Company and a solvency letter from an independent firm,
in each case satisfactory in form and substance to the Lenders, which
may be Houlihan Lokey Howard & Zukin.
G. Applicable Law. (i) Prior to the funding of the Credit
Facility, there shall not have been any statute, rule, regulation,
injunction or order applicable to any of the Transactions or the
financing thereof, promulgated, enacted, entered or enforced by any
state or federal government or governmental or regulatory authority or
agency or by any federal or state court, or by any tribunal, and (ii)
subsequent to the funding of the Credit Facility and prior to the
funding of the Bridge Loan, there shall not have been any statute,
rule, regulation, injunction or order applicable to any of the
Transactions or the financing thereof, promulgated, enacted, entered or
enforced by any state or federal government or governmental or
regulatory authority or agency or by any federal or state court, or by
any tribunal, in either case that would prohibit the making of the
Bridge Loan or that would result in the making of the Bridge Loan
causing a violation of any such statute, rule, regulation, injunction
or order.
H. Litigation. Prior to the funding of the Credit Facility, no
litigation or similar proceeding (governmental or other) shall exist or
be threatened with respect to or affecting (i) Company or any of its
subsidiaries, any of the Transactions, any party to any of the
Transactions or the Bridge Financing, which the Lenders shall determine
is reasonably likely to have a Material Adverse Effect, or (ii) the
Financing Documentation or any provision thereof, which the Lenders
shall determine is reasonably likely to materially adversely affect the
rights and remedies of the Lenders or any other Lenders
<PAGE> 9
-9-
thereunder, the ability of Company or any guarantor thereof to perform
its obligations thereunder, the making, sale or syndication of the
Bridge Loan or the sale or placement of the Securities.
I. Credit Facility. Company shall have entered into Bank
Documents with a commercial lender or a syndicate of commercial
lenders, an institutional investor or syndicate of institutional
investors, in form and substance satisfactory to the Lenders and
providing for commitments thereunder in an amount that is, together
with the proceeds of the other Transactions and the borrowing of the
Bridge Loan, sufficient to consummate the Recapitalization, to pay all
related fees and expenses and to have not less than $75.0 million of
availability under the Credit Facility immediately after the
consummation of the Recapitalization, which amount may be reduced to
$52.0 million if the acquisition of Rik Medical has been consummated.
Such documentation shall be in full force and effect. The initial
borrowings under the Credit Facility as described above shall have been
made in connection with the funding of the Tender Offer. Since the date
of the funding of the Credit Facility, the Bank Documents shall not
have been amended in a manner materially adverse to the Lenders.
J. Equity Financing. The Equity Securities shall have been
issued.
K. Conduct of Business. Prior to the funding of the Credit
Facility, Company and its subsidiaries shall have operated their
respective businesses in the ordinary course, except as contemplated by
the Transactions.
L. Marketing of Debt Securities. Company shall have engaged
one or more investment banks (collectively, the "Take-Out Banks")
satisfactory to the Lenders to publicly sell or privately place the
Securities the proceeds of which will be used to refinance the Bridge
Loan. Such engagement shall have been definitively documented on terms
and conditions satisfactory to the Lenders, such documentation shall be
in full force and effect and the parties thereto shall be in compliance
with all material agreements thereunder.
M. Release of Collateral. Any and all security interests in
the assets of Company granted in favor of holders of indebtedness
(other than under the Bank Documents)
<PAGE> 10
-10-
shall have been terminated unless otherwise satisfactory to the
Lenders.
N. Financial Statements. Prior to the funding of the Credit
Facility, the Lenders shall have received audited and unaudited
historical financial statements of Company and pro forma financial
statements of Company and its consolidated subsidiaries assuming
consummation of the Recapitalization, in each case in form and
presentation as required by the Securities Act of 1933, as amended, and
the rules and regulations thereunder applicable to registration
statements filed thereunder.
O. Fees and Expenses. All fees and expenses, including without
limitation, the Lenders' reasonable legal fees and out-of-pocket
expenses (including allocated internal legal expenses), shall have been
paid by you or Company, to the extent due.
4. Securities Demand. Upon request from the Take-Out Banks (a
"Request"), Company shall take any and every action necessary or desirable, to
the extent within the power of Company, so that the Take-Out Banks can, as soon
as practicable after such a Request, publicly sell or privately place the
Take-Out Securities. If the Take-Out Securities have not been sold or privately
placed within three months of the Request, Company agrees that upon notice by
the Take-Out Banks (a "Take-Out Securities Notice"), at any time and from time
to time following the three-month anniversary of the Request, Company will cause
the issuance and sale of Take-Out Securities upon such terms and conditions as
specified in the Take-Out Securities Notice; provided that for either a Request
or a Take-Out Securities Notice (i) interest and dividend rates (whether
floating or fixed) shall be determined by the Take-Out Banks, in light of the
then prevailing market conditions, but in no event shall the cash interest or
dividend rates on the Take-Out Securities exceed 15.0% per annum; (ii) Company,
in its reasonable discretion after consultation with the Take-Out Banks, shall
determine whether the Take-Out Securities shall be issued through a public
offering or a private placement; (iii) the scheduled final maturity of any
Take-Out Securities shall not be earlier than one year after the scheduled
termination date of the Credit Facility (as in effect on the Closing Date), but
in no event later than the tenth anniversary of the Closing Date; (iv) the
Take-Out Securities (to the extent they are debt securities) will be issued
pursuant to an indenture and in the form negotiated by Company and the Take-Out
Banks prior to the Closing Date and which shall contain such terms, conditions
and
<PAGE> 11
-11-
covenants (consistent with Section 3 hereof) as are customary for similar
financings and as are satisfactory in all respects to the Take-Out Banks and
their counsel and Company and its counsel; and (v) all other arrangements with
respect to the Take-out Securities shall be reasonably satisfactory in all
respects to the Take-Out Banks and Company in light of the then prevailing
market conditions; provided that the terms and conditions of the Take-Out
Securities are satisfactory to the Lenders under the Bank Documents.
Additionally, if it shall be determined by the Take-Out Banks, based on then
prevailing market conditions, that it is necessary and advisable to sell
Take-Out Securities that are debt securities in an aggregate principal amount in
excess of the principal amount of the Bridge Loan to be refinanced with such
Take-Out Securities, Company shall sell Take-Out Securities in the aggregate
principal amount recommended by the Take-Out Banks; provided that in no event
will Company be required to sell Take-Out Securities in an aggregate principal
amount in excess of $200.0 million pursuant to this sentence.
Further, if it shall be determined by the Take-Out Banks,
based on then prevailing market conditions, that it is necessary and advisable
to sell the Take-Out Securities with an equity component, Company shall issue
common equity or common equity equivalents to the purchasers of the Take-Out
Securities in such amount as is necessary in order for Company to receive net
proceeds from the sale of Company's equity securities, if any) in an amount
sufficient to repay the Bridge Loan, after taking into account the prevailing
market conditions; provided that at no time shall Company be required to issue
common equity or common equity equivalents to the purchasers of the Take-Out
Securities in an amount greater than 5.0% of the aggregate amount of the common
stock of Company on a fully-diluted basis.
As used herein and in the attached fee letter of even date
herewith with respect to the Bridge Loan (the "Fee Letter"), the term "fully
diluted" shall be deemed to include all securities of Company (including all
convertible, exchangeable or similar securities and determined without regard to
whether such securities are then convertible or exchangeable), (i) issued and
(ii) contemplated to be issued in connection with the Transactions even if not
then issued. At the election, from time to time, of the Lenders, any such equity
securities may be in the form of non-voting common stock exchangeable into
voting common stock on certain terms requested by the Lenders.
<PAGE> 12
-12-
With respect to any equity securities issuable pursuant to
this letter or the Fee Letter, the Lenders and their transferees shall be given
tag-along, registration and other rights as are customary in transactions like
that contemplated by this letter and the Fee Letter.
5. Indemnification and Contribution. Each of you agrees,
jointly and severally, to indemnify each of the Lenders and their affiliates and
each person in control of the Lenders and each of their affiliates and the
respective officers, directors, employees, agents and representatives of the
Lenders and their affiliates and control persons, as provided in the indemnity
letter of even date herewith and attached hereto (the "Indemnity Letter").
6. Expenses. In addition to any fees that may be payable to
the Lenders hereunder and regardless of whether any of the transactions
contemplated by this letter are consummated, each of you hereby agrees, jointly
and severally, to reimburse the Lenders for all reasonable fees and
disbursements of the Lenders' counsel, including, without limitation, allocated
internal legal expenses, and all of the Lenders' travel and other reasonable
out-of-pocket expenses incurred in connection with the Transactions or otherwise
arising out of the Lenders' commitment hereunder.
7. Termination. The Lenders' commitment hereunder to provide
the Bridge Loan shall terminate (a) if the Recapitalization Agreement has not
been entered into on terms and in form and substance reasonably satisfactory to
the Lenders on or prior to October 31, 1997, or (b) if the Bridge Loan is not
funded by February 21, 1998. No such termination of the commitments hereunder
shall affect your respective obligations under Section (a) or (b) of the Fee
Letter or under Sections 5 and 6 hereof or this Section 7, which shall survive
any such termination; provided that upon termination of the commitments
hereunder, such obligations shall be solely the obligations of the Company, and
RCBA and Fremont shall be released from all obligations under this Financing
Letter (Bridge Financing), the Fee Letter and the Indemnity Letter.
8. Assignment. This letter shall not be assignable by the New
Investor Group or the Company without the prior written consent of the Lenders;
provided that any member of the New Investor Group may assign this letter to any
of its affiliates. This letter may be assigned by the Lenders without the
consent of the New Investor Group or the Company to affiliates of the Lenders
(it being understood that any such affiliate
<PAGE> 13
-13-
shall be subject to the restrictions set forth in this Section 8 but no such
assignment will relieve the Lenders of their obligations hereunder without your
prior written consent); provided that the Lenders shall have the right (before
and after funding the Bridge Loan), in its sole discretion to syndicate the
Bridge Loan among banks or other financial institutions pursuant to the
Financing Documentation or otherwise and to sell, transfer or assign all or any
portion of, or interests or participation in, the Bridge Loan and any notes
issued in connection therewith; provided, however, that upon delivery by the
Lenders of a commitment letter for all or a portion of the Bridge Loan from a
reputable financial institution (which reputable financial institution shall be
reasonably acceptable to you) and otherwise containing terms and conditions
reasonably acceptable to you and Company, the Lenders shall be fully relieved of
their obligations hereunder to the extent of the commitment set forth in such
commitment letter.
9. Confidentiality. This letter is confidential and shall not
be disclosed by you to any person other than your respective accountants,
attorneys and, to the extent approved by the Lenders, other advisors, and to
Company and its attorneys and, to the extent approved by the Lenders, other
advisors, and then only on a confidential basis and in connection with the
Recapitalization and the related transactions contemplated herein. Additionally,
you may make such disclosures of this letter as are required by law or judicial
process or as may be required or appropriate in response to any summons or
subpoena or in connection with any litigation; provided that you will use your
best efforts to notify us of any such disclosure prior to making such
disclosure.
10. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES GOVERNING CONFLICTS OF LAWS. ANY RIGHT TO TRIAL BY JURY WITH
RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS LETTER IS HEREBY WAIVED. YOU
HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK
STATE COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE
RELATED TO THIS LETTER OR ANY OF THE MATTERS CONTEMPLATED HEREBY. This letter
(including the provisions of the Term Sheet, the Fee Letter and the Indemnity
Letter specifically incorporated herein) embodies the entire agreement and
understanding between you and the Lenders and supersedes all prior agreements
and understandings relating to the subject matter hereof. This letter may be
executed in any number of counterparts, each of which shall be an original, but
all of which shall constitute one instrument.
<PAGE> 14
-14-
You acknowledge that the Lenders and their affiliates may
share with each other any information related to you or your respective
affiliates (including information relating to creditworthiness) or the
Transactions or the financing therefor; provided that the Lenders and such
affiliates agree to hold any non-public information confidential in accordance
with their respective customary policies related to non-public information.
[remainder of page intentionally left blank]
<PAGE> 15
If you are in agreement with the foregoing, please sign and
return to the Lenders at 130 Liberty Street, New York, New York 10006, the
enclosed copy of this letter no later than 5:00 p.m., New York time, on October
3, 1997, whereupon the undertakings of the parties shall become effective to the
extent and in the manner provided hereby. This offer shall terminate if not so
accepted by you on or prior to that time. By your acceptance hereof, you agree
to undertake these obligations on your behalf and on behalf of Company, all such
obligations to be joint and several, but such obligations as to RCBA and Fremont
shall terminate upon consummation of the Recapitalization and shall be solely
the obligations of Company, and RCBA and Fremont shall be released from all such
obligations.
Very truly yours,
BANKERS TRUST NEW YORK CORPORATION
By: /s/ Joseph A. Manganello, Jr.
_______________________________
Name: Joseph A. Manganello, Jr.
Title: Executive Vice President
and Chief Credit Officer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Kevin P. Morrison
______________________________
Name: Kevin P. Morrison
Title: Vice President
<PAGE> 16
AGREED AND ACCEPTED this
1st day of October, 1997
RCBA PURCHASER I, L.P.
By: /s/ N. Colin Lind
______________________________
Name: N. Colin Lind
_________________________
Title:General Partner
________________________
FREMONT PURCHASER II, INC.
By: /s/ R. S. Kopf
______________________________
Name: R.S. Kopf
_________________________
Title: General Counsel and
Secretary
________________________
KINETIC CONCEPTS, INC.
By: /s/ Raymond R. Hannigan
______________________________
Name: Raymond R. Hannigan
_________________________
Title: President and Chief
Executive Officer
________________________
<PAGE> 17
Exhibit 1
RCBA Purchaser I, L.P.
Fremont Purchaser II, Corp.
Recapitalization of Kinetic Concepts, Inc.
Bridge Loan and Term Loan Facility
Summary Term Sheet *
Borrower: Kinetic Concepts, Inc.
Lenders: Bankers Trust New York Corporation and Bank of
America National Trust and Savings Association (the
"Lenders").
Facility: One-year unsecured senior subordinated bridge loan
(the "Bridge Loan") generating gross proceeds of
$200.0 million which, subject to the conditions
outlined below under "Conditions to Conversion of the
Bridge Loan," converts to an unsecured senior
subordinated term loan facility (the "Term Loan,"
and, collectively with the Bridge Loan, the
"Facility") on the date set forth be low under
"Conditions to Conversion of the Bridge Loan." The
Term Loan will mature on the tenth anniversary of the
Funding Date (as described be low).
Guarantors: Each subsidiary of Company that makes a guaranty in
favor of the lenders under the Bank Documents (a
"Guarantor") shall also make a guaranty (a
"Guaranty") in favor of the
- --------
* Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Financing Letter to which this Term Sheet is
attached.
T-1
<PAGE> 18
Lenders, pursuant to which such Guarantor shall
guarantee all of the obligations of the Company to
the Lenders under the Financing Documentation.
Use of Proceeds: Proceeds from borrowings under the Facility will be
used to refinance a portion of the Credit Facility
and be deposited in escrow pending acquisition of
additional Shares.
Funding Date: The date which is the earlier of (i) 21 days after
the closing of the Credit Facility and (ii) after the
closing of the Credit Facility, the date which is two
business days after written notice from Company to
Lenders that the Bridge Loan will be drawn.
Interest Rate: The Bridge Loan and the Term Loan shall bear interest
a rate equal to the greater of three-month LIBOR or
the 90-day U.S. Treasury Rate, reset monthly, plus an
initial spread of 6.0% (the "Interest Rate"), and
such spread over LIBOR or U.S. Treasury Rate shall
automatically increase by 0.5% for each period of
three months that the Bridge Loan or the Term Loan is
outstanding, as the case may be; provided, however,
that in no event shall the Interest Rate exceed 14.0%
per annum on a cash interest basis and 17.0% per
annum on a cash and payment in kind ("PIK") basis. At
any time after the Conversion Date (as hereinafter
defined), the Term Loan of any lender shall, at the
election of such lender, bear interest at a fixed
rate per annum equal to the Fixed Rate (as
hereinafter defined). The Fixed Rate, as of any date
of determination, shall be a rate of interest per
annum equal to
T-2
<PAGE> 19
17.0% per annum, subject to the limitations described
below.
Interest on the Bridge Loan and the Term Loan shall
be payable on a quarterly basis; provided that at
such time as the Term Loan bears interest at the
Fixed Rate, interest on the Term Loan shall be
payable on a semi-annual basis.
Interest on the Bridge Loan and the Term Loan shall
be paid (i) in cash to the extent that interest
thereon is less than or equal to a rate per annum of
14.0% and (ii) in PIK securities having terms and
provisions identical to the Bridge Loan or Term Loan,
as the case may be, to the extent that interest
thereon is greater than a rate per annum of 14.0% but
less than or equal to a rate per annum of 17.0%.
Fees: As set forth in the attached Fee Letter.
Ranking: The obligations of Company under the Facility will be
unsecured senior subordinated obligations and will
rank (i) pari passu with all other unsubordinated
indebtedness of Company (other than as provided in
(iii) below), (ii) senior to any subordinated
indebtedness of Company and (iii) subordinated in
right of payment to obligations of Company under the
Credit Facility and any refinancing thereof. The
obligations of each Guarantor under its Guaranty will
be senior subordinated obligations and will rank (i)
pari passu with all other unsubordinated indebtedness
of such Guarantor (other than as provided in (iii)
below), (ii) senior to any subordinated indebtedness
of such Guarantor and (iii) subordinated in
T-3
<PAGE> 20
right of payment to the obligations of each Guarantor
under the Bank Documents to which it is a party and
any refinancing thereof.
Optional Prepayment: Company may prepay the Bridge Loan or the Term Loan,
in whole or in part, at any time or from time to time
in an amount equal to 100.0% of the principal amount
thereof plus accrued interest thereon; provided that
at such time as the Term Loan bears interest at the
Fixed Rate, the Term Loan shall be subject to
prepayment restrictions and premiums typical for high
yield debt securities; and provided, further that at
such time as the Bridge Loan is less than $100.0
million, or would become less than $100.0 million as
the result of any optional prepayment, any such
prepayment shall prepay the entire outstanding amount
of the Bridge Loan.
Mandatory Prepayment: Net proceeds of sales of Securities or, to the extent
permitted pursuant to the terms of the Credit
Facility, debt or equity securities, whether in a
public offering or private placement by Company or
any subsidiaries thereof, shall be used to prepay the
Bridge Loan plus accrued interest and any other
amount payable thereunder to the full extent of net
proceeds so received.
Participation/Assignment The Lenders may participate out or sell or assign, or
or Syndication: syndicate to other lenders, the Bridge Loan or Term
Loan, in whole or in part, at any time.
Conditions to Conversion On the first anniversary of the Funding Date (the
of the Bridge Loan: "Conversion Date"), unless (A) Company or any
significant subsidiary (which shall be defined to
mean any subsidiary of the Company
T-4
<PAGE> 21
which, would be a "Significant Subsidiary" as defined
in Rule 1.02(w) of Regulation S-X promulgated under
the Securities Act) thereof is subject to a
bankruptcy or other insolvency proceeding, (B) there
exists a payment default (whether or not matured)
with respect to the Bridge Loan or the conversion fee
set forth in the Fee Letter, or (C) there exists a
default in the payment when due at final maturity of
any indebtedness (excluding the indebtedness created
under the Bridge Loan) of Company or any subsidiary
thereof in excess of $20 million in the aggregate for
any such default or all such defaults, or the
maturity of such indebtedness shall have been
accelerated, Company may convert all of the then
outstanding Bridge Loan into the Term Loan; provided
that if an event described in clause (C) is
continuing at the scheduled Conversion Date but the
applicable grace period, if any, set forth in the
events of default provision of the Bridge Loan has
not expired, the Conversion Date (and maturity date
of the Bridge Loan) shall be deferred until the
earlier to occur of (i) the cure of such event or
(ii) the expiration of any applicable grace period.
Debt Security Exchange: Any lender of the Term Loan may at any time after the
Conversion Date require that Company exchange the
Term Loan for long-term notes (the "Exchange Notes")
which shall bear interest at the Fixed Rate, deter
mined at such time, and shall have similar terms and
conditions customary for high yield debt securities
issued for cash in the then prevailing market and in
all cases not in conflict with Company's other debt
instruments and acceptable to such
T-5
<PAGE> 22
lender and shall in addition provide customary
registration rights (including, without limitation,
demand registrations). The lenders of the Term Loans
may designate, at Company's request, one or more
investment banks reasonably satisfactory to Company
to place such long-term notes to be exchanged for the
Term Loan and Company will pay customary fees in
connection therewith.
Conditions Precedent: The obligation of the Lenders to make funds available
under the Bridge Loan shall be subject to (i) receipt
by the Lenders of a borrowing request, (ii)
satisfaction of the conditions set forth in the
Financing Letter and (iii) satisfaction of other
customary closing conditions.
Covenants: Certain covenants will limit the ability of Company
and its subsidiaries to incur additional
indebtedness, pay certain dividends and make certain
other restricted payments and investments, create
liens, enter into transactions with affiliates,
merge, consolidate or transfer substantially all of
their respective assets, impose restrictions on the
ability of Company to pay dividends or make certain
payments to its shareholders, and impose restrictions
on the ability of Company's subsidiaries to limit
their ability pay dividends or make certain payments
to Company. Further, during the term of the Bridge
Loan, the covenants will be more restrictive than the
covenants applicable to the Term Loan and the
Take-Out Securities and will include additional
prohibitive covenants relating to asset sales,
certain acquisitions, certain debt incurrences,
amendments to the Bank Documents that would modify
any of the provisions or
T-6
<PAGE> 23
definitions thereof in respect of the issuance of
Take-Out Securities, the Term Loans or the Exchange
Notes in a manner adverse to the Lenders and certain
other corporate transactions.
Events of Default: Customary for transactions of this type, including
without limitation, payment defaults, covenant
defaults, bankruptcy and insolvency, judgments, cross
acceleration of and failure to pay at final maturity
other indebtedness aggregating an amount to be agreed
upon and foreclosure under the Bank Documents,
subject to, in certain cases, notice, grace periods
and thresholds to be agreed upon.
Governing Law and The State of New York.
Forum:
Indemnification and Ex- Customary for transactions of this type.
pense Reimbursements:
T-7
<PAGE> 1
EXHIBITS IN SUPPORT OF FAIRNESS OPINION FOR
PROJECT ROYALTY
[LOGO BT Alex. Brown]
October 1, 1997
<PAGE> 2
The information contained in this document was obtained from the management of
KING and other sources.
This document has been prepared for the use of the Board of Directors of KING
only. It is confidential and may not be disclosed or provided to any third
parties without the written permission of BT Alex. Brown Incorporated ("BT Alex.
Brown").
This document is prepared as of October 1, 1997 and reflects information made
available to us prior to such date. It does not include information regarding
all of the assessments made by BT Alex. Brown in arriving at its conclusions.
<PAGE> 3
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY
- Financial Summary of the Proposed Transaction
- Summary of Proposed Transaction Terms
- Review of Process
- KING Stock Price History
II. REVIEW OF KING
- Historical Financial Statements
- Summary of Analyst Research
- Ownership Profile
- Liquidity Analysis
III. VALUATION ANALYSIS
- Analysis of Selected Public Companies
- Analysis of Precedent Transactions
- Precedent Financial Buyer Transactions
- Discounted Cash Flow Analysis
IV. PRO FORMA TRANSACTION ANALYSIS
- Pro Forma Financial Statements
V. APPENDIX
- Premiums Paid Analysis
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 4
FINANCIAL SUMMARY OF THE PROPOSED TRANSACTION
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 5
FINANCIAL SUMMARY OF THE PROPOSED TRANSACTION
I. VALUATION (in millions, except per share data)
<TABLE>
<S> <C> <C> <C>
Offer Price per Share $ 19.25 Gross Equity Value $890.1
Less Option Proceeds 37.0
------
Common Shares Outstanding 42.6
Total Options 3.6 Equity Value $853.0
------ Plus: Debt $ 0.5
Total Shares & Options Outstanding 46.2 Less: Cash $ 38.4
====== ------
Enterprise Value $815.2
</TABLE>
<TABLE>
<CAPTION>
KING as of Transaction Selected Public Selected Recent Financial
II. MULTIPLES (06/30/97) Multiples Companies Transactions Buyer Transactions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Enterprise Value Multiples
LTM Revenues $286.2 2.8x 0.8x - 4.4x 0.9x - 2.0x 0.7x - 4.3x
LTM EBITDA $ 82.4 9.9 8.1 - 21.9 8.8 - 13.4 8.6 - 10.9
LTM EBIT $ 61.4 13.3 10.3 - 27.4 11.3 - 21.4 12.2 - 16.2
Equity Value Multiples
Book Value $222.5 3.8 1.1 - 7.7 1.1 - 4.9 2.3 - 7.9
LTM Net Income $ 38.8 22.0 16.6 - 41.0 19.0 - 47.6 19.4 - 28.8
CY 1997E Net Income (a) $ 41.7 20.5 16.8 - 33.9 NA NA NA NA
CY 1998E Net Income (a) $ 47.0 18.2 14.4 - 28.2 NA NA NA NA
Case One CY 1998E Net Income (b) $ 55.9 15.2 14.4 - 28.2 NA NA NA NA
Case Two CY 1998E Net Income (b) $ 48.3 17.6 14.4 - 28.2 NA NA NA NA
Forward Net Income $ 45.6 18.7 NA NA 19.5 - 25.8 NA NA
</TABLE>
<TABLE>
<CAPTION> KING as of
PREMIUM TO MARKET (06/30/97) Premium Analysis of Control Premiums (d)
----------------- ------- --------------------------------
<S> <C> <C> <C> <C>
Last Close (as of 09/30/97) $ 18.63 3.4% One Day Prior 27.6%
One Month Prior (as of 08/31/97) $ 18.38 4.8% One Month Prior 38.9%
Unaffected (as of 04/29/97) $ 14.81 30.0%
HISTORICAL TRADING
All-Time High (08/08/97) $19.94
All-Time Low (09/29/93) $ 3.38
III. STAND-ALONE DISCOUNTED CASH FLOW ANALYSIS (c)
Discount Rates 14.0% - 22.0%
Terminal Multiple 8.0x - 10.0x EBITDA $17.00 - $30.00
</TABLE>
(a) I/B/E/S estimates.
(b) Management estimates.
(c) Range as calculated under Case One and Case Two scenarios, rounded to the
nearest dollar.
(d) Represents mean.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 6
SUMMARY OF PROPOSED TRANSACTION TERMS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 7
SUMMARY OF PROPOSED TRANSACTION TERMS
TRANSACTION KING will offer $19.25 per share in cash for up to
approximately 32.5 million KING shares (approximately
76% of KING shares outstanding) in a self-tender
offer. James D. Leininger and Richard C. Blum &
Associates, L.P. will rollover approximately 10.1
million KING shares (approximately 24% of existing
ownership in KING) in a recapitalization of KING
involving an approximately $152 million combined
equity infusion from Richard C. Blum & Associates,
L.P. and The Fremont Group and approximately $519
million in third party debt financing.
POST-TRANSACTION Post-transaction, James D. Leininger, Richard C. Blum
OWNERSHIP & Associates, L.P. and The Fremont Group will own
approximately 34%, 26% and 40% of the recapitalized
equity of KING.
BOARD SEATS KING's eight member board will consist of James D.
Leininger, Raymond R. Hannigan, President and Chief
Executive Officer, two designees from Richard C. Blum
& Associates, L.P., two designees from The Fremont
Group and two independent designees.
ACCOUNTING TREATMENT Recapitalization accounting treatment.
TERMINATION FEE $30 million (or approximately 3.7% of the enterprise
value) plus up to $2 million of expenses; triggered
if (i) Board withdraws recommendation or (ii) in the
event another party acquires 20% or more ownership in
KING and completes an acquisition of KING within one
year of the termination of the Agreement.
KEY CONDITIONS TO KING Board approval, delivery of fairness opinion and
CLOSING solvency opinion to KING's Board; filing of Schedule
13E-3 and 13E-4 Tender Offer Statements; KING
shareholder approval as required under Texas law; all
necessary regulatory consents; closing of third-party
financing (commitment letters have been received);
successful self-tender of KING shares and execution
of Stock Retention Agreement with certain KING
employees.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 8
SUMMARY OF PROPOSED TRANSACTION TERMS
SHAREHOLDER SUPPORT Dr. Leininger agrees (i) to vote all shares in
AGREEMENT support of the Transaction and (ii) grant Richard C.
Blum & Associates, L.P. and the Fremont Group an
option to acquire approximately 4.2 million of his
shares at $19.25 per share in the event KING
terminates the Agreement and completes a transaction
with another party within 180 days after termination
of the Agreement.
KEY REPRESENTATIONS No material adverse change in KING; no undisclosed
liabilities; compliance with all regulatory matters
in conduct of business.
DUE DILIGENCE Richard C. Blum & Associates, L.P. and The Fremont
Group have completed their due diligence.
TIMING Expected closing on or about November 15, 1997.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 9
SUMMARY OF PROPOSED TRANSACTION TERMS
(dollars in thousands)
SUMMARY SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
SOURCES Term (yrs) Interest Rate
---------- -------------
<S> <C> <C> <C>
Revolver (Base Rate + 125) $ 18,841 6.0 7.35%
Term Loan A (Base Rate + 125) 120,000 6.0 7.35%
Term Loan B (Base Rate + 150) 90,000 7.5 7.60%
Term Loan C (Base Rate + 175) 90,000 9.0 7.85%
Senior Sub Note 200,000 10.0 10.24%
Fremont New Equity 138,197
RCBA Total Equity (a) 91,294
Leininger "Rollover" Equity 116,735
Management "Rollover" Equity 8,974
Existing Cash in Company (b) 23,000
--------
Total Sources of Funds $897,041
========
USES
"Rollover" of Equity 203,484
Purchase of Primary Shares 617,037
Net Purchase of Options 32,514
Fees and Expenses 44,007
--------
Total Uses of Funds $897,041
========
</TABLE>
(a) Includes $77.8 million of "rollover equity" and net $13.5 million of new
equity.
(b) Prior to the funding of the RIK Medical acquisition.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 10
SUMMARY OF PROPOSED TRANSACTION TERMS
PRO FORMA OWNERSHIP PROFILE
<TABLE>
<CAPTION>
SHARES SHARES POST-DEAL
PRE-DEAL ISSUED PURCHASED POST-DEAL FULLY DILUTED
---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James D. Leininger, M.D.(Chairman) 21,123,146 49.6% 0 (15,058,991) 6,064,155 33.5% 6,064,155 32.9%
Richard C. Blum & Associates, L.P. 4,040,250 9.5% 702,286 0 4,742,536 26.2% 4,742,536 25.7%
The Fremont Group 0 0.0% 7,179,066 0 7,179,066 39.7% 7,179,066 38.9%
Other Management and Directors 1,967,166 4.6% 0 (1,867,166) 100,000 0.6% 100,000 0.5%
Rolled Management Options (a) 0 0.0% 0 0 0 0.0% 366,176 2.0%
---------- ----- --------- ----------- ---------- ----- ---------- -----
Total Insider Holdings 27,130,562 63.7% 7,881,352 (16,926,157) 18,085,757 100.0% 18,451,933 100.0%
Total Institutional Holdings 12,213,185 28.7% 0 (12,213,185) 0 0.0% 0 0.0%
Retail and Other Holdings 3,280,730 7.7% 0 (3,280,730) 0 0.0% 0 0.0%
---------- ----- --------- ----------- ---------- ----- ---------- -----
Total Common Shares Outstanding 42,624,477 100.0% 7,881,352 (32,420,072) 18,085,757 100.0% 18,451,933 100.0%
</TABLE>
(a) Based on 821,550 option shares with a strike price of $10.67 assuming $19.25
purchase price per share.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 11
REVIEW OF PROCESS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 12
REVIEW OF PROCESS
- - Full auction process following public announcement that Company had
retained BT Alex. Brown to explore strategic alternatives.
- - Broad universe of both financial and strategic buyers contacted.
- - Potential buyers included both domestic and international prospects.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 13
REVIEW OF PROCESS
<TABLE>
<CAPTION>
PARTIES MATERIALS INDICATIONS MANAGEMENT
CONTACTED SENT OF INTEREST PRESENTATION
--------- ---- ----------- ------------
<S> <C> <C> <C> <C>
STRATEGIC BUYERS 16 13 0 0
FINANCIAL BUYERS 22 17 9 7
-- -- - -
TOTALS 38 30 9 7
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 14
SELECTED CONSIDERATIONS OF INTERESTED PARTIES
- - OVERALL IMPRESSIONS
- Solid company with strong senior management
- Well-established market position with broad product line
- Established international distribution network and operating
infrastructure
- Steady historical performance
- Positive overall impressions; issues related to growth
- - INDUSTRY MARKET CONDITIONS
- Presence of significant competitor with substantial resources
- Changing reimbursement environment
- Health care industry subject to intense cost pressures
- - KING STAND-ALONE ISSUES
- Capital intensive business
- Shift from frames to overlays
- Shift in customers from acute to extended care settings
- New products (VAC, PlexiPulse) are early-stage
- Treatment protocols for products dependent on collection of
additional clinical data
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 15
KING STOCK PRICE HISTORY
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 16
KING ANNOTATED STOCK PRICE HISTORY 11/01/94 - 09/30/97
[graph]
plot points on CM 59-74
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 17
RELATIVE STOCK PRICE PERFORMANCE SINCE 01/01/97
[graph]
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 18
RELATIVE STOCK PRICE PERFORMANCE SINCE 05/29/97
[graph]
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 19
HISTORICAL FINANCIAL STATEMENTS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 20
KING HISTORICAL INCOME STATEMENTS
<TABLE>
<CAPTION>
(dollars in thousands)
FISCAL YEAR ENDED DECEMBER 31, 1994-96 LTM AS OF
1994 1995 1996 CAGR 09/30/97 (a)
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
REVENUES $222,084 $243,443 $269,881 10.2% $294,489
EBITDA 63,437 66,552 77,148 10.3% 85,964
EBIT 38,636 43,792 55,354 19.7% 63,394
NET INCOME $20,505 $28,441 $38,987 37.9% $43,669
======== ======== ======== ========
F.D. E.P.S. $0.46 $0.63 $0.86 35.8% $0.99
======== ======== ======== ========
MARGINS:
EBITDA 28.6% 27.3% 28.6% 29.2%
EBIT 17.4% 18.0% 20.5% 21.5%
Net Income 9.2% 11.7% 14.4% 14.8%
GROWTH RATES:
Revenue NA 9.6% 10.9% ---
EBITDA NA 4.9% 15.9% ---
EBIT NA 13.3% 26.4% ---
Net Income NA 38.7% 37.1% ---
</TABLE>
(a) Source: KING management. Based on 8 months actual and 1 month projected
results.
PROJECT ROYALTY
[LOGO] BT Alex. Brown
Incorporated
<PAGE> 21
KING HISTORICAL BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997 (a)
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $52,399 $59,045 $37,630
Accounts Receivable, Net 56,032 58,241 74,835
Inventories 18,854 20,042 21,303
Other Current Assets 15,156 6,860 11,968
--------- --------- ---------
Total Current Assets 142,441 144,188 145,736
PP&E, Net 62,276 65,224 74,303
Intangibles 13,968 13,541 27,370
Other Non-Current Assets 25,041 30,440 33,977
--------- --------- ---------
Total Non-Current Assets 101,285 109,205 135,650
--------- --------- ---------
TOTAL ASSETS $243,726 $253,393 $281,386
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Expenses $29,002 $33,766 $38,334
Current Portion of L-T Debt 0 0 134
Revolver -- -- --
Other Current Liabilities 4,026 3,088 2,594
--------- --------- ---------
Total Current Liabilities 33,028 36,854 41,062
Deferred Taxes 374 5,065 9,516
Other Non-Current Liabilities 0 396 534
--------- --------- ---------
Total Liabilities 33,402 42,315 51,112
--------- --------- ---------
Stockholders' Equity 210,324 211,078 230,274
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $243,726 $253,393 $281,386
========= ========= =========
</TABLE>
(a) Source: KING management. Based on 8 months actual and 1 month projected
results.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 22
SUMMARY OF ANALYST RESEARCH
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 23
SUMMARY OF ANALYST RESEARCH ON KING
<TABLE>
<CAPTION>
Report 1997 1997 Long Term
Financial Institution (Analyst) Stock Price Recommendation Date Estimate Estimate Growth Rate
- ------------------------------- ----------- -------------- ---- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bear, Stearns & Co. (F. Wise) $17.96 Neutral 07/21/97 $0.94 $1.06 17%
Brean Murray (P. Putnam) $17.71 Hold 07/18/97 $0.94 $1.05 15%
BT Alex. Brown (A. Jay) $18.15 Buy 07/17/97 $0.93 $1.07 20%
- --------------------------------------------------------------------------------------------------------------
I/B/E/S Inc. $18.63 -- 09/30/97 $0.94 $1.06 17%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -- BEAR, STEARNS (07/21/97) -- KING reported 2Q EPS of $0.23, $0.02 above our
estimates. Sales were up 17% over 1996 and slightly above our estimate despite a
loss of $1.5 million due to foreign currency exchange. Lower-than-expected SG&A
expenses also contributed to the EPS surprise. KING saw the first hints of
erosion in its business with Premier in the second quarter, but still far below
what had been expected and budgeted for since the contract was lost to a
competitor last fall. KING actually saw revenue increases year-over-year in
Acute care, thanks to aggressive marketing and replacement sales from other
hospitals. Despite higher than expected sales into Premier, we are forecasting
hospital sales to increase by only 2% total over the next two years, partly as a
result of the loss of the Premier contract and partly as a result of a shrinking
hospital market and price pressures.
- -- BREAN MURRAY (07/18/97) -- Fueled by better than expected revenue growth,
KING reported Q2 EPS of $0.23 versus our estimate of $0.21. Strong domestic
sales of the Company's wound closure device (V.A.C.), continued improvement
in domestic specialty patient surface revenues, including compared to last
year, an incremental $2.0 million in revenues from the H.F. Systems acquisition,
accounted for the revenue strength. We would continue to hold KING pending the
outcome of this evaluation of strategic alternatives.
- -- BT Alex. Brown (7/17/97) -- KING reported solid 2Q 1997 results, slightly
exceeding our revenue and EPS estimates. The Company continues to capitalize on
its technically rich product line to penetrate new accounts, without the need to
bolster an already humming distribution infrastructure. Our investment thesis
remains intact as KING continues to leverage its top-of-the-line, proprietary
therapeutic beds to enter new accounts and gain share. The revenue growth can be
leveraged into faster EPS growth because KING's distribution infrastructure is
already in place. Management reported that the loss of the Premier hospital
group purchasing contract to a competitor late in 1995 has not had a significant
adverse impact on KING's business as pricing has not eroded. While KING has seen
some leakage of business from Premier accounts, gains through a new preferred
vendor relationship with the VHA purchasing group alliance are offsetting them.
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 24
OWNERSHIP PROFILE
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 25
OWNERSHIP PROFILE
<TABLE>
<CAPTION>
PERCENT OF
INSTITUTIONAL HOLDINGS (a) SHARES HELD OUTSTANDING
- -------------------------- ----------- -----------
<S> <C> <C>
Richard C. Blum & Associates, L.P. 4,040,250 9.5%
Wellington Management 1,787,400 4.2%
Wanger Asset Management L.P. 1,448,000 3.4%
Neuberger & Berman Institutional Investment 1,445,300 3.4%
Edgemont Asset Management Corp 1,200,000 2.8%
Neuberger & Berman Management 697,400 1.6%
Barclays Bank PLC 552,937 1.3%
Cullen / Frost Bankers Inc. 439,473 1.0%
Roger H. Jenswold & Co. 410,068 1.0%
Investco Management & Research 399,400 0.9%
Dimensional Fund Advisors 388,900 0.9%
Mellon Bank Corporation 380,643 0.9%
Artisan Partners, L.P. 303,200 0.7%
Putnam Investment Management 270,262 0.6%
Guardian Investor Services 217,700 0.5%
Luther King Capital Management 207,200 0.5%
Morgan Stanley, Dean Witter 181,800 0.4%
Peoples Bank (CT) 175,000 0.4%
Chancellor LGT Asset Management 171,200 0.4%
California State Teachers Retirement 165,087 0.4%
Vanguard Group 163,100 0.4%
Franklin Resources, Inc. 150,000 0.4%
Grantham Mayo Van Otter 139,700 0.3%
ANB Investment Management & Trust 126,400 0.3%
First Union Corporation 102,500 0.2%
Others 690,515 1.6%
----------- -----------
TOTAL 16,253,435 38.1%
<CAPTION>
PERCENT OF OPTIONS
INSIDER HOLDINGS (b) SHARES HELD (c) OUTSTANDING (c) HELD (d)
- -------------------- --------------- --------------- --------
<S> <C> <C> <C>
James D. Leininger, M.D. (Chairman) 21,123,146 49.6% NA
Peter A. Leininger, M.D. (Executive 1,438,694 3.4% NA
Vice President)
Raymond R. Hannigan (President & CEO) 387,200 0.9% 340,000
Sam A. Brooks (Director) 69,000 0.2% 107,500
Frank A. Ehmann (Director) 2,500 0.0% 20,000
Wendy L. Gramm, Ph.D. (Director) 4,000 0.0% 20,000
Bernhard T. Mittemeyer, M.D. (Director) 1,200 0.0% 24,000
Christopher M. Fashek (President, KCTS) 16,600 0.0% 30,350
Frank DiLazzaro (President, KCII) 20,000 0.0% 20,284
--------------- --------------- --------
TOTAL 23,090,312 54.2% 541,850
INSTITUTIONAL HOLDINGS 16,253,435 38.1%
INSIDER HOLDINGS 23,090,312 54.2%
RETAIL AND OTHER HOLDINGS 3,280,730 7.7%
--------------- ---------------
TOTAL SHARES OUTSTANDING (e) 42,624,477 100.0%
=============== ===============
</TABLE>
- ----------
(a) Source: CDA Spectrum as of June 1997, except for Richard C. Blum &
Associates, L.P. which is taken from 13-D amendment, dated July 10, 1997.
(b) Source: Company Proxy dated May 13, 1997.
(c) Excludes outstanding options. Excludes 143,014 shares (including 118,014
options) held by Bianca Rhodes, former CFO of the Company.
(d) Includes options exercisable within sixty days.
(e) Source: Company management.
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 26
LIQUIDITY ANALYSIS
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 27
LIQUIDITY ANALYSIS OF KING
<TABLE>
<S> <C>
SHARES OUTSTANDING 42,624,477
FLOAT (a) 19,534,165
ADJUSTED FLOAT (b) 8,915,815
AVERAGE DAILY TRADING VOLUME
30-Day 85,807
60-Day 71,443
90-Day 78,594
180-Day 79,846
AVERAGE DAILY TURNOVER (c)
30-Day 0.4%
60-Day 0.4%
90-Day 0.4%
180-Day 0.4%
AVERAGE DAILY ADJUSTED TURNOVER (d)
30-Day 1.0%
60-Day 0.8%
90-Day 0.9%
180-Day 0.9%
NUMBER OF ACTIVE MARKET MAKERS 18
NUMBER OF RESEARCH ANALYSTS 6
</TABLE>
STOCK PRICE AND VOLUME HISTORY
[GRAPH]
<TABLE>
<CAPTION>
DIVESTITURE DAYS BASED ON 25%
OF AVERAGE DAILY TRADING VOLUME
---------------------------------------------
CURRENT
COMPANY HOLDINGS 30-DAY 60-DAY 90-DAY 180-DAY
------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Richard C. Blum & Associates, L.P. 4,040,250 188.3 226.2 205.6 202.4
Wellington Management 1,787,400 83.3 100.1 91.0 89.5
Wanger Asset Management L.P. 1,448,000 67.5 81.1 73.7 72.5
Neuberger & Berman Institutional Investment 1,445,300 67.4 80.9 73.6 72.4
Edgemont Asset Management Corp 1,200,000 55.9 67.2 61.1 60.1
Neuberger & Berman Management 697,400 32.5 39.0 35.5 34.9
Barclays Bank PLC 552,937 25.8 31.0 28.1 27.7
Cullen/Frost Bankers Inc. 439,473 20.5 24.6 22.4 22.0
Roger H. Jenswold & Co. 410,068 19.1 23.0 20.9 20.5
Investco Management & Research 399,400 18.6 22.4 20.3 20.0
</TABLE>
- ----------------
(a) Float represents Shares Outstanding less Insider Holdings.
(b) Adjusted Float represents Float less five largest Institutional Holders
(Neuberger Berman holdings are consolidated).
(c) Average Daily Turnover represents Average Daily Trading Volume divided by
Outstanding Float.
(d) Adjusted Daily Turnover represents Average Daily Trading Volume divided by
Adjusted Float.
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
-24-
<PAGE> 28
ANALYSIS OF SELECTED PUBLIC COMPANIES
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 29
SELECTED PUBLICLY TRADED COMPANIES
<TABLE>
<CAPTION>
SELECTED PUBLICLY TRADED
KING COMPANY MULTIPLES
TRANSACTION -------------------------
MULTIPLES MEAN RANGE
----------- ----- ------------------
<S> <C> <C> <C> <C>
VALUATION BASED ON LATEST TWELVE MONTHS STATISTICS (a) (b)
LTM REVENUES 2.8x 2.1x 0.8x - 4.4x
LTM EBITDA 9.9x 12.0x 8.1x - 21.9x
LTM EBIT 13.3x 16.0x 10.3x - 27.4x
LTM NET INCOME 22.0x 24.0x 16.6x - 41.0x
VALUATION BASED ON PROJECTED STATISTICS
CAL. 1997 NET INCOME (I/B/E/S) 20.5x 22.3x 16.8x - 33.9x
CAL. 1998 NET INCOME (I/B/E/S) 18.2x 18.6x 14.4x - 28.2x
CAL. 1998 NET INCOME (CASE ONE) (c) 15.2x 18.6x 14.4x - 28.2x
CAL. 1998 NET INCOME (CASE TWO) (c) 17.6x 18.6x 14.4x - 28.2x
</TABLE>
(a) Implied valuation based on revenues, EBITDA and EBIT are adjusted by
adding cash of $38.4 and subtracting debt of $0.5.
(b) LTM as of 06/30/97.
(c) KING management estimates.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 30
SELECTED PUBLICLY TRADED COMPANIES
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
MARKET STATISTICS
-------------------------------------------
Stock Price Equity Enterprise
Company 09/30/97 Value Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Becton, Dickinson & Company $47.88 $6,133.7 $6,806.5
C.R. Bard, Inc. $34.00 $1,979.0 $2,101.1
Hillenbrand Industries, Inc. $45.06 $3,115.0 $3,069.0
Invacare Corporation $23.50 $719.8 $887.2
Steris Corporation $41.13 $1,468.8 $1,479.2
Stryker Corporation $43.69 $4,292.5 $4,192.2
Sunrise Medical Inc. $15.63 $301.5 $498.6
- -----------------------------------------------------------------------------
MEAN: $2,572.9
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
KING $19.25 $853.0 $815.2
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUATION BENCHMARKS
-------------------------------------------------------------------------------------------------
Enterprise Value as a Multiple of Equity Value as a Multiple of
---------------------------------- -------------------------------------------------------------
Company Revenues EBITDA EBIT Training EPS Cal'97 EPS Cal'98 EPS Book Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Becton, Dickinson & Company 2.4x 10.3x 15.0x 21.1x 19.2x 16.9x 4.6x
C.R. Bard, Inc. 1.7x 8.1x 10.3x 16.6x 17.8x 15.8x 3.3x
Hillenbrand Industries, Inc. 1.8x 8.6x 12.0x 20.8x 19.7x 17.1x 3.9x
Invacare Corporation 1.4x 10.3x 13.0x 17.7x 16.8x 14.4x 2.8x
Steris Corporation 2.4x 14.1x 17.0x 27.1x 23.8x 19.2x 4.8x
Stryker Corporation 4.4x 21.9x 27.4x 41.0x 33.9x 28.2x 7.7x
Sunrise Medical Inc. 0.8x 10.5x 17.5x NM 25.2x 18.6x 1.1x
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN: 2.1x 12.0x 16.0x 24.0x 22.3x 18.6x 4.0x
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
KING 2.8x 9.9x 13.3x 22.0x 20.5x 18.2x 3.8x
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROWTH RATES
-------------------------------------------------------------------------------------------------
Historical (Most Recent Qtr.) Projected Calendar Year EPS
---------------------------- ------------------------------------------------ 1998 P/E to
Company Revenues EPS 1996 to 1997 1997 to 1998 3-5 Year I/B/E/S Growth Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bectonton, Dickinson & Company 2.0% -7.1% 14.0% 14.1% 13.8% 122.3%
C.R. Bard, Inc. 3.0% -4.2% 3.8% 12.6% 11.7% 135.2%
Hillenbrand Industries, Inc. 0.5% 12.5% 12.2% 15.0% 15.1% 113.4%
Invacare Corporation 3.7% 3.4% 9.4% 16.4% 15.8% 91.2%
Steris Corporation -7.7% -25.1% 38.6% 24.2% 21.9% 87.6%
Stryker Corporation 10.0% 20.9% 19.4% 20.2% 19.5% 144.5%
Sunrise Medical Inc. -6.6% NM 31.9% 35.5% 15.0% 124.0%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN: 0.7% 0.1% 18.5% 19.7% 16.1% 116.9%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
KING 16.7% 28.9% 9.3% 12.8% 17.3% 105.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARGINS
-------------------------------------------
Net
Company EBITDA EBIT Income
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Becton, Dickinson & Company 23.6% 16.3% 10.7%
C.R. Bard, Inc. 21.4% 16.8% 9.6%
Hillenbrand Industries, Inc. 20.9% 15.0% 8.8%
Invacare Corporation 13.4% 10.6% 6.3%
Steris Corporation 17.0% 14.2% 8.4%
Stryker Corporation 20.0% 16.1% 10.8%
Sunrise Medical Inc. 7.2% 4.3% 0.2%
- -----------------------------------------------------------------------------
MEAN: 17.7% 13.3% 7.8%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
KING 28.8% 21.4% 13.6%
- -----------------------------------------------------------------------------
</TABLE>
PROJECT ROYALTY [BT Alex. Brown
Incorporated Logo]
<PAGE> 31
SELECTED PUBLICLY TRADED COMPANIES
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
MARKET STATISTICS
----------------------------------------------------------
Stock 52-Week
Price ------------ Price Change Price as a %
Company 09/30/9 High(a) Low(a) Last Year of High
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Becton, Dickenson
& Company $47.88 $55.63 $37.00 9.4% 86.1%
C.R. Bard, Inc. $34.00 $39.00 $25.88 11.6% 87.2%
Hillenbrand Industries,
Inc. $45.06 $48.63 $33.88 25.4% 92.7%
Invacare Corporation $23.50 $30.00 $16.50 -15.9% 78.3%
Steris Corporation $41.13 $44.13 $22.63 21.4% 93.2%
Stryker Corporation $43.69 $45.31 $24.25 45.5% 96.4%
Sunrise Medical Inc. $15.63 $16.88 $ 9.50 - 1.6% 92.6%
- -------------------------------------------------------------------------------
MEAN: 13.7% 89.5%
- -------------------------------------------------------------------------------
KING: $19.25 $19.94 $11.38 34.7% 96.6%
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET STATISTICS
- -------------------------------------------------------------------------------
Cash and Total
Equivalents Assets Total Debt Book Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Becton, Dickinson
& Company $155.1 $3,038.0 $828.0 $1,342.3
C.R. Bard, Inc. $ 75.7 $1,327.4 $197.8 $ 607.2
Hillenbrand Industries, Inc. $312.0 $3,542.0 $266.0 $ 802.0
Invacare Corporation $ 9.1 $ 522.8 $176.6 $ 255.2
Steris Corporation $ 25.4 $ 539.0 $ 35.9 $ 306.0
Stryker Corporation $302.7 $ 938.9 $147.7 $ 560.6
Sunrise Medical Inc. $ 0.7 $ 619.6 $197.8 $ 274.4
- -------------------------------------------------------------------------------
MEAN:
- -------------------------------------------------------------------------------
KING: $ 38.4 $ 271.3 $ 0.5 $ 222.5
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA (LATEST TWELVE MONTHS)
- -------------------------------------------------------------------------------
Company Revenues EBITDA EBIT Net Income
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Becton, Dickinson
& Company $2,792.7 $659.5 $454.6 $297.9
C.R. Bard, Inc. $1,214.7 $260.5 $204.0 $117.2
Hillenbrand Industries, Inc. $1,698.0 $355.0 $255.0 $149.0
Invacare Corporation $ 642.4 $ 86.1 $ 68.3 $ 40.4
Steris Corporation $ 615.1 $104.7 $ 87.2 $ 51.8
Stryker Corporation $ 954.6 $191.3 $153.3 $102.8
Sunrise Medical Inc. $ 660.2 $ 47.7 $ 28.5 $ 1.6
- -------------------------------------------------------------------------------
MEAN: $1,225.4 $243.5 $178.7 $108.7
- -------------------------------------------------------------------------------
KING: $ 286.2 $ 82.4 $ 61.4 $ 38.8
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EPS ESTIMATES
- -------------------------------------------------------------------------------
Company Cal '97 Cal '98
- -------------------------------------------------------------------------------
<S> <C> <C>
Becton, Dickinson
& Company $2.49 $2.84
C.R. Bard, Inc. $1.91 $2.15
Hillenbrand Industries, Inc. $2.29 $2.63
Invacare Corporation $1.40 $1.63
Steris Corporation $1.73 $2.14
Stryker Corporation $1.29 $1.55
Sunrise Medical Inc. $0.62 $0.84
- -------------------------------------------------------------------------------
MEAN: $1.67 $1.97
- -------------------------------------------------------------------------------
KING: $0.94 $1.06
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION
- -------------------------------------------------------------------------------
Total Debt/ Total Debt/ Total Debt/
Book Value Capitalization EBITDA
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Becton, Dickinson
& Company 61.7% 38.2% 1.3 x
C.R. Bard, Inc. 32.6% 24.6% 0.8 x
Hillenbrand Industries, Inc. 33.2% 24.9% 0.7 x
Invacare Corporation 69.2% 40.9% 2.1 x
Steris Corporation 11.7% 10.5% 0.3 x
Stryker Corporation 26.3% 20.9% 0.8 x
Sunrise Medical Inc. 72.1% 41.9% 4.2 x
- ------------------------------------------------------------------------------
MEAN: 43.8% 28.8% 1.4 x
- -------------------------------------------------------------------------------
KING: 0.2% 0.2% 0.0 x
- -------------------------------------------------------------------------------
(a) In intraday trading.
</TABLE>
PROJECT ROYALTY [LOGO]
BT Alex. Brown
Incorporated
<PAGE> 32
ANALYSIS OF PRECEDENT TRANSACTIONS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 33
SELECTED MERGER AND ACQUISITION TRANSACTIONS
<TABLE>
<CAPTION>
KING SELECTED MERGERS AND ACQUISITIONS
TRANSACTION ------------------------------------
MULTIPLES(a) MEAN RANGE
------------ ------ ---------------------
<S> <C> <C> <C> <C>
VALUATION BASED ON LATEST TWELVE MONTHS (b) (c)
LTM REVENUES 2.8x 1.5x 0.9x - 2.0x
LTM EBITDA 9.9x 11.2x 8.8x - 13.4x
LTM EBIT 13.3x 15.5x 11.3x - 21.4x
LTM NET INCOME 22.0x 28.4x 19.0x - 47.6x
VALUATION BASED ON PROJECTED STATISTICS
FORWARD NET INCOME (I/B/E/S) 18.7x 21.6x 19.5x - 25.8x
</TABLE>
(a) Multiples based on purchase price of $19.25.
(b) Implied valuation based on revenues, EBITDA and EBIT are adjusted by
adding cash of $38.4 and subtracting debt of $0.5.
(c) LTM as of 06/30/97.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 34
SELECTED MERGER AND ACQUISITION TRANSACTIONS
- -------------------------------------------------------------------------------
(dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Aggregate
Date Target Company Purchase Purchase
Ann. Acquiror Price Price(a)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Sep-96 Aequitron Medical, Inc. $ 59,746 $ 58,891
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. $ 400,000 $ 400,000
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. $ 669,124 $ 680,940
STERIS Corp.
Jul-95 Arjo AB $ 325,000 $ 325,000
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. $ 61,692 $ 76,998
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation $ 464,640 $ 546,284
Nellcor, Inc.
Jul-94 Kendall International, Inc. $1,414,530 $1,623,318
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. $ 73,600 $ 82,951
Marquette Electronics, Inc.
MEAN: $ 433,542 $ 474,298
MEDIAN: $ 362,500 $ 362,500
LOW: $ 59,746 $ 58,891
HIGH: $1,414,530 $1,623,318
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Aggregate Purchase Price
as a Multiple of Trailing:
-----------------------------
Cash Oper.
Revenue Flow Income
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. 1.5 x 11.9 x 15.7 x
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. 1.8 x 9.7 x NA
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. 1.5 x 8.8 x 11.3 x
STERIS Corp.
Jul-95 Arjo AB 1.5 x NA 11.3 x
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. 1.5 x 13.4 x 21.4 x
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation 1.6 x 12.7 x 19.9 x
Nellcor, Inc.
Jul-94 Kendall International, Inc. 2.0 x 9.3 x 12.0 x
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. 0.9 x 12.2 x 17.0 x
Marquette Electronics, Inc.
MEAN: 1.5 x 11.2 x 15.5 x
MEDIAN: 1.5 x 11.9 x 15.7 x
LOW: 0.9 x 8.8 x 11.3 x
HIGH: 2.0 x 13.4 x 21.4 x
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Equity Purchase Price
as a Multiple of:
- ----------------------------------------------------------------------------
Trailing Forward Latest
Net Inc. Net Inc. Bk. Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. 24.8 x 19.9 x 3.6 x
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. 47.6 x NA NA
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. 23.3 x NA 3.1 x
STERIS Corp.
Jul-95 Arjo AB 19.0 x NA NA
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. 40.1 x 25.8 x 3.3 x
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation 29.4 x 19.5 x 3.7 x
Nellcor, Inc.
Jul-94 Kendall International, Inc. 21.9 x 21.0 x 4.9 x
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. 20.9 x NA 1.1 x
Marquette Electronics, Inc.
MEAN: 28.4 x 21.6 x 3.3 x
MEDIAN: 24.0 x 20.5 x 3.4 x
LOW: 19.0 x 19.5 x 1.1 x
HIGH: 47.6 x 25.8 x 4.9 x
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Premium to Market
- ----------------------------------------------------------------------------
Day Month
Prior Prior
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. 22.8% 48.3%
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. NA NA
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. 13.8% 15.5%
STERIS Corp.
Jul-95 Arjo AB NA NA
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. 39.5% 89.5%
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation 38.9% 65.2%
Nellcor, Inc.
Jul-94 Kendall International, Inc. 44.1% 50.6%
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. NA NA
Marquette Electronics, Inc.
MEAN: 31.8% 53.8%
MEDIAN: 38.9% 50.6%
LOW: 13.8% 15.5%
HIGH: 44.1% 89.5%
</TABLE>
(a) Defined as Equity Purchase Price plus debt less cash and equivalents.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 35
SELECTED MERGER AND ACQUISITION TRANSACTIONS
- -------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Equity Aggregate
Date Target Company Purchase Total Purchase
Ann. Acquiror Price Debt Cash Price (a)
<S> <C> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. $59,746 $2,288 $3,143 $58,891
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. $400,000 NA NA $400,000
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. $669,124 $102,616 $90,800 $680,940
STERIS Corp.
Jul-95 Arjo AB $325,000 NA NA $325,000
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. $61,692 $15,886 $580 $76,998
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation $464,640 $82,806 $1,162 $546,284
Nellcor, Inc.
Jul-94 Kendall International, Inc. $1,414,530 $222,709 $13,921 $1,623,318
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. $73,600 $9,923 $572 $82,951
Marquette Electronics, Inc.
- -----------------------------------------------------------------------------------------------------------
MEAN: $433,542 $72,705 $18,363 $474,298
MEDIAN: $362,500 $49,346 $2,153 $362,500
- -----------------------------------------------------------------------------------------------------------
LOW: $59,746 $2,288 $572 $58,891
HIGH: $1,414,530 $222,709 $90,800 $1,623,318
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Trailing
----------------------------------------------
Date Target Company Cash Oper. Net Forward Book
Ann. Acquiror Revenues Flow Income Income Income Value
<S> <C> <C> <C> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. $ 38,478 $ 4,954 $ 3,750 $ 2,411 $ 3,002 $ 16,419
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. $225,600 $41,200 NA $8,400 NA NA
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. $464,624 $77,051 $60,462 $28,731 NA $216,639
STERIS Corp.
Jul-95 Arjo AB $224,109 NA $28,707 $17,126 NA NA
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. $52,095 $5,726 $3,605 $1,539 $2,395 $18,980
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation $340,111 $42,911 $27,383 $15,793 $23,808 $124,172
Nellcor, Inc.
Jul-94 Kendall International, Inc. $813,551 $174,436 $135,541 $64,629 $67,235 $287,967
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. $93,584 $6,783 $4,884 $3,519 NA $67,845
Marquette Electronics, Inc.
- ---------------------------------------------------------------------------------------------------------------------------
MEAN: $281,519 $50,437 $37,762 $17,768 $24,110 $122,004
MEDIAN: $224,854 $41,200 $27,383 $12,096 $13,405 $96,009
- ----------------------------------------------------------------------------------------------------------------------------
LOW: $38,478 $4,954 $3,605 $1,539 $2,395 $16,419
HIGH: $813,551 $174,436 $135,541 $64,629 $67,235 $287,967
- ----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------
(a) Defined as Equity Purchase Price plus debt less cash and equivalents.
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 36
SELECTED MERGER AND ACQUISITION TRANSACTIONS
- -------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Equity Aggregate Margins
Date Target Company Purchase Purchase -----------------------------------
Ann. Acquiror Price Price(a) Cash Flow Operating Net
<S> <C> <C> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. $59,746 $58,891 12.9% 9.7% 6.3%
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. $400,000 $400,000 18.3% NA 3.7%
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. $669,124 $680,940 16.6% 13.0% 6.2%
STERIS Corp.
Jul-95 Arjo AB $325,000 $325,000 0.0% 12.8% 7.6%
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. $61,692 $76,998 11.0% 6.9% 3.0%
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation $464,640 $546,284 12.6% 8.1% 4.6%
Nellcor, Inc.
Jul-94 Kendall International, Inc. $1,414,530 $1,623,318 21.4% 16.7% 7.9%
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. $73,600 $82,951 7.2% 5.2% 3.8%
Marquette Electronics, Inc.
MEAN: $433,542 $474,298 14.3% 10.3% 5.4%
MEDIAN: $362,500 $362,500 12.9% 9.7% 5.4%
- ----------------------------------------------------------------------------------------------------------------------
LOW: $59,746 $58,891 7.2% 5.2% 3.0%
HIGH: $1,414,530 $1,623,318 21.4% 16.7% 7.9%
</TABLE>
<TABLE>
<CAPTION>
Historical Growth
Date Target Company ----------------------- Percentage Accounting
Ann Acquiror Revenue Earnings Cash Method
<S> <C> <C> <C> <C> <C>
Sep-96 Aequitron Medical, Inc. 24.9% 29.8% 0.0% Pooling
Nellcor Puritan Bennett, Inc.
Aug-96 Ivac Medical Systems, Inc. NA NA 100.0% Purchase
Advanced Medical, Inc.
Dec-95 Amsco International, Inc. -1.4% -30.2% 0.0% Purchase
STERIS Corp.
Jul-95 Arjo AB 7.7% -5.3% NA Pooling
Getinge Industrier
Jun-95 Bird Medical Technologies, Inc. 2.5% 29.7% 0.0% Pooling
Thermo Electron Corporation
May-95 Puritan-Bennett Corporation 5.8% -5.6% 0.0% Pooling
Nellcor, Inc.
Jul-94 Kendall International, Inc. 2.5% NA 0.0% Pooling
Tyco International Ltd.
Apr-94 Corometrics Medical Systems, Inc. -1.5% -30.9% 100.0% Purchase
Marquette Electronics, Inc.
MEAN: 5.8% -2.1%
MEDIAN: 2.5% -5.4%
- -----------------------------------------------------------------------
LOW: -1.5% -30.9%
HIGH: 24.9% 29.8%
- ------------------------------------------------------------------------
(a)Defined as Equity Purchase Price plus debt less cash and equivalent.
</TABLE>
PROJECT ROYALTY BT Alex. Brown
Incorporated
<PAGE> 37
RECENT FINANCIAL BUYER TRANSACTIONS
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 38
SUMMARY OF RECENT FINANCIAL BUYER TRANSACTIONS
IN THE HEALTH CARE INDUSTRY
SELECTED FINANCIAL BUYER TRANSACTIONS
IN THE HEALTH CARE INDUSTRY
KING ------------------------------------
TRANSACTION
MULTIPLES MEAN RANGE
----------- -------- -------------------------
LTM REVENUES 2.8 x 2.0 x 0.7 x - 4.3 x
LTM EBITDA 9.9 x 10.0 x 8.6 x - 10.9 x
LTM FREE CASH FLOW 15.2 x 16.2 x 15.9 x - 16.4 x
LTM EBIT 13.3 x 13.7 x 12.2 x - 16.2 x
LTM NET INCOME 22.0 x 24.1 x 19.4 x - 28.8 x
----------- -------- -------- --- -------
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 39
SUMMARY OF RECENT FINANCIAL BUYER TRANSACTIONS
IN THE HEALTH CARE INDUSTRY
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
Equity Purchase
Enterprise Purchase Price Multiples of LTM Price Multiples of
Date Target Company ------------------------------------------- ----------------------
Announced Acquiror Revenue EBITDA Free Cash Flow EBIT Net Income Book Value
- --------- -------------- ------- ------ -------------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
08/07/97 Fisher Scientific International, Inc. 0.7 x 9.6 x 16.4 x 13.8 x 25.5 x 2.8 x
Thomas H. Lee Company
05/08/97 Living Centers of America, Inc. 1.0 x 8.6 x 15.9 x 12.4 x 19.4 x 2.3 x
Apollo Management, L.P.
06/10/96 Community Health Systems, Inc. 2.2 x 10.9 x 16.4 x 16.2 x 28.8 x 4.3 x
Forstmann Little & Co.
12/08/95 Transition Systems, Inc. 4.3 x 10.6 x NA 12.2 x 22.7 x 7.9 x
Warburg Pincus Ventures, L.P.
<CAPTION>
Premium to Market Price
Date Target Company ------------------------
Announced Acquiror Day Prior 30 Day Prior
- --------- -------------- --------- ------------
<S> <C> <C> <C>
08/07/97 Fisher Scientific International, Inc. 0.2% 10.9%
Thomas H. Lee Company
05/08/97 Living Centers of America, Inc. 9.8% 13.3%
Apollo Management, L.P.
06/10/96 Community Health Systems, Inc. 19.9% 18.9%
Forstmann Little & Co.
12/08/95 Transition Systems, Inc. NA NA
Warburg Pincus Ventures, L.P.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mean: 2.0 x 10.0 x 16.2 x 13.7 x 24.1 x 4.3 x 10.0% 14.3%
Median: 1.6 x 10.1 x 16.2 x 13.1 x 24.1 x 3.6 x 5.0% 12.1%
High: 4.3 x 10.9 x 16.4 x 16.2 x 28.8 x 7.9 x 19.9% 18.9%
Low: 0.7 x 8.6 x 15.9 x 12.2 x 19.4 x 2.3 x 0.2% 10.9%
</TABLE>
- --------------------------------------------------------------------------------
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 40
DISCOUNTED CASH FLOW ANALYSIS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 41
SUMMARY VALUATION DISCOUNTED CASH FLOW ANALYSIS
<TABLE>
<CAPTION>
Per Share
Valuation Range (a)
---------------------
<S> <C> <C>
Case One $22.00 -- $30.00
Case Two $17.00 -- $23.00
</TABLE>
(a) Assumes a 14.0-22.0% discount rate and a terminal value multiple range of
8.0x-10.0x EBITDA, rounded to nearest dollar.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 42
SUMMARY OF FINANCIAL PROJECTIONS
<TABLE>
<CAPTION>
CAGR CAGR 1997E - 2001E
1994A - 1996A Case One Case Two
------------- -------- --------
<S> <C> <C> <C>
Revenues 10.2% 15.2% 10.0%
EBITDA 10.3% 24.3% 11.9%
EBIT 19.7% 27.8% 12.0%
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 43
SUMMARY OF PROJECTIONS - REVENUES
[graph]
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 44
SUMMARY OF PROJECTIONS - EBITDA
[graph]
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 45
DISCOUNTED CASH FLOW ANALYSIS - CASE ONE
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1996 1997E (a) 1998E (a) 1999E (a) 2000E (a) 2001E (a)
- ------------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $269,881 $311,902 $361,398 $425,568 $492,982 $548,517
Growth Rate 10.9% 15.6% 15.9% 17.8% 15.8% 11.3%
EBITDA $ 77,148 $ 93,321 $113,446 $146,279 $190,147 $222,664
EBITDA Margin 28.6% 29.9% 31.4% 34.4% 38.6% 40.6%
EBIT 55,354 69,678 88,815 119,223 156,561 186,579
EBIT Margin 20.5% 22.3% 24.6% 28.0% 31.8% 34.0%
EBIT After Tax (b) 33,212 41,807 53,289 71,534 93,937 111,948
plus: Depreciation & Amortization 21,794 23,643 24,631 27,056 33,586 36,085
less: Use of Non-cash Working Capital (Source) -- 4,918 3,821 9,866 11,537 9,233
less: Capital Expenditures 27,783 27,069 29,200 39,395 39,674 33,901
-------- -------- -------- -------- -------- --------
Unlevered Free Cash Flow $ 27,223 $ 33,464 $ 44,899 $ 49,329 $ 76,312 $104,898
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PV Cash PV of Terminal Value as of 9/30/97 Plus:
Discount Flows as of Multiple of 2001 EBITDA ($222.7 million) Net Cash Implied Equity Valuation
Rate 9/30/97 8.0x 9.0x 10.0x @ 9/30/97 8.0x 9.0x 10.0x
------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18.0% $ 199,152 $ 881,849 $ 992,080 $1,102,311 $ 36,937 $1,117,937 $1,228,168 $1,338,399
20.0% $ 191,053 $ 821,085 $ 923,720 $1,026,356 $ 36,937 $1,049,074 $1,151,710 $1,254,346
22.0% $ 183,513 $ 765,410 $ 861,086 $ 956,763 $ 36,937 $ 985,860 $1,081,536 $1,177,212
</TABLE>
<TABLE>
<CAPTION>
Discount Implied Equity Valuation per Share
Rate 8.0x 9.0x 10.0x
----- --------- --------- ---------
<S> <C> <C> <C> <C>
18.0% $ 25.08 $ 27.47 $ 29.86
20.0% $ 23.58 $ 25.81 $ 28.04
22.0% $ 22.21 $ 24.28 $ 26.36
</TABLE>
- -------------
(a) KING management estimates.
(b) Assumes a 40% tax rate.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 46
DISCOUNTED CASH FLOW ANALYSIS - CASE TWO
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1996 1997E(a) 1998E(a) 1999E(a) 2000E(a) 2001E(a)
------------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $269,881 $311,902 $342,991 $377,268 $414,847 $455,931
Growth Rate 10.9% 15.6% 10.0% 10.0% 10.0% 9.9%
EBITDA $ 77,148 $ 93,321 $100,166 $113,418 $134,778 $146,408
EBITDA Margin 28.6% 29.9% 29.2% 30.1% 32.5% 32.1%
EBIT 55,354 69,678 76,247 87,870 99,817 110,500
EBIT Margin 20.5% 22.3% 22.2% 23.3% 24.1% 24.2%
EBIT After Tax (b) 33,212 41,807 45,748 52,722 59,890 66,300
plus: Depreciation & Amortization 21,794 23,643 23,919 25,548 34,960 35,909
less: Use of Non-cash Working Capital (Source) -- 4,918 327 4,188 5,473 5,496
less: Capital Expenditures 27,783 27,069 29,200 38,331 38,284 39,382
-------- -------- -------- -------- -------- --------
Unlevered Free Cash Flow $ 27,223 $ 33,464 $ 40,140 $ 35,751 $ 51,094 $ 57,331
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PV Cash PV of Terminal Value as of 9/30/97 Plus:
Discount Flows as of Multiple of 2001 EBITDA ($146.4 million) Net Cash Implied Equity Valuation
Rate 9/30/97 8.0x 9.0x 10.0x @ 9/30/97 8.0x 9.0x 10.0x
------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14.0% $ 158,852 $ 669,205 $ 752,855 $ 836,506 $ 36,937 $ 864,994 $ 948,644 $1,032,295
16.0% $ 152,741 $ 621,287 $ 698,948 $ 776,609 $ 36,937 $ 810,965 $ 888,626 $ 966,287
18.0% $ 147,053 $ 577,533 $ 649,725 $ 721,917 $ 36,937 $ 761,524 $ 833,715 $ 905,907
</TABLE>
<TABLE>
<CAPTION>
Discount Implied Equity Valuation per Share
Rate 8.0x 9.0x 10.0x
---- ---- ---- -----
<S> <C> <C> <C> <C>
14.0% $19.58 $21.40 $23.21
16.0% $18.41 $20.09 $21.78
18.0% $17.33 $18.90 $20.47
</TABLE>
(a) Adjusted KING management estimates.
(b) Assumes a 40% tax rate.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 47
PRO FORMA FINANCIAL STATEMENTS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 48
PRO FORMA BALANCE SHEET ADJUSTMENTS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------
09/30/97 RECAPITALIZATION DEBT RECLASS PRO FORMA
-------- ---------------- ------------ ---------
ASSETS
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 37,630 ($ 23,000) $ 14,630
PP&E, Net 74,303 74,303
Intangibles 27,370 27,370
New Goodwill and Financing Costs 11,458 11,458
Other Non-Current Assets 33,977 0 33,977
--------- --------- ---- ---------
Total Assets $ 281,386 ($ 11,542) $ 269,844
========= ========= ==== =========
LIABILITIES
Accounts Payable and Accrued Expense 38,334 38,334
Current Portion of L-T Debt 0 0 449 449
Revolver 0 18,841 0 18,841
Existing Long-Term Debt 0 0 0 0
New Long-Term Debt 0 500,000 (449) 499,551
Other Non-Current Liabilities 534 0 0 534
SHAREHOLDERS' EQUITY $ 230,274 ($530,384) ($300,110)
--------- --------- ---- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 281,386 ($ 11,542) $ 269,844
========= ========= ==== =========
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 49
KING PRO FORMA INCOME STATEMENT PROJECTIONS - CASE ONE
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, LTM AS OF -------------------------------------------------------------------------- 1997-2001
1996 09/30/97 1997E 1998E 1999E 2000E 2001E CAGR
---- -------- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 269,881 $294,489 $ 311,902 $ 361,398 $ 425,568 $ 492,982 $ 548,517 15.2%
EBITDA 77,148 85,964 93,321 113,446 146,279 190,147 222,664 24.3%
EBIT 55,354 63,394 69,340 87,458 117,866 155,204 185,222 27.8%
NET INCOME $ 38,987 $ 43,669 $ 35,432 $ 28,091 $ 47,332 $ 71,480 $ 92,626 27.2%
========== ======== ========== ========== ========== ========== ==========
MARGINS:
EBITDA 28.6% 29.2% 29.9% 31.4% 34.4% 38.6% 40.6%
EBIT 20.5% 21.5% 22.2% 24.2% 27.7% 31.5% 33.8%
Net Income 14.4% 14.8% 11.4% 7.8% 11.1% 14.5% 16.9%
GROWTH RATES:
Revenue 10.9% -- 15.6% 15.9% 17.8% 15.8% 11.3%
EBITDA 15.9% -- 21.0% 21.6% 28.9% 30.0% 17.1%
EBIT 26.4% -- 25.3% 26.1% 34.8% 31.7% 19.3%
Net Income 37.1% -- -9.1% -20.7% 68.5% 51.0% 29.6%
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 50
KING PRO FORMA BALANCE SHEET PROJECTIONS - CASE ONE
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, PRO FORMA -------------------------------------------------------------
1996(a) 09/30/97 1997E 1998E 1999E 2000E 2001E
------- -------- ----- ----- ----- ----- -----
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash & Cash Equivalents $ 59,045 $ 14,630 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Total Current Assets 144,188 122,736 106,236 115,176 130,725 147,346 160,918
--------- --------- --------- --------- --------- --------- ---------
Total Assets $ 253,393 $ 269,844 $ 248,132 $ 261,674 $ 289,652 $ 312,506 $ 324,102
========= ========= ========= ========= ========= ========= =========
LIABILITIES
Total Current Liabilities 36,854 60,352 46,574 58,943 74,371 66,118 73,629
Total Debt 0 518,841 478,351 458,559 433,394 379,554 294,051
--------- --------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY $ 211,078 ($300,110) ($278,830) ($250,739) ($203,407) ($131,927) ($ 39,300)
--------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 253,393 $ 269,844 $ 248,132 $ 261,674 $ 289,652 $ 312,506 $ 324,102
========= ========= ========= ========= ========= ========= =========
CAPITAL EXPENDITURES 27,783 NA 27,069 29,200 39,395 39,674 33,901
COVERAGE AND LEVERAGE RATIOS
EBITDA / Interest NM 1.9X 2.1x 2.8x 3.7x 5.2x 7.2x
(EBITDA - Cap Ex) / Interest NM NA 1.5x 2.1x 2.7x 4.1x 6.1x
Total Debt / EBITDA 0.0X 6.0x 5.1x 4.0x 3.0x 2.0x 1.3x
Total Debt / (EBITDA - Cap Ex) 0.0X NA 7.2x 5.4x 4.1x 2.5x 1.6x
</TABLE>
- ----------
(a) Actual, not pro forma for the transaction.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 51
KING PRO FORMA INCOME STATEMENT PROJECTIONS - CASE TWO
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, LTM AS OF ---------------------------------------------------------------------- 1997-2001
1996 09/30/97 1997E 1998E 1999E 2000E 2001E CAGR
------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 269,881 $ 294,489 $ 311,902 $ 342,991 $ 377,268 $ 414,847 $ 455,931 10.0%
EBITDA 77,148 85,964 93,321 100,166 113,418 134,778 146,408 11.9%
EBIT 55,354 63,394 69,340 74,890 86,513 98,460 109,142 12.0%
NET INCOME $ 38,987 $ 43,669 $ 35,432 $ 20,443 $ 27,994 $ 36,010 $ 43,789 5.4%
========== ========== ========== ========== ========== ========== ==========
MARGINS:
EBITDA 28.6% 29.2% 29.9% 29.2% 30.1% 32.5% 32.1%
EBIT 20.5% 21.5% 22.2% 21.8% 22.9% 23.7% 23.9%
Net Income 14.4% 14.8% 11.4% 6.0% 7.4% 8.7% 9.6%
GROWTH RATES:
Revenue 10.9% -- 15.6% 10.0% 10.0% 10.0% 9.9%
EBITDA 15.9% -- 21.0% 7.3% 13.2% 18.8% 8.6%
EBIT 26.4% -- 25.3% 8.0% 15.5% 13.8% 10.8%
Net Income 37.1% -- -9.1% -42.3% 36.9% 28.6% 21.6%
</TABLE>
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 52
KING PRO FORMA BALANCE SHEET PROJECTIONS - CASE TWO
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 3l,
1996(a) 09/30/97
------------ ---------
<S> <C> <C>
ASSETS
Cash & Cash Equivalents $ 59,045 $ 14,630
Total Current Assets 144,188 122,736
--------- ---------
Total Assets $ 253,393 $ 269,844
========= =========
LIABILITIES
Total Current Liabilities 36,854 60,352
Total Debt 0 518,841
--------- ---------
SHAREHOLDERS' EQUITY $ 211,078 ($300,110)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 253,393 $ 269,844
========= =========
CAPITAL EXPENDITURES 27,783 NA
COVERAGE AND LEVERAGE RATIOS
EBITDA / Interest NM 1.9x
(EBITDA - Cap Ex) / Interest NM NA
Total Debt / EBITDA 0.0x 6.0x
Total Debt / (EBITDA - CapEx) 0.0x NA
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997E 1998E 1999E 2000E 2001E
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash & Cash Equivalents $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Total Current Assets 106,236 110,722 118,768 128,593 139,231
--------- --------- --------- --------- ---------
Total Assets $ 248,132 $ 257,933 $ 278,850 $ 292,145 $ 306,463
========= ========= ========= ========= =========
LIABILITIES
Total Current Liabilities
Total Debt 46,574 57,983 71,586 87,198 78,040
478,351 463,425 452,364 425,166 390,419
SHAREHOLDERS' EQUITY --------- --------- --------- --------- ---------
($278,830) ($258,387) ($230,393) ($194,383) ($150,594)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY --------- --------- --------- --------- ---------
$ 248,132 $ 257,933 $ 278,850 $ 292,145 $ 306,463
CAPITAL EXPENDITURES ========= ========= ========= ========= =========
27,069 29,200 38,331 38,284 39,382
COVERAGE AND LEVERAGE RATIOS
EBITDA / Interest 2.1x 2.4x 2.8x 3.5x 4.0x
(EBITDA - Cap Ex) / Interest 1.5x 1.7x 1.9x 2.5x 2.9x
Total Debt / EBITDA 5.1x 4.6x 4.0x 3.2x 2.7x
Total Debt / (EBITDA - CapEx) 7.2x 6.5x 6.0x 4.4x 3.6x
</TABLE>
(a) Actual, not pro forma for the transaction.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 53
PR0 FORMA COVERAGE RATIOS
CASE ONE:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, LTM AS OF ----------------------------------------------------------
1996(a) 09/30/97(a) 1997E(a) 1998E 1999E 2000E 2001E
------------ ----------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA/INTEREST
100% 1.7x 1.9x 2.1x 2.8x 3.7x 5.2x 7.2x
90% 1.6x 1.7x 1.9x 2.5x 3.4x 4.7x 6.4x
80% 1.4x 1.5x 1.7x 2.2x 3.0x 4.2x 5.7x
70% 1.2x 1.3x 1.5x 1.9x 2.6x 3.7x 5.0x
60% 1.0x 1.2x 1.3x 1.7x 2.2x 3.1x 4.3x
50% 0.9x 1.0x 1.0x 1.4x 1.9x 2.6x 3.6x
</TABLE>
CASE TWO:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, LTM AS OF ----------------------------------------------------------
1996(a) 09/30/97(a) 1997E(a) 1998E 1999E 2000E 2001E
------------ ----------- -------- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA/INTEREST
100% 1.7x 1.9x 2.1x 2.4x 2.8x 3.5x 4.0x
90% 1.6x 1.7x 1.9x 2.2x 2.5x 3.1x 3.6x
80% 1.4x 1.5x 1.7x 2.0x 2.3x 2.8x 3.2x
70% 1.2x 1.3x 1.5x 1.7x 2.0x 2.4x 2.8x
60% 1.0x 1.2x 1.3x 1.5x 1.7x 2.1x 2.4x
50% 0.9x 1.0x 1.0x 1.2x 1.4x 1.7x 2.0x
</TABLE>
(a) Assumes interest on $518 million of debt.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 54
APPENDIX
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 55
PREMIUMS PAID ANALYSIS
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 56
PREMIUMS PAID
<TABLE>
<CAPTION>
Premium to Market
Value of -------------------
Date Transaction One Day Thirty Day
Announced Target Name Acquiror Name (in millions) Prior Prior
--------- ------------------------------- --------------------------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
03/02/95 Abbey Healthcare Group Inc Homedco Group Inc $ 750.3 118.5% 118.5%
03/30/95 Circa Pharmaceuticals Inc Watson Pharmaceuticals Inc $ 621.1 57.5% 66.9%
04/20/95 Bruno's Inc Kohlberg Kravis Roberts & Co $1,160.7 28.9% 33.3%
07/17/95 Automotive Industries Holding Lear Seating Corp $ 613.1 3.9% 45.7%
07/27/95 Chipcom Corp 3Com Corp $ 680.9 34.7% 66.1%
08/10/95 Emphesys Financial Group Inc Humana Inc $ 642.8 13.6% 1.4%
08/24/95 Comdata Holdings Corp Ceridian Corp $ 845.3 20.2% 35.5%
09/20/95 Conner Peripherals Inc Seagate Technology Inc $1,164.6 23.7% 56.1%
09/25/95 National Gypsum Co (Delcor) CD Spangler $1,134.9 0.0% 0.9%
11/10/95 IES Industries Inc WPL Holdings Inc $1,120.7 40.9% 44.9%
11/13/95 Vigoro Corp IMC Global Inc $1,187.8 31.9% 34.2%
12/11/95 Maybelline Inc L'Oreal SA (Gesparal) $ 785.7 41.9% 93.4%
12/14/95 Alantec Corp FORE Systems Inc $ 779.1 20.6% 44.9%
12/18/95 AMSCO International Steris Corp $ 673.1 7.5% 15.7%
12/18/95 Cobra Golf Inc American Brands Inc $ 670.4 30.3% 32.7%
01/31/96 Tivoli Systems Inc IBM Corp $ 709.8 25.8% 41.8%
02/07/96 Pyxis Corp Cardinal Health Inc $ 907.3 53.3% 66.5%
02/13/96 Citicasters (American Finl Grp) Jacor Communications Inc $ 767.6 9.3% 28.3%
02/14/96 Helene Curtis Industries Inc Unilever NV $ 737.4 18.6% 71.8%
02/16/96 Circle K Corp Tosco Corp $ 983.0 45.8% 68.8%
02/16/96 Forum Group Inc Marriott International Inc $ 622.3 4.0% 44.4%
02/20/96 Davidson & Associates Inc CUC International Inc $1,145.0 72.3% 67.8%
02/20/96 Sierra On-Line Inc CUC International Inc $ 911.0 69.3% 90.4%
02/23/96 Cray Research Inc Silicon Graphics Inc $ 770.0 18.8% 20.6%
03/18/96 Athena Neurosciences Inc Elan Corp PLC $ 601.3 20.7% 40.4%
03/29/96 MediSense Inc Abbott Laboratories $ 821.6 48.8% 39.0%
04/15/96 Enserch Exploration Inc Shareholders $ 835.8 -22.0% -19.0%
04/25/96 Sterling Chemicals Inc Investor Group $ 798.4 29.7% 47.7%
06/06/96 Atria Software Inc Pure Software Inc $ 944.4 -2.8% 8.9%
06/11/96 Community Health Systems Inc Forstmann Little & Co $1,080.0 20.2% 18.9%
06/26/96 Kemet Corp Vishay Intertechnology Inc $ 854.2 30.4% -1.1%
</TABLE>
Source: Securities Data Company, as of 09/30/97.
Note: Includes non-financial company merger and acquisition transactions between
$600 million and $1.2 billion.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 57
PREMIUMS PAID
<TABLE>
<CAPTION>
Premium to Market
Value of -------------------
Date Transaction One Day Thirty Day
Announced Target Name Acquiror Name (in millions) Prior Prior
- --------- ----------- ----------------------------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
07/01/96 Renaissance Commun Corp Tribune Co $1,094.4 11.6% 20.5%
07/19/96 Rexene Corp Huntsman Corp $ 606.8 75.3% 56.1%
08/05/96 EZ Communications Inc American Radio Systems Corp $ 687.3 45.5% 89.2%
08/12/96 Atlantic Energy (AmeriGas) Delmarva Power & Light $ 951.1 5.3% 3.1%
08/26/96 Career Horizons Inc AccuStaff Inc $1,010.3 34.4% 64.0%
08/28/96 Red Lions Hotels (Red Lion Inn) Doubletree Corp $1,174.1 28.6% 31.4%
09/23/96 Diamond Shamrock Inc Ultramar Corp $ 860.9 -3.9% 5.7%
10/29/96 Carter-Wallace Inc Investor $ 927.8 68.4% 60.0%
11/18/96 Tyco Toys Inc Mattel Inc $ 737.4 73.7% 94.5%
01/07/97 American Medical Response Inc MedTrans Inc (Laidlaw Inc) $1,011.1 21.2% 36.8%
01/15/97 Value Health Inc Columbia/HCA Healthcare Corp $1,132.3 1.2% 0.0%
02/18/97 Chancellor Broadcasting Co Evergreen Media Corp $ 669.4 1.8% 13.4%
02/26/97 Petrolite Corp Baker Hughes Inc $ 710.9 62.7% 78.1%
02/27/97 Production Operators Corp Camco International Inc $ 609.6 22.9% 15.9%
03/25/97 Foodbrands America Inc IBP Inc $ 657.5 47.4% 61.4%
04/07/97 Mesa Inc Parker & Parsley Petroleum Co $ 938.7 -24.3% -27.5%
04/07/97 Pure Atria Corp Rational Software Corp $ 958.4 18.5% 23.8%
04/14/97 APL Ltd Neptune Orient Lines Ltd $ 878.5 55.8% 42.6%
04/14/97 Wyndham Hotel Corp Patriot American Hospitality $ 773.1 48.0% 48.9%
04/15/97 Total Petroleum (North Amer) Ltd Ultramar Diamond Shamrock $ 823.7 -1.8% 0.7%
04/21/97 Goulds Pumps Inc ITT Industries Inc $ 922.1 61.7% 60.9%
04/21/97 National Education Corp Harcourt General Inc $ 776.1 22.6% 40.0%
05/05/97 DecisionOne Holdings Corp DLJ Merchant Bkg Partners II $ 831.7 39.4% 49.6%
05/05/97 Logicon Inc Northrop Grumman Corp $1,027.5 75.7% 102.7%
05/06/97 BBN Corp GTE Corp $ 713.8 26.1% 64.5%
05/08/97 Living Centers of America Inc Apollo Management LP $1,048.2 17.8% 41.5%
05/23/97 Palmer Wireless Inc Price Communications Corp $ 870.4 45.1% 64.7%
05/28/97 CommNet Cellular Inc Blackstone Capital Partners $ 631.2 21.8% 39.8%
05/28/97 Fibreboard Corp Owens Corning $ 631.2 15.8% 49.7%
06/06/97 Telco Communications Group Inc Excel Communications Inc $1,046.5 32.9% 26.4%
06/09/97 Prime Service Inc Atlas Copco North America Inc $1,112.0 28.6% 31.3%
</TABLE>
Source: Securities Data Company, as of 09/30/97.
Note: Includes non-financial company merger and acquisition transactions between
$600 million and $1.2 billion.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 58
PREMIUMS PAID
<TABLE>
<CAPTION>
Premium to Market
Value of ------------------
Date Transaction One Day Thirty Day
Announced Target Name Acquiror Name (in millions) Prior Prior
--------- ----------------------------- ------------------------------ ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
06/20/97 Wheelabrator Technologies Inc Waste Management Inc $ 774.7 15.4% 18.8%
07/07/97 RoTech Medical Corp Integrated Health Services Inc $ 918.9 19.8% 22.2%
07/28/97 Freeport-McMoRan Inc IMC Global Inc $ 790.7 14.4% 5.2%
07/30/97 Amdahl Corp Fujitsu Ltd $ 924.8 5.0% 25.6%
08/07/97 Fisher Scientific Intl Inc Investor Group $1,021.6 -4.7% 6.0%
08/21/97 Boston Technology Inc Comverse Technology Inc $ 873.9 -0.3% 10.4%
09/03/97 Hudson Foods Inc Tyson Foods Inc $ 648.4 27.2% 29.6%
09/05/97 Medic Computer Systems Inc Misys PLC $ 915.8 7.7% 25.0%
09/08/97 CompuServe Inc (H&R Block) WorldCom Inc $1,185.9 1.4% 8.4%
09/11/97 Fieldcrest Cannon Inc Pillowtex Corp $ 768.2 1.5% 31.7%
Mean: $ 860.6 27.6% 38.9%
Median: $ 822.7 20.9% 34.9%
High: $1,187.8 118.5% 118.5%
Low: $ 601.3 -24.3% -27.5%
</TABLE>
Source: Securities Data Company, as of 09/30/97.
Note: Includes non-financial company merger and acquisition transactions between
$600 million and $1.2 billion.
PROJECT ROYALTY [LOGO] BT Alex. Brown
Incorporated
<PAGE> 59
Date Stock Price
11/l/94 6
11/2/94 5.75
11/3/94 5.75
11/4/94 5.563
11/7/94 5.625
11/8/94 5.938
11/9/94 6
11/10/94 5.75
11/11/94 5.75
11/14/94 5.938
11/15/94 5.875
11/16/94 5.688
11/17/94 5.719
11/18/94 5.5
11/21/94 5.5
11/22/94 5.625
11/23/94 5.5
11/24/94 5.5
11/25/94 5.375
11/28/94 5.75
11/29/94 6
11/30/94 5.75
12/1/94 5.813
12/2/94 6.75
12/5/94 5.688
12/6/94 5.5
12/7/94 5.531
12/8/94 5.438
12/9/94 5.438
12/12/94 5.375
12/13/94 5.75
12/14/94 5.5
12/15/94 5.75
12/16/94 5.75
12/19/94 5.625
12/20/94 5.75
12/21/94 5.75
12/22/94 6.25
12/23/94 6.625
12/26/94 6.625
12/27/94 6.875
12/28/94 6.875
12/29/94 6.875
12/30/94 6.875
1/2/95 6.875
1/3/95 6.563
1/4/95 6.688
1/5/95 6.75
<PAGE> 60
1/6/95 6.625
1/9/95 6.938
1/10/95 6.875
1/11/95 7.125
1/12/95 6.875
1/13/95 6.875
1/16/95 7
1/17/95 6.75
1/18/95 7
1/19/95 6.75
1/20/95 7
1/23/95 6.938
1/24/95 7.313
1/25/95 7.188
1/26/95 6.938
1/27/95 7.125
1/30/95 7.25
1/31/95 7.125
2/1/95 7.125
2/2/95 7
2/3/95 6.875
2/6/95 7
2/7/95 7.063
2/8/95 7.063
2/9/95 7.375
2/10/95 7.25
2/13/95 7.5
2/14/95 7.375
2/15/95 8.25
2/16/95 8.125
2/17/95 7.625
2/20/95 7.625
2/21/95 7.75
2/22/95 7.625
2/23/95 8
2/24/95 7.75
2/27/95 7.75
2/28/95 7.75
3/1/95 7.75
3/2/95 7.375
3/3/95 7.5
3/6/95 7.5
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3/9/95 7.5
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<PAGE> 61
3/16/95 7.625
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3/22/95 7.5
3/23/95 7.25
3/24/95 7.25
3/27/95 7.5
3/28/95 8
3/29/95 7.875
3/30/95 7.75
3/31/95 7
4/3/95 7.563
4/4/95 7.75
4/5/95 7.5
4/6/95 7.375
4/7/95 7.5
4/10/95 7.875
4/11/95 8.125
4/12/95 8
4/13/95 8.125
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4/19/95 7.75
4/20/96 7.875
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4/27/95 7.5
4/28/95 7.5
5/1/95 7.625
5/2/95 7.5
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5/5/95 7.625
5/8/95 7.5
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5/10/95 7.375
5/11/95 7.375
5/12/95 7.375
5/15/95 6.75
5/16/95 6.813
5/17/95 7.25
5/18/95 7
5/19/95 6.875
5/22/95 7
5/23/95 7
<PAGE> 62
5/24/95 6.875
5/25/95 6.75
5/26/95 7
5/29/95 7
5/30/95 7.125
5/31/95 7
6/1/95 6.875
6/2/95 7
6/5/95 7.125
6/6/95 7.125
6/7/95 7.25
6/8/95 7
6/9/95 6.875
6/12/95 6.875
6/13/95 7
6/14/95 6.876
6/15/95 7.125
6/16/95 6.875
6/19/95 7.25
6/20/95 7
6/21/95 6.75
6/22/95 6.625
6/23/95 7
6/26/95 6.875
6/27/95 7
6/28/95 6.875
6/29/95 7
6/30/95 7.125
7/3/95 7
7/4/95 7
7/5/95 7.25
7/6/95 7.25
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7/10/95 8.125
7/11/95 8
7/12/95 8.25
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7/17/95 7.875
7/18/95 7.875
7/19/95 7.875
7/20/95 8.313
7/21/95 8.25
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7/25/95 8.375
7/26/95 8.375
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7/31/95 8.5
<PAGE> 63
8/1/95 8.75
8/2/95 9.125
8/3/95 9.125
8/4/95 8.75
8/7/95 9
8/8/95 8.875
8/9/95 9
8/10/95 9
8/11/95 9
8/14/95 9.125
8/15/95 9.125
8/16/95 9.125
8/17/95 9
8/18/95 9.063
8/21/95 9.125
8/22/95 9.063
8/23/95 9.125
8/24/95 9.125
8/25/95 9.25
8/28/95 9
8/29/95 9.25
8/30/95 9
8/31/95 9
9/1/95 9
9/4/95 9
9/5/95 9
9/6/95 9.25
9/7/95 9
9/8/95 9.25
9/11/95 10.25
9/12/95 10.375
9/13/95 10.5
9/14/95 10.875
9/15/95 11.563
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9/20/95 11.25
9/21/95 11.25
9/22/95 11.375
9/25/95 11.25
9/26/95 11
9/27/95 10.875
9/28/95 11.25
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1/12/95 11.75
10/3/95 11.625
10/4/95 11.75
10/1/95 11.875
10/6/95 11.875
<PAGE> 64
10/9/95 11.5
10/10/95 11.375
10/11/95 11.25
10/12/95 11.5
10/13/95 11.875
10/16/95 12.5
10/17/95 13
10/18/95 11.625
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10/20/95 11.25
10/23/95 11.125
10/24/95 11.125
10/25/95 11.25
10/26/95 11.125
10/27/95 11.375
10/30/95 11.125
10/31/95 11.125
11/1/95 11
11/2/95 11.5
11/3/96 11.125
11/6/95 10.625
11/7/95 10.844
11/8/95 10.375
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11/10/95 10.375
11/13/95 10.25
11/14/95 10.125
11/15/95 10
11/16/95 10.25
11/17/96 11
11/20/95 10.875
11/21/95 11.5
11/22/95 11.375
11/23/95 11.375
11/24/95 11.5
11/27/95 11.5
11/28/95 11.375
11/20/95 11.5
11/30/95 11.375
12/1/95 11.188
12/4/95 11.375
12/5/95 11
12/6/95 11.25
12/7/95 11
12/8/95 11.125
12/11/95 11.125
12/12/95 11
12/13/95 11.125
12/14/95 11.313
<PAGE> 65
12/15/95 11.25
12/18/95 11.25
12/19/95 11.375
12/20/95 11.75
12/21/95 11.875
12/22/95 11.875
12/25/95 11.875
12/26/95 11.875
12/27/95 11.875
12/28/95 12.125
12/29/95 12
1/1/96 12
1/2/96 12.063
1/3/96 11.875
1/4/96 12
1/5/96 11.875
1/8/96 11.625
1/9/96 12
1/10/96 11.875
1/11/96 12
1/12/96 11.75
1/15/96 12
1/16/96 12
1/17/96 11.75
1/18/96 11.625
1/19/96 11.375
1/22/96 10.625
1/23/96 10.438
1/24/96 10.438
1/25/96 11
1/26/96 11.375
1/29/96 11.375
1/30/96 12
1/31/96 12.375
2/1/96 11.75
2/2/96 12
2/5/96 12.25
2/6/96 12.125
2/7/96 11.875
2/8/96 12
2/9/96 12
2/12/96 12
2/13/96 11.875
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2/15/96 12
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2/20/96 12
2/21/96 11.875
<PAGE> 66
2/22/96 13.188
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2/26/96 13.875
2/27/96 13.75
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2/29/96 13.625
3/1/96 13.125
3/4/96 13
3/5/96 13
3/6/96 13.25
3/7/96 13
3/8/96 12.75
3/11/96 12.5
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4/19/96 16.625
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4/23/96 15
4/24/96 13.625
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4/26/96 14.5
######## 15.125
######## 14.75
<PAGE> 67
5/1/96 15
5/2/96 15.315
5/3/96 15.25
5/6/96 15.563
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5/15/96 16.5
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5/20/96 17.125
5/21/96 16.188
5/22/96 16.5
5/23/96 16
5/24/96 16
5/27/96 16
5/28/96 17
5/29/96 17.188
5/30/96 17
5/31/96 17
6/3/96 16.875
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6/5/96 16.5
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6/10/96 16.125
6/11/96 15.875
6/12/96 16
6/13/96 16.375
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6/17/96 16.75
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6/19/96 16
6/20/96 15.5
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6/24/96 16
6/25/96 16.125
6/26/96 16
6/27/96 15.875
6/28/96 15.5
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1/3/96 16
7/4/96 16
7/5/96 15.75
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<PAGE> 68
7/9/96 15.625
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7/24/96 14.75
7/25/96 15.156
7/26/96 14.875
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7/31/96 14
8/1/96 14.25
8/2/96 14.125
8/5/96 14.438
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8/8/96 14
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8/12/96 13.875
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8/19/96 15.563
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8/21/96 14.875
8/22/96 14.938
8/23/96 14.938
8/26/96 15
8/27/96 14.875
8/28/96 14.588
8/29/96 14.75
8/30/96 14.875
9/2/96 14.875
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9/4/96 14.875
9/5/96 15
9/6/96 14.625
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9/13/96 15
<PAGE> 69
9/16/96 14.938
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9/24/96 14.313
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10/l/96 14.375
10/2/96 14.375
10/3/96 14.75
10/4/96 14.75
10/7/96 15
10/8/96 14.625
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10/14/96 14.25
10/15/96 14
10/16/96 14.063
10/17/96 13.875
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1O/22/96 12.5
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10/28/96 10.75
10/29/96 12.188
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11/1/96 12.75
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<PAGE> 70
11/22/96 12.875
11/25/96 13
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12/2/96 12
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<PAGE> 71
1/30/97 12
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2/6/97 14.5
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2/11/97 14.75
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2/14/97 15
2/17/97 15
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3/7/97 15
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4/8/97 13.93887
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4/9/97 14.18778
4/10/97 14.9345
4/11/97 14.43668
4/14/97 14.68559
4/15/97 14.68559
4/16/97 14.9345
4/17/97 14.9345
4/18/97 14.56114
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4/22/97 14.81005
4/23/97 14.43668
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4/28/97 14.68559
4/29/97 14.81005
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5/1/97 14.56114
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5/5/97 14.68559
5/6/97 14.81005
5/7/97 14.81005
5/8/97 14.74782
5/9/97 14.68559
5/12/97 15.18341
5/13/97 15.05895
5/14/97 15.30786
5/15/97 15.68123
5/16/97 16.17904
5/19/97 16.5524
5/20/97 16.11682
5/21/97 17.21455
5/22/97 17.21455
5/23/97 16.59084
5/26/97 16.59084
5/27/97 16.84032
5/28/97 17.40167
5/29/97 17.21455
5/30/97 16.46609
6/2/97 16.96507
6/3/97 16.77795
6/4/97 16.71558
6/5/97 16.84032
6/6/97 16.59084
6/9/97 16.96507
6/10/97 17.21455
6/11/97 17.46404
6/12/97 17.58878
6/13/97 17.46404
6/16/97 17.21455
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6/17/97 17.27693
6/18/97 17.46404
6/19/97 17.71353
6/20/97 18.2125
6/23/97 17.83827
6/24/97 18.2125
6/25/97 17.83827
6/26/97 18.08776
6/27/97 17.96301
6/30/97 17.96301
7/1/97 18.08776
7/2/97 18.02538
7/3/97 17.83827
7/4/97 17.83827
7/7/97 18.08776
7/8/97 17.96301
7/9/91 17.96301
7/10/97 17.96301
7/11/97 18.46199
7/14/97 17.96301
7/15/97 18.33724
7/16/97 18.2125
7/17/97 18.15013
7/18/97 17.71353
7/21/97 17.96301
7/22/97 17.96301
7/23/97 18.46199
7/24/97 18.2125
7/25/97 18.2125
7/28/97 18.2125
7/29/97 18.2125
7/30/97 18.2125
7/31/97 19
8/1/97 19.25
8/4/97 18.875
8/5/97 19.5
8/6/97 19.25
8/7/97 19
8/8/97 19.5
8/11/97 19.375
8/12/97 18.875
8/13/97 18.875
8/14/97 18.875
8/15/97 17.875
8/18/97 18.25
8/19/97 18.5
8/20/97 18.5
8/21/97 19
8/22/97 19.125
<PAGE> 74
8/25/97 18.875
8/26/97 18.625
8/27/97 18.875
8/28/97 18.375
8/29/97 16.375
9/1/97 18.375
9/2/97 19
9/3/97 18.75
9/4/97 19
9/5/97 19.0625
9/8/97 19.0625
9/9/97 19
9/10/97 19.25
9/11/97 19.25
9/12/97 19
9/13/97 19
9/14/97 18.88
9/15/97 18.5
9/16/97 18.38
9/17/97 18.13
9/18/97 17.88
9/19/97 17.88
9/22/97 17.625
9/23/97 18
9/24/97 17.875
9/25/97 17.75
9/26/97 17.63
9/30/97 18.625
<PAGE> 1
================================================================================
TRANSACTION AGREEMENT
Among
FREMONT PURCHASER II, INC.,
RCBA PURCHASER I, L.P.
and
KINETIC CONCEPTS, INC.
Dated as of October 2, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I
THE OFFER
<S> <C>
SECTION 1.01. The Offer....................................................... 2
SECTION 1.02. Company Action.................................................. 3
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of the Shares................................. 3
SECTION 2.02. Purchase Price.................................................. 4
SECTION 2.03. Closing......................................................... 4
SECTION 2.04. Closing Deliveries by the Company............................... 4
SECTION 2.05. Closing Deliveries by Purchasers................................ 4
ARTICLE III
THE MERGER
SECTION 3.01. The Merger...................................................... 5
SECTION 3.02. Effective Time; Closing......................................... 5
SECTION 3.03. Effect of the Merger............................................ 6
SECTION 3.04. Articles of Incorporation; By-laws.............................. 6
SECTION 3.05. Directors and Officers.......................................... 6
SECTION 3.06. Conversion of Securities........................................ 6
SECTION 3.07. Employee Stock Options and Other Equity Awards.................. 7
SECTION 3.08. Dissenting Shares............................................... 8
SECTION 3.09. Surrender of Shares; Stock Transfer Books....................... 9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01 Organization and Qualification................................... 10
SECTION 4.02 Capitalization................................................... 10
SECTION 4.03 Authorization and Validity of Agreement.......................... 11
SECTION 4.04 Consents and Approvals........................................... 12
SECTION 4.05 No Violation..................................................... 12
SECTION 4.06 SEC Reports; Financial Statements................................ 13
SECTION 4.07 Company Statement; Schedule 13E-3; Schedule 13E-4................ 14
SECTION 4.08 Compliance with Law.............................................. 14
SECTION 4.09 Absence of Certain Changes....................................... 15
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 4.10 No Undisclosed Liabilities....................................... 15
SECTION 4.11 Litigation....................................................... 15
SECTION 4.12 Employee Benefit Matters......................................... 16
SECTION 4.13 Taxes............................................................ 18
SECTION 4.14 Intellectual Property............................................ 19
SECTION 4.15 Other Interests.................................................. 20
SECTION 4.16 Labor Matters.................................................... 20
SECTION 4.17 Brokers and Finders.............................................. 21
SECTION 4.18 Opinions of Financial Advisors................................... 21
SECTION 4.19 Real Property and Leases......................................... 21
SECTION 4.20 Material Contracts............................................... 22
SECTION 4.21 Certain Business Practices....................................... 23
SECTION 4.22 Accounting Treatment............................................. 24
SECTION 4.23 Stock Retention Agreements....................................... 24
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
SECTION 5.01 Organization and Qualification................................... 24
SECTION 5.02 Authorization and Validity of Agreement.......................... 25
SECTION 5.03 Consents and Approvals........................................... 25
SECTION 5.04 No Violation..................................................... 25
SECTION 5.05 Offer Documents; Company Statement; Schedule 13E-3;
Schedule 13E-4............................................... 26
SECTION 5.06 Financing........................................................ 26
SECTION 5.07 Brokers and Finders.............................................. 27
SECTION 5.08 Operations of Purchasers......................................... 27
ARTICLE VI
COVENANTS
SECTION 6.01 Conduct of the Business of the Company Pending the Merger........ 27
SECTION 6.02 Access; Confidentiality.......................................... 29
SECTION 6.03 Preparation of Company Statement; Shareholders' Meeting;
Further Actions.............................................. 29
SECTION 6.04 Public Announcements............................................. 31
SECTION 6.05 Recapitalization................................................. 31
SECTION 6.06 Acquisition Proposals............................................ 31
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 6.07 D&O Indemnification and Insurance................................ 32
SECTION 6.08 Employee Benefits................................................ 33
SECTION 6.09 Fees and Expenses................................................ 34
SECTION 6.10 Debt Financing................................................... 34
SECTION 6.11 Headquarters of the Company...................................... 35
SECTION 6.12 Available Cash................................................... 35
SECTION 6.13 Options.......................................................... 35
ARTICLE VII
CONDITIONS
SECTION 7.01. Conditions to the Stock Purchase................................ 35
SECTION 7.02. Conditions to the Merger........................................ 37
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination..................................................... 39
SECTION 8.02. Effect of Termination........................................... 40
SECTION 8.03. Fees............................................................ 40
SECTION 8.04. Amendment....................................................... 41
SECTION 8.05. Waiver.......................................................... 41
ARTICLE X
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations, Warranties and
Agreements................................................... 41
SECTION 9.02. Notices......................................................... 41
SECTION 9.03. Certain Definitions............................................. 43
SECTION 9.04. Severability.................................................... 44
SECTION 9.05. Entire Agreement; Assignment.................................... 44
SECTION 9.06. Parties in Interest............................................. 44
SECTION 9.07. Specific Performance............................................ 44
SECTION 9.08. Governing Law................................................... 45
SECTION 9.09. Joint and Several Obligations................................... 45
SECTION 9.10. Headings........................................................ 45
SECTION 9.11. Counterparts.................................................... 45
</TABLE>
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<TABLE>
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<S> <C>
ANNEX A Conditions to the Offer
EXHIBIT A Amended and Restated Articles of Incorporation of Kinetic Concepts,
Inc.
EXHIBIT B Amended and Restated By-Laws of Kinetic Concepts, Inc.
EXHIBIT C Agreement Among Shareholders
</TABLE>
<PAGE> 6
Glossary of Defined Terms
<TABLE>
<CAPTION>
Defined Term Location of Definition
- ------------ ----------------------
<S> <C>
1987 Plan...................................................................... Section 3.07(a)
1995 Plan...................................................................... Section 3.07(a)
1997 Plan...................................................................... Section 3.07(a)
Acquisition Proposal........................................................... Section 6.07
Action......................................................................... Section 6.08(e)
affiliate...................................................................... Section 9.03(a)
Agreement...................................................................... Preamble
Agreement Among Shareholders................................................... Section 2.04(d)
BT Alex. Brown................................................................. Section 1.02(a)
Articles of Merger............................................................. Section 3.02
beneficial owner............................................................... Section 9.03(b)
B Purchase Price............................................................... Section 2.02(b)
B Purchaser.................................................................... Preamble
B Shares....................................................................... Section 2.01(b)
Board.......................................................................... Preamble
business day................................................................... Section 9.03(c)
Certificate of Merger.......................................................... Section 3.02
Certificates................................................................... Section 3.09(b)
Closing........................................................................ Section 2.03
Closing Date................................................................... Section 2.03
Code........................................................................... Section 4.12(a)
Company........................................................................ Preamble
Company Benefit Plans.......................................................... Section 4.12(a)
Company Disclosure Schedule.................................................... Section 4.01
Company SEC Documents.......................................................... Section 4.06
Company Statement.............................................................. Section 4.07
control........................................................................ Section 9.03(d)
Costs.......................................................................... Section 6.08(a)
Debt Financing................................................................. Section 5.06
Delaware Law................................................................... Recitals
Directors Plan................................................................. Section 3.07(a)
Dissenting Shares.............................................................. Section 3.08(a)
D&O Insurance.................................................................. Section 6.08(c)
Effective Time................................................................. Section 3.02
Environmental Laws............................................................. Section 4.08
Equity Financing............................................................... Section 6.09
EP Date........................................................................ Section 3.07(a)
ERISA.......................................................................... Section 4.12(a)
ESPP........................................................................... Section 4.12(f)
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Defined Term Location of Definition
- ------------ ----------------------
<S> <C>
Exchange Act................................................................... Section 3.07(a)
Expenses....................................................................... Section 8.03(b)
Fee............................................................................ Section 8.03(a)
F Purchase Price............................................................... Section 2.02(a)
F Purchaser.................................................................... Preamble
F Shares....................................................................... Section 2.01(a)
Foreign Benefit Plan........................................................... Section 4.12(e)
Governmental Entity............................................................ Section 6.03(d)
Governmental Order............................................................. Section 4.08
HMO............................................................................ Section 4.12(d)
Houlihan Lokey................................................................. Section 1.02(a)
HSR Act........................................................................ Section 4.04
Indemnified Parties............................................................ Section 6.08(a)
Intellectual Property.......................................................... Section 4.14(d)
IRS............................................................................ Section 4.12(a)
Knowledge...................................................................... Section 9.03(e)
Law............................................................................ Section 4.08
Licensed Intellectual Property................................................. Section 4.14(a)
Liens.......................................................................... Section 4.19(b)
Material Adverse Effect........................................................ Section 9.03(f)
Material Contracts............................................................. Section 4.20(a)
Maximum Number................................................................. Recitals
Merger......................................................................... Recitals
Merger Consideration........................................................... Section 3.06(a)
Minimum Condition.............................................................. Section 1.01(a)
Notice Date.................................................................... Section 3.07(a)
Offer.......................................................................... Recitals
Offer Documents................................................................ Section 1.01(c)
Offer to Purchase.............................................................. Section 1.01(c)
Option Plans................................................................... Section 3.07(a)
Options........................................................................ Section 3.07(a)
Original Expiration Date....................................................... Section 1.01(b)
Owned Intellectual Property.................................................... Section 4.14(b)
Paying Agent................................................................... Section 3.10(a)
Permits........................................................................ Section 4.08
Permitted Liens................................................................ Section 4.19(b)
Per Share Amount............................................................... Recitals
Person......................................................................... Section 9.03(g)
Preferred Stock................................................................ Section 4.02(a)
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Defined Term Location of Definition
- ------------ ----------------------
<S> <C>
Purchase Date.................................................................. Section 4.12(f)
Purchaser Disclosure Schedule.................................................. Section 5.04
Purchaser Parties.............................................................. Section 6.08(e)
Purchasers..................................................................... Preamble
Schedule 13E-3................................................................. Section 1.01(c)
Schedule 13E-4................................................................. Section 1.01(c)
Scheduled Intellectual Property................................................ Section 4.14(a)
SEC............................................................................ Section 1.01(c)
Securities Act................................................................. Section 4.06(a)
Shareholder.................................................................... Recitals
Shareholder Support Agreement.................................................. Recitals
Shares......................................................................... Recitals
Shareholders' Meeting.......................................................... Section 6.03(c)
Stock Purchase................................................................. Recitals
Stock Retention Agreement...................................................... Section 4.23
subsidiary..................................................................... Section 9.03(h)
Surviving Corporation.......................................................... Section 3.01
Tax............................................................................ Section 4.13(a)
Texas Law...................................................................... Recitals
Transactions................................................................... Section 1.01(c)
</TABLE>
<PAGE> 9
TRANSACTION AGREEMENT, dated as of October 2, 1997 (this
"Agreement"), among FREMONT PURCHASER II, INC., a Delaware corporation ("F
Purchaser"), RCBA PURCHASER I, L.P., a Delaware limited partnership ("B
Purchaser" and, together with F Purchaser, "Purchasers") and KINETIC CONCEPTS,
INC., a Texas corporation (the "Company").
WHEREAS, the Board of Managers or Directors, as the case may be, of
each Purchaser and the Company has each determined that it is in the best
interests of its members or shareholders, as the case may be, for Purchasers to
acquire the Company upon the terms and subject to the conditions set forth
herein; and
WHEREAS, in furtherance of such acquisition, it is proposed that the
Company shall make a cash tender offer (the "Offer") to acquire all of the
shares of Common Stock, par value $.001 per share, of the Company (shares of
Common Stock of the Company being collectively referred to as "Shares") for
$19.25 per Share (such amount, or any greater amount per Share paid pursuant to
the Offer, being referred to herein as the "Per Share Amount") net to the seller
in cash, upon the terms and subject to the conditions of this Agreement and the
Offer; and
WHEREAS, the Board of Directors of the Company (the "Board") has
unanimously approved the making of the Offer and resolved and agreed to
recommend that holders of Shares tender their Shares pursuant to the Offer; and
WHEREAS, also in furtherance of such acquisition, the Board of
Managers or Directors, as the case may be, of each Purchaser and the Company has
each approved the purchase by Purchasers and the sale by the Company (the "Stock
Purchase") of 8,083,712 Shares for the Per Share Amount immediately prior to the
consummation of the Offer; and
WHEREAS, also in furtherance of such acquisition, the Board of
Managers or Directors, as the case may be, of each Purchaser and the Company has
each approved the merger (the "Merger") of Purchasers with and into the Company
in accordance with the General Corporation Law and the Revised Uniform Limited
Partnership Act of the State of Delaware ("Delaware Law") and the Texas Business
Corporation Act ("Texas Law") following the consummation of the Offer and upon
the terms and subject to the conditions set forth herein; and
WHEREAS, F Purchaser and B Purchaser have entered into a support
agreement with James Leininger (the "Shareholder"), dated as of the date hereof
(the "Shareholder Support Agreement"), providing, subject to certain conditions,
for (i) the grant by the Shareholder to F Purchaser of an option on up to
2,529,197 Shares at the Per Share Amount, subject to the conditions set forth
therein, (ii) the grant by the Shareholder to B Purchaser of an option on up to
1,670,803 Shares at the Per Share Amount, subject to the conditions set forth
therein, (iii) the tender of 13,792,211 Shares owned or controlled by the
Shareholder pursuant to the Offer and (iv) the voting by the Shareholder of all
Shares owned
<PAGE> 10
2
or controlled by the Shareholder at the time of the Shareholders' Meeting in
favor of the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Purchasers and the Company hereby agree as follows:
ARTICLE I
THE OFFER
SECTION 1.01. The Offer. (a) Provided that this Agreement shall not
have been terminated in accordance with Section 8.01 and none of the events set
forth in Annex A hereto shall have occurred or be existing, the Company shall
commence the Offer as promptly as reasonably practicable after the date hereof.
The obligation of the Company to accept for payment and pay for Shares tendered
pursuant to the Offer shall be subject to the condition (the "Minimum
Condition") that at least 27,500,000 Shares shall have been validly tendered and
not withdrawn prior to the expiration of the Offer and also shall be subject to
the satisfaction of the other conditions set forth in Annex A hereto. The Per
Share Amount shall, subject to applicable withholding of taxes, be net to the
seller in cash, upon the terms and subject to the conditions of the Offer.
Subject to the terms and conditions of the Offer (including, without limitation,
the Minimum Condition), the Company shall pay, as promptly as practicable after
expiration of the Offer, for all Shares validly tendered and not withdrawn.
(b) Notwithstanding any other provision contained herein,
including, without limitation, Section 1.01(a), the Company shall, at the
direction of Purchasers, extend the Offer one or more times for a period not to
exceed 10 business days in aggregate.
(c) As soon as reasonably practicable on the date of commencement
of the Offer, the Company shall file with the Securities and Exchange Commission
(the "SEC") an Issuer Tender Offer Statement on Schedule 13E-4 (together with
all amendments and supplements thereto, the "Schedule 13E-4") with respect to
the Offer, and the Company, the Shareholder and Purchasers shall file with the
SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 (together with all
amendments and supplements thereto, the "Schedule 13E-3") with respect to the
Offer, the Stock Purchase, the Merger and the other transactions contemplated by
this Agreement (collectively, the "Transactions"). The Schedule 13E-4 and the
Schedule 13E-3 shall contain or shall incorporate by reference an offer to
purchase (the "Offer to Purchase") and forms of the related letter of
transmittal, any related summary advertisement and any other documents related
to the Offer (the Schedule 13E-4, the Schedule 13E-3, the Offer to Purchase and
such other documents, together with all supplements and amendments thereto,
being referred to herein collectively as the "Offer Documents"). Each Purchaser
and the Company agree to correct promptly any
<PAGE> 11
3
information provided by it for use in the Offer Documents which shall have
become false or misleading, and Purchasers and the Company further agree to take
all steps necessary to cause the Schedule 13E-4 and the Schedule 13E-3 as so
corrected to be filed with the SEC and the other Offer Documents as so corrected
to be disseminated to holders of Shares, in each case as and to the extent
required by applicable federal securities laws.
SECTION 1.02. Company Action. (a) The Company hereby approves of and
agrees to undertake the Offer and represents that (i) the Board, at a meeting
duly called and held on October 1, 1997, has unanimously (A) determined that
this Agreement and the Transactions are fair to and in the best interests of the
holders of Shares, (B) approved and adopted this Agreement and the Merger and
(C) recommended that the shareholders of the Company accept the Offer and
approve and adopt this Agreement and the Merger, (ii) BT Alex. Brown
Incorporated ("BT Alex. Brown") has delivered to the Board an opinion to the
effect that, as of the date of this Agreement, the cash consideration to be
received in the Offer and the Merger by the holders of Shares (other then B
Purchaser and its affiliates and any other holders of Shares who will retain
Shares following consummation of the Offer and the Merger) is fair from a
financial point of view to such holders and (iii) Houlihan Lokey Howard & Zukin
("Houlihan Lokey") has delivered to the Board and Purchasers an opinion that the
Company will be solvent following the purchase of Shares pursuant to the Offer
and related matters. The Company agrees to include in the Offer Documents the
recommendation of the Board described in the immediately preceding sentence. The
Company has been advised by each of its directors and executive officers (other
than the Shareholder and as otherwise provided in any Stock Retention Agreement)
that they intend either to tender all Shares beneficially owned by them to the
Company pursuant to the Offer or to vote such Shares in favor of the approval
and adoption by the shareholders of the Company of this Agreement and the
Merger. The Company has been advised by the Shareholder that the Shareholder
intends to tender 13,792,211 Shares pursuant to the Offer and to vote any Shares
then owned or controlled by him in favor of approval and adoption of this
Agreement and the Merger.
(b) The Company shall take all action as may be necessary to
effect the Offer as contemplated by this Agreement, including, without
limitation, promptly mailing the Offer Documents to the record holders and
beneficial owners of the Shares.
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of the Shares. (a) Upon the terms
and subject to the conditions of this Agreement, at the Closing, the Company
shall sell to F
<PAGE> 12
4
Purchaser, and F Purchaser shall purchase from the Company, 7,179,066 Shares
(the "F Shares").
(b) Upon the terms and subject to the conditions of this
Agreement, at the Closing, the Company shall sell to B Purchaser, and B
Purchaser shall purchase from the Company, 904,646 Shares (the "B Shares").
(c) In the event the Equity Financing is reduced pursuant to
Section 5.06, the number of F Shares and B Shares to be purchased at the Closing
shall be adjusted accordingly.
SECTION 2.02. Purchase Price. (a) The aggregate purchase price for
the F Shares shall be the number of F Shares multiplied by the Per Share Amount
(the "F Purchase Price").
(b) The aggregate purchase price for the B Shares shall be the
number of B Shares multiplied by the Per Share Amount (the "B Purchase Price).
SECTION 2.03. Closing. Upon the terms and subject to the conditions
of this Agreement, the sale and purchase of the F Shares and the B Shares
contemplated by this Agreement shall take place at a closing (the "Closing") to
be held at the offices of Shearman & Sterling, 599 Lexington Avenue, New York,
New York at 10:00 A.M. New York time on the day the Offer is scheduled to
expire, or at such other place or at such other time or on such other date as
the Company and Purchasers may mutually agree upon in writing (the day on which
the Closing takes place being the "Closing Date").
SECTION 2.04. Closing Deliveries by the Company. At the Closing, the
Company shall deliver or cause to be delivered to Purchasers:
(a) stock certificates evidencing the F Shares and the B Shares,
respectively;
(b) a receipt for the F Purchase Price and the B Purchase Price;
(c) the certificates and other documents required to be delivered
pursuant to Section 7.01(c)(iii); and
(d) an executed copy of the Agreement Among Shareholders in the
form attached as Exhibit C (the "Agreement Among Shareholders").
SECTION 2.05. Closing Deliveries by Purchasers. (a) At the Closing,
F Purchaser shall deliver to the Company:
<PAGE> 13
5
(i) the F Purchase Price by wire transfer in immediately available
funds as directed in writing by the by the Company at least three business
day prior to the Closing;
(ii) the certificates and other documents required to be delivered
pursuant to Section 7.01(b)(iii); and
(iii) an executed copy of the Agreement Among Shareholders.
(b) At the Closing, B Purchaser shall deliver to the Company:
(i) the B Purchase Price by wire transfer in immediately available
funds as directed in writing by the Company at least three business day
prior to the Closing;
(ii) the certificates and other documents required to be delivered
pursuant to Section 7.01(b)(iii); and
(iii) an executed copy of the Agreement Among Shareholders.
ARTICLE III
THE MERGER
SECTION 3.01. The Merger. Upon the terms and subject to the
conditions set forth in Article VII, and in accordance with Delaware Law and
Texas Law, at the Effective Time (as hereinafter defined), each Purchaser shall
be merged with and into the Company. As a result of the Merger, the separate
corporate existence of Purchasers shall cease and the Company shall continue as
the surviving corporation of the Merger (the "Surviving Corporation").
SECTION 3.02. Effective Time; Closing. As promptly as practicable
after the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the "Certificate of Merger") with the Secretary
of State of the State of Delaware and articles of merger (the "Articles of
Merger") with the Secretary of the State of Texas, in such form or forms as is
required by, and executed in accordance with the relevant provisions of,
Delaware Law and Texas Law, respectively (the date and time of the later of such
filings being the "Effective Time"). Prior to such filing, a closing shall be
held at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New
York, 10022, or such other place as the parties shall agree, for the purpose of
confirming the satisfaction or waiver, as the case may be, of the conditions set
forth in Article VII.
<PAGE> 14
6
SECTION 3.03. Effect of the Merger. At the Effective Time, the
effect of the Merger shall be as provided in the applicable provisions of
Delaware Law and Texas Law, including, without limitation, Article 5.06 of Texas
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and each Purchaser shall vest in the Surviving Corporation, and
all debts, liabilities, obligations, restrictions, disabilities and duties of
the Company and Purchasers shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 3.04. Articles of Incorporation; By-laws. (a) At the
Effective Time, the Articles of Incorporation attached hereto as Exhibit A shall
be the Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Articles of Incorporation.
(b) At the Effective Time, the By-laws attached hereto as Exhibit
B shall be the By-laws of the Surviving Corporation until thereafter
amended as provided by law and such By-laws.
SECTION 3.05. Directors and Officers. The directors of the Company
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and By-laws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
SECTION 3.06. Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of either Purchaser, the
Company or the holders of any of the following securities:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than any Shares to be cancelled pursuant to Section
3.06(b), any Shares to remain outstanding pursuant to Section 3.06(c) and
any Dissenting Shares) shall be cancelled and shall be converted
automatically into the right to receive an amount equal to the Per Share
Amount in cash (the "Merger Consideration") payable, without interest, to
the holder of such Share, upon surrender, in the manner provided in
Section 3.08, of the certificate that formerly evidenced such Share;
(b) (i) Each Share held in the treasury of the Company and each
Share owned by any direct or indirect wholly owned subsidiary of the
Company and each Share owned by the Purchasers immediately prior to the
Effective Time shall be cancelled without any conversion thereof and no
payment or distribution shall be made with respect thereto;
<PAGE> 15
7
(ii) Each (A) share of common stock of the F Purchaser outstanding
immediately prior to the Effective Time shall be converted and exchanged
for a number of validly issued, fully paid and nonassessable shares of
Common Stock, par value $.001 per share, of the Surviving Corporation
equal to the quotient obtained by dividing the number of F Shares by the
number of outstanding shares of common stock of the F Purchaser and (B)
limited or general partnership interest of B Purchaser shall be converted
and exchanged for a number of validly issued, fully paid and nonassessable
shares of common stock, par value $.001 per share, of the Surviving
Corporation equal to the quotient obtained by dividing the number of B
Shares by the number of partnership interests; and
(c) The 6,064,155 of the Shares held by and registered in the name
of the Shareholder at the Effective Time, 3,837,890 of the Shares held by
and registered in the names of Stinson Capital Partners, L.P., BK Capital
Partners IV, L.P., the Carpenters Pension Trust for Southern California,
United Brotherhood of Carpenters and Joiners of America Local Unions and
Councils Pension Fund, Insurance Company Supported Organizations Pension
Plan, Richard C. Blum & Associates, L.P., Richard C. Blum & Associates,
Inc., Richard C. Blum, Prism Partners I, L.P., Weintraub Capital
Management, Fremont Partners L.P., FP Advisors, L.L.C., Fremont Group,
L.L.C., and Fremont Investors Inc. and the aggregate number of Shares
owned by senior management pursuant to Stock Retention Agreements, shall
not be cancelled as provided above, but shall remain outstanding.
SECTION 3.07. Employee Stock Options and Other Equity Awards. (a)
Except to the extent payment has been made as provided in Section 6.13 or as may
otherwise be agreed by Purchasers and any holder of any outstanding employee or
director options to purchase Shares, including any tandem stock appreciation
right ("Options"), granted under the Company's 1997 Stock Incentive Plan, (the
"1997 Plan"), 1995 Senior Executive Stock Option Plan (the "1995 Plan"), 1988
Directors Stock Option Plan (the "Directors Plan") the 1987 Key Contributor
Stock Option Plan (the "1987 Plan") and, together with the 1997 Plan, the 1995
Plan and the Directors Plan, the "Option Plans"), (i) each of such holder's
Options under the Option Plans shall become fully exercisable, according to its
terms, as of the time provided in the notice from the Company, (ii) each of such
holder's Options under the Options Plans shall be exercisable until the last day
provided in such notice (the "Notice Date"), which will be prior to the last day
of the Offer, (iii) each of such holder's Options may be surrendered prior to
the Notice Date for the right to receive cash in an amount determined in
accordance with the applicable Option Plan, provided, however, that Options
granted under the 1997 Plan may be so surrendered on or prior to the last day in
the applicable 90 day Change of Control Exercise Period, as defined in the 1997
Plan (the "EP Date"), and (iv) all Options remaining unexercised that have not
been surrendered as of the Effective Time (or, in the case of Options granted
under the 1997 Plan, the EP Date) shall be canceled provided, further, that
<PAGE> 16
8
with respect to any Person subject to Section 16 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the Company shall use its reasonable
efforts to ensure that any such amount shall be paid as soon as practicable
after the first date payment can be made without liability to such Person under
Section 16(b) of the Exchange Act but in no event shall Purchasers or the
Company be required to indemnify such Person for any loss, cost or damages
sustained by such Person as a result of Section 16(b) of the Exchange Act. All
applicable withholding taxes attributable to payments made hereunder or to
distributions contemplated hereby shall be deducted from the amounts payable
under this Section 3.07 and all such taxes attributable to the exercise of
Options shall be withheld from the proceeds received in respect of the Shares
issuable upon such exercise.
(b) Except as provided herein or as otherwise agreed to by the
parties and to the extent permitted by the Option Plans, the Option Plans shall
terminate as of the Effective Time and any rights under any provisions in any
other plan, program or arrangement providing for the issuance or grant by the
Company of any interest in respect of the capital stock of the Company shall be
cancelled as of the Effective Time.
SECTION 3.08. Dissenting Shares. (a) Notwithstanding any provision
of this Agreement to the contrary, Shares that are outstanding immediately prior
to the Effective Time and that are held by shareholders who shall not have voted
in favor of the Merger or consented thereto in writing and who shall have
properly perfected dissenter's rights for such Shares in accordance with Article
5.12 of Texas Law (collectively, the "Dissenting Shares") shall not be converted
into or represent the right to receive the Merger Consideration unless and until
such shareholders shall have withdrawn or lost such shareholder's dissenter's
rights. Such shareholders shall be entitled to receive payment of the appraised
value of such Shares held by them in accordance with the provisions of Article
5.12 of Texas Law, except that all Dissenting Shares held by shareholders who
shall have withdrawn or lost such dissenter's rights under Article 5.12 of Texas
Law shall thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 3.08, of the certificate or certificates that formerly
evidenced such Shares.
(b) The Company shall give Purchasers (i) prompt notice of any
demands for appraisal received by the Company, withdrawals of such demands, and
any other instruments served pursuant to Texas Law and received by the Company
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under Texas Law. The Company shall not, except with the
prior written consent of each Purchaser (which consent shall not be unreasonably
withheld), make any payment with respect to Dissenting Shares or offer to settle
or settle any claims or demands with respect to Dissenting Shares.
<PAGE> 17
9
SECTION 3.09. Surrender of Shares; Stock Transfer Books. (a) Prior
to the Effective Time, Purchasers shall designate a bank or trust company (which
bank or trust company shall be reasonably acceptable to the Company) to act as
agent (the "Paying Agent") for the holders of Shares in connection with the
Merger to receive the funds to which holders of Shares shall become entitled
pursuant to Section 3.06(a). Such funds shall be invested by the Paying Agent as
directed by the Surviving Corporation, provided that such investments shall be
in obligations of or guaranteed by the United States of America or of any agency
thereof and backed by the full faith and credit of the United States of America,
in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors
Services, Inc. or Standard & Poor's Corporation, respectively, or in deposit
accounts, certificates of deposit or banker's acceptances of, repurchase or
reverse repurchase agreements with, or Eurodollar time deposits purchased from,
commercial banks with capital, surplus and undivided profits aggregating in
excess of $1.0 billion (based on the most recent financial statements of such
bank which are then publicly available at the SEC or otherwise).
(b) Promptly after the Effective Time, the Surviving Corporation
or the Company, as the case may be, shall cause to be mailed to each Person who
was, at the Effective Time, a holder of record of Shares entitled to receive the
Merger Consideration pursuant to Section 3.06(a), a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates evidencing Shares (the "Certificates") shall
pass, only upon proper delivery of the Certificates to the Paying Agent) and
instructions for use in effecting the surrender of the Certificates pursuant to
such letter of transmittal. Upon surrender to the Paying Agent of a Certificate,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration for each Share
formerly evidenced by such Certificate, and such Certificate shall then be
cancelled. No interest shall accrue or be paid on the Merger Consideration
payable upon the surrender of any Certificate for the benefit of the holder of
such Certificate. If payment of the Merger Consideration is to be made to a
Person other than the Person in whose name the surrendered Certificate is
registered on the stock transfer books of the Company, it shall be a condition
of payment that the Certificate so surrendered shall be endorsed properly or
otherwise be in proper form for transfer and that the Person requesting such
payment shall have paid all transfer and other taxes required by reason of the
payment of the Merger Consideration to a Person other than the registered holder
of the Certificate surrendered or shall have established to the satisfaction of
the Surviving Corporation that such taxes either have been paid or are not
applicable.
(c) At any time following the sixth month after the Effective
Time, the Surviving Corporation shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent and
not disbursed to holders of Shares (including, without limitation, all interest
and other income received by the Paying Agent in
<PAGE> 18
10
respect of all funds made available to it), and thereafter such holders shall be
entitled to look to the Surviving Corporation (subject to abandoned property,
escheat and other similar laws) only as general creditors thereof with respect
to any Merger Consideration that may be payable upon due surrender of the
Certificates held by them. Notwithstanding the foregoing, neither the Surviving
Corporation nor the Paying Agent shall be liable to any holder of a Share for
any Merger Consideration delivered in respect of such Share to a public official
pursuant to any abandoned property, escheat or other similar law.
(d) At the close of business on the day of the Effective Time, the
stock transfer books of the Company shall be closed and thereafter there shall
be no further registration of transfers of Shares on the records of the Company.
From and after the Effective Time, the holders of Shares outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
Shares except as otherwise provided herein or by applicable law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchasers as follows:
SECTION 4.01 Organization and Qualification. The Company and each of
its subsidiaries (a) is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, (b) has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted and (c) is in good standing
and duly qualified to do business in each jurisdiction in which the transaction
of its business makes such qualification necessary, except where the failure to
be so organized, existing, qualified and in good standing or to have such power
or authority would not have a Material Adverse Effect. True and complete copies
of the Articles or Certificates of Incorporation and the by-laws of the Company
and each of its subsidiaries have been made available to Purchasers. A true and
complete list of all of the Company's subsidiaries, together with the
jurisdiction of incorporation of each such subsidiary and the percentage of the
outstanding capital stock of each such subsidiary owned by the Company and its
subsidiaries, is set forth in Section 4.01 of the Company's disclosure schedule
delivered to Purchasers in connection with this Agreement (the "Company
Disclosure Schedule").
SECTION 4.02 Capitalization. (a) The authorized capital stock of the
Company consists of 100,000,000 Shares and 20,000,000 shares of preferred stock,
par value $.001 per share (the "Preferred Stock"). As of the date of this
Agreement, (i) 42,636,016 Shares were issued and outstanding and 186,824 Shares
were held in treasury, (ii) 3,629,133
<PAGE> 19
11
Shares were reserved for issuance pursuant to outstanding Options and 2,672,300
Shares were reserved for issuance in respect of future grants of Options, and
(iii) no shares of Preferred Stock were issued and outstanding. All outstanding
Shares are validly issued, fully paid and nonassessable and are not subject to
preemptive rights. Except as set forth in this Section 4.02(a) or as disclosed
in the Company SEC Documents or in Section 4.02(a) of the Company Disclosure
Schedule, there are no outstanding subscriptions, options, warrants, calls,
rights, commitments or any other agreements to which the Company is a party or
by which the Company is bound which obligate the Company to (i) issue, deliver
or sell or cause to be issued, delivered or sold any additional Shares or any
other capital stock of the Company or any other securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
such Shares or (ii) purchase, redeem or otherwise acquire any Shares and any
other capital stock of the Company. All Shares subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, will be duly authorized, validly issued, fully paid
and nonassessable. There are no outstanding contractual obligations of the
Company or any of its subsidiaries to repurchase, redeem or otherwise acquire
any Shares or any capital stock of any such subsidiary or to provide funds to,
or make any investment (in the form of a loan, capital contribution or
otherwise) in, any subsidiary (other than a wholly owned subsidiary of the
Company) or any other Person. Each outstanding share of capital stock of each of
the Company's subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and each such share owned by the Company and its subsidiaries is
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on the Company's or such other
subsidiary's voting rights, charges and other encumbrances of any nature
whatsoever, except for liens arising by operation of law that are not in the
aggregate material.
(b) Except as provided in the Company SEC Documents or in Section
4.02(b) of the Company Disclosure Schedule, there are no voting trusts or
shareholder agreements to which the Company is a party with respect to the
voting of the capital stock of the Company.
SECTION 4.03 Authorization and Validity of Agreement. The Company
has the requisite corporate power and authority to execute and deliver this
Agreement and to consummate the Transactions in accordance with the terms hereof
(subject to the approval and adoption of this Agreement and the Merger by the
holders of two-thirds of the outstanding Shares, if required by applicable law,
and the filing and recordation of appropriate merger documents as required by
Delaware Law and Texas Law). The Board has duly authorized the execution,
delivery and performance of this Agreement by the Company, and no other
corporate action or other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or the Transactions (other than the
approval and adoption of this Agreement and the Merger by the holders of
two-thirds of the outstanding Shares, if required by applicable law). This
Agreement has been duly and
<PAGE> 20
12
validly executed and delivered by the Company and, assuming this Agreement
constitutes the legal, valid and binding obligation of Purchasers, constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting the enforcement of creditors' rights
generally or by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The Board has
taken all necessary actions such that the provisions of the Texas Business
Combination Law, Articles 13.01 - 13.08 of Texas Law, do not apply to the
Transactions.
SECTION 4.04 Consents and Approvals. Neither the execution and
delivery of this Agreement by the Company nor the performance of this Agreement
by the Company and the consummation by the Company of the Transactions will
require on the part of the Company or any of its subsidiaries any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (i) in connection with the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (ii) pursuant to the applicable requirements
of the Exchange Act and the SEC's rules and regulations promulgated thereunder
and state takeover laws (iii) the filing and recordation of the Certificate of
Merger pursuant to Delaware Law and the Articles of Merger pursuant to Texas Law
and appropriate documents with the relevant authorities of other states in which
the Company is authorized to do business, (iv) as set forth in Section 4.04 of
the Company Disclosure Schedule or (v) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not, individually or in the aggregate, have a Material Adverse Effect or
restrict or prevent the consummation of the Transactions.
SECTION 4.05 No Violation. Except as set forth in Section 4.05 of
the Company Disclosure Schedule, assuming the Merger has been duly approved by
the holders of two-thirds of the outstanding Shares, if required by applicable
law, neither the execution and delivery of this Agreement by the Company nor the
performance of this Agreement by the Company and the consummation by the Company
of the Transactions will (a) conflict with or violate the Certificate or
Articles of Incorporation of the Company or the By-laws of the Company or any of
its subsidiaries, (b) result in a violation or breach of, constitute a default
(with or without notice or lapse of time, or both) under, give rise to any right
of termination, cancellation or acceleration of, or result in the imposition of
any lien, charge or other encumbrance on any assets or property of the Company
or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective assets
or properties are bound, except for such violations, breaches and defaults (or
rights of termination, cancellation or acceleration or lien or other charge or
encumbrance) as to which requisite waivers or consents have been obtained or
which would not individually
<PAGE> 21
13
or in the aggregate have a Material Adverse Effect or materially restrict or
prevent the consummation of the Transactions or (c) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
Section 4.04 and this Section 4.05 are duly and timely obtained or made and the
approval of the Merger by the holders of two-thirds of the outstanding Shares
has been obtained if required by applicable law, conflict with or violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company, any of its subsidiaries or any of their respective assets and
properties, except for such violations which would not, individually or in the
aggregate, have a Material Adverse Effect or materially restrict or prevent the
consummation of the Transactions.
SECTION 4.06 SEC Reports; Financial Statements. (a) Except as set
forth on Section 4.06 of the Company Disclosure Schedule, since January 1, 1994
the Company has filed with the SEC all forms, reports, schedules, statements and
other documents required to be filed by it with the SEC pursuant to the
Securities Act of 1933, as amended (the "Securities Act") and the SEC's rules
and regulations promulgated thereunder and the Exchange Act and the SEC's rules
and regulations promulgated thereunder (any such documents filed prior to the
date hereof being collectively, the "Company SEC Documents"). The Company SEC
Documents including, without limitation, any financial statements or schedules
included therein, at the time filed, or in the case of registration statements
on their respective effective dates, (i) complied as to form in all material
respects with the applicable requirements of and the SEC's rules and regulations
promulgated thereunder and the Exchange Act and the SEC's rules and regulations
promulgated thereunder and (ii) did not at the time filed (or, in the case of
registration statements, at the time of effectiveness), contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. No
subsidiary of the Company is required to file any form, report or other document
with the SEC.
(b) Each of the consolidated financial statements of the Company
(including any related notes thereto) included in the Company SEC Documents
(excluding the Company SEC Documents described in Section 4.07) comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the period involved (except as may be indicated in
such financial statements or in the notes thereto or, in the case of unaudited
financial statements, as permitted by the requirements of Form 10-Q) and present
fairly, in all material respects (subject, in the case of the unaudited
statements, to normal year-end adjustments which such adjustments in the
aggregate would not have a Material Adverse Effect and the absence of
footnotes), the financial position of the Company as of the dates thereof and
the results of the Company's operations and cash flows for the periods presented
therein.
<PAGE> 22
14
(c) The Company has heretofore furnished or made available to
Purchasers complete and correct copies of all amendments and modifications that
have not been filed by the Company with the SEC to all agreements, documents and
other instruments that previously had been filed by the Company with the SEC and
are currently in effect.
SECTION 4.07 Company Statement; Schedule 13E-3; Schedule 13E-4. The
proxy statement to be sent to the shareholders of the Company in connection with
the Shareholders' Meeting (such proxy statement, as amended or supplemented,
being referred to herein as the "Company Statement"), as of the date first
mailed to the shareholders of the Company and at the time of the Shareholders'
Meeting, the Schedule 13E-3 and the Schedule 13E-4 at the time filed with the
SEC will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. The Company Statement, the Schedule 13E-3 and the Schedule
13E-4 will, when filed by the Company with the SEC, comply as to form in all
material respects with the applicable provisions of the Exchange Act and the SEC
rules and regulations promulgated thereunder. Notwithstanding the foregoing, the
Company makes no representation or warranty with respect to the statements made
in any of the foregoing documents based on written information supplied by or on
behalf of either Purchaser or any of their respective affiliates specifically
for inclusion therein.
SECTION 4.08 Compliance with Law. Except as set forth in the Company
SEC Documents or in Section 4.08 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries is in violation of any applicable federal,
state, local or foreign statute, rule, regulation, decree, ordinance, code
requirement or order of any governmental or regulatory authority or rule of
common law, including, without limitation, all federal and state antitrust law
(whether statutory or otherwise) (collectively, "Law") applicable to the Company
or any of its subsidiaries, or any of the products produced, distributed
marketed or sold by the Company or any of its subsidiaries, except for
violations which would not have a Material Adverse Effect. Section 4.08 of the
Company Disclosure Schedule sets forth a brief description of each order, writ,
judgment, injunction, decree, stipulation, determination or award (including,
without limitation, recalls, field notifications or seizures) entered by or with
any governmental or regulatory authority (each, a "Governmental Order")
applicable to the Company and any of its subsidiaries. No such Governmental
Order has had or is likely to have a Material Adverse Effect. Without limiting
the foregoing, except for matters which would not, individually or in the
aggregate, have a Material Adverse Effect and those matters disclosed in the
Company SEC Documents or in Section 4.08 of the Company Disclosure Schedule, to
the Knowledge of the Company, (a) the business of the Company and each of its
subsidiaries is being conducted in compliance with applicable Environmental
Laws, (b) the business of the Company and each of its subsidiaries has not, and
no other Person has, made, caused or contributed to any material release of any
hazardous or toxic waste or substance on, at or under any of the Company's
<PAGE> 23
15
or its subsidiaries' properties, and (c) neither the Company nor any of its
subsidiaries is subject to any compliance, remediation or settlement agreement
from an alleged violation of Environmental Laws. For purposes hereof,
"Environmental Laws" shall mean all applicable Laws relating to pollution or
protection of human health or the environment, including the Resource
Conservation and Recovery Act, the Clean Air Act, the Water Pollution Control
Act, the Toxic Substances Control Act and the Comprehensive Environmental
Response, Compensation and Liability Act and analogous state Law. The Company
and each of its subsidiaries hold all permits, licenses, exemptions, orders and
approvals of governmental, administrative, and regulatory authorities,
(collectively, "Permits") necessary for the conduct of their respective
businesses, including, without limitation, all Permits issued by any
governmental, administrative and regulatory authorities that are concerned with
the safety, efficacy, reliability or manufacturing of medical products, as now
being conducted and the same are in full force and effect, except where the
failure to hold Permits, or for such Permits to be in full force and effect,
would not, individually or in the aggregate, have a Material Adverse Effect.
SECTION 4.09 Absence of Certain Changes. Except as disclosed in the
Company SEC Documents or in Section 4.09 of the Company Disclosure Schedule,
since December 31, 1996, the Company and each of its subsidiaries have conducted
its businesses only in the ordinary course of business and consistent with past
practice and (a) there has not been any Material Adverse Effect and (b) the
Company has not taken any of the actions set forth in paragraphs (a) through (i)
of Section 6.01.
SECTION 4.10 No Undisclosed Liabilities. Except (a) for liabilities
incurred in the ordinary course of business and consistent with past practice,
(b) liabilities incurred in connection with the Transactions, (c) liabilities
which would not, individually or in the aggregate, have a Material Adverse
Effect and (d) as disclosed in the Company SEC Documents or as set forth in
Section 4.10 of the Company Disclosure Schedule, from December 31, 1996, neither
the Company nor any of its subsidiaries has incurred any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
which would be required to be reflected in or reserved against on a consolidated
balance sheet, or in the notes thereto, of the Company prepared in accordance
with generally accepted accounting principles consistent with past practice.
SECTION 4.11 Litigation. Except as disclosed in the Company SEC
Documents or in Section 4.11 of the Company Disclosure Schedule and except for
regulatory proceedings of which the Company has not yet been notified (except to
the extent the Company has Knowledge of any such regulatory proceeding), there
are no claims, actions, proceedings or governmental, administrative or
regulatory investigations pending, nor has the Company or any of its
subsidiaries received notice of any threatened claims, actions, proceedings or
governmental, administrative or regulatory investigations, against the Company
or any of its subsidiaries by or before any court, arbitrator or administrative
or
<PAGE> 24
16
governmental or regulatory body, domestic or foreign, which, if adversely
determined, would, individually or in the aggregate, have a Material Adverse
Effect or seek to delay or prevent the consummation of the Transactions. None of
the Company, its subsidiaries, nor any of their respective assets is subject to
any outstanding and unsatisfied order, writ, judgment, injunction,
determination, award or decree which would, individually or in the aggregate,
have a Material Adverse Effect.
SECTION 4.12 Employee Benefit Matters. (a) All employee benefit
plans and other benefit arrangements covering employees of the Company and its
subsidiaries are listed in Section 4.12 of the Company Disclosure Schedule (the
"Company Benefit Plans"). True and complete copies of the Company Benefit Plans
have been provided to Purchasers. Except as set forth in Section 4.12(a) of the
Company Disclosure Schedule and to the extent applicable, the Company Benefit
Plans comply in all material respects with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal
Revenue Code of 1986, as amended (the "Code"), and any Company Benefit Plan
intended to be qualified under Section 401(a) of the Code has been determined by
the Internal Revenue Service (the "IRS") to be so qualified. Except as set forth
in Section 4.12(a) of the Company Disclosure Schedule, no Company Benefit Plan
is covered by Title IV of ERISA or Section 412 of the Code. Except as set forth
in Section 4.12(a) of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries has incurred any liability or penalty under Section 4975
of the Code or Section 502(i) of ERISA with respect to any Company Benefit Plan.
Each Company Benefit Plan has been maintained and administered in all material
respects in compliance with its terms and with all applicable laws including,
but not limited to, ERISA and the Code to the extent applicable thereto. Except
as set forth in Section 4.12(a) of the Company Disclosure Schedule, to the
Knowledge of the Company, there are no pending, nor has the Company or any of
its subsidiaries received notice of any threatened, claims against or otherwise
involving any of the Company Benefit Plans. No Company Benefit Plan is under
audit or investigation by the IRS, the Department of Labor or the Pension
Benefit Guaranty Corporation, and to the Knowledge of the Company, no such audit
or investigation is pending or threatened. All material contributions required
to be made as of the date of this Agreement to the Company Benefit Plans have
been made or provided for. Neither the Company nor any entity under "common
control" with the Company within the meaning of Section 4001 of ERISA has
contributed to, or been required to contribute to, any "multi-employer plan" (as
defined in Sections 3(37) and 4001(a)(3) of ERISA).
(b) Except as set forth in Section 4.12(b) of the Company
Disclosure Schedule, the consummation of the Transactions will not (either alone
or upon the occurrence of any additional or subsequent events) (i) constitute an
event under any Company Benefit Plan, trust, or loan that will or may result in
any payment (whether of severance pay or otherwise), acceleration, forgiveness
of indebtedness, vesting, distribution, increase in benefits or obligation to
fund benefits with respect to any Company employee, or (ii) result
<PAGE> 25
17
in the triggering or imposition of any restrictions or limitations on the right
of the Company or either Purchaser to amend or terminate any Company Benefit
Plan and receive the full amount of any excess assets remaining or resulting
from such amendment or termination, subject to applicable taxes. No payment or
benefit which will or may be made by the Company, any of its subsidiaries,
either Purchaser or any of their respective affiliates with respect to any
employee of the Company or its subsidiaries will be characterized as an "excess
parachute payment," within the meaning of Section 280G(b)(1) of the Code.
(c) Except as set forth in Section 4.12(c) of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries (i)
maintains or contributes to any Company Benefit Plan which provides, or has any
liability to provide, life insurance, medical, severance or other employee
welfare benefits to any employee upon his retirement or termination of
employment, except as may be required by Section 4980B of the Code; or (ii) has
ever represented, promised or contracted (whether in oral or written form) to
any employee (either individually or to employees as a group) that such
employee(s) would be provided with life insurance, medical, severance or other
employee welfare benefits upon their retirement or termination of employment,
except to the extent required by Section 4980B of the Code.
(d) With respect to each Company Benefit Plan which is an
"employee welfare benefit plan" within the meaning of Section 3(1) of ERISA, all
material claims incurred (including claims incurred but not reported) by
employees thereunder for which the Company is, or will become, liable are (i)
insured pursuant to a contract of insurance whereby the insurance company bears
any risk of loss with respect to such claims; (ii) covered under a contract with
a health maintenance organization (an "HMO") pursuant to which the HMO bears the
liability for such claims, or (iii) reflected as a liability or accrued for in
Section 4.12(d) of the Company Disclosure Schedule.
(e) Except as set forth in Section 4.12(e) of the Company
Disclosure Schedule or except as would not have a Material Adverse Effect, with
respect to each Company Benefit Plan that is not subject to United States Law
("Foreign Benefit Plan"): (i) all employer and employee contributions to each
Foreign Benefit Plan required by law or by the terms of such Foreign Benefit
Plan have been made or, if applicable, accrued in accordance with normal
accounting practices; (ii) the fair market value of the assets of each funded
Foreign Benefit Plan, the liability of each insurer for any Foreign Benefit
Plan, funded through insurance or the book reserve established for any Foreign
Benefit Plan, together with any accrued contributions, is sufficient to procure
or provide for the accrued benefit obligations, as of the Effective Time, with
respect to all current and former participants in such plan according to the
actuarial assumptions and valuations most recently used to determine employer
contributions to such Foreign Benefit Plan and no transaction contemplated by
this Agreement shall cause such assets or insurance obligations to be less than
such benefit obligations; and (iii) each Foreign Benefit Plan required to be
registered
<PAGE> 26
18
has been registered and has been maintained in good standing with the
appropriate regulatory authorities.
(f) The Company shall take such actions as are necessary to cause
the Employee Stock Purchase Plan to terminate prior to the termination of the
Offer. The Company shall take such actions as are necessary to cause any offer
to purchase Shares pursuant to the Company's Employee Stock Purchase Plan (the
"ESPP") to expire on or prior to the termination of the Offer. On such date, the
Company shall apply the funds credited as of such date under the ESPP within
each participant's payroll withholdings to the purchase of whole Shares in
accordance with the terms of the ESPP.
SECTION 4.13 Taxes. (a) For purposes of this Agreement, "Tax" or
"Taxes" means any and all taxes, fees, levies, duties, tariffs, imposts, and
other charges of any kind (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any governmental or taxing authority including, without limitation, taxes or
other charges on or with respect to income, franchises, windfall or other
profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains taxes; license, registration and
documentation fees; and customs' duties, tariffs, and similar charges.
(b) Except as disclosed in the Company SEC Documents or in Section
4.13(b) of the Company Disclosure Schedule, the Company and each of its
subsidiaries (i) have filed all federal, state, local and foreign Tax returns
required to be filed by the Company or any of its subsidiaries for tax years
ended prior to the date of this Agreement, except for those Tax returns the
failure of which to file would not, individually or in the aggregate, have a
Material Adverse Effect or for which requests for extensions have been timely
filed, and all such returns are complete in all material respects, (ii) have
paid or accrued all Taxes shown to be due and payable on such returns, (iii)
have accrued all such Taxes for such periods subsequent to the periods covered
by such returns, (iv) have "open" years for federal income tax returns only as
set forth in the Company SEC Documents or in Section 4.13(b) of the Company
Disclosure Schedule and (v) have not participated in or cooperated with an
international boycott within the meaning of Section 999 of the Code. There are
no liens for Taxes on the assets of the Company or any of its subsidiaries,
except for liens that would not, individually or in the aggregate, have a
Material Adverse Effect, liens for Taxes not yet due and payable, and except as
set forth in the Company SEC Documents or in Section 4.13 of the Company
Disclosure Schedule, there is no pending, nor has the Company or any of its
subsidiaries received notice of any threatened Tax audit, examination, refund
litigation or adjustment in controversy which, if determined adversely, would,
individually or in the aggregate, have a Material Adverse Effect. Except as set
forth
<PAGE> 27
19
in Section 4.13(b) of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries is a party to any agreement providing for the allocation
or sharing of Taxes.
SECTION 4.14 Intellectual Property. (a) Section 4.14(a) of the
Company Disclosure Schedule sets forth a true and complete list of all
Intellectual Property owned by the Company for which registrations have been
made or applied for, including all patents, trademarks, copyrights, mask works
and other forms of registrable Intellectual Property (the "Scheduled
Intellectual Property"). Except as would not individually or in the aggregate
have a Material Adverse Effect and except as set forth in Section 4.14(a) of the
Company Disclosure Schedule, the Company is the sole and exclusive owner of the
Scheduled Intellectual Property, free and clear of any Encumbrance. Except as
would not individually or in the aggregate have a Material Adverse Effect and
except as set forth in Section 4.14(a) of the Company Disclosure Schedule, the
registrations made for the Scheduled Intellectual Property are current,
outstanding and valid, and the Company has complied with all requirements to
maintain such Intellectual Property in full force and effect.
(b) The Scheduled Intellectual Property, together with all other
Intellectual Property owned by the Company (collectively, the "Owned
Intellectual Property"), constitute all of the Intellectual Property requisite
and necessary for the conduct of the businesses of the Company. Except as set
forth in Section 4.14(b) of the Company Disclosure Schedule, the Company does
not have, nor does it require, any license (other than licenses generally
available to the public at reasonable cost) from another in or to any material
Intellectual Property that is material to the businesses of the Company. As a
result of the Transaction, as of the Effective Date, the Company shall own all
right, title and interest in and to all material Intellectual Property requisite
and necessary for the conduct of the businesses of the Company. Except as
provided on Section 4.14(b) of the Company Disclosure Schedule, the Company has
not granted a license to another in or to any of the Owned Intellectual
Property.
(c) Except as provided on Section 4.14(c) of the Company
Disclosure Schedule, to the Knowledge of the Company, no actions or proceedings
involving the Company are pending or threatened, (i) which challenge the
ownership, validity or enforceability of any of the Owned Intellectual Property,
(ii) which seek to restrict the use by the Company of any of the Owned
Intellectual Property, or (iii) which allege that the Company infringes or
violates the Intellectual Property of another. No pending or threatened action
or proceeding, including but not limited to those on Section 4.14(c) of the
Company Disclosure Schedule, would have a material effect on the businesses of
the Company if decided adversely to the Company. To the Knowledge of the
Company, the Company is aware of no infringement or violation of the Owned
Intellectual Property by another.
(d) For the purpose of this Section 4.14, the Company means the
Company and its subsidiaries, and the Intellectual Property means (i)
inventions, whether or not
<PAGE> 28
20
patentable, whether or not reduced to practice, and whether or not yet made the
subject of a pending patent application or applications, (ii) ideas and
conceptions of potentially patentable subject matter, including, without
limitation, any patent disclosures, whether or not reduced to practice and
whether or not yet made the subject of a pending patent application or
applications, (iii) national (including the United States) and multinational
statutory invention registrations, patents, patent registrations and patent
applications (including all reissues, divisions, continuations,
continuations-in-part, extensions and reexaminations) and all rights therein
provided by international treaties or conventions and all improvements to the
inventions disclosed in each such registration, patent or application, (iv)
trademarks, service marks, trade dress, logos, trade names and corporate names,
whether or not registered, including all common law rights, and registrations
and applications for registration thereof, including, but not limited to, all
marks registered in the United States Patent and Trademark Office, the Trademark
Offices of the States and Territories of the United States of America, and the
Trademark Offices of other nations throughout the world, and all rights therein
provided by international treaties or conventions, (v) copyrights (registered or
otherwise) and registrations and applications for registration thereof, and all
rights therein provided by international treaties or conventions, (vi) computer
software, including, without limitation, source code, operating systems and
specifications, data, data bases, files, documentation and other materials
related thereto, data and documentation, (vii) trade secrets and confidential,
technical and business information (including ideas, formulas, compositions,
inventions, and conceptions of inventions whether patentable or unpatentable and
whether or not reduced to practice), (viii) whether or not confidential,
technology (including know-how and show-how), manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information, (ix) copies
and tangible embodiments of all the foregoing, in whatever form or medium, (x)
all rights to obtain and rights to apply for patents, and to register trademarks
and copyrights, and (xi) all rights to sue or recover and retain damages and
costs and attorneys' fees for present and past infringement of any of the
foregoing.
SECTION 4.15 Other Interests. Except as set forth in Section 4.15 of
the Company Disclosure Schedule or in the Company SEC Documents, the Company
does not own, directly or indirectly, any interest or investment (whether equity
or debt) in any corporation, partnership, joint venture, business, trust or
entity (other than investments in short-term investment securities).
SECTION 4.16 Labor Matters. Except as set forth in Section 4.16 of
the Company Disclosure Schedule, neither the Company nor any of its subsidiaries
is presently, nor has in the past been, a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor union organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the
<PAGE> 29
21
Knowledge of the Company, threatened against the Company or any of its
subsidiaries relating to their respective businesses except for any such
proceeding which would not, individually or in the aggregate, have a Material
Adverse Effect.
SECTION 4.17 Brokers and Finders. No broker, finder or investment
bank has acted directly or indirectly for the Company, nor has the Company
incurred any obligation to pay any brokerage, finder's or other fee or
commission in connection with the transactions contemplated hereby, other than
BT Alex. Brown and Houlihan Lokey, the fees and expenses of which shall be borne
by the Company. The Company has furnished to Purchasers a complete and correct
copy of all agreements between the Company and BT Alex. Brown and Houlihan Lokey
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated by this Agreement.
SECTION 4.18 Opinions of Financial Advisors. (a) BT Alex. Brown has
delivered its opinion, dated the date of this Agreement, to the Board to the
effect that, as of such date, the cash consideration to be received in the Offer
and the Merger by the holders of Shares (other than B Purchaser and its
affiliates and any other holders of Shares who will retain Shares following
consummation of the Offer and the Merger) is fair from a financial point of view
to such holders and such opinion has not been withdrawn or modified in any
material respect prior to consummation of the Offer.
(b) Houlihan Lokey has delivered its opinion and report to the
Board and Purchasers with respect to solvency and related matters, and such
opinion has not been withdrawn or modified.
SECTION 4.19 Real Property and Leases. (a) The Company and each of
its subsidiaries has sufficient title to all of its properties and assets to
conduct its businesses as currently conducted or as contemplated to be
conducted, except as would not, individually or in the aggregate, have a
Material Adverse Effect.
(b) Each parcel of real property owned or leased by the Company or
any of its subsidiaries (i) is owned or leased free and clear of all mortgages,
pledges, liens, security interests, conditional and installment sale agreements,
encumbrances, charges or other claims of third parties of any kind
(collectively, "Liens"), other than (A) Liens for current taxes and assessments
not yet past due, (B) inchoate mechanics' and materialmen's Liens for
construction in progress, (C) workmen's, repairmen's, warehousemen's and
carriers' Liens arising in the ordinary course of business of the Company or
such subsidiary consistent with past practice, and (D) all matters of record,
Liens and other imperfections of title and encumbrances which would not,
individually or in the aggregate, have a Material Adverse Effect (collectively,
"Permitted Liens"), and (ii) is neither subject to any governmental decree or
order to be sold nor is being condemned, expropriated or otherwise taken by any
public authority with or without payment of compensation therefor, nor, has
<PAGE> 30
22
any notice been received by the Company stating that any such condemnation,
expropriation or taking been proposed.
(c) All leases of real property leased for the use or benefit of
the Company or any of its subsidiaries to which the Company or any of its
subsidiaries is a party requiring rental payments in excess of $100,000 on an
annualized basis during the period of the lease, and all amendments and
modifications thereto are in full force and effect and have not been modified or
amended, and there exists no default under any such lease by the Company or any
of its subsidiaries, nor any event which with notice or lapse of time or both
would constitute a default thereunder by the Company or any of its subsidiaries,
except as would not, individually or in the aggregate, have a Material Adverse
Effect.
SECTION 4.20 Material Contracts. (a) Section 4.20(a) of the Company
Disclosure Schedule lists each of the following contracts and agreements
(including, without limitation, oral arrangements to the extent legally binding)
of the Company and each of its subsidiaries (such contracts and agreements,
together with all contracts and agreements disclosed in Section 4.14 of the
Disclosure Schedule, being "Material Contracts"):
(i) each contract, agreement and other arrangement for the
purchase of inventory, spare parts, other materials or personal property
with any supplier or for the furnishing of services to the Company and
each of its subsidiaries or otherwise related to the businesses of the
Company and each of its subsidiaries under the terms of which the Company
or any of its subsidiaries: (A) are likely to pay or otherwise give
consideration of more than $3,000,000 in the aggregate during the calendar
year ended December 31, 1997 or (B) are likely to pay or otherwise give
consideration of more than $10,000,000 in the aggregate over the remaining
term of such contract;
(ii) each contract, agreement and other arrangement for the sale of
inventory or other personal property or for the furnishing of services by
the Company or any of its subsidiaries which: (A) is likely to involve
consideration of more than $3,000,000 in the aggregate during the calendar
year ended December 31, 1997 or (B) is likely to involve consideration of
more than $10,000,000 in the aggregate over the remaining term of the
contract;
(iii) all material broker, distributor, dealer, manufacturer's
representative, franchise, agency, sales promotion, market research,
marketing, consulting and advertising contracts and agreements to which
the Company or any of its subsidiaries is a party;
(iv) all management contracts and contracts with independent
contractors or consultants (or similar arrangements) to which the Company
or any of its subsidiaries
<PAGE> 31
23
is a party and which are not cancelable without penalty or further payment
in excess of $50,000 and without more than 90 days' notice;
(v) all contracts and agreements relating to indebtedness of the
Company or any of its subsidiaries or to any direct or indirect guaranty
by the Company or any of its subsidiaries of indebtedness of any other
Person;
(vi) all contracts, agreements, commitments, written understandings
or other arrangements with any Governmental Entity, to which the Company
or any of its subsidiaries is a party (other than arrangements entered
into in the ordinary course of business with hospitals or other medical
facilities owned or operated by any such Governmental Entity);
(vii) all contracts and agreements that limit or purport to limit
the ability of the Company or any of its subsidiaries to compete in any
line of business or with any Person or in any geographic area or during
any period of time; and
(viii) all other contracts and agreements, whether or not made in
the ordinary course of business, which are material to the Company and its
subsidiaries, taken as a whole, or the conduct of the business of the
Company and its subsidiaries, taken as a whole, or the absence of which
would, in the aggregate, have a Material Adverse Effect.
(b) Except as disclosed in Section 4.20(b) of the Company
Disclosure Schedule, each Material Contract: (i) is legal, valid and binding on
the Company or its respective subsidiary party thereto and, to the Knowledge of
the Company, the other parties thereto, and is in full force and effect and (ii)
upon consummation of the transactions contemplated by this Agreement, except to
the extent that any consents set forth in Section 4.04 of the Company Disclosure
Schedule are not obtained, shall continue in full force and effect without
penalty or other adverse consequence. Neither the Company nor any of its
subsidiaries is in breach of, or default under, any Material Contract.
(c) No other party to any Material Contract is, to the Knowledge
of the Company, in material breach thereof or default thereunder.
(d) Except as disclosed in Section 4.20(d) of the Company
Disclosure Schedule, there is no contract, agreement or other arrangement
granting any Person any preferential right to purchase any of the properties or
assets of the Company or any of its subsidiaries.
SECTION 4.21 Certain Business Practices. Neither the Company nor any
of its subsidiaries nor any of their respective directors, officers, agents,
representatives or
<PAGE> 32
24
employees (in their capacity as directors, officers, agents, representatives or
employees) has: (a) used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity; (b)
directly or indirectly, paid or delivered any fee, commission or other sum of
money or item of property, however characterized, to any finder, agent, or other
party acting on behalf of or under the auspices of a governmental official or
Governmental Entity, in the United States or any other country, which is in any
manner related to the business or operations of the Company or any of its
subsidiaries, that was illegal under any federal, state or local laws of the
United States or any other country having jurisdiction; or (c) made any payment
to any customer or supplier of the Company or any of its subsidiaries or any
officer, director, partner, employee or agent of any such customer or supplier
for the unlawful sharing of fees or to any such customer or supplier or any such
officer, director, partner, employee or agent for the unlawful rebating of
charges, or engaged in any other unlawful reciprocal practice, or made any other
unlawful payment or given any other unlawful consideration to any such customer
or supplier or any such officer, director, partner, employee or agent, in
respect of the business of the Company and its subsidiaries.
SECTION 4.22 Accounting Treatment. The Company has received from
Ernst & Young LLP a letter in form and substance reasonably satisfactory to
Purchasers that the Transactions will receive recapitalization accounting
treatment and such letter has not been withdrawn or modified.
SECTION 4.23 Stock Retention Agreements. Certain employees have, on
the date hereof, and the Company shall use all reasonable efforts to have
certain employees listed in Section 4.23 of the Company Disclosure Schedule
enter into agreements pursuant to which such employees will retain stock or
options in the Surviving Corporation (each such agreement being a "Stock
Retention Agreement"). The Company shall not enter into any Stock Retention
Agreement without the prior consent of Purchasers.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Purchasers hereby represent and warrant, jointly and severally, to
the Company as follows:
SECTION 5.01 Organization and Qualification. Each Purchaser is (a)
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has the requisite power and authority to
own, lease and operate its properties and to carry on its business as it is now
being conducted and (c) is in good standing and duly qualified to do business in
each jurisdiction in which the transaction of its business makes such
qualification necessary, except where the failure to be so organized,
<PAGE> 33
25
existing, qualified and in good standing or to have such power or authority
would not materially restrict or prevent the consummation of the Transaction.
SECTION 5.02 Authorization and Validity of Agreement. Each Purchaser
has the requisite power and authority to execute and deliver this Agreement and
to consummate the Transactions in accordance with the terms hereof. The Board of
Managers of each Purchaser has duly authorized the execution, delivery and
performance of this Agreement by such Purchaser, and no other action or other
proceedings on the part of either Purchaser is necessary to authorize this
Agreement or the Transactions. This Agreement has been duly and validly executed
and delivered by each Purchaser and, assuming this Agreement constitutes the
legal, valid and binding obligation of the Company, constitutes the legal, valid
and binding obligation of each Purchaser, enforceable against such Purchaser in
accordance with its terms, except as enforcement thereof may be limited by any
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally or
by general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
SECTION 5.03 Consents and Approvals. Neither the execution and
delivery of this Agreement by Purchasers nor the performance of this Agreement
by Purchasers or the consummation by Purchasers of the Transactions will require
on the part of either Purchaser or any of its respective affiliates any consent,
approval, authorization or permit of, or filing with, or notification to, any
governmental or regulatory authority, except (a) in connection with the
applicable requirements of the HSR Act, (b) pursuant to the applicable
requirements of the Exchange Act and the SEC's rules and regulations promulgated
thereunder and state takeover laws, (c) the filing and recordation of the
Certificate of Merger pursuant to Delaware Law and the Articles of Merger
pursuant to Texas Law, (d) as set forth in Section 5.03 of Purchasers'
disclosure schedule delivered to the Company in connection with this Agreement
(the "Purchaser Disclosure Schedule") or (e) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not materially restrict or prevent the consummation of the
Transactions.
SECTION 5.04 No Violation. Except as set forth in Section 5.04 of
the Purchaser Disclosure Schedule, neither the execution and delivery of this
Agreement by Purchasers nor the performance of this Agreement by Purchasers or
the consummation by Purchasers of the Transactions will (a) conflict with or
violate the organizational documents of either Purchaser, (b) result in a
violation or breach of, constitute a default (with or without notice or lapse of
time, or both) under, give rise to any right of termination, cancellation or
acceleration of, or result in the imposition of any lien, charge or other
encumbrance on any assets or property of either of Purchasers pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which either of Purchasers is a
party or by which either of Purchasers or any of their respective assets or
properties are bound, except for such
<PAGE> 34
26
violations, breaches and defaults (or rights of termination, cancellation or
acceleration or lien or other charge or encumbrance) as to which consents have
been obtained or which would not individually or in the aggregate materially
restrict or prevent the consummation of the transactions contemplated hereby or
(c) assuming the consents, approvals, authorizations or permits and filings or
notifications referred to in Section 5.03 and this Section 5.04 are duly and
timely obtained or made, conflict with or violate any order, writ, injunction,
decree, statute, rule or regulation applicable to either Purchaser, except for
such violations which would not restrict prevent the consummation of the
Transactions.
SECTION 5.05 Offer Documents; Company Statement; Schedule 13E-3;
Schedule 13E-4. No information supplied by or on behalf of Purchasers
specifically for inclusion in the Company Statement, Schedule 13E-3 or Schedule
13E-4 will, at the respective times filed with the SEC or other governmental
entity, or at any time thereafter when the information included therein is
required to be updated pursuant to applicable law, or, in the case of the
Company Statement, at the date mailed to the Company's shareholders and at the
time of the Shareholders' Meeting, contain any untrue statement of a material
act or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Schedule 13E-3
will, when filed by Purchasers with the SEC or other governmental entity, comply
as to form in all material respects with the provisions of the Exchange Act and
the SEC's rules and regulations promulgated thereunder.
SECTION 5.06 Financing. Purchasers have provided the Company with
complete and correct copies of (a) a commitment letter dated the date hereof
from Bank of America National Trust and Savings Association pursuant to which it
has committed, subject to the terms and conditions set forth therein, to provide
a senior credit facility in an aggregate amount of $300,000,000 and a tender
facility in an aggregate amount of $130,000,000 to finance the Transactions and
(b) a letter dated the date hereof from BT Alex. Brown pursuant to which it has
indicated that it is highly confident of its ability to underwrite in the public
markets, subordinated notes in an aggregate amount of $200,000,000 to finance
the Transactions. The financing to be provided pursuant to the foregoing
arrangements is hereinafter referred to as the "Debt Financing". As of the date
hereof, the commitment letter and the highly confident letter relating to the
Debt Financing referred to above have not been withdrawn. At the Closing, F
Purchaser will have available $17,414,435.50 and B Purchaser will have available
$138,197,020.50 for purposes of consummating the Closing (the "Equity
Financing"), reduced by an amount equal to the sum of (i) the number of shares
purchased by B Purchaser between the date hereof and the expiration of the Offer
multiplied by the Per Share Amount, (ii) the number of Shares retained by
management pursuant to Stock Retention Agreements entered into after the date
hereof multiplied by the Per Share Amount and (iii) the number of Options
retained by management pursuant to Stock Retention Agreements entered into after
the date hereof multiplied by the excess of the Per Share Amount over the
exercise price of such Options.
<PAGE> 35
27
SECTION 5.07 Brokers and Finders. No broker, finder or investment
bank has acted directly or indirectly for either Purchaser, nor has either
Purchaser incurred any obligation to pay any brokerage, finder's or other fee or
commission in connection with the Transactions.
SECTION 5.08 Operations of Purchasers. Purchasers have been formed
solely for the purpose of engaging in the Transactions and prior to the Closing
Date will have engaged in no other business activities.
ARTICLE VI
COVENANTS
SECTION 6.01 Conduct of the Business of the Company Pending the
Merger. From the date hereof until the Effective Time, the Company shall conduct
the business of the Company and each of its subsidiaries in all material
respects only in the ordinary course consistent with past practice, shall use
all reasonable efforts to preserve intact the business organization of the
Company and keep available the services of its present key officers and
employees (provided, however, that to satisfy the foregoing obligation, the
Company shall not be required to make any payments or enter into or amend any
contractual arrangements or understandings, except in the ordinary course of
business consistent with past practice) and shall use all reasonable efforts to
preserve the current relationships of the Company and each of its subsidiaries
with customers and suppliers with which the Company or such subsidiary has
significant business relations and, except as otherwise required by applicable
law or as set forth in Section 6.01 of the Company Disclosure Schedule, the
Company shall not, without the prior consent of Purchasers (which consent shall
not be unreasonably withheld):
(a) amend its Articles of Incorporation or By-Laws;
(b) declare, set aside or pay any dividend or other distribution
or payment in cash, stock or property in respect of its capital stock
(other than a quarterly cash dividend of $.0375 per Share for the third
quarter of fiscal year 1997), and not reclassify, combine, split,
subdivide or redeem, purchase or otherwise acquire, directly or
indirectly, any of its capital stock;
(c) issue, grant, sell, dispose of, encumber or pledge or agree to
or authorize the issuance, grant, sale, disposition, encumbrance of or
pledge of any shares of, or rights of any kind to acquire any shares of,
the capital stock of any class of or any other ownership interest in the
Company or any of its subsidiaries (other than pursuant to the
Transactions);
<PAGE> 36
28
(d) acquire, sell, transfer, lease or encumber any material assets
except in the ordinary course of business and consistent with past
practice;
(e) adopt a plan of complete or partial liquidation or adopt
resolutions providing for the complete or partial liquidation,
dissolution, consolidation, merger, restructuring or recapitalization of
the Company or any of its subsidiaries;
(f) grant any severance or termination pay to, or enter into any
employment agreement with, any executive officer or director of the
Company, other than in the ordinary course of business and consistent with
past practice;
(g) except in the ordinary course of business, increase the
compensation payable or to become payable to its officers or employees,
enter into any contract or other binding commitment in respect of any such
increase (other than pursuant to a Company Benefit Plan or policy or
agreement existing as of the date hereof) to, or enter into any severance
agreement with any director, executive officer or other employee of the
Company or establish, adopt, enter into, make any new grants or awards
under or amend, any Company Benefit Plan, except as required by applicable
law, to maintain tax-qualified status or as may be required by any Company
Benefit Plan as of the date hereof;
(h) settle or compromise any material claims or litigation or,
except in the ordinary course of business and consistent with past
practice, modify, amend or terminate any Material Contracts or waive,
release or assign any material rights or claims, or make any payment,
direct or indirect, of any material liability of the Company before the
same becomes due and payable in accordance with its terms;
(i) take any action, other than in the ordinary course of business
and consistent with past practice with respect to accounting policies or
procedures (including tax accounting policies and procedures); except as
may be required by law or generally accepted accounting principles;
(j) make any Tax election or permit any material insurance policy
naming it as a beneficiary or a loss payable payee to be cancelled or
terminated without notice to Purchasers, except in the ordinary course of
business and consistent with past practice;
(k) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation,
partnership, other business organization or any division thereof or any
material amount of assets; (ii) incur any indebtedness for borrowed money
or issue any debt securities or assume, guarantee or endorse, or otherwise
as an accommodation become responsible for, the obligations of
<PAGE> 37
29
any Person, or make any loans or advances, except in the ordinary course
of business and consistent with past practice; (iii) enter into any
contract or agreement other than in the ordinary course of business and
consistent with past practice; or (iv) authorize any single capital
expenditure which is in excess of $2,000,000 or capital expenditures which
are, in the aggregate, in excess of $9,000,000 for the Company and its
subsidiaries taken as a whole; or
(l) authorize or enter into an agreement to do any of the
foregoing.
SECTION 6.02 Access; Confidentiality. (a) From the date of this
Agreement until the Effective Time, upon reasonable prior notice to the Company,
the Company shall give Purchasers and their authorized representatives, and
Persons providing or committing to provide Purchasers with financing for the
Transactions and their representatives, reasonable access to its officers,
properties, books and records and shall furnish Purchasers and each of their
authorized representatives with such financial and operating data and other
information concerning the business and properties of the Company as Purchasers
from time to time may reasonably request.
(b) Purchasers will hold and will cause their respective
affiliates, agents and other representatives to keep all documents and
information concerning the Company furnished to Purchasers or their respective
representatives in connection with the Transactions confidential in accordance
with a confidentiality agreement dated March 10, 1997, between the Company and
Fremont Group L.L.C. and a confidentiality agreement dated March 11, 1997
between the Company and Richard C. Blum & Associates, L.P., which
confidentiality agreements shall remain in full force and effect until the
termination of this Agreement or otherwise in accordance with its terms.
SECTION 6.03 Preparation of Company Statement; Shareholders'
Meeting; Further Actions. (a) The Company shall file the Offer Documents and, if
required by law, the Company Statement with the SEC. Each Purchaser shall
cooperate with the Company in connection with the preparation of the Offer
Documents and the Company Statement including, but not limited to, furnishing to
the Company any and all information regarding such Purchaser and any of its
affiliates as may be required to be disclosed therein. The Company shall use its
commercially reasonable efforts to cause the Offer Documents and the Company
Statement to be mailed to the Company's shareholders as promptly as practicable
after the date hereof in the case of the Offer Documents or after the
consummation of the Offer in the case of the Company Statement.
(b) The Company shall as promptly as practicable notify Purchasers
of the receipt of any comments from the SEC. All filings by the Company with the
SEC and all mailings to the Company's shareholders in connection with the
Transactions, including the
<PAGE> 38
30
Offer Documents and the Company Statement, shall be subject to the prior review,
comment and approval of Purchasers (such approval not to be unreasonably
withheld or delayed).
(c) If required by applicable law in order to consummate the
Merger, the Company, acting through the Board, shall, in accordance with
applicable law and the Company's Articles of Incorporation and By-laws, (i) duly
call, give notice of, convene and hold an annual or special meeting of its
shareholders as soon as practicable following consummation of the Offer for the
purpose of considering and taking action on this Agreement and the Merger (the
"Shareholders' Meeting") and (ii) subject to its fiduciary duties under
applicable law as advised in writing by outside counsel, (A) include in the
Company Statement the unanimous recommendation of the Board that the
shareholders of the Company approve and adopt this Agreement and the Merger and
(B) use its best efforts to obtain such approval and adoption. At the
Shareholders' Meeting, Purchasers shall cause all Shares then owned by them and
their subsidiaries to be voted in favor of the approval and adoption of this
Agreement and the Merger.
(d) Subject to the terms and conditions of this Agreement and
applicable law, each of the parties shall act in good faith and use commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective the Transactions as soon as practicable, including such actions
or things as any other party may reasonably request in order to cause any of the
conditions to such other party's obligation to consummate the Transactions to be
fully satisfied. Without limiting the foregoing, the parties shall (and shall
cause their respective subsidiaries, and use commercially reasonable efforts to
cause their respective affiliates, directors, officers, employees, agents,
attorneys, accountants and representatives, to) consult and fully cooperate with
and provide assistance to each other in (i) obtaining all necessary consents,
approvals, waivers, licenses, permits, authorizations, registrations,
qualifications, or other permission or action by, and giving all necessary
notices to and making all necessary filings with and applications and
submissions to any court, administrative agency or commission or other
governmental authority, or instrumentality, domestic or foreign (collectively,
"Governmental Entity") or other Person or entity as soon as reasonably
practicable after filing; (ii) make promptly its respective filings, and
thereafter make any other required submissions, under, seeking early termination
of any waiting period under, the HSR Act; (iii) providing all such information
concerning such party, its subsidiaries and its officers, directors, partners
and affiliates and making all applications and filings as may be necessary or
reasonably requested in connection with any of the foregoing; (iv) consummating
and making effective the transactions contemplated hereby; and (v) in the event
and to the extent required, amending this Agreement so that this Agreement and
the Offer and the Merger comply with Delaware Law and Texas Law. Prior to making
any application to or filing with any Governmental Entity or other Person or
entity in connection with this Agreement (other than filing under the HSR Act),
each party shall provide the other party with drafts thereof and afford the
other party a reasonable opportunity
<PAGE> 39
31
to comment on such drafts. If at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall use
their commercially reasonable efforts to take all such action.
SECTION 6.04 Public Announcements. The Company and Purchasers will
obtain the consent of one another prior to issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated hereby and shall not issue any such press release or make any
public statement prior to obtaining such consent, except as may be required by
applicable law or pursuant to the rules and regulations of the NASDAQ National
Market
SECTION 6.05 Recapitalization. The Company shall cooperate with any
reasonable requests of Purchasers or the SEC related to the reporting of the
Transactions as a recapitalization for financial reporting purposes including,
without limitation, to assist Purchasers and their affiliates with any
presentation to the SEC with regard to such reporting and to include appropriate
disclosure with regard to such reporting in all filings with the SEC and
mailings to the shareholders of the Company made in connection with the Offer or
the Merger. In furtherance of the foregoing, the Company shall provide to
Purchasers for the prior review of Purchasers' advisors any description of
Transactions which is meant to be disseminated.
SECTION 6.06 Acquisition Proposals. Neither the Company nor any of
its subsidiaries shall, directly or indirectly, through any officer, director,
agent or otherwise, solicit, initiate or encourage the submission of any
proposal or offer from any Person relating to any acquisition or purchase of all
or (other than in the ordinary course of business) any portion of the assets of,
or any equity interest in, the Company or any of its subsidiaries or any
recapitalization, business combination or similar transaction with the Company
or any of its subsidiaries (any communication with respect to the foregoing
being an "Acquisition Proposal") or participate in any negotiations regarding,
or furnish to any other Person any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other Person to do or seek any of the foregoing;
provided, however, that, at any time prior to the purchase of Shares by the
Company pursuant to the Offer, the Company may furnish information to, and
negotiate or otherwise engage in discussions with, any party who delivers a
written Acquisition Proposal which was not solicited or encouraged after the
date of this Agreement if the Board determines in good faith by a majority vote
(i) after consultation with and receipt of advice from its outside legal
counsel, that failing to take such action is reasonably determined to constitute
a breach of the fiduciary duties of the Board under applicable Law, (ii) after
consultation with and receipt of advice from a nationally recognized investment
banking firm, that such proposal is more favorable to the Company's Shareholders
from a financial point of view than the Transactions (including any adjustment
to the terms and conditions proposed by
<PAGE> 40
32
Purchasers in response to such Acquisition Proposal), (iii) that sufficient
commitments have been obtained with respect to such Acquisition Proposal that
the Board reasonably expects a transaction pursuant to such Acquisition Proposal
could be consummated and (iv) that such Acquisition Proposal is not subject to
any regulatory approvals that could reasonably be expected to prevent
consummation. The Company will immediately cease all existing activities,
discussions and negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. From and after the execution of this Agreement, the
Company shall immediately advise Purchasers in writing of the receipt, directly
or indirectly, of any inquiries, discussions, negotiations, or proposals
relating to an Acquisition Proposal (including the specific terms thereof and
the identity of the other party or parties involved) and furnish to Purchasers
within 48 hours of such receipt an accurate description of all material terms
(including any changes or adjustments to such terms as a result of negotiations
or otherwise) of any such written proposal in addition to any information
provided to any third party relating thereto. In addition, the Company shall
immediately advise Purchasers, in writing, if the Board shall make any
determination as to any Acquisition Proposal as contemplated by the proviso to
the first sentence of this Section 6.06. Notwithstanding the foregoing, the
Company shall be permitted to take such actions as may be required to comply
with Rule 14e-2 of the Exchange Act.
SECTION 6.07 D&O Indemnification and Insurance. (a) From the
Effective Time through the sixth anniversary of the date on which the Effective
Time occurs, Purchasers shall cause the Surviving Corporation to indemnify and
hold harmless each present and former officer, director, employee or agent of
the Company, including, without limitation, each Person controlling any of the
foregoing Persons (the "Indemnified Parties"), against all claims, losses,
liabilities, damages, judgments, fines, fees, costs or expenses, including,
without limitation, attorneys' fees and disbursements (collectively, "Costs"),
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Effective Time (including, without limitation, this Agreement and the
transactions and actions contemplated hereby and giving effect to the
consummation of such transactions and actions), whether asserted or claimed
prior to, at or after the Effective Time, to the fullest extent permitted under
the Articles of Incorporation or By-Laws of the Company or indemnification
agreements in effect on the date hereof, including provisions relating to
advancement of expenses incurred in the defense of any claim, action, suit,
proceeding or investigation. Without limiting the foregoing, in the event that
any claim, action, suit, proceeding or investigation is brought against an
Indemnified Party (whether arising before or after the Effective Time), the
Indemnified Party may retain counsel satisfactory to such Indemnified Party and
Purchasers shall, or shall cause the Surviving Corporation to, advance the fees
and expenses of such counsel for the Indemnified Party in accordance with the
Articles of Incorporation or By-Laws of the Company in effect on the date of
this Agreement.
<PAGE> 41
33
(b) For a period of six years from the Effective Time, Purchasers
shall, or shall cause the Surviving Corporation to, keep in effect provisions in
its Articles of Incorporation and By-Laws of the Company providing for
exculpation of director and officer liability and its indemnification of the
Indemnified Parties to the fullest extent permitted under Texas Law, which
provisions shall not be amended except as required by applicable law or except
to make changes permitted by law that would enlarge the Indemnified Parties'
right to indemnification.
(c) Purchasers shall cause the Surviving Corporation to maintain,
at no expense to the beneficiaries, directors' and officers' liability insurance
("D&O Insurance") for the Indemnified Parties with respect to matters occurring
at or prior to the Effective Time, issued by a carrier or carriers assigned a
claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher,
providing at least the same coverage as the D&O Insurance currently maintained
by the Company and containing terms and conditions which are not materially less
favorable to the beneficiaries, for a period of at least six years from the
Effective Time; provided, however, that in no event shall the Surviving
Corporation be required to expend pursuant to this Section 6.07(c) more than an
amount per year equal to 200% of current annual premiums paid by the Company for
such insurance (which premiums the Company represents to be $134,480 per year in
aggregate). In the event any claim is made against present or former directors,
officers or employees of the Company that is covered or potentially covered by
insurance, neither the Surviving Corporation nor Purchasers shall do anything
that would forfeit, jeopardize, restrict or limit the insurance coverage
available for that claim until the final disposition thereof.
(d) Notwithstanding anything herein to the contrary, if any claim,
action, suit, proceeding or investigation (whether arising before, at or after
the Effective Time) is made against any Indemnified Party, on or prior to the
sixth anniversary of the Effective Time, the provisions of this Section 6.07
shall continue in effect until the final disposition of such claim, action,
suit, proceeding or investigation.
(e) In the event that the Surviving Corporation or Purchasers or
any of their respective successors or assigns (i) consolidates with or merges
into any other Person and shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in each
such case, to the extent necessary to effectuate the purposes of this Section
6.07, proper provision shall be made so that the successors and assigns of the
Surviving Corporation or Purchasers shall succeed to the obligations set forth
in this Section 6.08 and none of the actions described in clauses (i) or (ii)
shall be taken until such provision is made.
SECTION 6.08 Employee Benefits. (a) From and after the Effective
Time, Purchasers and the Surviving Corporation and their respective affiliates
will honor in
<PAGE> 42
34
accordance with their terms all existing employment, severance, consulting and
salary continuation agreements between the Company and any current or former
officer, director, employee or consultant of the Company.
(b) In the event that the Surviving Corporation or Purchasers or
any of their respective successors or assigns (i) consolidates with or merges
into any other Person and shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in each
such case, to the extent necessary to effectuate the purposes of this Section
6.08, proper provision shall be made so that the successors and assigns of the
Surviving Corporation or Purchasers shall succeed to the obligations set forth
in this Section 6.08 and none of the actions described in clauses (i) or (ii)
shall be taken until such provision is made.
SECTION 6.09 Fees and Expenses. (a) In the event the Merger is
consummated, all costs and expenses incurred by each party hereto in connection
with this Agreement and the Transactions (including, without limitation, fees
and disbursements of counsel, financial advisors and accountants) and
transaction fees of $5,119,000 to F Purchaser and $3,381,000 to B Purchaser
shall be paid by the Company or the Company shall promptly reimburse such party,
as the case may be.
(b) In the event the Fee is paid by the Company to Purchasers
pursuant to Section 8.03 the Company shall promptly reimburse Purchasers for all
costs and expenses incurred by Purchasers in connection with this Agreement and
the Transactions (including, without limitation, fees and disbursements of
counsel, financial advisors and accountants) in an amount not to exceed
$2,000,000.
(c) In all events other than those expressly described in Section
6.09(a) and (b), all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants) shall be borne by the party which incurs such cost or expense,
provided that all costs and expenses related to the preparation, printing,
filing and mailing (as applicable) of the Offer Documents, the Company Statement
and all SEC and other regulatory filing fees incurred in connection with the
Company Statement shall be borne equally by the Company, on the one hand, and
Purchasers, on the other hand.
SECTION 6.10 Debt Financing. Purchasers shall use their reasonable
best efforts to obtain Debt Financing or other alternative financing on
substantially comparable or more favorable terms. The Company shall use its
reasonable best efforts to cooperate with Purchasers in obtaining the Debt
Financing, including, without limitation, by participating in roadshows and
meeting with, and providing information to, potential sources of financing
identified by Purchasers.
<PAGE> 43
35
SECTION 6.11 Headquarters of the Company. Purchasers shall use their
reasonable efforts to ensure that the headquarters of the Company shall be
situated in San Antonio, Texas until the third anniversary of the date of this
Agreement.
SECTION 6.12 Available Cash. As of the Closing, the assets of the
Company shall include $33,000,000 in cash of which $23,000,000 will be in
immediately available cash held by the Company or any of its direct or indirect
subsidiaries incorporated in the United States in an account at a commercial
bank located in the United States and available for use in consummating the
Offer as adjusted to reflect any amounts paid by the Company pursuant to any
agreement entered into by the Company to purchase the assets of RIK Medical,
L.L.C. and RIK Medical East, L.L.C. net of any cash included in such assets.
SECTION 6.13 Options. To the extent that any holders of Options
elect to surrender such Options for payment in accordance with Section 3.07, the
parties agree that proceeds of the Debt and Financing and the Equity Financing
shall be used to make such payments to the holders of Options who so elect.
ARTICLE VII
CONDITIONS
SECTION 7.01. Conditions to the Stock Purchase. (a) The respective
obligations of each party to effect the Stock Purchase shall be subject to the
satisfaction at or prior to the Closing Date of the following condition:
(i) No Order. No United States or state governmental authority or
other agency or commission or United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any law, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is then in
effect and has the effect of making the acquisition of Shares by
Purchasers or any affiliate of any of them illegal or otherwise
restricting, preventing or prohibiting consummation of the Transactions.
(ii) Offer. The conditions to the Offer set forth in Annex A shall
have been satisfied and the Company shall simultaneously with the Closing
purchase all Shares validly tendered and not withdrawn pursuant to the
Offer.
(b) The obligation of the Company to effect the Stock Purchase is
also subject to the satisfaction at or prior to the Closing Date of each of the
following additional conditions, unless waived by the Company:
<PAGE> 44
36
(i) Accuracy of Representations and Warranties. All
representations and warranties made by Purchasers herein shall be true and
correct in all material respects (except for representations qualified by
materiality or Material Adverse Effect which shall be correct in all
respects) on the Closing Date, with the same force and effect as though
such representations and warranties had been made on and as of the Closing
Date, except for changes permitted or contemplated by this Agreement and
except for representations and warranties that are made as of a specified
date or time, which shall be true and correct in all material respects
(except for representations qualified by materiality or Material Adverse
Effect which shall be correct in all respects) only as of such specific
date or time.
(ii) Compliance with Covenants. Each Purchaser shall have
performed in all material respects all obligations and agreements, and
complied in all material respects with covenants, contained in this
Agreement to be performed or complied with by it prior to or on the
Closing Date.
(iii) Officer's Certificates. The Company shall have received
such certificates of each Purchaser, dated as of the Closing Date, signed
by an executive officer of such Purchaser to evidence satisfaction of the
conditions set forth in this Article VII (insofar as it relates to
Purchasers) as may be reasonably requested by the Company.
(c) The obligation of Purchasers to effect the Stock Purchase is
also subject to the satisfaction at or prior to the Closing Date of each of the
following additional conditions, unless waived by Purchasers:
(i) Accuracy of Representations and Warranties. All
representations and warranties made by the Company herein shall be true
and correct in all material respects (except for representations qualified
by materiality or Material Adverse Effect which shall be correct in all
respects) on the Closing Date, with the same force and effect as though
such representations and warranties had been made on and as of the Closing
Date, except for changes permitted or contemplated by this Agreement and
except for representations and warranties that are made as of a specified
date or time, which shall be true and correct in all material respects
(except for representations qualified by materiality or Material Adverse
Effect which shall be correct in all respects) only as of such specific
date or time.
(ii) Compliance with Covenants. The Company shall have
performed in all material respects all obligations and agreements, and
complied in all material respects with covenants, contained in this
Agreement to be performed or complied with by it prior to or on the
Closing Date.
<PAGE> 45
37
(iii) Officer's Certificates. Each Purchaser shall have
received such certificates of the Company, dated as of the Closing Date,
signed by an executive officer of the Company to evidence satisfaction of
the conditions set forth in this Article VII (insofar as it relates to the
Company) as may be reasonably requested by the Company.
(iv) Directors Resignations. All Directors of the Company
shall have tendered their resignations effective as of the Closing and
shall have been replaced by nominees acceptable to Purchasers.
SECTION 7.02. Conditions to the Merger. (a) The respective
obligations of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(i) Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the
affirmative vote of the shareholders of the Company to the extent required
by Texas Law and the Articles of Incorporation of the Company;
(ii) No Order. No United States or state governmental
authority or other agency or commission or United States or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any law, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is then
in effect and has the effect of making the acquisition of Shares by
Purchasers or any affiliate of any of them illegal or otherwise
restricting, preventing or prohibiting consummation of the Transactions;
and
(iii) Stock Purchase. Purchasers shall have purchased,
respectively, the F Shares and the B Shares pursuant to the Stock
Purchase.
(b) The obligation of the Company to effect the Merger is also
subject to the satisfaction at or prior to the Closing Date of each of the
following additional conditions, unless waived by the Company:
(i) Accuracy of Representations and Warranties. All
representations and warranties made by Purchasers herein shall be true and
correct in all material respects (except for representations qualified by
materiality or Material Adverse Effect which shall be correct in all
respects) at the Effective Time, with the same force and effect as though
such representations and warranties had been made on and as of the
Effective Time, except for changes permitted or contemplated by this
Agreement and except for representations and warranties that are made as
of a specified date or time, which shall be true and correct in all
material respects (except
<PAGE> 46
38
for representations qualified by materiality or Material Adverse Effect
which shall be correct in all respects) only as of such specific date or
time.
(ii) Compliance with Covenants. Each Purchaser shall have
performed in all material respects all obligations and agreements, and
complied in all material respects with covenants, contained in this
Agreement to be performed or complied with by it prior to or as of the
Effective Time.
(iii) Officer's Certificates. The Company shall have received
such certificates of Purchasers, dated as of the Effective Time, signed by
an executive officer of each Purchaser to evidence satisfaction of the
conditions set forth in this Article VII (insofar as it relates to
Purchasers) as may be reasonably requested by the Company.
(c) The obligation of Purchasers to effect the Merger is also
subject to the satisfaction at or prior to the Closing Date of each of the
following additional conditions, unless waived by Purchasers:
(i) Accuracy of Representations and Warranties. All
representations and warranties made by the Company herein shall be true
and correct in all material respects (except for representations qualified
by materiality or Material Adverse Effect which shall be correct in all
respects) as of the Effective Time, with the same force and effect as
though such representations and warranties had been made on and as of the
Effective Time, except for changes permitted or contemplated by this
Agreement and except for representations and warranties that are made as
of a specified date or time, which shall be true and correct in all
material respects (except for representations qualified by materiality or
Material Adverse Effect which shall be correct in all respects) only as of
such specific date or time.
(ii) Compliance with Covenants. The Company shall have
performed in all material respects all obligations and agreements, and
complied in all material respects with covenants, contained in this
Agreement to be performed or complied with by it prior to or as of the
Effective Time.
(iii) Officer's Certificates. Each Purchaser shall have
received such certificates of the Company, dated as of the Effective Time,
signed by an executive officer of the Company to evidence satisfaction of
the conditions set forth in this Article VII (insofar as it relates to the
Company) as may be reasonably requested by the Company.
ARTICLE VIII
<PAGE> 47
39
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated and the
Transactions may be abandoned at any time prior to the Effective Time, as the
case may be, notwithstanding any requisite approval and adoption of this
Agreement and the transactions contemplated hereby by the shareholders of the
Company:
(a) By mutual written consent duly authorized by the Board of
Directors or Managers of each Purchaser and the Company; or
(b) By either Purchaser or the Company if (i) the Closing
shall not have occurred by January 31, 1998 or (ii) the Effective Time
shall not have occurred on or before May 31, 1998; provided, however,
that the right to terminate this Agreement under this Section 8.01(b)
shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in,
the failure of the Closing or the Effective Time, as the case may be,
to occur on or before such dates or (ii) any court of competent
jurisdiction in the United States or other United States governmental
authority shall have issued an order, decree, ruling or taken any other
action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable; or
(c) By either Purchaser if (i) due to an occurrence or
circumstance that would result in a failure to satisfy any condition
set forth in Annex A hereto, the Company shall have (A) failed to
commence the Offer within 10 business days following the date of this
Agreement, (B) terminated the Offer without having accepted any Shares
for payment thereunder or (C) failed to pay for Shares pursuant to the
Offer within 60 days following the commencement of the Offer, unless
such failure to pay for Shares shall have been caused by or resulted
from the failure of Purchasers to perform in any material respect any
material covenant or agreement of either of them contained in this
Agreement or the material breach by Purchasers of any material
representation or warranty of either of them contained in this
Agreement or (ii) prior to the purchase of Shares pursuant to the
Offer, the Board or any committee thereof shall have withdrawn or
modified in a manner adverse to Purchasers its approval or
recommendation of the Offer, this Agreement, the Transactions or shall
have recommended another transaction pursuant to any Acquisition
Proposal, or shall have resolved to do any of the foregoing; or
(d) By the Company, upon approval of the Board, if (i) due to
an occurrence or circumstance that would result in a failure to satisfy
any of the conditions set forth in Annex A hereto, the Company shall
have (A) failed to commence the Offer within 10 business days following
the date of this Agreement,
<PAGE> 48
40
(B) terminated the Offer without having accepted any Shares for payment
thereunder or (C) failed to pay for Shares pursuant to the Offer within 60
days following the commencement of the Offer, unless such failure to pay
for Shares shall have been caused by or resulted from the failure of the
Company to perform in any material respect any material covenant or
agreement of it contained in this Agreement or the material breach by the
Company of any material representation or warranty of it contained in this
Agreement or (ii) prior to the purchase of Shares pursuant to the Offer,
the Board shall have withdrawn or modified in a manner adverse to
Purchasers its approval or recommendation of the Offer, this Agreement or
the Transactions in order to approve the execution by the Company of a
definitive agreement concerning a transaction pursuant to an Acquisition
Proposal.
SECTION 8.02. Effect of Termination. In the event of the termination
of this Agreement pursuant to Section 8.01, this Agreement shall forthwith
become void, and there shall be no liability on the part of any party hereto,
except (i) as set forth in Sections 6.02(b), 8.03 and 9.01 and (ii) nothing
herein shall relieve any party from liability for any breach hereof.
SECTION 8.03. Fees. Notwithstanding the provisions of Section 6.10,
in the event that
(a) any Person shall have commenced, publicly proposed or
communicated to the Company a proposal that is publicly disclosed for a
tender or exchange offer for 20% or more (or which, assuming the maximum
amount of securities which could be purchased, would result in any Person
beneficially owning 20% or more) of the then outstanding Shares or
otherwise for the direct or indirect acquisition of the Company or all or
substantially all of its assets for per Share consideration having a value
greater than the Per Share Amount and (w) the Offer shall have remained
open for at least 20 business days, (x) the Minimum Condition shall not
have been satisfied, (y) this Agreement shall have been terminated
pursuant to Section 8.01 and (z) within 12 months of any such termination
a transaction such as the transaction contemplated by this Section 8.03(a)
shall have been consummated or definitive documentation shall have been
entered into with respect thereto; or
(b) this Agreement is terminated pursuant to Section
8.01(c)(ii) or 8.01(d)(ii);
then, in any such event, the Company shall pay Purchasers (i) prior to such
consummation or entering into of definitive documentation in the case of
paragraph (a) or (ii) prior to such withdrawal or modification in the case of
termination pursuant to paragraph (b), a fee of $30 million (the "Fee").
<PAGE> 49
41
SECTION 8.04. Amendment. This Agreement may be amended by the
parties hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
after the approval and adoption of this Agreement and the transactions
contemplated hereby by the shareholders of the Company, no amendment may be made
which would reduce the amount or change the type of consideration into which
each Share shall be converted upon consummation of the Merger. This Agreement
may not be amended except by an instrument in writing signed by the parties
hereto.
SECTION 8.05. Waiver. At any time prior to the Effective Time, any
party hereto may (i) extend the time for the performance of any obligation or
other act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
ARTICLE X
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.01, as the case may be, except that the agreements set
forth in Article III and Sections 6.08 and 6.09 shall survive the Effective Time
indefinitely and those set forth in Sections 6.02(b) and 8.03 shall survive
termination indefinitely.
SECTION 9.02. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 9.02):
<PAGE> 50
42
if to F Purchaser:
Fremont Purchasers II, Inc.
50 F Street, Suite 3700
San Francisco, California 94105-1895
Facsimile No: (415) 284-8191
Attention: General Counsel
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Facsimile No: (212) 848-7179
Attention: David W. Heleniak, Esq.
if to B Purchaser:
RCBA Purchaser I, L.P.
909 Montgomery Street, Suite 400
San Francisco, California 94133-4625
Facsimile No.: (415) 434-3130
Attention: Murray Indick, Esq., General Counsel
with a copy to:
Wilmer Cutler & Pickering
2445 M Street, NW
Washington, DC 20037
Facsimile No.: (202) 663-6363
Attention: Michael Klein, Esq.
if to the Company:
Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, Texas 78230-4726
Facsimile No.: (210) 255-6993
Attention: Dennis E. Noll, Esq., General Counsel
<PAGE> 51
43
with a copy to:
Cox & Smith
112 East Pecan Street, Suite 1800
San Antonio, Texas 78205-1521
Facsimile No.: (210) 226-8395
Attention: Stephen Seidel, Esq.
SECTION 9.03. Certain Definitions. For purposes of this Agreement, the
term:
(a) "affiliate" of a specified Person means a Person who
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with, such specified Person;
(b) "beneficial owner" with respect to any Shares means a
Person who shall be deemed to be the beneficial owner of such Shares (i)
which such Person or any of its affiliates or associates (as such term is
defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such Person or any of its affiliates or associates
has, directly or indirectly, (A) the right to acquire (whether such right
is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other Persons with whom such Person or any of its
affiliates or associates or Person with whom such Person or any of its
affiliates or associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any Shares;
(c) "business day" means any day on which the principal
offices of the SEC in Washington, D.C. are open to accept filings, or, in
the case of determining a date when any payment is due, any day on which
banks are not required or authorized to close in the City of New York;
(d) "control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise;
(e) "Knowledge" means the actual knowledge, after due
investigation, of the officers of the Company with a title of vice
president or higher;
<PAGE> 52
44
(f) "Material Adverse Effect" means any change or effect or
any event or circumstance which is, or is reasonably likely to be,
materially adverse to the assets, liabilities, business, financial
condition or results of operations of the Company and its subsidiaries
taken as a whole;
(g) "Person" means an individual, corporation, partnership,
limited partnership, syndicate, person (including, without limitation, a
"person" as defined in Section 13(d)(3) of the Exchange Act), trust,
association or entity or government, political subdivision, agency or
instrumentality of a government; and
(h) "subsidiary" or "subsidiaries" of the Company, the
Surviving Corporation, either of Purchasers or any other person means an
affiliate controlled by such person, directly or indirectly, through one
or more intermediaries.
SECTION 9.04. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 9.05. Entire Agreement; Assignment. This Agreement and the
Shareholder Support Agreement constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior agreements and
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof. This Agreement shall not be assigned by
operation of law or otherwise, except that Purchasers may assign all or any of
their rights and obligations hereunder to any affiliate or affiliates of either
of Purchasers provided that no such assignment shall relieve the assigning party
of its obligations hereunder if such assignee does not perform such obligations.
SECTION 9.06. Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, other than Section 6.07 (which is intended to be for the
benefit of the persons covered thereby and may be enforced by such persons).
SECTION 9.07. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not
<PAGE> 53
45
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 9.08. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware applicable
to contracts executed in and to be performed in that State. All actions and
proceeding arising out of or relating to this Agreement shall be heard and
determined in any Delaware state or federal court. THE COMPANY AND PURCHASERS
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVER ANY RIGHT THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH, THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR PURCHASERS.
SECTION 9.09. Joint and Several Obligations. The obligations of
Purchasers under this Agreement shall be joint and several except that neither
Purchaser shall have any obligation or liability with respect to the portion of
the Equity Financing to be provided by the other Purchaser in accordance with
Section 5.06.
SECTION 9.10. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 9.11. Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
<PAGE> 54
46
IN WITNESS WHEREOF, Purchasers and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
FREMONT PURCHASER II, INC.
By /s/ R. S. Kopf
--------------------------------
Title:
RCBA PURCHASER I, L.P.
By /s/ N. Colin Lind
--------------------------------
Title: Managing Director
KINETIC CONCEPTS, INC.
By /s/ Raymond R. Hannigan
--------------------------------
Title: President and Chief
Executive Officer
<PAGE> 55
ANNEX A
Conditions to the Offer
Notwithstanding any other provision of the Offer, the Company shall
not be required to accept for payment or pay for any Shares tendered pursuant to
the Offer, if (v) the Minimum Condition shall not have been satisfied, (w) any
applicable waiting period under the HSR Act shall not have expired or been
terminated prior to the expiration of the Offer, (x) the Debt Financing shall
not have been obtained, (y) the Closing shall not have occurred or (z) at any
time on or after the date of this Agreement, and prior to the acceptance for
payment of Shares, any of the following conditions shall exist:
(a) there shall be instituted or be pending any action or
proceeding before any court or governmental, administrative or regulatory
authority or agency, domestic or foreign, in each case that has a
reasonable likelihood of success notwithstanding the reasonable efforts of
the Company and Purchasers to dismiss or otherwise terminate such action
or proceeding, (i) challenging or seeking to make illegal, materially
delay or otherwise directly or indirectly restrain or prohibit or make
materially more costly the making of the Offer, the acceptance for payment
of, or payment for, any Shares by the Company, Purchasers or any affiliate
of either of Purchasers, or the consummation of any other Transaction, or
seeking to obtain material damages in connection with any Transaction;
(ii) seeking to prohibit or limit materially the ownership or operation by
the Company, Purchasers or any of their affiliates of all or any material
portion of the business or assets of the Company, Purchasers or any of
their affiliates, or to compel the Company, Purchasers or any of their
affiliates to dispose of or hold separate all or any material portion of
the business or assets of the Company, Purchasers or any of their
affiliates, as a result of the Transactions; (iii) seeking to impose or
confirm limitations on the ability of Purchasers or any of their
affiliates to exercise effectively full rights of ownership of any Shares,
including, without limitation, the right to vote any Shares acquired by
Purchaser pursuant to the Stock Purchase or the Shareholder Support
Agreement or otherwise on all matters properly presented to the Company's
shareholders, including, without limitation, the approval and adoption of
this Agreement and the transactions contemplated hereby; or (iv) seeking
to require divestiture by Purchasers or any of their affiliates;
(b) there shall have been any action taken, or any statute,
rule, regulation, legislation, interpretation, judgment, order or
injunction enacted, entered, enforced, promulgated, amended, issued or
deemed applicable to (i) Purchasers, the Company or any of their
affiliates or (ii) any Transaction, by any legislative body,
<PAGE> 56
A-2
court, government or governmental, administrative or regulatory
authority or agency, domestic or foreign, other than the routine
application of the waiting period provisions of the HSR Act to the
Offer, which is reasonably likely to result, directly or indirectly, in
any of the consequences referred to in clauses (i) through (v) of
paragraph (a) above;
(c) there shall have occurred any change, condition, event or
development that has a Material Adverse Effect on the Company;
(d) there shall have occurred (i) any general suspension of,
or limitation on prices for, trading in securities on any national
securities exchange, the NASDAQ National Market, or the
over-the-counter market in the United States, (ii) any decline,
measured from the date hereof, in the Standard & Poor's 500 Index by an
amount in excess of 15%, (iii) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States,
(iv) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency,
domestic or foreign, on, or other event that, in the reasonable
judgment of Purchasers, might affect, the extension of credit by banks
or other lending institutions, (v) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States or (vi) in the case of any of
the foregoing existing on the date hereof, a material acceleration or
worsening thereof;
(e) (i) it shall have been publicly disclosed or Purchasers
shall have otherwise learned that beneficial ownership (determined for
the purposes of this paragraph as set forth in Rule 13d-3 of the
Exchange Act) of 20% or more of the then outstanding Shares has been
acquired by any person, other than Purchasers or any of either of their
affiliates or (ii) (A) the Board or any committee thereof shall have
withdrawn or modified in a manner adverse to Purchasers the approval or
recommendation of the Offer or the Transactions, or approved or
recommended any takeover proposal or any other acquisition of Shares
other than pursuant to the Transactions or (B) the Board or any
committee thereof shall have resolved to do any of the foregoing;
(f) the Merger Agreement shall have been terminated in
accordance with its terms;
(g) Purchasers and the Company shall have agreed that the
Company shall terminate the Offer or postpone the acceptance for
payment of or payment for Shares thereunder; or
<PAGE> 57
A-3
(h) The Company shall not have received Houlihan Lokey's
written opinion, which opinion shall not have been withdrawn, addressed to
the Board and the Purchasers with respect to solvency and related matters
in form and substance reasonably satisfactory to the Board and Purchasers.
The parties acknowledge that the Conditions to the Offer set forth above in this
Annex A are for the benefit of the Purchasers and the Company and that the
Company shall not assert failure of, or waive, any such condition without the
prior written consent of each Purchaser (which consent shall not be unreasonably
withheld).
<PAGE> 58
EXHIBIT A
RESTATED ARTICLES OF INCORPORATION
(WITH AMENDMENTS)
OF KINETIC CONCEPTS, INC.
ARTICLE ONE
Kinetic Concepts, Inc., pursuant to the provisions of Article 4.07
of the Texas Business Corporation Act ("TBCA"), hereby adopts restated articles
of incorporation that accurately copy the articles of incorporation and all
amendments thereto that are in effect to date and as further amended by such
restated articles of incorporation as hereinafter set forth and that contain no
other change in any provisions thereof.
ARTICLE TWO
The articles of incorporation of the corporation are amended by the
restated articles of incorporation as follows:
Article Three of the Articles of Incorporation is amended by the restated
articles of incorporation of the corporation to read as follows:
"ARTICLE THREE
The purpose for which the Corporation is organized is to transact
any or all lawful business for which corporations may be organized under
the Texas Business Corporation Act; provided, however, that the
corporation shall not transact any business in this state that is
prohibited by Article 2.01-B of the Texas Business Corporation Act."
Article Four of the Articles of Incorporation is amended by the restated
articles of incorporation of the corporation to read as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock that the
Corporation is authorized to issue is [one hundred fifty million
(150,000,000) shares], all of which shall be shares of Common Stock, par
value $.001 per share."
Article Six has been redesignated Article Ten and amended by the restated
articles of incorporation of the corporation to read as follows:
<PAGE> 59
2
"ARTICLE TEN
The street address of the registered office of the Corporation is
[ ], and the name of the registered agent of the Corporation at such
address is [ ]."
Article Seven has been redesignated as paragraph (2) of Article Eight and
amended by the restated articles of incorporation of the corporation to
read as follows:
"(2) To the extent permitted by the Texas Business Corporation Act
as it now exists and as it may hereafter be amended, 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 that constitutes a breach of duty of the
Director to the Corporation or an act or omission 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, or (d) an act or omission for which the liability for
the Director is expressly provided for by statute."
Article Eight has been redesignated Article Nine and amended by the
restated articles of incorporation of the corporation to read as follows:
"ARTICLE NINE
The current board of directors of the Corporation [at the time of
filing] [at the time of execution] of these Amended and Restated Articles
of Incorporation consists of eight (8) directors. The names and address of
the persons who are acting [at the time of filing] [at the time of
execution] of these Amended and Restated Articles of Incorporation in the
capacity of directors until the selection of their successors are:
NAME ADDRESS
[ ] [ ]
[ ] [ ]
[ ] [ ]
<PAGE> 60
3
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]"
Article Nine has been redesignated Article Six and amended by the restated
articles of incorporation of the corporation to read as follows:
"ARTICLE SIX
No shareholder or other holder of securities of the Corporation
shall have any preemptive right to acquire additional, unissued or
treasury shares of the Corporation, or securities of the Corporation
convertible into or carrying a right to subscribe to or acquire shares,
except as provided by any agreement between the Corporation and its
shareholders."
Articles Ten and Eleven have been deleted in their entirety by the
amendments effected by the restated articles of incorporation of the
corporation .
The Articles of Incorporation are further amended by the restated articles
of incorporation of the corporation by adding new Article Seven and
paragraph (1) to Article Eight to read as follows:
"ARTICLE SEVEN
(1) With respect to any matter for which, but for this provision,
the affirmative vote of the holders of two-thirds of the shares entitled
to vote is required by the Act, the act of the shareholders on that matter
shall be the affirmative vote of a majority of the shares entitled to vote
on that matter rather than the affirmative vote otherwise required by the
Act. With respect to any matter for which, but for this provision, the
affirmative vote of the holders of two-thirds of the shares of any class
or series is required by the Act, the act of the shareholders on that
matter shall be the affirmative vote of a majority of the shares of that
class or series rather than the affirmative vote of the holders of shares
of that class or series otherwise required by the Act.
(2) Any action required by the Texas Business Corporation Act to be
taken at any annual or special meeting of shareholders, or any action
which
<PAGE> 61
4
may be taken at any annual or special meeting of shareholders, may be
taken without a meeting, without prior notice, and without a vote, if a
consent or consents in writing, setting forth the action so taken shall be
signed by the holder or holders of all shares entitled to vote on the
action were present and voted.
ARTICLE EIGHT
(1) Elections of directors of the Corporation need not be by written
ballot, except and to the extent provided in the By-laws of the
Corporation."
The Articles of Incorporation are further amended by the restated articles
of incorporation of the corporation by adding new Articles Eleven and
Twelve to read as follows:
"ARTICLE ELEVEN
(1) The Corporation reserves the right to amend, alter, change or
repeal any provision of these Articles of Incorporation, in the manner now
or hereafter prescribed by law, and all rights conferred on shareholders
in these Articles of Incorporation are subject to this reservation.
(2) The By-laws of the Corporation may be amended, repealed or
adopted by the affirmative vote of the holders of a majority of shares
then entitled to vote on such action. The Board of Directors shall not
have the power to amend, repeal or adopt any By-law of the Corporation.
<PAGE> 62
5
ARTICLE TWELVE
The Corporation shall indemnify its directors to the fullest extent
provided by the Texas Business Corporation act, as amended."
ARTICLE THREE
Each such amendment made by the restated articles of incorporation
has been effected in conformity with the provisions of the Texas Business
Corporation Act and such restated articles of incorporation and each such
amendment made by the restated articles of incorporation were duly adopted by
the shareholders of the corporation on the ___ day of ________, 199_.
ARTICLE FOUR
The number of shares outstanding was ________, and the number of
shares entitled to vote on the restated articles of incorporation as so amended
was ________. All of the shareholders have signed a written consent to the
adoption of such restated articles of incorporation as so amended pursuant to
Article 9.10(A) of the TBCA and any written notice required by Article 9.10(A)
of the TBCA has been given.
ARTICLE FIVE
The articles of incorporation and all amendments and supplements
thereto are hereby superseded by the following restated articles of
incorporation which accurately copy the entire text thereof and as amended as
above set forth:
"AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
KINETIC CONCEPTS, INC.
ARTICLE ONE
The name of the corporation (which is hereinafter called the
"Corporation") is Kinetic Concepts, Inc.
ARTICLE TWO
The period of duration of the Corporation is perpetual.
<PAGE> 63
6
ARTICLE THREE
The purpose for which the Corporation is organized is to transact
any or all lawful business for which corporations may be organized under the
Texas Business Corporation Act; provided, however, that the corporation shall
not transact any business in this state that is prohibited by Article 2.01-B of
the Texas Business Corporation Act.
ARTICLE FOUR
The total number of shares of all classes of stock that the
Corporation is authorized to issue is [one hundred fifty million (150,000,000)
shares], all of which shall be shares of Common Stock, par value $.001 per
share.
ARTICLE FIVE
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of at least One Thousand
Dollars ($1,000.00), consisting of money, labor done or property actually
received.
ARTICLE SIX
No shareholder or other holder of securities of the Corporation
shall have any preemptive right to acquire additional, unissued or treasury
shares of the Corporation, or securities of the Corporation convertible into or
carrying a right to subscribe to or acquire shares, except as provided by any
agreement between the Corporation and its shareholders.
ARTICLE SEVEN
(1) With respect to any matter for which, but for this provision,
the affirmative vote of the holders of two-thirds of the shares entitled to vote
is required by the Act, the act of the shareholders on that matter shall be the
affirmative vote of a majority of the shares entitled to vote on that matter
rather than the affirmative vote otherwise required by the Act. With respect to
any matter for which, but for this provision, the affirmative vote of the
holders of two-thirds of the shares of any class or series is required by the
Act, the act of the shareholders on that matter shall be the affirmative vote of
a majority of the shares of that class or series rather than the affirmative
vote of the holders of shares of that class or series otherwise required by the
Act.
(2) Any action required by the Texas Business Corporation Act to be
taken at any annual or special meeting of shareholders, or any action which may
be taken at any annual or special meeting of shareholders, may be taken without
a meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so
<PAGE> 64
7
taken shall be signed by the holder or holders of shares having not less than
the minimum number of votes that would be necessary to take such action at a
meeting at which the holders of all shares entitled to vote on the action were
present and voted.
ARTICLE EIGHT
(1) Elections of directors of the Corporation need not be by written
ballot, except and to the extent provided in the By-laws of the Corporation.
(2) To the extent permitted by the Texas Business Corporation Act as
it now exists and as it may hereafter be amended, 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 that constitutes a breach of duty of the Director to the Corporation
or an act or omission 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, or (d) an act or omission for which
the liability for the Director is expressly provided for by statute.
[Any repeal or modification of all or part of this article Eight by
the shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.]
ARTICLE NINE
The current board of directors of the Corporation [at the time of
filing] [at the time of execution] of these Amended and Restated Articles of
Incorporation consists of eight (8) directors. The names and address of the
persons who are acting [at the time of filing] [at the time of execution] of
these Amended and Restated Articles of Incorporation in the capacity of
directors until the selection of their successors are:
NAME ADDRESS
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
<PAGE> 65
8
[ ] [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
ARTICLE TEN
The street address of the registered office of the Corporation is
[ ], and the name of the registered agent of the Corporation at such address
is [ ].
ARTICLE ELEVEN
(1) The Corporation reserves the right to amend, alter, change or repeal
any provision of these Articles of Incorporation, in the manner now or hereafter
prescribed by law, and all rights conferred on shareholders in these Articles of
Incorporation are subject to this reservation.
(2) The By-laws of the Corporation may be amended, repealed or adopted by
the affirmative vote of the holders of a majority of shares then entitled to
vote on such action. The Board of Directors shall not have the power to amend,
repeal or adopt any By-law of the Corporation.
ARTICLE TWELVE
The Corporation shall indemnify its directors to the fullest extent
provided by the Texas Business Corporation act, as amended.
--------------------------
Name:
Title:"
<PAGE> 66
EXHIBIT B
AMENDED AND RESTATED
BY-LAWS
OF
KINETIC CONCEPTS, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of the Corporation
shall be in the City of San Antonio, Texas.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Texas as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
SHAREHOLDERS
Section 1. Time and Place of Meeting. All meetings of the
shareholders shall be held at such time and at such place within or without the
State of Texas as shall be determined by the Board of Directors.
Section 2. Annual Meetings. The annual meeting of shareholders of
the Corporation for the election of directors of the Corporation, and for the
transaction of such other business as may properly come before such meeting,
shall be held at such place, date and time as shall be fixed by the Board and
designated in the notice or waiver of notice of such annual meeting.
Section 3. Special Meetings. Special meetings of the shareholders
may be called at any time by the President or the Board of Directors, and shall
be called by the President or Secretary at the request in writing of the holders
of not less than fifty percent (50%) of all the shares issued, outstanding and
entitled to vote at the meeting. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at special meetings shall
be confined to the purposes stated in the notice of the meeting.
Section 4. Notice. Written or printed notice stating the place, day
and hour of any shareholders' meeting, and in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the President,
Secretary, or the officer or person calling the meeting, to each shareholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be
<PAGE> 67
2
delivered when deposited in the United States mail, postage prepaid, to the
shareholder at his address as it appears on the stock transfer books of the
Corporation.
Section 5. Record Date. The Board of Directors may fix in advance a
record date for the purpose of determining shareholders entitled to notice of or
to vote at a meeting of shareholders, such record date to be not less than ten
(10) nor more than sixty (60) days prior to such meeting, or the Board of
Directors may close the stock transfer books for such purpose for a period of
not less than ten (10) nor more than sixty (60) days prior to such meeting. In
the absence of any action by the Board of Directors, the date upon which the
notice of the meeting is mailed shall be the record date.
Section 6. List of Shareholders. The officer or agent of the
Corporation having charge of the share transfer records for shares of the
Corporation shall make, at least ten (10) days before each meeting of the
shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of voting shares held by each, which list, for a
period of ten (10) days prior to such meeting, shall be kept on file at the
registered office of the Corporation and shall be subject to inspection by any
such shareholder at any time during the usual business hours. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original share transfer records shall be prima facie evidence as to
who are the shareholders entitled to examine such list or transfer books or to
vote at any meetings of shareholders.
Section 7. Quorum. Except as otherwise provided by law or the
Articles of Incorporation, the holders of a majority of the issued and
outstanding shares and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by the
Texas Business Corporation Act (herein called the "Act"). If, however, such
quorum shall not be present or represented at any meeting of the shareholders,
the shareholders entitled to vote, present in person or represented by proxy,
shall have power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. When any adjourned meeting is reconvened and a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. Once a quorum is constituted,
the shareholders present or represented by proxy at a meeting may continue to
transact business until adjournment, notwithstanding the subsequent withdrawal
therefrom of such number of shareholders as to leave less than a quorum.
Section 8. Voting. When a quorum is present at any meeting, the vote
of the holders of a majority of the shares present or represented by proxy at
such meeting and
<PAGE> 68
3
entitled to vote shall be the act of the shareholders, unless the vote of a
different number is required by the Act, the Articles of Incorporation or these
By-Laws.
Section 9. Proxy. Each shareholder shall at every meeting of the
shareholders be entitled to one vote in person or by proxy for each share having
voting power held by such shareholder. Every proxy must be executed in writing
by the shareholder or by his duly authorized attorney-in-fact, and shall be
filed with the Secretary of the Corporation prior to or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution unless otherwise provided therein. Each proxy shall be revocable
unless expressly provided therein to be irrevocable and unless otherwise made
irrevocable by law.
Section 10. Action by Written Consent. Any action required or
permitted to be taken at any meeting of the shareholders may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the shareholders entitled to vote with respect to the subject
matter thereof, and such consent shall have the same force and effect as a
unanimous vote of shareholders.
Section 11. Meetings by Conference Telephone. Shareholders may
participate in and hold meetings of shareholders by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in such a
meeting shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transactions of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE III
DIRECTORS
Section 1. Numbers of Directors. The Corporation shall have no less
than one and no more than ten directors as may be provided from time to time by
a resolution of the Board of Directors or by a vote of the holders of a majority
of shares then entitled to vote in the election of Directors, but no decrease
shall have the effect of reducing the term of any incumbent Director. Directors
shall be elected at the annual meeting of the shareholders, except as provided
in Section 2 of this Article, and each director shall hold office until his
successor is elected and qualified. Directors need not be shareholders of the
Corporation or residents of the State of Texas. Except as otherwise provided by
any agreement between the Corporation and its shareholders, any or all of the
Directors may be removed, with or without cause, by the shareholders, at any
time, by a vote of the holders of a majority of the shares then entitled to vote
in the election of Directors, provided that notice of the meeting states that
one of the purposes of the meeting is the removal of a director or directors.
<PAGE> 69
4
Section 2. Vacancies. Except as otherwise provided by any agreement
between the Corporation and its shareholders, the affirmative vote of the
holders of a majority of the shares then entitled to vote in the election of
Directors may fill any vacancy occurring in the Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase in
the number of directors shall be filled by a vote of the holders of a majority
of the shares then entitled to vote in the election of Directors at an annual
meeting or at a special meeting of shareholders called for that purpose. Except
as otherwise provided by any agreement between the Corporation and its
shareholders, at any annual meeting of shareholders, or any special meaning
called for such purpose, any director may be removed from office, with or
without cause, though his term may not have expired.
Section 3. General Powers. The business and affairs of the
Corporation shall be managed by its Board of Directors, which may exercise all
powers of the Corporation and do all such lawful acts and things as are not by
the Act, the Articles of Incorporation or by these By-Laws directed or required
to be exercised or done by the shareholders.
Section 4. Place of Meetings. The directors of the Corporation may
hold their meetings, both regular and special, either within or without the
State of Texas.
Section 5. Annual Meetings. The first meeting of each newly elected
Board of Directors shall be held without further notice immediately following
the annual meeting of the shareholders, and at the same place, unless by
unanimous consent of the directors then elected and serving such time or place
shall be changed.
Section 6. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the President on two days' notice to each director,
either personally or by mail or by telegram. Special meetings shall be called by
the President or Secretary in like manner and on like notice on the written
request of any two directors.
Section 8. Quorum. At all meetings of the Board of Directors, the
presence of a majority of the number of directors fixed by Section 1 of this
Article shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the affirmative vote of at least a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by the
Act, the Articles of Incorporation or these By-Laws. If a quorum shall not be
present at any meeting of directors, the directors present thereat may adjourn
the meeting from time to time without notice other than announcement at the
meeting, until a quorum shall be present.
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Section 9. Executive Committee. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate an Executive
Committee, to consist of two or more directors, one of whom shall be designated
as chairman, who shall preside at all meetings of such Committee. To the extent
provided in the resolution of the Board of Directors, the Executive Committee
shall have and may exercise all of the authority of the Board of Directors in
the management of the business and affairs of the Corporation, except where
action of the Board of Directors is required by the Act or by the Articles of
Incorporation, and shall have the power to authorize the seal of the Corporation
to be affixed to all papers which may require it. The Executive Committee shall
keep regular minutes of its proceedings and report the same to the Board of
Directors when required. Any member of the Executive Committee may be removed,
for or without cause, by the affirmative vote of a majority of the whole Board
of Directors. If any vacancy or vacancies occur in the Executive Committee, such
vacancy or vacancies shall be filled by the affirmative vote of a majority of
the whole Board of Directors.
Section 10. Other Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate other committees,
each committee to consist of two or more directors, which committees shall have
such power and authority and shall perform such functions as may be provided in
such resolution. Such committee or committees shall have such name or names as
may be designated by the Board of Directors and shall keep regular minutes of
their proceedings and report the same to the Board of Directors when required.
Section 11. Compensation of Directors. Directors, as such, shall not
receive any stated salary for their services, but, by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors;
provided that nothing herein contained shall be construed to preclude any
directors from serving the Corporation in any other capacity and receiving
compensation therefor. Members of the Executive Committee may, by resolution of
the Board of Directors, be allowed like compensation for attending Executive
Committee meetings.
Section 12. Action by Written Consent. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee designated by the Board of Directors may be taken without a meeting if
a written consent, setting forth the action so taken, is signed by all the
members of the Board of Directors or of such committee, and such consent shall
have the same force and effect as a unanimous vote at a meeting.
Section 13. Meetings by Conference Telephone. Members of the Board
of Directors or members of any committee designated by the Board of Directors
may participate in and hold a meeting of such Board or committee by means of
conference telephone or simi-
<PAGE> 71
6
lar communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transactions of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE IV
NOTICES
Section 1. Form of Notice. Whenever under the provisions of the Act,
the Articles or Incorporation or these By-Laws, notice is required to be given
to any director or shareholder, and no provision is made as to how such notice
shall be given, it shall not be construed to mean personal notice, but any such
notice may be given in writing, by mail, postage prepaid, addressed to such
director or shareholder at such address as appears on the books of the
Corporation. Any notice required or permitted to be given by mail shall be
deemed to be given at the time when the same be thus deposited, postage prepaid,
in the United States mail as aforesaid.
Section 2. Waiver. Whenever any notice is required to be given to
any director or shareholder of the Corporation, under the provisions of the Act,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated in such notice, shall be deemed equivalent to the giving of such
notice.
ARTICLE V
OFFICERS
Section 1. In General. The officers of the Corporation shall be
elected by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors may also, if it chooses to do so, elect a
Chairman of the Board, additional Vice Presidents, one or more Assistant
Secretaries and one or more Assistant Treasurers, all of whom shall also be
officers. Two or more offices may be held by the same person.
Section 2. Election. The Board of Directors at its first meeting
after such annual meeting of the shareholders shall elect a President and, if it
so chooses, may elect a Chairman of the Board, both of whom shall be members of
the Board, but the other officers need not be members of the Board. The Board of
Directors may appoint such other officers and agents as it shall deem necessary
and may determine the salaries of all officers and agents from time to time. The
officers shall hold office until their successors are chosen and qualified. Any
officer elected or appointed by the Board of Directors may be removed, for or
without cause, at any time by a majority vote of the whole Board. Election or
appointment of an officer or agent shall not of itself create contract rights.
<PAGE> 72
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Section 3. Chairman. The Chairman of the Board of Directors, if
there be a Chairman, shall preside at all meetings of the shareholders and the
Board of Directors and shall have such other powers as may from time to time be
assigned by the Board of Directors.
Section 4. President. The President shall preside at all meetings of
the shareholders and the Board of Directors, if a Chairman of the Board has not
been elected, and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The President shall execute all contracts
requiring a seal and shall also execute mortgages, conveyances or other legal
instruments in the name of and on behalf of the Corporation, but this provision
shall not prohibit the delegation of such powers by the Board of Directors to
some other officer, agent or attorney-in-fact of the Corporation.
Section 5. Vice Presidents. The Vice President or, if there be more
than one, the Vice Presidents in the order of their seniority or in any other
order determined by the Board of Directors, shall, in the absence or disability
of the Senior Vice President, perform the duties and exercise the powers of the
Senior Vice President, and shall generally assist the President and Senior Vice
Presidents and perform such other duties as the Board of Directors shall
prescribe.
Section 6. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the shareholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for any other committees of the Board when required. He
shall give, or cause to be given, notice of all meetings of the shareholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he shall be. He shall keep in safe custody the seal of the
Corporation.
Section 7. Assistant Secretaries. Any Assistant Secretary shall, in
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as may be prescribed
by the Board of Directors or the President.
Section 8. Treasurer. The Treasurer shall have the custody of all
corporate funds and securities, and shall keep full and accurate accounts of
receipts and disbursements of the Corporation, and shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the President and
directors at the regular meetings of the Board or whenever they may require it,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation,
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8
and shall perform such other duties as may be prescribed by the Board of
Directors or the President.
Section 9. Assistant Treasurers. Any Assistant Treasurer shall, in
the absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as may be prescribed
by the Board of Directors or the President.
ARTICLE VI
CERTIFICATES OF REPRESENTING SHARES
Section 1. Form of Certificates. The Corporation shall deliver
certificates representing shares to which shareholders are entitled.
Certificates representing shares of the Corporation shall be in such form as
shall be determined by the Board of Directors and shall be numbered
consecutively and entered in the books of the Corporation as they are issued.
Each certificate shall state on the face thereof the holder's name, the number,
class of shares, and the par value of the shares or a statement that the shares
are without par value. They shall be signed by the President or a Vice President
and the Secretary or an Assistant Secretary, and may be sealed with the seal of
the Corporation or a facsimile thereof if the Corporation shall then have a
seal. If any certificate is countersigned by a transfer agent or registered by a
registrar, either of which is other than the Corporation or an employee of the
Corporation, the signatures of the Corporation's officers may be facsimiles. In
case any officer or officers who have signed, or whose facsimile signature or
signatures have been used on such certificate or certificates, shall cease to be
such officer or officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates have been
delivered by the Corporation or its agents, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed the certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation.
Section 2. Lost Certificates. The Board of Directors may direct that
a new certificate be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing the issue of a new certificate, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of the lost or destroyed, certificate, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Corporation a bond in such form, in such sum, and with such
surety or sureties as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost or destroyed.
<PAGE> 74
9
Section 3. Transfer of Shares. Shares of stock shall be transferable
only on the books of the Corporation by the holder thereof in person or by his
duly authorized attorney and, upon surrender to the Corporation or to the
transfer agent of the Corporation of a certificate representing shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation or the transfer
agent of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 4. Registered Shareholders. The Corporation shall be
entitled to recognize the holder of record of any share or shares of stock as
the holder in fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the outstanding shares of the
Corporation, subject to the provisions of the Act and of the Articles of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting. Dividends may be declared and paid in cash, in property, or
in shares of the Corporation, provided that all such declarations and payments
of dividends shall be in strict compliance with all applicable laws and the
Articles of Incorporation. The Board of Directors may fix in advance a record
date for the purposes of determining shareholders entitled to receive payment of
any dividend, such record date to be not more than sixty (60) days prior to the
payment of such dividend, or the Board of Directors may close the stock transfer
books for such purpose for a period of not more than fifty (60) days prior to
the payment date of such dividend. In the absence of any action by the Board of
Directors, the date upon which the Board of Directors adopts the resolution
declaring such dividend shall be the record date.
Section 2. Reserves. There may be created by resolution of the Board
of Directors out of the earned surplus of the Corporation such reserve or
reserves as the Board of Directors from time to time, in its discretion, deems
proper to provide for contingencies or to equalize dividends, or to repair or
maintain any property of the Corporation, or for such other purpose as the Board
shall deem beneficial to the Corporation, and the Board may modify or abolish
any reserve in the same manner in which it was created.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
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Section 4. Annual Statement. The Board of Directors shall present at
each annual meeting and when called for by vote of the shareholders at any
special meeting of the shareholders, a full and clear statement of the business
and condition of the Corporation.
Section 5. Disallowed Payments. Any payments made to an officer of
the Corporation such as a salary, commission, bonus, interest, or rent, or
entertainment expense incurred by him, which shall be disallowed in whole or in
part as a deductible expense by the Internal Revenue Service, shall be
reimbursed by such officer to the Corporation to the full extent of such
disallowance. It shall be the duty of the Directors, as a Board, to enforce
payment by the officer, subject to the determination of the Directors,
proportionate amounts may be withheld from his future compensation payments
until the amount owed to the Corporation has been recovered.
ARTICLE VIII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1. As utilized in this Article, the following terms shall
have the meanings indicated:
(a) The term "corporation" includes any domestic or foreign
predecessor entity of the corporation in a merger, consolidation or other
action in which the liabilities of the predecessor are transferred to the
corporation by operation of law and in any other transaction in which the
corporation assumes the liabilities of the predecessor, but does not
specifically exclude liabilities that are the subject matter of this
Article.
(b) The term "director" means any person who is or was a director of
the corporation and any person who, while a director of the corporation,
is or was serving at the request of the corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another foreign or domestic corporation,
partnership, joint venture, sole proprietorship, trust, employee benefit
plan or other enterprise.
(c) The term "expenses" include court costs and attorneys' fees.
(d) The term "official capacity" means: (i) when used with respect
to a director, the office of director in the corporation, and (ii) when
used with respect to a person other than a director, the elective or
appointive office in the corporation held by the officer or the employment
or agency relationship undertaken by the employee or agent on behalf of
the corporation, but (iii) in both (i) and (ii) above does not include
service for any other foreign or domestic corporation or any partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise.
<PAGE> 76
11
(e) The term "proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action, suit or
proceeding and any inquiry or investigation that could lead to such an
action, suit or proceeding.
Section 2. The corporation shall indemnify a person who was, is or
is threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director only if it is determined, in accordance with
Section 6 of this Article that the person (a) conducted himself or herself in
good faith; (b) reasonably believed: (1) in the case of conduct in the official
capacity as a director of the corporation, that the conduct was in the
corporation's best interests, and (ii) in all other cases, that the conduct was
at least not opposed to the corporation's best interests; and (iii) in the case
of any criminal proceeding, had no reasonable cause to believe the conduct was
unlawful.
Section 3. A director shall not be indemnified by the corporation as
provided in Section 2 of this Article for obligations resulting from a
proceeding (a) in which the director is found liable on the basis that a
personal benefit was improperly received by the director, whether or not the
benefit resulted from an action taken in the person's official capacity, or (b)
in which the person is found liable to the corporation, except to the extent
permitted in Section 5 of this Article.
Section 4. The termination of a proceeding by judgment, order,
settlement or conviction or on a plea of nolo contendere or its equivalent is
not of itself determinative that the person did not meet the requirements set
forth in Section 2 of this Article. A person shall be deemed to have been found
liable in respect of any claim, issue or matter only after the person shall have
been so adjudged by a court of competent jurisdiction after exhaustion of all
appeals therefrom.
Section 5. A person may be indemnified by the corporation as
provided in Section 2 of this Article against judgements, penalties (including
excise and similar taxes), fines, settlements and reasonable expenses actually
incurred by the person in connection with the proceeding; but if the person is
found liable to the corporation or is found liable on the basis that a personal
benefit was improperly received by the person, the indemnification (a) shall be
limited to reasonable expenses actually incurred by the person in connection
with the proceeding, and (b) shall not be made in respect of any proceeding in
which the person shall have been found liable for willful or intentional
misconduct in the performance of the person's duty to the corporation.
Section 6. A determination of indemnification under Section 2 of
this Article shall be made (a) by a majority vote of a quorum consisting of
directors who at the time of the vote are not named defendants or respondents in
the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a
committee of the board of directors, designated
<PAGE> 77
12
to act in the matter by a majority vote of all directors, consisting solely of
two (2) or more directors who at the time of the vote are not named defendants
or respondents in the proceeding (c) by special legal counsel selected by the
board of directors or a committee thereof by a vote as set forth in subsection
(a) or (b) of this Section 6, or, if such a quorum cannot be obtained and such a
committee cannot be established, by a majority vote of all directors; or (d) by
the shareholders in a vote that excludes the shares held by directors who are
named defendants or respondents in the proceeding.
Section 7. Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses shall be
made in the manner specified by subsection (c) of Section 6 of this Article for
the selection of special legal counsel. A provision contained in the articles of
incorporation, the bylaw, a resolution of shareholders or directors, or an
agreement that makes mandatory the indemnification described in Section 2 of
this Article shall be deemed to constitute authorization of indemnification in
the manner required herein, even though such provision may not have been adopted
or authorized in the same manner as the determination that indemnification is
permissible.
Section 8. The corporation shall indemnify a director against
reasonable expenses incurred by the director in connection with a proceeding in
which the director is a named defendant or respondent because the person is or
was a director if the director has been wholly successful, on the merits or
otherwise, in the defense of the proceeding.
Section 9. If upon application of a director, a court of competent
jurisdiction determines, after giving any notice the court considers necessary,
that the director is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not the director has met the
requirements set forth in Section 2 of this Article or has been found liable in
the circumstances described in Section 3 of this Article, the corporation shall
indemnify the director to such further extent as the court shall determine; but
if the person is found liable to the corporation or is found liable on the basis
that personal benefit was improperly received by the person, the indemnification
shall be limited to reasonable expenses actually incurred by the person in
connection with the proceeding.
Section 10. Reasonable expenses incurred by a director who was, is
or is threatened to be made a named defendant or respondent in a proceeding may
be paid or reimbursed by the corporation in advance of the final disposition of
the proceeding and without the defemination specified in Section 6 of this
Article or the authorization or determination specified in Section 7 of this
Article, after the corporation receives a written affirmation by the director of
a good faith belief that the standard of conduct necessary for indemnification
under this Article has been met and a written undertaking by or on behalf of
<PAGE> 78
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the director to repay the amount paid or reimbursed if it is ultimately
determined that he has not met that standard or if it is ultimately determined
that indemnification of the director against expenses incurred by him in
connection with that proceeding is prohibited by Section 5 of this Article. A
provision contained in the articles of incorporation, these bylaws, a resolution
of the shareholders or directors, or an agreement that makes mandatory the
payment or reimbursement permitted under this Section shall be deemed to
constitute authorization of that payment or reimbursement.
Section 11. The written undertaking required by Section 10 of this
Article shall be an unlimited general obligation of the director, but need not
be secured. It may be accepted without reference to financial ability to make
repayment.
Section 12. Notwithstanding any other provision of this Article, the
corporation may pay or reimburse expenses incurred by a director in connection
with an appearance as a witness or other participation in a proceeding at a time
when he is not a named defendant or respondent. in the proceeding.
Section 13. An officer of the corporation shall be indemnified by
the corporation as and to the same extent provided by Sections 7, 8 and 9 of
this Article for a director and is entitled to seek indemnification under those
sections to the same extent as a director. The corporation may indemnify and
advance expenses to an officer, employee or agent of the corporation to the same
extent that it may indemnify and advance expenses to directors under this
Article.
Section 14. The corporation may indemnify and advance expenses to
persons who are not or were not officers, employees or agents of the corporation
but who are or were serving at the request of the corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other enterprise,
to the same extent that it may indemnify and advance expenses to directors under
this Article.
Section 15. The corporation may indemnify and advance expenses to an
officer, employee, agent or person identified in Section 14 of this Article and
who is not a director to such further extent, consistent with law, as may be
provided by the articles of incorporation, these bylaws, general or specific
action of the board of directors or contract or as permitted or required by
common law.
Section 16. The corporation may purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director, officer,
employee or agent of the corporation or who is or was serving at the request of
the corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of
<PAGE> 79
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another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise, against any
liability asserted against such person and incurred by such person in such a
capacity or arising out of the status as such a person, whether or not the
corporation would have the power to indemnify such person against that liability
under this Article. If the insurance or other arrangement is with a person or
entity that is not regularly engaged in the business of providing insurance
coverage, the insurance or arrangement may provide for payment of a liability
with respect to which the corporation would not have the power to indemnify the
person only if including coverage for the additional liability has been approved
by the shareholders of the corporation. Without limiting the power of the
corporation to procure or maintain any kind of insurance or other arrangement,
the corporation may, for the benefit of persons indemnified by the corporation
(a) create a trust fund, (b) establish any form of self-insurance, (c) secure
its indemnity obligations by grant of a security interest or other lien on the
assets of the corporation, or (d) establish a letter of credit, guaranty or
surety arrangement. The insurance or other arrangement may be procured,
maintained or established within the corporation or with any insurer or other
person deemed appropriate by the board of directors, regardless of whether all
or part of the stock or other securities of the insurer or other person are
owned in whole or part by the corporation. In the absence of fraud, the judgment
of the board of directors as to the terms and conditions of the insurance or
other arrangement and the identity of the insurer or other person participating
in an arrangement shall be conclusive and the insurance or arrangement shall not
be voidable and shall not subject the directors approving the insurance or
arrangement to liability, on any ground, regardless of whether directors
participating in the approval are beneficiaries of the insurance or arrangement.
Section 17. Any indemnification of or advance of expenses to a
director in accordance with this Article shall be reported in writing to the
shareholders with or before the notice or waiver of notice of the next meeting
of shareholders or with or before the next submission to shareholders of a
consent to action without a meeting and, in any case, within the twelve (12)
month period immediately following the date of the indemnification or advance.
Section 18. For purposes of this Article, the corporation is deemed
to have requested a director to serve an employee benefit plan whenever the
performance by the director of the director's duties to the corporation also
imposes duties on, or otherwise involves services by, the director to the plan
or participants or beneficiaries of the plan. Excise taxes assessed on a
director with respect to an employee benefit plan pursuant to applicable law
shall be deemed to be fines. Action taken or omitted by the director with
respect to an employee benefit plan in the performance of the director's duties
or for a purpose reasonably believed by the director to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the corporation.
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ARTICLE IX
BY-LAWS
Section 1. Amendments. These By-Laws may be altered, amended or
repealed and new By-Laws may be adopted by the shareholders in accordance with
the Articles of Incorporation.
Section 2. When By-Laws Silent. It is expressly recognized that when
the By-Laws are silent as to the manner of performing any corporate function,
the provisions of the Act shall control.
<PAGE> 81
CERTIFICATE
I, [ ], do hereby certify that I am duly elected and
acting Secretary of [ ] (the "Company") and that the above and
foregoing Amended and Restated By-Laws were adopted as the By-Laws of the
Company by Consent Action of the Board of Directors of the Company dated
[ ], 1997.
____________________________________
[ ]
<PAGE> 82
EXHIBIT C
AGREEMENT AMONG SHAREHOLDERS
This agreement (the "Agreement") dated this _____ day of _________ 1997
concerns the respective obligations and relationship of those identified below
as shareholders of Kinetic Concepts, Inc.
SECTION 1. Definitions. The following terms shall have the following meanings
for the purposes of this Agreement:
1.01 "Affiliate" means, with respect to any Person, any other Person
that directly or indirectly, through one or more intermediaries or by agreement,
controls, is controlled by, or is under common control with such Person, and,
with respect to any natural person, any member of his or her immediate family or
a trust for the benefit of any such Person.
1.02 "Closing Time" means the time of the closing of the redemption of
the Common Stock by KCI.
1.03 "Common Stock" means the common stock, par value $0.001 per share,
of KCI.
1.04 "Dr. Leininger" means Dr. James R. Leininger, the founder of KCI
and its Chairman since 1976.
1.05 "Fremont" means Fremont Partners, L.P. and/or its Affiliates
listed on Schedule 1.05.
1.06 "Fremont/KCI Group" means those Persons listed on Schedule 1.06 to
which additions may be made after the Closing Time only to reflect transfers by
Fremont to Fremont Affiliates who invest within six (6) months of the Closing
Time.
1.07 "KCI" means Kinetic Concepts, Inc.
1.08 "KCI Percentage" means, for each of the Shareholders, the
percentage of all outstanding fully diluted Common Stock owned by that
Shareholder from time to time. Schedule 1.08 reflects the KCI Percentage of each
Shareholder as of the date of this Agreement.
1.09 "Person" means any individual, firm, corporation, partnership,
limited liability company, trust, joint venture, pension fund, governmental
authority, or other entity.
1.10 "Public Offering" means a consummated public offering of a number
of shares equal to at least twenty percent (20%) of the then issued and
outstanding Common Stock that is underwritten on a firm commitment basis by a
nationally-recognized investment banking firm.
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1.11 "RCBA" means Richard C. Blum & Associates, L.P. and/or its
Affiliates listed on Schedule 1.11.
1.12 "RCBA/KCI Group" means those Persons listed on Schedule 1.12, to
which additions may be made after the Closing Time only to reflect transfers by
RCBA to RCBA Affiliates who invest within six (6) months of the Closing Time.
1.13 "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
1.14 "Shareholder" means any Person that is, as of the date of this
Agreement, or becomes, at any subsequent time, a party to this Agreement. The
Shareholders as of the date of this Agreement are Fremont, RCBA, Dr. Leininger,
the Fremont/KCI Group, and the RCBA/KCI Group.
1.15 Terms and Usage Generally. The definitions in this Section 1 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine, and neuter forms. All references herein to Sections and
Schedules shall be deemed to be references to Sections of and Schedules to this
Agreement unless the context shall otherwise require. All Exhibits and Schedules
attached hereto shall be deemed incorporated herein as if set forth in full
herein. The words "include," "includes," and "including" shall be deemed to be
followed by the phrase "without limitation." The words "hereof," "herein," and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. References to a Person are also to its permitted successors and
permitted assigns.
SECTION 2. Transfer of Shares.
2.01 Restrictions on Transfer of Shares. Each of Fremont and RCBA agree
for themselves and for the respective Fremont/KCI Group and RCBA/KCI Group, and
Dr. Leininger agrees for himself, that immediately after the Closing Time, the
KCI Percentages held by them will be that set forth in Schedule 1.08, and that
until six (6) months after the Common Stock shall have been the subject of a
Public Offering pursuant to the Securities Act, no shares of Common Stock or of
equity interests in the entities comprising the controlling interests in the
Persons comprising the Fremont/KCI Group or the RCBA/KCI Group may be sold,
transferred, pledged, or hypothecated, directly or indirectly (a "Transfer"),
except as set forth in Section 2.02 hereof. Any attempted Transfer that is not
permitted by this Section 2 shall be deemed a violation and breach of this
Agreement that may be treated as null and void by the Shareholders and by KCI.
Any shares of Common Stock or of equity interests in the entities comprising the
controlling interests in the Persons comprising the Fremont/KCI Group or the
RCBA/KCI Group that are the subject of a Transfer permitted by this Section 2
shall remain subject to this Section 2. As a condition precedent to the
effectiveness of any Transfer to any person or entity that is not a party to
this Agreement, such transferee, for good and recognizable consideration, shall
agree in writing to become a party to this Agreement and to be bound by its
terms and provisions.
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2.02 Permitted Transfers. Notwithstanding the foregoing, the following
Transfers will be permitted so long as the transferee, for good and recognizable
consideration, agrees in writing to become a party to this Agreement and to be
bound by its terms and provisions and so long as the Transfer complies with the
registration provisions (or exemptions therefrom) of all applicable federal and
state securities laws:
(a) Transfers by gift or the laws of descent and distribution
to any Affiliate of the transferor.
(b) Sales by Fremont or any member of the Fremont/KCI Group to
any other member of the Fremont/KCI Group.
(c) Sales by RCBA or any member of the RCBA/KCI Group to any
other member of the RCBA/KCI Group.
(d) Sales between Fremont or any member of the Fremont/KCI
Group on the one hand and RCBA or any member of the RCBA/KCI
Group on the other hand, or vice versa, so long as the seller
has first offered the securities on the same price and terms,
for at least thirty (30) days, to the member of its own Group.
(e) Sales by Dr. Leininger of up to 10.5% of KCI's then
outstanding Common Stock.
2.03 Tag-Along Rights. If, at any time after the restrictions of
Section 2.01 expire, a Shareholder proposes to sell Common Stock for value (the
"Transferor") to any Person (other than a transferee in a Transfer permitted by
Section 2.02) in one transaction or a series of related transactions, then such
Transferor shall offer (the "Participation Offer") to include in the proposed
sale a number of shares of Common Stock designated by any of the other
Shareholders not to exceed, in respect of any such Shareholder, the number of
shares equal to the product of (i) the aggregate number of shares to be sold to
the proposed transferee and (ii) the Shareholder's respective KCI Percentage;
provided that if the consideration to be received includes any securities, only
Shareholders that are Accredited Investors (as defined below) shall be entitled
to include their shares in such sale (but, in such case, each Shareholder shall
be entitled to include in such sale a number of its shares, without duplication,
equal to the number of shares held by its Affiliates that are excluded from sale
by the operation of this proviso). The Transferor shall give written notice to
each Shareholder of the Participation Offer (the "Transferor's Notice") at least
twenty (20) days prior to the proposed sale. The Transferor's Notice shall
specify the proposed transferee, the number of shares to be sold to such
transferee, the amount and type of consideration to be received therefor, and
the place and date on which the sale is to be consummated. Each Shareholder that
wishes to include shares of Common Stock in the proposed sale in accordance with
the terms of this Section 2.03 shall so notify the Transferor not more than ten
(10) days after the date of the Transferor's Notice. The Participation Offer
shall be conditioned upon the Transferor's sale of shares pursuant to the
transactions contemplated in the Transferor's Notice with the transferee named
therein. If any Shareholder accepts the
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Participation Offer, the Transferor shall reduce to the extent necessary the
number of shares it otherwise would have sold in the proposed sale so as to
permit other Shareholders that have accepted the Participation Offer to sell the
number of shares that they are entitled to sell under this Section 2.03, and the
Transferor and such other Shareholder or Shareholders shall sell the number of
shares specified in the Participation Offer to the proposed transferee in
accordance with the terms of such sale set forth in the Transferor's Notice. For
purposes of this Section 2.03, "Accredited Investor" shall have the meaning set
forth for such term in Regulation D. Notwithstanding the foregoing, a
Shareholder shall have the right to include shares of Common Stock in the
Transferor's sale under this Section 2.03 only if such Shareholder holds, on the
date he receives the Transferor's Notice, at least ten percent (10%) of the
issued and outstanding shares of Common Stock.
2.04 Drag-Along Rights.
(a) Notwithstanding any other provision in this Section 2, if,
at any time after the restrictions of Section 2.01 expire, Fremont, RCBA, the
Fremont/KCI Group, and the RCBA/KCI Group (collectively, the "Seller") propose
to sell all (but not less than all) of the Common Stock they then hold to a
third party or parties in which the Seller does not own, have any right to
acquire, or propose to own or acquire, any interest (a "Third Party") pursuant
to a Bona Fide Offer (as defined below), then the Seller shall have the right,
subject to the provisions of this Section 2.04, to require Dr. Leininger (the
"Co-Seller"), to include in such sale (a "Required Sale") all of the Common
Stock held by the Co-Seller by delivering notice (the "Required Sale Notice") to
the Co-Seller.
(b) The Required Sale Notice shall set forth: (i) the date of
such notice (the "Notice Date"), (ii) the name and address of the Third Party,
(iii) the proposed amount of consideration to be paid per share for the Sale
Shares, and the terms and conditions of payment offered by the Third Party in
reasonable detail, together with written proposals or agreements, if any, with
respect thereto, (iv) the aggregate number of Sale Shares, (v) confirmation that
the Seller is selling one hundred percent (100%) of the aggregate number of
shares of Common Shares then held by it to a Third Party, and (vi) the proposed
date of the Required Sale (the "Required Sale Date"), which shall be not less
than twenty (20) nor more than one hundred eighty (180) days after the date of
the Notice Date.
(c) The Co-Seller shall cooperate in good faith with the
Seller in connection with consummating the Required Sale (including, without
limitation, the giving of consents and the voting of any Common Stock held by
the Co-Seller to approve such Required Sale). On the Required Sale Date, the
Co-Seller shall deliver, free and clear of all liens, claims, or encumbrances, a
certificate or certificates and/or other instrument or instruments for all of
its Common Stock, duly endorsed and in proper form for transfer, with the
signature guaranteed, to such Third Party in the manner and at the address
indicated in the Required Sale Notice and the Seller shall cause the Co-Seller's
share of the purchase price to be paid to the Co-Seller.
(d) "Bona Fide Offer" shall mean an offer (whether in the form
of a purchase of shares, merger, recapitalization, business combination, or
otherwise) for Common Stock.
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(e) In the event of any Required Sale, if the Co-Seller holds
options to purchase Common Stock, he must exercise or cancel all such stock
options prior to or simultaneously with the consummation of the Required Sale.
Any shares of Common Stock for which options are exercised must be included in
the Required Sale.
(f) Notwithstanding the foregoing, the Co-Seller shall not be
required to sell his shares of Common Stock under this Section 2.04 if, on the
date he receives the Required Sale Notice, he holds less than ten percent (10%)
of the issued and outstanding shares of Common Stock.
SECTION 3. Governance and Voting.
3.01 The Shareholders agree that each shall take such steps as are
required to assure that after the Closing Time, and continuing until such time
as the Common Stock shall have been the subject of a Public Offering registered
under the Securities Act, the Board of Directors of KCI shall have at least
eight (8) members, two (2) of whom shall be persons designated by Fremont, two
(2) of whom shall be persons designated by RCBA, one (1) of whom shall be Dr.
Leininger (so long as he shall own at least fifteen percent (15%) of the
outstanding equity of KCI), one (1) of whom shall be Raymond R. Hannigan
(provided, however, that if Raymond R. Hannigan for any reason ceases to serve
KCI as its chief executive officer, then the successor chief executive officer
shall be elected to serve as director in Mr. Hannigan's place), and two (2) or
more of whom shall be independent outside directors, who shall not be affiliated
with Fremont or RCBA and who shall be designated by the unanimous vote of the
Nominating Committee of the Board of Directors of KCI, which shall comprise Dr.
Leininger, one (1) director designated by Fremont, and one (1) director
designated by RCBA.
3.02 Each of Fremont, RCBA and Dr. Leininger agrees that none of them
shall charge any management, monitoring, consulting or similar fees to KCI or
their Affiliates without the prior consent of the other two (which consent shall
not be unreasonably withheld). In the event Fremont or RCBA charge any such fees
to KCI or its Affiliates (i) the fees shall be of a type and amount customary
between financial buyers and companies that have been the subject of a leveraged
buyout and (ii) Dr. Leininger shall participate in such fees to the extent
equitable in consideration for any management, monitoring or consulting services
that he has provided to KCI or its Affiliates.
SECTION 4. Preemptive Rights.
4.01 Grant of Preemptive Rights. KCI will not issue or sell any capital
stock without first complying with this Section 4. KCI hereby grants to each of
the Shareholders the preemptive right to purchase up to that Shareholder's Pro
Rata Share (as defined below) of any capital stock that KCI may, from time to
time, propose to sell or issue. For purposes of this Section 4, a Shareholder's
"Pro Rata Share" shall mean the percentage of all outstanding fully diluted
capital stock of KCI owned by that Shareholder from time to time.
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4.02 Suspension of Preemptive Rights. The preemptive rights granted in
Section 4.01 shall be suspended with respect to Dr. Leininger if, at the time of
the proposed issuance and sale of capital stock, the exercise of such right
would result in Fremont, RCBA, the Fremont/KCI Group, and the RCBA/KCI Group
collectively holding less than a majority of the issued and outstanding shares
of Common Stock after giving effect to such issuance and sale.
4.03 Notice to Shareholders. If KCI proposes to issue or sell any
capital stock, KCI shall provide each Shareholder with written notice of KCI's
intention (the "Notice of Issuance"). The Notice of Issuance shall describe the
type of capital stock to be issued or sold and the price and other terms upon
which KCI proposes to issue or to sell such capital stock.
4.04 Exercise of Preemptive Rights. Each Shareholder may exercise its
preemptive right under this Section 4, in whole or in part, by giving written
notice of its election to participate in the offering within twenty (20) days
after receipt of the Notice of Issuance. If a Shareholder fails fully to
exercise such preemptive right within such twenty (20) day period, KCI shall
have sixty (60) days in which the sell the capital stock described in the Notice
of Issuance that the Shareholder did not agree to purchase. In the event that
KCI does not sell such capital stock within such sixty (60) day period, KCI
thereafter will not issue or sell such capital stock without again complying
with this Section 4.
4.05 Exceptions. Notwithstanding the foregoing, the preemptive rights
granted in Section 4.01 will not apply to (i) any issuance of capital stock as a
dividend or stock split in respect of outstanding capital stock or (ii) any
issuance of capital stock in an underwritten public offering.
SECTION 5. Registration Rights.
5.01 Demand Registration.
(a) At any time after the fifth anniversary of this Agreement,
if there has not been a Public Offering by such date, each of the Shareholders
may make one (1) written request to KCI for registration of at least
thirty-three percent (33%) of the shares of Common Stock then held by such
Shareholder under Form S-3 (or such other appropriate or successor form if Form
S-3 is not available) and in accordance with the provisions of Rule 415
promulgated under the Securities Act (a "Demand Registration"). In addition to
that right to request a Demand Registration, each Shareholder shall have the
right to request an additional Demand Registration of at least thirty-three
percent (33%) of the shares of Common Stock then held by such Shareholder at any
time after one (1) year, but before three (3) years, following the completion of
a Public Offering.
(b) A registration will not count as a Demand Registration
unless the Shareholder is able to register and sell at least seventy-five
percent (75%) of the shares requested to be included in such registration;
provided, however, that if the Shareholder is able to register and sell less
than such stated percentage, the Shareholder shall be entitled to invoke this
provision to request a subsequent Demand Registration on only one additional
occasion.
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(c) KCI may include in any Demand Registration any of its
securities to be registered for offering and sale on behalf of KCI.
(d) If a Demand Registration is an underwritten registration
and the managing underwriters advise KCI in writing that, in their opinion, the
number of securities in such offering exceeds the number that can be sold in an
orderly manner within a price range acceptable to the Shareholder and to KCI,
then the number of such shares that the managing underwriters believe that may
be sold in such offering shall be allocated first to the Shareholder's shares
for inclusion in the registration statement, second to the shares of any
Piggyback Shareholder (as defined in Section 5.02(a)), then to the KCI shares.
(e) If a Demand Registration is an underwritten offering, the
investment bankers and managers for the offering will be selected by the
Shareholder, subject to the approval of KCI, which will not be unreasonably
withheld.
(f) KCI shall pay the expenses described in Section 5.06 for
any registration pursuant to this Section 5.01.
5.02 Piggyback Registration Rights.
(a) If at any time KCI shall determine to proceed with the
preparation and filing of a registration statement (other than a registration
statement on Form S-4, Form S-8, or other limited purpose form) under the
Securities Act in connection with KCI's or another securityholder's proposed
offer and sale of Common Stock or equity securities convertible into Common
Stock, KCI will give written notice of its determination to the Shareholders at
least twenty (20) days prior to filing the registration statement. Upon the
written request from a Shareholder given within ten (10) days after receipt of
any such notice from KCI, KCI will include the number of shares requested by the
Shareholder in such registration statement ("Piggyback Registration").
Notwithstanding anything in this Agreement to the contrary, if a Shareholder (a
"Piggyback Shareholder") makes a request for Piggyback Registration in a
registration statement filed pursuant to another Shareholder's request for a
Demand Registration under Section 5.01, and the Piggyback Shareholder is able to
register and sell at least seventy-five percent (75%) of the shares requested to
be included in the registration, such request shall be deemed to satisfy the
Piggyback Shareholder's right to request a Demand Registration under Section
5.01.
(b) If a Piggyback Registration is an underwritten primary
registration on behalf of KCI and the managing underwriters advise KCI in
writing that, in their opinion, the number of total securities to be registered
in such offering exceeds the number that can be sold in an orderly manner within
a price range acceptable to KCI, then the number of securities that the managing
underwriter believes may be sold in such offering shall be allocated first to
the shares being offered by KCI for inclusion in the registration statement,
then to the shares of Shareholders submitted for registration, pro rata among
the Shareholders in accordance with the number of shares they then hold.
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(c) If a Piggyback Registration is an underwritten secondary
registration on behalf of the shareholders of KCI's securities and the managing
underwriters advise KCI in writing that, in their opinion, the number of total
securities to be registered in such offering exceeds the number that can be sold
in an orderly manner within a price range acceptable to the shareholders
initially requesting such registration, KCI will include in such registration
the securities being requested to be included therein by the holders initially
requesting such registration and the shares of the Shareholders that requested
Piggyback Registration, pro rata among the holders of such securities on the
basis of the number of shares owned by each such shareholder.
(d) KCI shall pay the expenses described in Section 5.06 for
registration statements filed pursuant to this Section 5.02.
5.03 Registration Procedures. Whenever a Shareholder has requested that
KCI, pursuant to the provisions of Section 5.01 or Section 5.02, effect the
registration of Common Stock under the Securities Act, KCI will:
(a) as soon as reasonably practicable, prepare and file with
the SEC a registration statement with respect to such securities and use its
best efforts to cause such registration statement to become and remain effective
for such period as may be reasonably necessary to effect the sale of such
securities (the "Effective Period");
(b) as soon as reasonably practicable, prepare and file with
the SEC such amendments to such registration statement and supplements to the
prospectus contained therein as may be necessary to keep such registration
statement effective for the Effective Period as may be reasonably necessary to
effect the sale of such securities;
(c) furnish to the Shareholder and to the underwriters for the
securities being registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus, and such other documents as
the Shareholder and such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the Common
Stock covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as the Shareholder may reasonably request in
writing within ten (10) days following the original filing of such registration
statement, except that KCI shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified or subject itself
to taxation in a jurisdiction where it had not previously been subject to
taxation or take any other action that would subject KCI to service of process
in a lawsuit other than one arising out of the registration of the Common Stock;
(e) cause all such registered shares of Common Stock to be
listed on an exchange or NASDAQ by filing a subsequent listing application;
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(f) notify the Shareholder, promptly after it shall receive
notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(g) notify the Shareholder promptly of any request by the SEC
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(h) prepare and promptly file with the SEC and promptly notify
the Shareholder of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at any time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; and
(i) advise the Shareholder, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
5.04 Underwriting. A Shareholder may not participate in any
registration hereunder unless such Shareholder (a) agrees to sell its shares of
Common Stock on the basis provided in the underwriting arrangements, if any, and
(b) completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements, and other documents reasonably required under the terms
of such underwriting arrangements, if any, and these registration rights.
5.05 Holdback Agreements. Each Shareholder agrees not to effect any
public sale or distribution of Common Stock or any securities convertible into
or exchangeable or exercisable for Common Stock, including a sale pursuant to
Rule 144 under the Securities Act, during the fourteen (14) days prior to, and
during a period of up to one hundred eighty (180) days beginning on and
following the effective date of any registration statement filed by KCI pursuant
to this Section 5 (except as part of such registration), if and to the extent
reasonably requested by the managing underwriter of the offering.
5.06 Expenses. With respect to any registration requested pursuant to
Section 5.01 hereof and with respect to an inclusion of a Shareholder's shares
of Common Stock in a registration statement pursuant to Section 5.02 hereof, all
fees, costs, and expenses of such registration, inclusion, and public offering,
including, without limitation, all registration, filing, and listing fees,
printing expenses, fees and disbursements of legal counsel and accountants for
KCI, and all legal fees and disbursements and other expenses of complying with
state securities or blue sky laws of any jurisdictions in which the securities
to be offered are to be registered and
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qualified, shall be borne by KCI; provided, however, that each Shareholder shall
bear its own attorney fees and the underwriting commissions and registration
fees with respect to the sale of its shares of Common Stock.
5.07 Indemnification.
(a) KCI will indemnify and hold harmless each Shareholder and
any underwriter (as defined in the Securities Act) for a Shareholder and each
person, if any, who controls such Shareholder or underwriter within the meaning
of the Securities Act, from and against and will reimburse the Shareholder and
each such underwriter and controlling person with respect to, any and all loss,
damage, liability, cost, and expense to which the Shareholder or any such
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs, or expenses are
caused by any untrue statement or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained therein, or
any amendment 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, in light of the
circumstances in which they were made, not misleading; provided, however, that
KCI will not be liable in any such case to the extent that any such loss,
damage, liability, cost, or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing by a Shareholder, such
underwriter, or such controlling person specifically for use in the preparation
thereof. KCI will not be subject to any liability for any settlement made
without its consent, which consent shall not be unreasonably withheld.
(b) Each Shareholder will indemnify and hold harmless KCI, its
directors and officers, any controlling person, and any underwriter thereof from
and against, and will reimburse KCI, its directors and officers, any controlling
person, and any underwriter thereof with respect to, any and all loss, damage,
liability, cost, or expense to which KCI or any controlling person and/or any
underwriter thereof may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs, or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein, or any
amendment 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, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
conformity with information furnished in writing by or on behalf of the
Shareholder specifically for use in the preparation thereof. A Shareholder will
not be subject to any liability for any settlement made without its consent,
which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party pursuant to
the provisions of paragraph (a) or (b) of this Section 5.07 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will,
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if a claim thereof is to be made against the indemnifying party pursuant to the
provisions of said paragraph (a) or (b), promptly notify the indemnifying party
of the commencement thereof; but the omission to so notify the indemnifying
party will not relieve it from any liability that it may have to any indemnified
party otherwise than hereunder, except to the extent that such omission
materially and adversely affects the indemnifying party's ability to defend
against or compromise such claim. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have the right to participate in and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if the defendants in any action
include both the indemnified party and the indemnifying party and there are
legal defenses available to the indemnified party and/or other indemnified
parties that are different from or in addition to those available to the
indemnifying party or if there is a conflict of interest that would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to an indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party pursuant to the provisions of said paragraph
(a) or (b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provisions of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
(d) If for any reason the foregoing indemnification is
unavailable or is insufficient to hold harmless an indemnified party, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities, or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and the indemnified party on the other
hand in connection with the statement or omission that resulted in the losses,
claims, damages, liabilities, or expenses, as well as any other relevant
equitable considerations. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 6. Liabilities and Indemnification.
6.01 Unless otherwise expressly assumed in writing by Fremont, the
Fremont/KCI Group, RCBA, the RCBA/KCI Group, or Dr. Leininger:
(a) none of them shall be liable to any third parties for any
actions, commitments, or debts of any other as a shareholder of KCI;
and
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(b) each of them shall take all reasonable steps to negotiate
and preclude exposing any of the other of them to any such liability to
any third party.
6.02 To the extent any of Fremont, the Fremont/KCI Group, RCBA, the
RCBA/KCI Group, or Dr. Leininger is presented with a demand or made party to an
adjudication by a third party asserting their potential liability as a
shareholder of KCI for any acts or omissions by any other party or parties to
this Agreement, they shall notify the other party or parties in writing
promptly, and upon the receipt of such notice the notified party or parties will
assume the responsibility for the defense, resolution, and/or satisfaction of
the claim and in all respects indemnify the party that is faced with such a
claim to the full extent of that party's costs and ultimate liabilities, if any.
SECTION 7. Miscellaneous.
7.01 Notices. Except as otherwise expressly provided in this Agreement,
all notices, requests, and other communications to any party hereunder shall be
in writing (including a facsimile or similar writing) and shall be given to such
party at the address or facsimile number specified for such party on Schedule
7.01 hereto or as such party shall hereafter specify for that purpose by notice
to the other parties. Each such notice, request, or other communication shall be
effective (i) if given by facsimile, at the time such facsimile is transmitted
and the appropriate confirmation is received (or, if such time is not during a
business day, at the beginning of the next such business day), (ii) if given by
mail, three business days (or, if to an address outside the United States, seven
calendar days) after such communication is deposited in the mails with
first-class postage prepaid, addressed as aforesaid, or (iii) if given by any
other means, when delivered at the address specified pursuant to this Section
7.01.
7.02 No Third Party Beneficiaries. This Agreement is not intended to
confer any rights or remedies hereunder upon, and shall not be enforceable by,
any Person other than the parties hereto.
7.03 Waiver. No failure by any party to insist upon the strict
performance of any covenant, agreement, term, or condition of this Agreement or
to exercise any right or remedy consequent upon a breach of such or any other
covenant, agreement, term, or condition shall operate as a waiver of such or any
other covenant, agreement, term, or condition of this Agreement. Any Person by
notice given in accordance with Section 7.01 may, but shall not be under any
obligation to, waive any of its rights or conditions to its obligations
hereunder, or any duty, obligation, or covenant of any other Person. No waiver
shall affect or alter the remainder of this Agreement, but each and every
covenant, agreement, term, and condition hereof shall continue in full force and
effect with respect to any other then existing or subsequent breach. The rights
and remedies provided by this Agreement are cumulative, and the exercise of any
one right or remedy by any party shall not preclude or waive its right to
exercise any or all other rights or remedies.
12
<PAGE> 94
7.04 Integration. This Agreement constitutes the entire agreement among
the parties hereto and thereto pertaining to the subject matter hereof and
thereof and supersedes all prior agreements and understandings of the parties in
connection herewith and therewith, and no covenant, representation, or condition
not expressed in this Agreement, the confidentiality agreements between Fremont,
RCBA, and KCI, or any other such agreement shall affect, or be effective to
interpret, change, or restrict, the express provisions of this Agreement.
7.05 Dispute Resolution. Any controversy, claim or dispute between Dr.
Leininger and any other party to this Agreement, arising out of or relating to
this Agreement or any breach thereof, including any dispute concerning the scope
of this Section 7.05, shall be resolved exclusively in a California court of law
in a proceeding conducted without a jury, each party hereto expressly waiving
their right to a trial by jury.
7.06 Headings. The titles of the Sections of this Agreement are for
convenience only and shall not be interpreted to limit or amplify the provisions
of this Agreement.
7.07 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which, taken
together, shall constitute one and the same instrument, which may be
sufficiently evidenced by one counterpart.
7.08 Severability. Each provision of this Agreement shall be considered
separable and if for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing of future law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement that are valid.
7.09 Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the conflicts of law principles thereof.
7.10 Non-Assignability. All of the rights and obligations of the
parties to this Agreement are intended to be exercisable and fulfilled by the
parties themselves, as presently constituted. None of those rights or
obligations may be assigned, assumed, or transferred without the written
informed consent of the counterparties.
13
<PAGE> 95
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties as of the day and year first above written.
Fremont Partners, L.P. Richard C. Blum & Associates, L.P.
By Fremont Advisers, L.L.C., By Richard C. Blum & Associates, Inc.,
its General Partner its General Partner
By:_________________________ By_____________________________________
Name: Name:
Title: Title:
Kinetic Concepts, Inc.
By:_________________________ _____________________________________
Name: Dr. James R. Leininger
Title:
[Fremont/KCI Group and RCBA/KCI Group members' signatures lines.]
14
<PAGE> 1
SHAREHOLDER SUPPORT AGREEMENT
SHAREHOLDER SUPPORT AGREEMENT, dated as of October 2, 1997
(this "Agreement"), among FREMONT PURCHASER II, INC., a Delaware corporation ("F
Purchaser"), RCBA PURCHASER I, L.P., a Delaware limited partnership ("B
Purchaser"; and together with F Purchaser, "Purchasers"; each individually, a
"Purchaser") and JAMES R. LEININGER, M.D., a citizen of the United States (the
"Shareholder").
WHEREAS, as of the date hereof Shareholder owns or controls
19,856,366 shares of Common Stock, par value $.001 per share ("Company Common
Stock"), of Kinetic Concepts, Inc., a Texas corporation (the "Company ") (all
such Company Common Stock and any shares of Company Common Stock of which
ownership (either beneficially or of record) or control is hereafter acquired by
the Shareholder prior to the termination of this Agreement being referred to
herein as the "Shares");
WHEREAS, Purchasers and the Company propose to enter into a
Transaction Agreement, dated as of even date herewith (as the same may be
amended from time to time, the "Transaction Agreement"), which provides, upon
the terms and subject to the conditions thereof, for (i) the Company to make a
cash tender offer (the "Offer") to acquire all of the issued and outstanding
shares of Company Common Stock for $19.25 per share, net to the seller in cash,
upon and subject to the conditions of the Transaction Agreement and the Offer,
(ii) the purchase by Purchasers and the sale by the Company (the "Stock
Purchase") of 8,083,712 shares of Company Common Stock (subject to adjustment in
accordance with Section 2.0 and Section 5.06 of the Transaction Agreement)
immediately prior to the consummation of the Offer and (iii) the merger of each
of Purchasers with and into the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Purchasers to
enter into the Transaction Agreement, Purchasers have requested that the
Shareholder agree, and, in order to induce Purchasers to enter into the
Transaction Agreement, the Shareholder has agreed, subject to the terms and
conditions hereof, (i) to grant to the Purchasers an option to purchase from the
Shareholder 4,200,000 Shares, (ii) to tender 13,792,211 Shares pursuant to the
Offer and (iii) vote all Shares he then owns or controls at the time of the
Stockholders' Meeting in favor of the Merger;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements and covenants set forth herein and in the Transaction
Agreement, the parties hereto agree as follows:
<PAGE> 2
2
ARTICLE I
THE OPTIONS
SECTION 1.01. Grant of Options. (a) The Shareholder hereby
grants to F Purchaser an irrevocable option (the "F Option") to purchase
2,529,197 Shares at a price per Share equal to $19.25 (the "Purchase Price").
(b) The Shareholder hereby grants to B Purchaser an
irrevocable option (the "B Option"; and together with the F Option, the
"Options"; and each individually, an "Option") to purchase 1,670,803 Shares at a
price per Share equal to the Purchase Price.
(c) The Options shall expire if not exercised prior to the
earlier of (i) the close of business on the 180th day following termination of
the Transaction Agreement pursuant to Section 8.01(c)(ii) or 8.01(d)(ii) thereof
and (ii) the consummation of the Offer.
SECTION 1.02. Exercise of Options. Provided that (a) to the
extent necessary, any applicable waiting periods (and any extension thereof)
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the rules and
regulations promulgated thereunder (the "HSR Act") with respect to the exercise
of an option shall have expired or been terminated and (b) no preliminary or
permanent injunction or other order, decree or ruling issued by any court or
governmental or regulatory authority, domestic or foreign, of competent
jurisdiction prohibiting the exercise of the Options or the delivery of Shares
shall be in effect, either Purchaser may exercise its Option at any time
following termination of the Transaction Agreement pursuant to Section
8.01(c)(ii) or 8.01(d)(ii) thereof until the expiration of such Option. In the
event that either Purchaser wishes to exercise its Option, such Purchaser shall
give written notice (the date of such notice being herein called the "Notice
Date"), to the Shareholder specifying a place and date (not later than ten
Business Days (as defined below) and not earlier than three Business Days
following the Notice Date) for closing such purchase (the "Closing"). For the
purpose of this Agreement, the term "Business Day" shall mean a Saturday, a
Sunday or a day on which banks are not required or authorized by law or
executive order to be closed in the City of New York.
SECTION 1.03. Payment for Delivery of Certificates. At the
Closing, (a) The Purchaser exercising its Option shall pay the aggregate
Purchase Price for the shares being purchased from the Shareholder by wire
transfer in immediately available funds of the total amount of the Purchase
Price for such Shares to an account designated by the Shareholder by written
notice to such Purchaser, and (b) the Shareholder shall deliver to such
Purchaser a certificate or certificates evidencing such Shares, and the
Shareholder agrees that such Shares shall be transferred free and clear of all
liens. All such certificates shall be duly endorsed in blank, or with
appropriate stock powers, duly executed in blank, attached
<PAGE> 3
3
thereto, in proper form for transfer, with the signature of the Shareholder
thereon guaranteed, and with all applicable taxes paid or provided for.
ARTICLE II
TENDER OF SHARES
SECTION 2.01. Tender of Shares. The Shareholder hereby
undertakes to validly tender or cause to be validly tendered (i) 10,000,000
Shares pursuant to the Offer by the third Business Day following commencement of
the Offer and (ii) an additional 3,792,211 Shares pursuant to the Offer by the
tenth Business Day following the commencement of the Offer, and thereafter not
to withdraw from the Offer any such Shares prior to the expiration or
termination of the Offer; provided, however, in the event the number of Shares
to be purchased in the Stock Purchase is reduced in accordance with Section 2.01
and Section 5.06 of the Transaction Agreement the number of Shares so tendered
shall be adjusted so that the portion of the Shares to be retained by the
Shareholder after consummation of the Merger shall remain at 33.53%.
ARTICLE III
TRANSFER AND VOTING OF SHARES
SECTION 3.01. Transfer of Shares. Except as otherwise provided
herein, the Shareholder shall not (a) sell, pledge or otherwise dispose of any
of his Shares, (b) deposit his Shares into a voting trust or enter into a voting
agreement or arrangement with respect to such Shares or grant any proxy with
respect thereto or (c) enter into any contract, option or other arrangement or
undertaking with respect to the direct or indirect acquisition or sale,
assignment, transfer or other disposition of any Shares; provided, however, that
the Shareholder shall have the right to transfer Shares by gift or the laws of
descent to any person or entity directly or indirectly controlled by the
Shareholder.
SECTION 3.02. Voting of Shares; Further Assurances. (a) The
Shareholder, by this Agreement, with respect to those Shares that he owns of
record, does hereby constitute and appoint Purchasers, or any nominee of
Purchasers, with full power of substitution, as his true and lawful attorney and
proxy, for and in its name, place and stead, to vote each of such Shares as his
proxy, at every annual, special or adjourned meeting of the stockholders of the
Company (including the right to sign his name (as stockholder) to any consent,
certificate or other document relating to the Company that may be permitted or
required by applicable law) (i) in favor of the adoption of the Transaction
Agreement and approval of the Merger and the other transactions contemplated by
the Transaction Agreement, (ii) against any transaction pursuant to an
Acquisition Proposal (as defined below) or any other action or agreement that
would result in a breach of any covenant,
<PAGE> 4
4
representation or warranty or any other obligation or agreement of the Company
under the Transaction Agreement or which could result in any of the conditions
to the Company's obligations under the Transaction Agreement not being
fulfilled, and (iii) in favor of any other matter relating to consummation of
the transactions contemplated by the Transaction Agreement. The Shareholder
further agrees to cause a minimum of 6,064,155 Shares and all Shares owned by
him beneficially to be voted in accordance with the foregoing. The Shareholder
acknowledges receipt and review of a copy of the Transaction Agreement.
(b) If either Purchaser shall exercise its Option in
accordance with the terms of this Agreement, and without additional
consideration, the Shareholder shall execute and deliver further transfers,
assignments, endorsements, consents and other instruments as such Purchaser may
reasonably request for the purpose of effectively carrying out the transactions
contemplated by this Agreement and the Transaction Agreement, including the
transfer of any and all of the Shareholder's Shares to such Purchaser and the
release of any and all liens, claims and encumbrances covering such Shares.
(c) The Shareholder shall perform such further acts and
execute such further documents and instruments as may reasonably be required to
vest in Purchaser the power to carry out the provisions of this Agreement.
(d) The Shareholder shall take all such other actions as such
other actions as shall be reasonably requested by Purchasers in order to assist
in, and shall cooperate with Purchasers in connection with, the consummation of
the transactions contemplated by the Transaction Agreement, including (i)
participating in meetings with shareholders of the Company and financing
sources, (ii) soliciting proxies and (iii) providing information concerning the
Company to third parties.
(e) The obligations of the Shareholder pursuant to this
Article III shall terminate upon the earlier of (i) the date of termination of
the Transaction Agreement in the case of termination for any reason and (ii) the
consummation of the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES; COVENANTS OF THE SHAREHOLDER
The Shareholder hereby represents and warrants and covenants
to Purchasers as follows:
SECTION 4.01. Power; Binding Agreement. The Shareholder has
the legal capacity, power and authority to enter into and perform all of the
Shareholder's obligations under this agreement. This Agreement has been duly
executed and delivered by the
<PAGE> 5
5
Shareholder and, assuming its due authorization, execution and delivery by
Purchasers, constitutes a legal, valid and binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its terms.
SECTION 4.02. No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by the Shareholder does not, and
the performance of this Agreement by the Shareholder will not, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the
Shareholder. There is no beneficiary or holder of a voting trust certificate or
other interest of any trust of which the Shareholder is a trustee whose consent
is required for the execution and delivery of this Agreement or the consummation
by the Shareholder of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by the
Shareholder does not, and the performance of this Agreement by the Shareholder
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Exchange Act and
the HSR Act and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or materially delay the performance by the Shareholder of its
obligations under this Agreement.
SECTION 4.03. Title to Shares. The Shareholder has full right,
power and authority to sell, transfer and deliver, or cause to be transferred or
delivered 19,856,366 Shares pursuant to this Agreement. Upon delivery of such
Shares and payment of the Purchase Price therefor as contemplated herein, each
Purchaser will receive good and valid title to such Shares, free and clear of
any pledge, lien, security interest, charge, claim, equity, option, proxy,
voting restriction or encumbrance of any kind.
SECTION 4.04 Acquisition Proposals. Until the earlier of (i)
the consummation of the Merger and (ii) 180 days after the termination of the
Transaction Agreement in case of termination pursuant to Section 8.01(c)(ii) or
8.01(d)(ii) thereof, or on the date of termination in the case of termination
for any other reason, the Shareholder shall not, directly or indirectly, through
any representative, agent or otherwise, solicit, initiate or encourage the
submission of any proposal or offer from any person or entity relating to any
acquisition or purchase of all or (other than in the ordinary course of
business) any portion of the assets of, or any equity interest in, the Company
or any of its subsidiaries or any recapitalization, business combination or
similar transaction with the Company or any of its subsidiaries (any
communication with respect to the foregoing being an "Acquisition Proposal") or
participate in any negotiations regarding, or furnish to any other person or
entity any information with respect to, or otherwise cooperate in any way with,
or assist or participate in, facilitate or encourage, any effort or attempt by
any other person to do or seek any of the foregoing. The Shareholder will
immediately cease all existing activities,
<PAGE> 6
6
discussions and negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. From and after the execution of this Agreement, the
Shareholder shall immediately advise Purchasers in writing of the receipt,
directly or indirectly, of any inquiries, discussions, negotiations, or
proposals relating to an Acquisition Proposal that the Shareholder receives in
his capacity as a shareholder of the Company (including the specific terms
thereof and the identity of the other party or parties involved) and furnish to
Purchasers within 48 hours of such receipt an accurate description of all
material terms (including any changes or adjustments to such terms as a result
of negotiations or otherwise) of any such written proposal in addition to any
information provided to any third party relating thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Purchasers hereby represent and warrant to the Shareholder as
follows:
SECTION 5.01. Due Organization; Binding Agreement. Each of
Purchasers is duly organized and validly existing under the laws of the State of
Delaware. Each of Purchasers has all necessary corporate or partnership power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby by each of
Purchasers have been duly authorized by all necessary corporate or partnership
action on the part of each of Purchasers. This Agreement has been duly executed
and delivered by each of Purchasers and, assuming its due authorization,
execution and delivery by the Shareholder, constitutes a legal, valid and
binding obligation of each of Purchasers, enforceable against Purchasers in
accordance with its terms.
SECTION 5.02. No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by each of Purchasers does not, and
the performance of this Agreement by each of Purchasers will not, (i) conflict
with or violate the organizational documents of either of Purchasers, (ii)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to either of Purchasers or by which either of Purchasers or any of
its properties is bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any of the property or assets of either of Purchasers pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which either of
Purchasers is a party or by which it or any of its properties is bound or
affected, except for any such breaches, defaults or other occurrences that would
not prevent or materially delay the performance by either of Purchasers of its
obligations under this Agreement.
<PAGE> 7
7
(b) The execution and delivery of this Agreement by each of
Purchasers does not, and the performance of this Agreement by each of Purchasers
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Exchange Act and
the HSR Act and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay the performance by either of Purchasers of its obligations
under this Agreement.
SECTION 5.03. Investment Intent. The purchase of Shares from
the Shareholder pursuant to this Agreement is for the account of Purchasers for
the purpose of investment and not with a view to or for sale in connection with
any distribution thereof within the meaning of the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Notices. All notices and other communications
given or made pursuant hereto shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address as shall be specified by notice given in accordance
with this Section 6.01):
(a) if to F Purchaser:
Fremont Purchaser II, Inc.
50 F Street, Suite 3700
San Francisco, California 94105-1895
Facsimile No: (415) 284-8191
Attention: General Counsel
<PAGE> 8
8
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Facsimile No: (212) 848-7179
Attention: David W. Heleniak, Esq.
(b) if to B Purchaser:
RCBA Purchaser I, L.P.
909 Montgomery Street, Suite 400
San Francisco, California 94133-4625
Facsimile No.: (415) 434-3130
Attention: Murray Indick, Esq., General Counsel
with a copy to:
Wilmer Cutler & Pickering
2445 M Street, NW
Washington, DC 20037
Facsimile No.: (202) 663-6363
Attention: Michael Klein, Esq.
(c) If to Shareholder to:
James Leininger, M.D.
c/o Mission Center Management
8122 Datapoint Drive
Suite 900
San Antonio, Texas 78232
Facsimile No.: (210) 255-6993
Attention: Tim Lyles
with a copy to:
Hughes & Luce
1717 Main Street, Suite 2800
Dallas, Texas 75201
Facsimile No.: (214) 939-6100
Attention: Ken Hawari, Esq.
<PAGE> 9
9
SECTION 6.02. Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
SECTION 6.03. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 6.04. Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior agreements and
undertakings, both written and oral, between the parties, or any of them, with
respect to the subject matter hereof.
SECTION 6.05. Assignment. This Agreement shall not be assigned
by operation-of law or otherwise.
SECTION 6.06. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, except that this Agreement shall not be amended without the
prior written consent of the Company.
SECTION 6.07. Specific Performance. The parties hereto agree
that irreparable would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 6.08. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware
applicable to contracts executed in and to be performed in that State. All
actions and proceeding arising out of or relating to this Agreement shall be
heard and determined in any Delaware state or federal court. THE COMPANY AND
PURCHASERS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF,
UNDER OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY COURSE OF CONDUCT,
<PAGE> 10
10
COURSE OF DEALING, STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR
PURCHASERS.
SECTION 6.09. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
FREMONT PURCHASER II, INC.
By: /s/ R. S. Kopf
------------------------
Name: R. S. Kopf
Title: General Counsel
and Secretary
RCBA PURCHASER I, L.P.
By: /s/ N. Colin Lind
------------------------
Name: N. Colin Lind
Title: Managing Director
/s/ James R. Leininger, M.D.
---------------------------
JAMES R. LEININGER, M.D.
Acknowledged for purposes of
Section 6.06 only:
KINETIC CONCEPTS, INC.
By: /s/ Raymond R. Hannigan
-----------------------------
Name: Raymond R. Hannigan
Title: President and Chief Executive Officer
<PAGE> 1
AGREEMENT AMONG BIDDERS
This Agreement Among Bidders (the "Agreement") dated as of October 2, 1997
concerns the respective obligations and relationship of those identified below
as participants in certain transactions relating to Kinetic Concepts, Inc.
SECTION 1. Definitions. The following terms shall have the following meanings
for the purposes of this Agreement:
1.01. "Affiliate" means with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries or by agreement,
controls, is controlled by or is under common control with such Person.
1.02. "Bidder Commitments" means $229,490,838.50, representing the amounts
(whether in cash or contribution of securities of KCI) Fremont and RCBA have
committed to contribute to fund the KCI Transactions. The Fremont Bidder
Commitment and the RCBA Bidder Commitment are separately defined below.
1.03. "Closing Time" means the time of funding the Bidder Commitments.
1.04. "Fremont" means Fremont Partners, L.P.
1.05. "Fremont Bidder Commitment" means $138,197,020.50, adjusted as
necessary and appropriate pursuant to Section 3.04(a).
1.06. "Fremont/KCI Group" means any Affiliate of Fremont or any investor
who invests in any such Affiliate within six months of the Closing Time.
1.07. "KCI" means Kinetic Concepts, Inc.
1.08. "KCI Percentages" means the ratio of each party's Bidder Commitment
in relation to their combined commitments, adjusted as necessary and appropriate
pursuant to Section 3.04(a).
1.09. "KCI Transactions" means those series of transactions contemplated
by the Transaction Agreement dated the date hereof among Fremont, RCBA and KCI.
1.10. "Person" means any individual, firm, corporation, partnership,
limited liability company, trust, joint venture, pension fund, governmental
authority or other entity.
1.11. "RCBA" means Richard C. Blum & Associates, L.P.
1.12. "RCBA Bidder Commitment" means $91,293,818.00, adjusted as
necessary and appropriate pursuant to Section 3.04(a).
1
<PAGE> 2
1.13. "RCBA/KCI Group" means RCBA Purchaser I, L.P., a Delaware limited
partnership (or any successor thereto), RCBA, Richard C. Blum & Associates,
Inc., The Southern California Carpenters Pension Fund, The United Brotherhood of
Carpenters and Joiners Pension Fund, Insurance Company Supported Organizations
Pension Plan, Stinson Capital Partners, L.P., Stinson Capital Partners II, L.P.,
BK Capital Partners IV, L.P., Prism Partners I. L.P., The Common Fund, and any
Affiliate of RCBA or any investor who invests in any such Affiliate or any
entity listed herein within six months of the Closing Time.
1.14. Terms and Usage Generally. The definitions in this Section 1 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. All references herein to Sections and
Schedules shall be deemed to be references to Sections of and Schedules to, this
Agreement unless the context shall otherwise require. All Schedules attached
hereto shall be deemed incorporated herein as if set forth in full herein. The
words "include", "includes" and "including" shall be deemed to be followed by
the phrase "without limitation". The words "hereof", "herein" and "hereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
References to a Person are also to its permitted successors and permitted
assigns.
SECTION 2. The KCI Transactions.
2.01. Fremont and RCBA agree to cooperate with one another to accomplish
in accordance with the timetable reflected therein the KCI Transactions.
2.02 Fremont and RCBA agree to make all decisions regarding their pursuit
and execution of the KCI Transactions jointly, by consensus among them, without
regard to percentage of interest or other factors.
2.03 Until the Closing Time:
a. All reasonably necessary books of account and other financial
records of expenses paid and incurred by Fremont and RCBA in pursuit of
the KCI Transactions from the inception of their joint activities shall be
created and maintained by each of them for themselves and their respective
groups.
b. The originals of all other documents germane to the KCI
Transactions shall be maintained by Fremont, and copies shall be provided
regularly to RCBA as it may reasonably request.
c. Fremont shall provide the foregoing services at its cost, and to
the extent Fremont is not reimbursed by KCI, RCBA shall reimburse Fremont
for its pro rata portion of such costs at such periodic intervals as
Fremont reasonably may request.
2
<PAGE> 3
d. Each of Fremont and RCBA otherwise shall be responsible for their
own costs, and will be reimbursed by KCI at or reasonably soon after the
Closing Time for their costs and for pro rata shares of such joint out of
pocket costs incurred and paid that have been associated with their joint
pursuit of the KCI Transactions. Their prorata shares shall be the
relationship between their KCI Percentages.
2.04. In the event the parties hereto fail to complete the KCI
Transactions because their bid is topped, they will divide between themselves in
accordance with their respective KCI Percentages, the sum of (a) all
consideration received on any KCI options held by them and their respective KCI
Groups; and (b) all breakup fees and expenses paid to them by KCI. However, in
consideration for the parties' respective rights and obligations under the KCI
Transactions (including without limitation Fremont's guaranty), the RCBA/KCI
Group's portion shall be reduced, and the Fremont/KCI Group's portion shall be
increased, by an amount equal to 5.4% of the aggregate over bid amount (adjusted
as necessary and appropriate pursuant to Section 3.04(a)), wherein the aggregate
over bid amount is calculated as the product of (i) the amount that the price
per share of the topping bid exceeds $19.25, and (ii) KCI's total shares
outstanding.
SECTION 3. Funding.
3.01 Until the Closing Time, each of Fremont and RCBA will contribute the
amounts required to fulfill their respective shares of the Bidders Commitments
and such other incidental funds for expenses as are reasonably required to
pursue the KCI Transactions in proportion to their respective commitments. To
the extent that either such party advances more than its proportionate share
during any month, the other party shall within five business days of the close
of that month true-up accounts, including interest at the rate paid by the party
which has a favorable balance, so that each party has borne all of its
proportionate share, but no more.
3.02 Each of Fremont and RCBA is responsible for raising or contributing
through the Fremont/KCI Group and the RCBA/KCI Group, respectively, the amounts
of equity required to consummate the KCI Transactions, as of the date of this
Agreement.
3.03 [Intentionally Omitted]
3.04. To the extent either of Fremont/KCI Group or RCBA/KCI Group defaults
by failing timely to provide all of its respective share of the equity
commitments set forth above:
a. If the default involves less than $15 million, the non-defaulting party
may elect to provide that share, in which event it will, in consideration
thereof, acquire that additional interest in KCI and be entitled to 125%
of the transaction fees on that additional interest that would have been
received by the defaulting party had it not defaulted; provided that the
defaulting party will have the right to cure any such default prior to the
closing of the tender contemplated as part of the KCI Transactions in
which event it can recoup from the non-defaulting party its additional
interest in KCI but not the transaction fees
3
<PAGE> 4
pertaining thereto. In the event of a default of an amount greater than
$15 million, there is no understanding; the parties will attempt to
resolve all issues at that time.
b. Notwithstanding the foregoing rights of the non-defaulting party, it
shall in all events be entitled to be held harmless and be fully
indemnified by the defaulting party from any liability to any and all
third parties, and any reasonable related expenses resulting from such
default.
SECTION 4. Liabilities and Indemnification.
4.01. It being understood as between Fremont and RCBA that they or their
affiliates may be assuming joint and several liability to KCI for some or all of
the KCI Transactions, Fremont and RCBA hereby agree that to the extent one of
them or their Affiliates breaches the Transaction Agreement, the breaching party
will indemnify and hold harmless the party not responsible for the breach from
any such liability and reasonably related expenses resulting from the assertion
of liability.
4.02. Except as set forth above and as otherwise expressly assumed in
writing by Fremont, the Fremont/KCI Group, RCBA or the RCBA/KCI Group:
a. none of them shall be liable to any third parties for any
actions, commitments or debts of any other; and
b. each of them shall take all reasonable steps to negate and
preclude exposing any of the other of them to any liability to any third
party.
4.03. To the extent any of Fremont, the Fremont/KCI Group, RCBA or the
RCBA/KCI Group is presented with a demand or made party to an adjudication by a
third party asserting their potential liability for the actions, commitments or
debts of the other respecting KCI, they shall notify that other party in writing
promptly, and upon the receipt of such notice the notified party will assume the
responsibility for the defense, resolution and/or satisfaction of the claim and
in all respects indemnify the party whose is faced with such a claim to the full
extent of that party's costs and ultimate liabilities, if any.
SECTION 5. Miscellaneous.
5.01. Notices. Except as otherwise expressly provided in this Agreement,
all notices, requests and other communications to any party hereunder shall be
in writing (including a facsimile or similar writing) and shall be given to such
party at the address or facsimile number specified for such party on Schedule
5.01 hereto or as such party shall hereafter specify for the purpose by notice
to the other parties. Each such notice, request or other communication shall be
effective (i) if given by facsimile, at the time such facsimile is transmitted
and the appropriate confirmation is received (or, if such time is not during a
Business Day, at the beginning of the next such Business Day), (ii) if given by
mail, three Business Days (or, if to an address outside
4
<PAGE> 5
the United States, seven calendar days) after such communication is deposited in
the mails with first-class postage prepaid, addressed as aforesaid, or (iii) if
given by any other means, when delivered at the address specified pursuant to
this Section 5.01.
5.02. No Third Party Beneficiaries. This Agreement is not intended to
confer any rights or remedies hereunder upon, and shall not be enforceable by,
any Person other than the parties hereto.
5.03. Waiver. No failure by any party to insist upon the strict
performance of any covenant, agreement, term or condition of this Agreement or
to exercise any right or remedy consequent upon a breach of such or any other
covenant, agreement, term or condition shall operate as a waiver of such or any
other covenant, agreement, term or condition of this Agreement. Any Person by
notice given in accordance with Section 5.01 may, but shall not be under any
obligation to, waive any of its rights or conditions to its obligations
hereunder, or any duty, obligation or covenant of any other Person. No waiver
shall affect or alter the remainder of this Agreement but each and every
covenant, agreement, term and condition hereof shall continue in full force and
effect with respect to any other then existing or subsequent breach. The rights
and remedies provided by this Agreement are cumulative and the exercise of any
one right or remedy by any party shall not preclude or waive its right to
exercise any or all other rights or remedies.
5.04. Dispute Resolution. Subject to the aforesaid provisions of this
Agreement providing for remedies, any controversy, claim or dispute arising out
of or relating to this Agreement or any breach hereof, including any dispute
concerning the scope of this Section 5.04, shall be resolved exclusively in a
California court of law, acting in a proceeding conducted without a jury, each
party hereto expressly waiving its right to trial by jury.
5.05. Integration. This Agreement constitutes the entire agreement among
the parties hereto and thereto pertaining to the subject matter hereof and
thereof and supersede all prior Agreements and understandings of the parties in
connection herewith and therewith, and no covenant, representation or condition
not expressed in this Agreement, the confidentiality Agreements between Fremont,
RCBA and KCI or any other such agreement shall affect, or be effective to
interpret, change or restrict, the express provisions of this Agreement.
5.06. Headings. The titles of the Sections of this Agreement are for
convenience only and shall not be interpreted to limit or amplify the provisions
of this Agreement.
5.07. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which, taken
together, shall constitute one and the same instrument, which may be
sufficiently evidenced by one counterpart.
5.08. Severability. Each provision of this Agreement shall be considered
separable and if for any reason any provision or provisions hereof are
determined to be invalid and contrary to
5
<PAGE> 6
any existing or future law, such invalidity shall not impair the operation of or
affect those portions of this Agreement which are valid.
5.09. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
conflicts of law principles thereof.
5.10. Non-Assignability. All of the rights and obligations of the parties
to this Agreement are intended to be exercisable and fulfilled by the parties
themselves, as presently constituted. None of those rights or obligations may be
assigned, assumed or transferred without the written informed consent of the
counterparty.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
as of the day and year first above written.
Fremont Partners, L.P. Richard C. Blum & Associates, L.P.
By FP Advisers, L.L.C., By Richard C. Blum & Associates,
its General Partner Inc., its General Partner
By /s/ G.H. Lamphere By /s/ Murray A. Indick
___________________________ ___________________________
Name: G.H. Lamphere Name: Murray A. Indick
Title: Member Title: Managing Director and
General Counsel
6
<PAGE> 1
KINETIC CONCEPTS, INC.
MANAGEMENT EQUITY PLAN
1. Purpose. The Kinetic Concepts, Inc. Management Equity Plan
(the "Plan") is intended to provide an incentive to certain officers and key
employees of Kinetic Concepts, Inc., a Texas corporation (the "Company"), and
its Subsidiaries (as defined in Section 2) to remain in the employ of the
Company and its Subsidiaries and to increase their interest in the success of
the Company. The Plan provides an opportunity for participants to obtain a
proprietary interest in the Company through the grant, offering or exchange of
shares (the "Management Shares") of common stock, no par value, of the Company
("Common Stock") and the grant or exchange of nonqualified stock options (the
"Nonqualified Stock Options"or the "Options"), to purchase shares of Common
Stock. Management Shares and Options are sometimes referred to herein as
"Awards".
2. Definitions. For purposes of the Plan, the following terms
have the following meanings:
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under
common control with, such Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms
"controlling", "controlled by" or "under common control with"), as used
with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership
of voting securities or by contract or otherwise.
"Agreement" means an agreement between the Company and an
officer or key employee of the Company or any of its Subsidiaries
providing for (i) the grant or sale to such officer or key employee of
Management Shares or (ii) the grant to such officer or key employee of
Options and signed by F Purchaser and B Purchaser to indicate such
parties agreement to be bound by Sections 16 and 17 of the Plan.
"Applicable Management Share Value" as of any date of
determination means the Applicable Value, provided, however, that if
the Company is not a Public Company and such date falls prior to the
fifth anniversary of the Effective Date, the Applicable Management
Share Value shall not exceed the lesser of the Fair Market Value of
such Management Share or $19.25 plus 7% compounded annually on each
anniversary of the Tender Date.
"Applicable Option Share Value" as of any date of
determination means the Applicable Value, provided, however, that if
the Company is not a Public Company, such date falls prior to the fifth
anniversary of the Effective Date and the Option Share was obtained
through the exercise of an Exchange Option, the Applicable Option Share
Value shall not exceed the lesser of (A) the Fair Market Value or (B)
the sum of (1)
<PAGE> 2
2
$19.25 less the exercise price of such underlying Exchange Option (the
"Spread") plus 7% of the Spread compounded annually on each anniversary
of the Tender Date and (2) the exercise price of such Option plus 7% of
the exercise price compounded annually on each anniversary of the date
of exercise.
"Applicable Option Value" as of any date of determination
means the Applicable Value, provided, however, that if the Company is
not a Public Company, such date falls prior to the fifth anniversary of
the Effective Date and the Option to be valued is an Exchange Option,
the Applicable Value shall not exceed the lesser of (A) the Fair Market
Value of the shares of Common Stock underlying such Exchange Option
less the exercise price of such Exchange Option or (B) the Spread plus
7% of the Spread compounded annually on each anniversary of the Tender
Date.
"Applicable Value" as of any date of determination means (i)
if the Company is a Public Company, Public Value and (ii) if the
Company is not a Public Company Fair Market Value.
"B Purchaser" means RCBA PURCHASER I, L.P.
"Beneficial owner" or "beneficially own" has the meaning given
such term in Rule 13d-3 under the 1934 Act.
"Beneficiary" or "Beneficiaries" means the person(s)
designated by a Participant or his Permitted Transferee in writing to
the Company to receive payments pursuant to the Plan upon the death of
a Participant or his Permitted Transferee. If no Beneficiary is so
designated or if no Beneficiary is living at the time a payment is due
pursuant to the Plan, payments shall be made to the estate of the
Participant or Permitted Transferee. The Participant or Permitted
Transferee, as the case may be, shall have the right to change the
designated Beneficiaries from time to time by written instrument filed
with the Committee in accordance with such rules as may be specified by
the Committee.
"Board of Directors" means the Board of Directors of the
Company.
"Call Right" means the right of the Company, exercisable in
accordance with Section 10(a) following termination of a Participant's
employment, (i) to purchase, and to cause a Participant or his
Permitted Transferee to sell, Management Shares and Option Shares
beneficially owned by such Participant or his Permitted Transferee and
(ii) to cause a Participant to surrender for cancellation, in
consideration of the payment
<PAGE> 3
3
provided for in Section 10(a), unexercised Vested Options granted to
such Participant pursuant to the Plan.
"Cause" means, with respect to any Participant, (a) "cause" as
defined in an employment agreement applicable to the Participant, or
(b) in the case of a Participant who does not have an employment
agreement that defines "cause": (i) any act or omission that
constitutes a material breach by the Participant of any of his
obligations under his employment agreement (if any) with the Company or
any of its Subsidiaries, the applicable Agreement or any other
material agreement with the Company or any of its Subsidiaries relating
to the Participants employment with the Company after a written demand
from a representative of the Company for substantial performance is
delivered to him; (ii) the willful and continued failure or refusal of
the Participant substantially to perform the material duties required
of him as an employee of the Company or any of its Subsidiaries after a
written demand from a representative of the Company for substantial
performance is delivered to him; (iii) any willful material violation
by the Participant of any federal or state law or regulation applicable
to the business of the Company or any of its Subsidiaries or
Affiliates, or the Participant's conviction of a felony, or any willful
perpetration by the Participant of a common law fraud; or (iv) any
other willful misconduct by the Participant which is materially
injurious to the financial condition or business reputation of, or is
otherwise materially injurious to, the Company or any of its
Subsidiaries or Affiliates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Committee" has the meaning assigned to such term in Section
3.
"Date of Grant" means the date of grant of an Award as set
forth in the applicable Agreement.
"Exchange Option" means an Option that was originally granted
under a Company plan other than the Plan and that was exchanged for an
Option to purchase shares of Common Stock under the Plan.
"Effective Date" has the meaning assigned to such term in
Section 19.
"Eligible Persons" means officers and key employees of the
Company and its Subsidiaries.
<PAGE> 4
4
"Encumbrance" means any lien, security interest, pledge,
claim, option, right of first refusal, marital right or other
encumbrance with respect to any share of Common Stock or any Option.
"Fair Market Value" means the value of a share of Common Stock
as determined in good faith by the Board of Directors or, under the
circumstances described in Section 11, as determined in a written
report to the Company by an independent appraisal or investment banking
firm selected by the Board of Directors. For purposes of the definition
of "Fair Market Value", the value to be determined by the Board of
Directors or such appraisal or investment banking firm shall be the
price per share at which a share of Common Stock would trade on a
national securities exchange, NASDAQ or a similar market, assuming full
liquidity and the absence of any "takeover" or "change in control"
premium.
"F Purchaser" means FREMONT PURCHASER II, INC.
"IPO" means a Public Offering that results in more than 20% of
the outstanding Common Stock being traded on a national securities
exchange, NASDAQ or a similar market.
"Involuntary Transfer" means a transfer of a Participant's
Management Shares or Option Shares by operation of law including,
without limitation, as a result of (i) a sale or other disposition by a
trustee or debtor in possession appointed or retained in a bankruptcy
case, (ii) a sale at any creditors' or judicial sale or (iii) a
transfer arising out of a divorce or separation proceeding.
"Legended Certificate" means a certificate evidencing a number
of shares of Common Stock issued in connection with an Award and
imprinted with a legend to indicate that (i) such shares are subject to
the restrictions on transfer set forth in the Plan and the applicable
Agreement and (ii) if the offer and sale of such shares have not been
registered under the 1933 Act, such shares may be sold only pursuant to
a registration statement under the 1933 Act or an exemption from
registration under the 1933 Act that the Company has determined is
available for such sale.
"NASDAQ" means the National Association of Securities Dealers'
Automated Quotation System.
"New Option" means an Option to that was originally granted
under this Plan and was not the result of an exchange for an option to
purchase shares of Common Stock granted under a Company option plan
other than the Plan.
<PAGE> 5
5
"1933 Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"Option Price" means, with respect to any Option, the exercise
price per share of Common Stock, as determined by the Committee in its
sole discretion and as set forth in the applicable Agreement.
"Option Shares" means the shares of Common Stock acquired by a
Participant upon exercise of an Option.
"outstanding", with respect to any share of Common Stock,
means, as of any date of determination, all shares that have been
issued on or prior to such date, other than shares repurchased or
otherwise reacquired by the Company or any Affiliate thereof, on or
prior to such date.
"Participant" means any Eligible Person who has been granted
an Award.
"Permanent Disability", with respect to any Participant who is
an employee of the Company or any of its Subsidiaries, shall be defined
in the same manner as such term or a similar term is defined in an
employment agreement applicable to the Participant or, in the case of a
Participant who does not have an employment agreement that defines such
term or a similar term, means that the Participant is unable to perform
substantially all his duties as an employee of the Company or any of
its Subsidiaries by reason of illness or incapacity for a period of
more than six consecutive months, or six months in the aggregate during
any 12-month period, established by medical evidence reasonably
satisfactory to the Company.
"Permitted Transferee" means (A) with respect to outstanding
shares of Common Stock held by any Participant, (i) the trustee or
trustees of a trust revocable solely by such Participant, (ii) such
Participant's guardian or conservator, (iii) any Person to whom such
shares are transferred by will or the laws of descent and distribution,
or (iv) any Person with respect to which the Board of Directors shall
have adopted a resolution stating that the Board of Directors has no
objection if a transfer of shares is made to such Person, and (B) with
respect to Options, any Person (other than the Company) to whom an
Option has been transferred in accordance with Section 8(a)(v).
<PAGE> 6
6
"Person" means an individual, a partnership, a joint venture,
a corporation, an association, a trust, an estate or other entity or
organization, including a government or any department or agency
thereof, or any group deemed to be a "person" under Section 14(d)(2) of
the 1934 Act.
"Prime Rate" means the rate which Bank of America announces
from time to time at its principal office as its prime lending rate for
domestic commercial loans, the Prime Rate to change when and as such
prime lending rate changes.
The Company shall be deemed to be a "Public Company" after it
completes a Public Offering and the Company's Common Stock is traded on
a national securities exchange or quoted on an automated quotation
system.
"Public Offering" means an underwritten public offering of
equity securities of the Company pursuant to an effective registration
statement under the 1933 Act.
The "Public Value" of a share of Common Stock on a given date
shall be the average closing price of a share of Common Stock on such
national securities exchange on which such shares are traded or, in the
event that the Common Stock is not listed for trading on a national
securities exchange but is quoted on an automated quotation system, the
average closing bid price per share of the Common Stock on such
automated quotation system (the "Average Closing Price"), in either
case for the 30-day period ending on such date. The Average Closing
Price of a share of Common Stock shall be determined by dividing (i) by
(ii), where (i) shall equal the sum of the closing prices for the
Common Stock on each day that the Common Stock was traded and a closing
price was reported on such national securities exchange or such
automated quotation system, as the case may be, during the 30-day
period, and (ii) shall equal the number of days on which the Common
Stock was traded and a closing price was reported on such national
securities exchange or such automated quotation system, as the case may
be, during the 30-day period.
"Registrable Securities" means all shares of Common Stock held
by Stockholders, and any common stock which may be issued or
distributed in respect thereof, by way of any recapitalization.
"Registration Expenses" means all out-of-pocket expenses
incident to the Company's performance of or compliance with Sections
14, 15 and 16, including, without limitation, all registration and
filing fees (including filing fees with respect to the National
Association of Securities Dealers, Inc.), all fees and expenses of
complying with state securities or "blue sky" laws (including
reasonable fees and disbursements of underwriters' counsel in
connection with the preparation of any "blue
<PAGE> 7
7
sky" memorandum or survey), all printing expenses, all listing fees,
all registrars' and transfer agents' fees, the fees and disbursements
of counsel for the Company and of its independent public accountants,
including, without limitation, the expenses of any special audits
and/or "cold comfort" letters required by or incident to such
performance and compliance, the reasonable fees and disbursements of
one outside counsel retained by the holders of Registrable Securities
being registered (which counsel shall be satisfactory to the holders of
a majority of the Registrable Securities being registered), but
excluding underwriting discounts and commissions and applicable
transfer taxes, if any, which shall be borne by the sellers of the
Registrable Securities being registered in all cases.
"Retirement", with respect to any Participant who is an
employee of the Company or any of its Subsidiaries, means resignation
or termination of employment after attainment of an age required for
payment of an immediate pension pursuant to the terms of any qualified
retirement plan maintained by the Company or any of its Subsidiaries in
which the Participant participates; provided, however, that no
resignation or termination prior to a Participant's sixty-fifth
birthday shall be deemed a Retirement unless the Committee so
determines in its sole discretion.
"Sale by Fremont/RCBA" means a sale of Common Stock that is
not a Public Offering by either F Purchaser or B Purchaser that results
in F Purchaser and B Purchaser together holding less than sixty-nine
percent of the shares of Common Stock initially held by F Purchaser and
B Purchaser on the Effective Date, as such number may be adjusted to
reflect stock splits, reverse stock splits, stock dividends,
acquisitions and the exercise of Options.
"Sale of Assets" means a sale (in one transaction or a series
of transactions) by the Company of all or substantially all its
business or assets (or both) to a third party that is not an Affiliate
of the Company.
"Sale of Stock" means a sale (in one transaction or in a
series of transactions) by the Company's stockholders of at least
two-thirds of the outstanding Common Stock to a Third Party, including
any merger with a Public Company following the consummation of which
two-thirds or more of the voting securities of the surviving entity
(which is a Public Company) in such merger are held by Third Parities.
"Subsidiary" means any corporation if 50% or more of the total
combined voting power of all classes of stock is owned, either directly
or indirectly, by the Company or another Subsidiary.
<PAGE> 8
8
"Tender Date" means the last day of the Offer, as such term is
defined in the transaction agreement between F Purchaser, B Purchaser
and the Company.
"Third Party" means, with respect to any Participant, any
Person, other than any Affiliate of (a) such Participant, (b) the
Company and its Subsidiaries or (c) F Purchaser or B Purchaser.
"Valuation Date" means December 31 and June 30, or such other
date that the Committee may from time to time select.
"Vested Options" means, as of any date, Options which by their
terms are exercisable on such date.
3. Administration of the Plan.
(a) Members of the Committee. The Plan shall be administered,
and Awards shall be granted hereunder, by a committee (the "Committee") of the
Board of Directors comprised of at least three directors selected by the Board
of Directors to administer the Plan. The composition of the Committee may, in
the discretion of the Board of Directors, be adjusted to the extent required in
order for the Company to rely on the exemptive relief provided under Rule 16b-3,
as it may be amended from time to time, promulgated pursuant to Section 16 of
the 1934 Act.
(b) Authority of the Committee. The Committee shall adopt such
rules as it may deem appropriate in order to carry out the purpose of the Plan.
All questions of interpretation, administration and application of the Plan
shall be determined in good faith by a majority of the members of the Committee
then in office, except that the Committee may authorize any one or more of its
members, or any officer of the Company, to execute and deliver documents on
behalf of the Committee. The determination of such majority shall be final and
binding in all matters relating to the Plan.
4. Number of Shares Issued in Connection with Awards. The
maximum aggregate number of shares of Common Stock that may be issued in
connection with Awards granted under the Plan (together with any shares of
Common Stock issued in connection with Management Shares and Options) is 6.5% of
the initial shares of Common Stock outstanding as of the Effective Date, subject
to adjustment as provided in Section 13. To the fullest extent permitted under
Section 422 of the Code, if any Management Shares are forfeited or are
repurchased by the Company, or if any Option expires or is surrendered without
being exercised in full, such Management Shares or shares of Common Stock as to
which such Option has not been exercised, as the case may be, may again be
available for issuance in connection with future grants or offerings of Awards.
<PAGE> 9
9
5. Eligible Persons. Awards may be granted or offered only to
Eligible Persons. The Chief Executive Officer of the Company (the "CEO") will
recommend for approval by the Board of Directors the individual Participants to
whom Awards may be granted from among such class of Eligible Persons and to
determine the number and form of Awards to be granted to each Participant.
6. Agreement. The terms and conditions of each grant or sale
of Awards shall be embodied in an Agreement in a form approved by the Committee,
which shall contain terms and conditions not inconsistent with the Plan and
which shall incorporate the Plan by reference. Each Agreement shall: (a) state
the date on which the Award was granted or sold, and (i) in the case of Options,
set forth the number of Options being granted to the Participant and the
applicable Option Price or Option Prices, and (ii) in the case of Management
Shares, set forth the number of Management Shares being granted or offered to
the Participant and, if applicable, the purchase price or other consideration
for such Management Shares; (b) set forth the vesting schedule; (c) be signed by
the recipient of the Award and a person designated by the Committee; and (d) be
delivered to the recipient of the Award.
7. Restrictions on Transfer. No Management Share, Option or
Option Share may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of to any third party other than the Company except as
provided in the Plan or Award Agreement or to a Permitted Transferee. Each
Permitted Transferee (other than the Company), by will, by the laws of descent
and distribution or otherwise, of any Management Shares, Options or Option
Shares shall, as a condition to the transfer thereof to such Permitted
Transferee, execute an agreement pursuant to which it shall become a party to
the Agreement applicable to the transferor. Each Permitted Transferee will
succeed to the rights held under the Plan by the transferring Participant, to
the extent that such rights are not limited in the Plan or the relevant
Agreement.
8. Options.
(a) Terms of Options Generally. Options may be granted to any
Eligible Person. Each Option shall entitle the Participant to whom such Option
was granted to purchase, upon payment of the relevant Option Price, one share of
Common Stock. Payment of the Option Price shall be made in cash, or, in the sole
discretion of the Committee and to the extent provided in the applicable
Agreement, in shares of Common Stock already owned by the Participant, in other
property acceptable to the Committee or in any combination of cash, shares of
Common Stock or such other property. Options granted under the Plan shall comply
with the following terms and conditions:
(i) Option Price. Each Agreement relating to an Option shall
specify the relevant Option Price.
<PAGE> 10
10
(ii) Vesting.
(A) Vesting Schedule. The vesting schedule of each
Option shall be set forth in the applicable Agreement.
(B) Acceleration of Vesting. In the event of a
termination of a Participant's employment with the Company and
its Subsidiaries by reason of death or Permanent Disability or
Retirement, all Options granted to such Participant shall vest
on the date of such termination. All Options shall immediately
vest upon (i) completion of a Sale of Stock within three years
from the Effective Date and (ii) completion of a Sale of
Assets within three years from the Effective Date. Fifty
percent of all unvested Options, proportionately per unvested
installment per Participant, shall immediately vest upon (i)
completion of an IPO within three years from the Effective
Date or (ii) completion of a Sale by Fremont/RCBA within three
years from the Effective Date.
(iii) Duration of Options. Each Option shall be effective for
such term as shall be determined by the Committee and set forth in the
applicable Agreement; provided, however, that the term of any New
Option shall not exceed 7 years from the Date of Grant.
(iv) Exercise Following Termination of Employment. Upon
termination of a Participant's employment with the Company and its
Subsidiaries for any reason, the Participant (or, in the case of the
Participant's death, his Beneficiary) may exercise any Vested Option,
subject to Section 8(b), at any time until the earlier of (A) 30 days
(180 days upon a termination of employment or status due to death or
Permanent Disability) following the date of such termination of
employment or status (or, if a Vested Option may not be exercised on
the date of such termination of employment or status because the
conditions to exercise set forth in Section 8(b) are not satisfied, 30
days (180 days upon a termination of employment or status due to death
or Permanent Disability) following the date on which the Company
notifies the Participant that such conditions have been satisfied and
that the Option may be exercised), and (B) exercise by the Company of
its Call Right under Section 10(a), but in no event after the
expiration of the Option under the provisions of clause (iii) above;
provided, however, that the applicable Agreement may, subject to clause
(iii) above, provide for a longer post-termination exercise period.
Upon the expiration of such period or exercise of such Call Right, any
such Vested Option not theretofore exercised shall be canceled, and the
shares of Common Stock that had been subject thereto shall again be
available for
<PAGE> 11
11
grants of further Awards under the Plan to the fullest extent permitted
under Section 422 of the Code.
(v) Certain Restrictions. Options granted hereunder shall not
be transferable by the Participant otherwise than to a Permitted
Transferee. A Participant may transfer Exchange Options to a charity or
charitable foundation (collectively, a "Charity"), subject to the
approval of the Board of Directors, provided however, that the Exchange
Options transferred shall represent more that than 4,000 Option Shares,
as such number may be adjusted to reflect stock splits, reverse stock
splits, stock dividends, and acquisitions. Upon completion of an IPO,
Option Shares may be freely transferred as permitted by applicable laws
and regulations.
(vi) Stockholder Rights. A Participant shall have no rights as
a stockholder with respect to any shares of Common Stock issuable upon
exercise of an Option until a certificate or certificates evidencing
such shares shall have been issued to such Participant, and no
adjustment shall be made for dividends or distributions or other rights
in respect of any share for which the record date is prior to the date
upon which the Participant shall become the holder of record thereof.
(vii) Dividends and Distributions. Any shares of Common Stock
or other securities of the Company received by the Participant as a
result of a stock dividend or other distribution in respect of Option
Shares shall be subject to the same restrictions as such Option Shares.
(viii) Additional Terms and Conditions. Each Option granted
hereunder, and any shares of Common Stock issued in connection with
such Option, shall be subject to such additional terms and conditions
not inconsistent with the Plan which are prescribed by the Committee
and set forth in the applicable Agreement.
(b) Limitation on Exercise. An Option shall not be exercisable
unless the offer and sale of the shares of Common Stock subject to the Option
have been registered under the 1933 Act and qualified under applicable state
"blue sky" laws, or the Company has determined that an exemption from
registration under the 1933 Act and from qualification under such state "blue
sky" laws is available.
(c) Issuance of Certificate. As soon as practicable following
the exercise of any Options, a Legended Certificate evidencing the number of
Option Shares issued in connection with such exercise shall be issued in the
name of the Participant.
<PAGE> 12
12
(d) Unvested Options. Upon termination of a Participant's
employment with the Company and its Subsidiaries, all Options granted to such
Participant which have not theretofore vested (and which do not vest by reason
of such termination of employment or status) shall terminate and be canceled
without any payment therefor.
9. Management Shares.
(a) Terms of Management Shares Generally. Management Shares
may be granted or offered for sale to any Eligible Person. If Management Shares
are offered for sale hereunder, the purchase price shall be payable in cash, or,
in the sole discretion of the Committee and to the extent provided in the
applicable Agreement, in shares of Common Stock already owned by the
Participant, in other property acceptable to the Committee or in any combination
of cash, shares of Common Stock or such other property. The Management Shares
granted or offered for sale under the Plan shall comply with the following terms
and conditions:
(i) Purchase Price; Offering Period. Management Shares may be
granted for no consideration or offered for sale at a purchase price
determined by the Committee in its sole discretion at the time of
offering and set forth in the applicable Agreement. Any offer to sell
Management Shares hereunder shall expire no later than 60 days
following the date of such offer to an Eligible Person.
(ii) Stockholder Rights. A Participant shall have all rights
of a stockholder as to the Management Shares, including the right to
receive dividends and the right to vote in accordance with the
Company's Certificate of Incorporation, subject to the restrictions set
forth in the Plan and the applicable Agreement.
(iii) Dividends and Distributions. Any shares of Common Stock
or other securities of the Company received by a Participant as a
result of a stock distribution to holders of Management Shares or as a
stock dividend on Management Shares shall be subject to the same
restrictions as such Management Shares and all references to Management
Shares hereunder shall be deemed to include such shares of Common Stock
or other securities.
(iv) Additional Terms and Conditions. Each Management Share
granted or offered for sale hereunder shall be subject to such
additional terms and conditions not inconsistent with the Plan which
are prescribed by the Committee and set forth in the applicable
Agreement.
(v) Restrictions on Transfers. No Participant shall be
permitted to transfer any Management Shares other than as expressly
permitted by this Plan or the relevant
<PAGE> 13
13
Agreement. Upon the completion of an IPO, Management Shares may be
freely transferred in accordance with all applicable laws and
regulations.
(b) Issuance of Certificate. At the time of grant or sale of
Management Shares to a Participant, a Legended Certificate evidencing the
appropriate number of shares of Common Stock granted or sold to the Participant
as Management Shares shall be issued in the name of the Participant.
10. Termination of Employment or Status; Involuntary
Transfers.
(a) Company Call Right.
(i) Exercise of Call Right. Unless the Committee in its sole
discretion determines otherwise and so sets forth in the applicable
Agreement, if prior to the completion of an IPO the employment of a
Participant with the Company and its Subsidiaries terminates for any
reason, or an Involuntary Transfer occurs, the Company shall have a
Call Right, exercisable for a period of 60 days after the date of such
termination or Involuntary Transfer, with respect to all of the
Management Shares, Vested Options and Option Shares beneficially owned
by such Participant and his Permitted Transferees. The Company may
exercise such Call Right by giving written notice thereof to the
Participant or his Permitted Transferee, as the case may be, prior to
the expiration of such 60-day period. The Company's Call Right shall
become null and void subsequent to the completion of an IPO.
(ii) Purchase Price. With respect to any exercise of a Call
Right under this Section 10(a), (A) the purchase price per Management
Share to be paid by the Company at the closing provided for in Section
10(c) shall be the Applicable Management Share Value, determined as of
the first Valuation Date coincident with or following the date of
termination of the Participant's employment or status or Involuntary
Transfer, (B) the purchase price per Option Share to be paid by the
Company at the closing provided for in Section 10(c) shall be the
Applicable Option Share Value, determined as of the first Valuation
Date coincident with or following the date of termination of the
Participant's employment or status or Involuntary Transfer and (C) the
consideration to be paid by the Company in respect of Vested Options
surrendered for cancellation at the closing provided for in Section
10(c) shall be the Applicable Option Share Value determined as of the
first Valuation Date coincident with or following the date of
termination of the Participant's employment or Involuntary Transfer.
The Company will give notice of the purchase price to be paid per
Management Share or Option Share within a reasonable time from the date
of determination of such price.
<PAGE> 14
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(b) Participant Put Right.
(i) Exercise of Put Right. To the extent provided in the
applicable Agreement and subject to Section 10(b)(iii), if prior to the
completion of an IPO the employment of a Participant with the Company
and its Subsidiaries terminates for any reason, the Participant (or, in
the case of the Participant's death, his Beneficiary) shall have a Put
Right, exercisable for a period of 60 days after the date of such
termination, with respect to all of the Management Shares, Vested
Options and Option Shares beneficially owned by such Participant and
his Permitted Transferees. The Participant may exercise such Put Right
by giving written notice thereof to the Company prior to the expiration
of such 60-day period. The Participants' Put Rights shall be null and
void subsequent to the completion of an IPO.
(ii) Purchase Price. The Put Right purchase price per
Management Share to be paid by the Company at the closing provided for
in Section 10(c) shall be the Applicable Management Share Value,
determined as of the first Valuation Date coincident with or following
the date of termination of the Participant's employment or status. The
Put Right purchase price per Option Share to be paid by the Company at
the closing provided for in Section 10(c) shall be the Applicable
Option Share Value, determined as of the first Valuation Date
coincident with or following the date of termination of the
Participant's employment or status. The consideration to be paid by the
Company in respect of Vested Options surrendered for cancellation at
the closing provided for in Section 10(c) shall be Applicable Option
Value, determined as of the first Valuation Date coincident with or
following the date of termination of the Participant's employment. The
Company will give notice of the consideration to be paid per Management
Share or Option Share within a reasonable time from the date of
determination of such amount.
(iii) Anything in this Plan to the contrary notwithstanding,
if, at any time, the Board of Directors shall determine, subject to the
written opinion of the Appraiser (as hereinafter defined) referred to
below, the Company is not financially capable of making some or all of
the aggregate payments to be made thereafter pursuant to the exercise
of Put Rights (the "Put Right Payments"), the Company shall have the
right to defer such Put Right Payments but only on the terms
hereinafter provided in this Section 10(b)(iii). In the event that the
Board of Directors shall have made such determination with respect to
the Company's financial capability, the Board of Directors shall, if so
requested in writing by at least two Participants within 10 business
days of the date that notice of such determination has been given (the
"Request Period"), promptly retain an appraisal or investment banking
firm, to be selected by the CEO and reasonably satisfactory to the
Board of Directors (the "Appraiser"), to render
<PAGE> 15
15
a written opinion as to whether the Company has the financial
capability to make any of, or any portion of, such Put Right Payments
at such time as it would otherwise be required to make such Put Right
Payments. If the Board of Directors' determination, or the Appraiser's
written opinion, if so required, indicates that, at the time a Put
Right Payment would otherwise be required to be made to a Participant,
the Company would not have the financial capability to make any of the
Put Right Payments that would otherwise then be required to be made, or
shall have the financial capability to make only a portion of such Put
Right Payments, then payments with respect to such Put Right Payments
shall be made on the following basis: As of the first day following a
determination by the Appraiser of lack of financial capability in
respect of which Put Right Payments are required to be made or, if no
request for an Appraiser's appraisal is made, on the day following the
last day of the Request Period (each such date being hereinafter called
a "Payout Date"), all unpaid amounts payable with respect to Put Rights
exercised prior to such a date, shall be aggregated (the "Aggregate
Payable Amount"), and the amount payable to each Participant shall be
determined by multiplying the full amount owing to such Participant as
of such date by a fraction, the numerator of which shall be the amount
that the Company, as indicated by the Board of Directors' determination
or the Appraiser's written opinion, shall then be financially capable
of paying (which may be zero if, as indicated by the Board of
Directors' determination or the Appraiser's written opinion, the
Company is not financially capable of making any of the Put Right
Payments then otherwise required to be made) and the denominator of
which shall be the Aggregate Payable Amount. Elections to exercise Put
Rights (or portions thereof) not satisfied pursuant to such pro rata
payment shall be deemed revoked, and the remaining Awards (or portions
thereof) with respect thereto shall thereafter be subject to the
provisions of the Plan as if a Put Right election had not been made,
provided, however that such Options will not be canceled pursuant to
Section 8(a)(iv) or as a result of the expiration of such Options' term
pursuant to Section 8(a)(iii). In acting pursuant to this Section 8,
the Appraiser shall be entitled to the rights and immunities of an
arbitrator.
(c) Election and Delivery Procedures.
(i) The closing of any exercise of any Call Right or Put Right
pursuant to Section 10(a) or 10(b) shall take place at the offices of
the Company, or such other place as may be mutually agreed, not less
than 15 nor more than 30 days after the Valuation Date coincident with
or following the relevant termination of employment. The exact date and
time of closing shall be specified by the party exercising such Call
Right or Put Right.
(ii) At such closing (the "Closing"), the Participant (or,
following the Participant's death, the Participant's Beneficiary or
Beneficiaries) shall deliver
<PAGE> 16
16
certificates for the shares of Common Stock to be sold to the Company
duly endorsed, or accompanied by written instruments of transfer in
form reasonably satisfactory to the Company duly executed, by such
transferor, free and clear of any Encumbrances, and shall consent to
the cancellation of the Vested Options to be surrendered, which Vested
Options shall also be free and clear of any Encumbrances. The Company
shall pay the applicable purchase price for shares of Common Stock and
consideration for surrendered Vested Options in cash; provided,
however, that such payment may be deferred under the circumstances, and
to the extent, provided for in Section 12.
11. Appraisal. If, in connection with the determination of the
Fair Market Value used to calculate the purchase price for shares of Common
Stock and Vested Options upon the exercise of any Call Right or Put Right under
Section 10(a) or 10(b), a Participant reasonably believes that the Board of
Directors' determination of Fair Market Value (if applicable) is not reasonable,
then such Participant may challenge the Board of Directors' determination of
such Fair Market Value by giving written notice to the Board of Directors no
later than 15 business days after receipt of notice of the purchase price per
share which the Company intends to pay with respect to such shares of Common
Stock and Vested Options. In such event, the Company shall engage at its own
expense an appraisal or investment banking firm that is independent of the
Company and its Subsidiaries and Affiliates and is knowledgeable in the
valuation of companies engaged in a business similar to the business in which
the Company is engaged to determine the Fair Market Value of the Common Stock
for purposes of determining the purchase price; provided, however, that if such
a determination has been made by such an appraisal or investment banking firm
less than six months prior to the date as of which the Fair Market Value of the
Common Stock is to be determined, the Company shall not be required to engage
any such firm and shall instead rely on such earlier valuation; provided
further, however, that the Company shall not rely on such earlier valuation if
it determines in good faith that such earlier valuation no longer reflects Fair
Market Value. Any such appraisal or investment banking firm engaged by the
Company shall be selected by the Board of Directors and shall be reasonably
satisfactory to such Participant. Such independent appraisal or investment
banking firm's determination of Fair Market Value shall be conclusive and
binding on the parties. Anything in this Section 11 to the contrary
notwithstanding, if such an independent appraisal or investment banking firm is
appointed, no payment shall be made in respect of the Participant's shares of
Common Stock or Vested Options pending the determination of Fair Market Value by
such firm, and payment of the purchase price shall instead be made no later than
the tenth business day following receipt by the Company of the report of such
firm establishing Fair Market Value. If the Fair Market Value so determined by
the independent banking firm exceeds the Fair Market Value as determined by the
Board of Directors by more than 10%, the costs of such firm shall be for the
account of the Company; in all other cases, the costs of such firm shall be
borne by the Participant, and the Company shall have the right to withhold such
costs from any payment it
<PAGE> 17
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makes in respect of its repurchase of shares of Common Stock or Vested Options
from the Participant.
12. Legal Limitations. Anything in the Plan or any Agreement
to the contrary notwithstanding, to the extent that the limitations or
restrictions applicable to the Company or any Subsidiary under the laws of their
respective jurisdictions of incorporation, the restrictions or limitations
contained in the Certificate of Incorporation or By-laws of the Company or any
Subsidiary or any other applicable law, rule or regulation or under the terms of
any indebtedness for borrowed money of the Company or any Subsidiary prohibit
the Company from making any payment required under the Plan or any applicable
Agreement with respect to a share of Common Stock or Vested Option, then the
Company shall not be obligated to make such payment at such time, and shall have
the right to defer such payment until the Board of Directors reasonably
determines that such limitations and restrictions no longer restrict the Company
from making such deferred payment. Any amounts the payment of which is so
deferred shall bear interest, compounded annually and calculated at a rate equal
to the Prime Rate, and shall be paid (with interest) promptly after, and to the
extent that, the Board of Directors determines that the limitations and
restrictions referred to in the first sentence of this Section 12 no longer
restrict such payment. Notwithstanding a deferral of payment in accordance with
this Section 12 for shares of Common Stock or Vested Options in respect of which
a Call Right or Put Right shall have been exercised, the closing of any exercise
of such Call Right or Put Right shall take place as provided in Section 10(c)
and the right of a Participant and his Permitted Transferees in respect of the
shares of Common Stock and Vested Options subject to such Call Right or Put
Right (other than the right to receive payment of amounts deferred in accordance
with this Section 12) shall terminate as of such closing.
13. Effect of Certain Corporate Changes and Changes in
Control.
(a) Dilution and Other Adjustments. In the event of a stock
dividend or split, the Committee shall make the following adjustments as are
necessary or advisable (the form of which shall be determined by the Committee
in its sole discretion) to provide each Participant with a benefit equivalent to
that which he would have been entitled to had such event not occurred: (i)
adjust the number of Awards granted to each Participant and the number of Awards
that may be granted generally pursuant to the Plan, (ii) adjust the Option Price
of any Options, and (iii) make any other adjustments, or take such action, as
the Committee, in its discretion, deems appropriate. Such adjustments shall be
conclusive and binding for all purposes. In the event of a change in the Common
Stock which is limited to a change in the designation thereof to "Capital Stock"
or other similar designation, or to a change in the par value thereof, or from
par value to no par value, without increase or decrease in the number of issued
shares of Common Stock, the shares resulting from any such change shall be
deemed to be Common Stock within the meaning of the Plan.
<PAGE> 18
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(b) Effect of Reorganization. In the event that (i) the
Company is merged or consolidated with another corporation, (ii) all or
substantially all the assets of the Company are acquired by another corporation,
person or entity, (iii) the Company is reorganized, dissolved or liquidated
(each such event in (i), (ii) or (iii) being hereinafter referred to as a
"Reorganization Event") or (iv) the Board of Directors shall propose that the
Company enter into a Reorganization Event, then the Committee shall make upon
consummation of such Reorganization Event any or all of the adjustments
described in Section 13(a) as are necessary or advisable in the sole discretion
of the Committee to provide the Participant with a benefit equivalent to that
which he would have been entitled to had such event not occurred.
14. Incidental Registration.
(a) Registration Process. If the Company at any time proposes
to register any shares of Common Stock under the 1933 Act for sale in a Public
Offering in the United States, whether or not for its own account, on a form and
in a manner that would permit registration of Registrable Securities under the
1933 Act for Sale in such Public Offering, it will each such time give prompt
written notice to all Participants holding Registrable Securities (including
Option Stock issuable upon exercise of any Vested Options held by the
Participants after giving effect to the accelerated vesting, if any, that would
result as a consequence of such Public Offering) of its intention to do so,
specifying the form and manner and the other relevant facts involved in such
proposed registration (including, without limitation, the identity of the
managing underwriter). Upon the written request of any such holder of
Registrable Securities delivered to the Company within 30 days after such notice
shall have been given to such holder (which request shall specify the
Registrable Securities intended to be disposed of by such holder and the
intended method of disposition thereof), the Company will use its best efforts
to effect the registration under the Securities Act, as expeditiously as is
reasonable, of all Registrable Securities that the Company has been so requested
to register by the holders of Registrable Securities, to the extent requisite to
permit the Sale of the Registrable Securities to be so registered in such Public
Offering; provided, however, that:
(i) if, at any time after giving such written notice of its
intention to register any of such shares of Common Stock proposed to be
registered by the Company and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such shares of
Common Stock, the Company may, at its election, give written notice of
such determination to each holder of Registrable Securities that has
requested to register Registrable Securities and thereupon the Company
shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its
obligation to pay the Registration Expenses in connection therewith to
the extent provided in Section 14(b));
<PAGE> 19
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(ii) if the managing underwriter of such Public Offering shall
advise the Company that, in its judgment, the number of shares of
Common Stock proposed to be included in such Public Offering should be
limited because the inclusion of Registrable Securities is likely to
adversely impact the purchase price obtained for the shares of Common
Stock proposed to be included in such Public Offering, then the Company
will promptly advise each such holder of Registrable Securities thereof
and may require, by written notice to each such holder accompanying
such advice, that, to the extent necessary to meet such limitation, all
holders of Registrable Securities proposing to sell shares of Common
Stock in such Public Offering shall share pro rata in the number of
shares of Common Stock to be excluded from such offering, such sharing
to be based on the respective numbers of Registrable Securities as to
which registration has been requested by such holders and that the
distribution of such Registrable Securities as are so excluded be
deferred (in case of a deferral as to a portion of such Registrable
Securities, such portion to be allocated among such holders in
proportion to the respective numbers of shares of Common Stock so
requested to be registered by such holders) until the completion of the
distribution of such shares of Common Stock and any other securities by
such underwriters; and
(iii) the Company shall not be obligated to effect any
registration of Registrable Securities under this Section 14 that is
incidental to the registration of any of its shares of Common Stock or
other securities in connection with any merger, acquisition, exchange
offer, dividend reinvestment plan or stock option or other employee
benefit plan.
(b) Registration Expenses. The Company will pay all
Registration Expenses in connection with each registration of Registrable
Securities effected by it pursuant to this Section 14.
15. Right to Participate in Certain Dispositions.
(a) Right to Participate. (i) So long as F Purchaser and B
Purchaser together (for purposes of this Section 15 the "Founding Stockholders")
shall own at least 40% of the outstanding shares of Common Stock, neither
Founding Stockholder shall in any transaction or series of related transactions,
directly or indirectly, sell or otherwise dispose of for value any shares of
Common Stock held by it to any Third Party or Third Parties, unless the terms
and conditions of such sale or other disposition shall include an offer to
include, at the option of each of the Participants, in such sale or other
disposition to the Third Party or Third Parties, the Pro Rata Portion (as
hereinafter defined) of the shares of Common Stock, including Management Shares
and Option Shares then owned (or issuable upon the exercise of any options
owned) by each such Participant. For purposes of this Section 15, "Pro Rata
Portion" means, with respect to each Participant, a number equal to the product
of (a) the total
<PAGE> 20
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number of shares of Common Stock then owned (or issuable upon the exercise of
any Vested Options held after giving effect to the accelerated vesting, if any,
that would result as a consequence of such sale or disposition) by such
Participant, times (b) a fraction, the numerator of which shall be the total
number of shares of Common Stock proposed to be sold by the Prospective Sellers
(as such term is defined in Section 15(a)(ii)), and the denominator of which
shall be the total number of shares of Common Stock owned (or issuable upon the
exercise of any Vested Options held after giving effect to the accelerated
vesting, if any, that would result as a consequence of such sale or disposition)
by the Prospective Sellers (including such shares of Common Stock so proposed to
be sold).
(ii) If, so long as the Founding Stockholders shall own at
least 40% of the outstanding shares of Common Stock, either Founding Stockholder
receives from a Third Party or Third Parties a bona fide offer or offers to
purchase or otherwise acquire (for purposes of this Section 15, an "Offer") any
shares of Common Stock held by such Founding Stockholder (for purposes of this
Section 15, the "Offered Shares"), and such Founding Stockholder intends to
pursue a sale of such shares of Common Stock to such Third Party or Third
Parties, such Founding Stockholder (for purposes of this Section 15, the
"Prospective Seller") shall provide written notice (for purposes of this Section
15, the "Offer Notice") of such Offer to each of the Participants not later than
the tenth business day prior to the consummation of the sale or other
disposition contemplated by the Offer. The Offer Notice shall identify the
Offered Shares, the price offered for such Offered Shares, all other material
terms and conditions of the Offer and, in the case of an Offer in which the
consideration payable for shares of Common Stock consists in whole or in part of
such other consideration as the Company may reasonably determine, such other
consideration. The Participants shall have the right and option, for a period of
10 business days after the date the Offer Notice is given to such Participants
(for purposes of this Section 15, the "Notice Period"), to notify the
Prospective Seller of such Participant's interest in selling or otherwise
disposing of up to the Pro Rata Portion of such Participant's shares of Common
Stock pursuant to the Offer). Each Participant desiring to exercise such option
shall, prior to the expiration of the Notice Period, provide the Prospective
Seller with written notice (specifying the number of shares of Common Stock as
to which such Participant has an interest in selling or otherwise disposing of
pursuant to the Offer) (for purposes of this Section 15, a "Notice of Interest")
and, deliver to the Prospective Seller (A) the certificate or certificates
evidencing the shares of Common Stock to be sold or otherwise disposed of
pursuant to such Offer by such Participant duly endorsed in blank or accompanied
by written instruments of transfer in form satisfactory to the Prospective
Seller executed by such Participant, (B) an instrument of assignment reasonably
satisfactory to the Prospective Seller assigning, as of the consummation of the
sale or other disposition to the Third Party or Third Parties, all such
Participant's rights hereunder with respect to the shares of Common Stock to be
sold or otherwise disposed of, and (C) a special irrevocable power-of-attorney
authorizing the Prospective Seller to sell or otherwise dispose of such shares
of Common Stock pursuant to the terms of the Offer and to take all such actions
as shall be
<PAGE> 21
21
necessary or appropriate in order to consummate such sale or other disposition.
Delivery of such certificate or certificates evidencing the shares of Common
Stock to be sold, the instrument of assignment and the special irrevocable
power-of-attorney authorizing the Prospective Seller to sell or otherwise
dispose of such shares of Common Stock shall constitute an irrevocable election
by such Participant to authorize and permit the Prospective Seller to sell such
shares of Common Stock pursuant to the Offer. Each Participant that shall have
delivered a Notice of Interest as provided in this Section 15(a)(ii) shall
deliver the documents described in clauses (A) and (B) of the second preceding
sentence at the closing of the sale of the Offered Shares.
(iii) Promptly after the consummation of the sale or other
disposition of the shares of Common Stock of the Prospective Seller and the
Participants to the Third Party or Third Parties pursuant to the Offer, the
Prospective Seller shall remit to each of the Participants the total sales price
of the shares of Common Stock of such Participants sold or otherwise disposed of
pursuant thereto.
(iv) If at the end of the Notice Period any Participant shall
not have given a Notice of Interest (and delivered all other required documents)
with respect to some or all of the Pro Rata Portion of such Participant's shares
of Common Stock, such Participant will be deemed to have waived all its rights
under this Section 15 with respect to the sale or other disposition pursuant to
the Offer of the portion of the Pro Rata Portion of the shares of Common Stock
owned by such Participant with respect to which a Notice of Interest shall not
have been given. If, at the end of the 120-day period following the giving of
the Offer Notice, the Prospective Seller has not completed the sale of all the
Offered Shares and the shares of Common Stock with respect to which Participants
shall have given Notices of Interest pursuant to this Section 15, the
Prospective Seller shall return to such Participants all certificates evidencing
the unsold shares of Common Stock that such Participants delivered for sale or
other disposition pursuant to this Section 15 and such Participants' related
instruments of assignment and powers-of-attorney.
(v) Except as expressly provided in this Section 15, the
Prospective Seller shall have no obligation to any Participant with respect to
the sale or other disposition of any shares of Common Stock owned by such
Participant in connection with this Section 15. Anything herein to the contrary
notwithstanding and irrespective of whether any Notice of Interest shall have
been given, the Prospective Seller shall have no obligation to any Participant
to sell or otherwise dispose of any Offered Shares pursuant to this Section 15
or as a result of any decision by the Prospective Seller not to accept or
consummate any Offer or sale or other disposition with respect to the Offered
Shares (it being understood that any and all such decisions shall be made by the
Prospective Seller in its sole discretion). No Participant shall be entitled to
sell or otherwise dispose of shares of Common Stock directly or to any Third
Party pursuant to an Offer (it being understood that all such sales and other
<PAGE> 22
22
dispositions shall be made only on the terms and pursuant to the procedures set
forth in this Section 15).
(b) Anything in this Section 15 to the contrary
notwithstanding, (i) the provisions of Section 15 will not be applicable to any
sale of shares of Common Stock pursuant to a Public Offering, (ii) in the event
that either Prospective Seller shall exercise the option referred to in Section
16 to require each of the Participants to participate in the sale of shares of
Common Stock referred to therein, the Participants shall thereafter have no
right pursuant to this Section 15 to participate in any such sale and (iii) all
rights to participate conveyed by this Section 15 will become null and void upon
an IPO. Nothing in this Section 15 shall affect any of the obligations of the
Founding Stockholders under any other provision of this Plan.
16. Right to Compel Participation in Certain Sales.
(a) Compelled Participation. If either Founding Stockholder
shall, individually or jointly, in any transaction or series of related
transactions, directly or indirectly, (for purposes of this Section 16,
collectively, the "Prospective Sellers") propose to sell to a Third Party or
Third Parties for cash, cash equivalents or marketable securities all shares of
Common Stock held by them (for purposes of this Section 16, the "Controlling
Shares") to a Third Party or Third Parties (for purposes of this Section 16, an
"Offer") and as a result of such sale such Third Party or Third Parties and all
Affiliates of such Third Party or Third Parties would own a number of shares of
Common Stock that constitutes a majority of the shares of Common Stock then
outstanding, the Prospective Sellers may, at their option, require each of the
Participants to sell all shares of Common Stock owned or held by such
Participant to the Third Party or Third Parties, for the same consideration per
share of Common Stock and otherwise on the same terms and conditions upon which
the Prospective Sellers sell their shares of Common Stock.
(b) Compelled Sales Procedure. (i) the Prospective Sellers
shall provide a written notice (for purposes of this Section 16, the "Offer
Notice") of such Offer to each of the Participants no later than the tenth
business day prior to the consummation of the sale contemplated by the Offer.
The Offer Notice shall contain written notice on the exercise of the Prospective
Sellers' rights pursuant to Section 16, setting forth the consideration per
share of Common Stock to be paid by the Third Party or Third Parties and the
other material terms and conditions of Offer. Within 10 business days following
the date the Offer Notice is given, each of the Participants shall deliver to
the Prospective Sellers (A) the certificate or certificates evidencing all the
shares of Common Stock owned or held by such Participant duly endorsed in blank
or accompanied by written instruments of transfer in form satisfactory to the
Prospective Sellers executed by such Participant, and (B) a special irrevocable
power-of-attorney authorizing the Prospective Sellers to sell such shares of
Common Stock pursuant to
<PAGE> 23
23
the terms of the Offer and to take all such action as shall be necessary or
appropriate in order to consummate such sale, provided, however, that if such
delivery is not permitted by applicable law, such Participant shall deliver an
unconditional agreement to deliver such shares of Common Stock pursuant to this
Section 16(b) at the closing for such Offer against delivery to such Participant
of the consideration therefor.
(ii) Promptly after the consummation of the sale of shares of
Common Stock of the Prospective Sellers and the Participants to the Third Party
or Third Parties pursuant to the Offer, the Prospective Sellers shall remit to
each of the Participants the total sales price of the shares of Common Stock of
such Participant sold pursuant thereto.
(iii) If, at the end of the 120-day period following the
giving of the Offer Notice, the Prospective Sellers have not completed the sale
of all the Controlling Shares and the shares of Common Stock delivered to the
Prospective Sellers pursuant to Section 16(b)(i), the Prospective Sellers shall
return to each of the Participants all certificates evidencing unsold shares of
Common Stock that such Participant delivered for sale pursuant to this Section
16 and such Participant's related powers-of-attorney.
(iv) Except as expressly provided in this Section 16, the
Prospective Sellers shall have no obligation to any Participant with respect to
the sale or other disposition of any shares of Common Stock owned by such
Participant in connection with this Section 16. Anything herein to the contrary
notwithstanding, the Prospective Sellers shall have no obligation to any
Participant to sell or otherwise dispose of any Controlling Shares pursuant to
this Section 16 or as a result of any decision by the Prospective Sellers not to
accept or consummate any Offer or sale with respect to the Controlling Shares
(it being understood that any and all such decisions shall be made by the
Prospective Sellers in their sole discretion). No Participant shall be entitled
to sell shares of Common Stock directly to any Third Party pursuant to an Offer
(it being understood that all such sales and other dispositions shall be made
only on the terms and pursuant to the procedures set forth in this Section 16).
Nothing in this Section 16 shall affect any of the obligations of either of the
Founding Stockholders under any other provisions of this Plan.
(c) Anything in this Section 16 to the contrary
notwithstanding, (i) the provisions of this Section 16 will not be applicable to
any sale of shares of Common Stock pursuant to a Public Offering and (ii) all
rights to compel sales under this Section 16 shall become null and void upon an
IPO.
17. Miscellaneous.
(a) No Rights to Grants or Continued Employment or Engagement.
No Participant shall have any claim or right to receive grants of Awards under
the Plan. Neither
<PAGE> 24
24
the Plan nor any action taken or omitted to be taken hereunder shall be deemed
to create or confer on any Participant any right to be retained in the employ of
the Company or any Subsidiary or other Affiliate thereof, or to interfere with
or to limit in any way the right of the Company or any Subsidiary or other
Affiliate thereof to terminate the employment or engagement of such Participant
at any time.
(b) Right of Company to Assign Rights and Delegate Duties. The
Company shall have the right to assign any of its rights and delegate any of its
duties hereunder to any of its Affiliates, provided, however, that such
assignment shall not release the Company from any duty hereunder which remains
unfulfilled by such an assignee.
(c) Tax Withholding. The Company and its Subsidiaries shall
have the right to require any individual entitled to receive shares of Common
Stock pursuant to an Award to remit to the Company, prior to the delivery of any
certificates evidencing such shares, any amount sufficient to satisfy any
federal, state or local tax withholding requirements. Prior to the Company's
determination of such withholding liability, such individual may make an
irrevocable election to satisfy, in whole or in part, such obligation to remit
taxes by directing the Company to withhold shares of Common Stock that would
otherwise be received by such individual. Such election may be denied by the
Committee in its discretion, or may be made subject to certain conditions
specified by the Committee, including, without limitation, conditions intended
to avoid the imposition of liability against the individual under Section 16(b)
of the 1934 Act. The Company and its Subsidiaries shall also have the right to
deduct from all cash payments made pursuant to the Plan or any applicable
Agreement any federal, state or local taxes required to be withheld with respect
to such payment.
(d) No Restriction on Right of Company to Effect Corporate
Changes. The Plan shall not affect in any way the right or power of the Company
or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
(e) 1934 Act. Notwithstanding anything contained in the Plan
or any Agreement to the contrary, if the consummation of any transaction under
the Plan would result in the possible imposition of liability on a Participant
pursuant to Section 16(b) of the 1934 Act, the Committee shall have the right,
in its sole discretion, but shall not be obligated, to
<PAGE> 25
25
defer such transaction to the extent necessary to avoid such liability, but in
no event for a period in excess of 180 days.
(f) Registration of Plan. On the date, or as soon as
practicable after, the Company becomes a Public Company, the Company shall file
a form S-8 with respect to the Plan.
18. Amendment. The Board of Directors may at any time and from
time to time alter, amend, suspend or terminate the Plan in whole or in part. No
termination or amendment of the Plan may, without the consent of the Participant
to whom any Awards.
19. Effective Date. The Plan shall be effective as of the
Effective Time of the Merger (the "Effective Date"), as such terms are defined
in the transaction agreement between F Purchaser, B Purchaser and the Company.
20. Termination of the Plan. The Plan shall continue until
terminated by the Board of Directors pursuant to Section 18, and no further
Awards shall be made hereunder after the date of such termination.
21. Headings. The headings of sections and subsections herein
are included solely for convenience of reference and shall not affect the
meaning of any of the provisions of the Plan.
22. Governing Law. The Plan and all rights hereunder shall be
governed by and construed in accordance with the laws of the State of Delaware
without reference to rules relating to conflicts of law.
<PAGE> 26
26
FREMONT PURCHASER II, INC. and RCBA PURCHASER I, L.P. acknowledge the Plan
and agree to be bound by Section 10 thereof.
By:/s/ R. S. Kopf By:/s/ N. Colin Lind
___________________________ _______________________
FREMONT PURCHASER II, INC. RCBA PURCHASER I, L.P.
Name: Name: N. Colin Lind
Title: Title: Managing Director
<PAGE> 1
FORM OF AWARD AGREEMENT
MANAGEMENT EQUITY AGREEMENT, dated as of [ ], 1997,
between KINETIC CONCEPTS, INC., a Texas corporation (the "Company"), and the
other party signatory hereto (the "Participant").
[WHEREAS, the Participant has agreed to retain certain shares
of Common Stock of the Company ("Common Stock") and make such shares subject to
this Agreement and the Plan (as defined below) (the "Old Management Shares");
and]
WHEREAS, the Participant has agreed to exchange options (the
"Old Options") to purchase shares of Common Stock under the Company's
pre-existing equity based compensation plans for nonqualified stock options (the
"Exchange Options" or the "Options") to purchase shares of Common Stock; and
WHEREAS, in connection with the foregoing, the Company's
Management Equity Plan (the "Plan") will govern the terms and conditions of the
[Old Management Shares and the New Management Shares (collectively, the
"Management Shares")] and the Options;
NOW, THEREFORE, in consideration of the covenants and
agreements herein contained, the parties hereto agree as follows:
1. Definitions; Incorporation of Plan Terms. Capitalized terms
used herein without definition shall have the meanings assigned to them in the
Plan, a copy of which is attached hereto. This Agreement, the [Management Shares
and the] Options shall be subject to the Plan, the terms of which are hereby
incorporated herein by reference, and in the event of any conflict or
inconsistency between the Plan and this Agreement, the Plan shall govern.
2. Surrender and Grant of Options. Subject to the terms and
conditions contained herein and in the Plan, the Participant has surrendered to
the Company certain of the Old Options in exchange for an equal number of
Exchange Options as specified at the foot of the signature page hereof, at the
Option Prices so listed. The Options are not intended to qualify as Incentive
Stock Options under Section 422 of the Code. Each such Option shall entitle the
Participant to purchase, upon payment of the Option Price, one share of Common
Stock. The shares of Common Stock issuable upon exercise of the Options are from
time to time referred to herein as the "Option Shares". For purposes of the Plan
and this Agreement, the Date of Grant shall be as specified at the foot of this
Agreement. The Options shall be exercisable as hereinafter provided.
3. Terms and Conditions of Options. The Options evidenced
hereby are subject to the following terms and conditions in addition to the
terms of the Plan:
<PAGE> 2
2
(a) Vesting. The Exchange Options shall be fully vested as of
the Date of Grant.
(b) Option Period. The Exchange Options shall not be
exercisable following the tenth anniversary of the date of grant of the
Old Options for which such Exchange Options were exchanged (the "Old
Date of Grant"), which shall be listed at the foot of this Agreement
next to the relevant Option Price. The Options shall be subject to
earlier termination as provided herein. Upon termination of the
Participant's employment with the Company and its Subsidiaries for any
reason, the Options, to the extent then vested, may be exercised in
accordance with Section 8(a)(iv) of the Plan. The Options shall be
exercisable during the Participant's lifetime only by the Participant.
Upon termination of the Participant's employment with the Company and
its Subsidiaries for any reason, all Options which have not theretofore
vested (and which do not vest by reason of Section 8(a)(ii)(B) of the
Plan) shall terminate and be canceled without any payment therefor.
(c) Notice of Exercise. Subject to Sections 3(d), 3(f) and
8(b) hereof, the Participant may exercise any or all of the Options (to
the extent vested and not forfeited) by giving written notice to the
Committee. The date of exercise of an Option shall be the later of (i)
the date on which the Committee receives such written notice or (ii)
the date on which the conditions provided in Sections 3(d), 3(f) and
8(b) hereof are satisfied.
(d) Payment. Prior to the issuance of a Legended Certificate
pursuant to Section 3(g) hereof evidencing Option Shares, the
Participant shall have paid to the Company the Option Price of all
Option Shares purchased pursuant to exercise of such Options in cash
or, with the consent of the Committee (which consent shall be granted
in the sole discretion of the Committee), in shares of Common Stock
already owned by the Participant (valued at their Applicable Value) or
in any combination of cash or shares of Common Stock.
(e) Stockholder Rights. The Participant shall have no rights
as a stockholder with respect to any shares of Common Stock issuable
upon exercise of the Options until a certificate or certificates
evidencing such shares shall have been issued to the Participant, and
no adjustment shall be made for dividends or distributions or other
rights in respect of any share for which the record date is prior to
the date upon which the Participant shall become the holder of record
thereof.
(f) Limitation on Exercise. The Options shall not be
exercisable unless the offer and sale of the shares of Common Stock
subject thereto have been registered under the 1933 Act and qualified
under applicable state "blue sky" laws, or the Company has determined
that an exemption from registration under the 1933 Act and from
qualification under such state "blue sky" laws is available. The
Company may require, as a condition
<PAGE> 3
3
to exercise of an Option, that the Participant make certain
representations and warranties as to the Participant's investment
intent with respect to the Option Shares.
(g) Delivery of Certificate. As soon as practicable following
the exercise of any Options, a Legended Certificate evidencing the
appropriate number of shares of Common Stock issued in connection with
such exercise shall be issued in the name of the Participant.
(h) Dividends and Distributions. Any shares of Common Stock or
other securities of the Company received by the Participant as a result
of a stock dividend or other distribution in respect of Option Shares
shall be subject to the same restrictions as such Option Shares, and
all references to Option Shares hereunder shall be deemed to include
such shares of Common Stock or other securities.
[4. Retention and Purchase of Management Shares. Subject to
the terms and conditions contained herein and in the Plan, the Participant has
agreed to retain and make subject to the terms of this Agreement and the Plan
the number of Old Management Shares indicated at the foot of this Agreement. For
purposes of the Plan and this Agreement, the Date of Grant shall be as specified
at the foot of this Agreement.
5. Terms of Management Shares. The Management Shares evidenced
hereby are subject to the following terms and conditions in addition to the
terms of the Plan:
(a) Delivery of Certificate. On the Date of Grant the
Participant shall surrender any existing certificates evidencing the Old
Management Shares to the Company and the Company shall deliver to the
Participant a Legended Certificate evidencing such Shares.
(b) Vesting. The Management Shares shall be fully vested as of
the Date of Grant.
(c) Stockholder Rights. The Participant shall have all rights
of a stockholder as to the Management Shares, including the right to receive
dividends and the right to vote in accordance with the Company's Certificate of
Incorporation, subject to the restrictions set forth in the Plan and this
Agreement.
(d) Dividends and Distributions. Any shares of Common Stock or
other securities of the Company received by the Participant as a result of a
stock distribution to holders of Management Shares or as a stock dividend on
Management Shares shall be subject to the same restrictions as such Management
Shares, and all references to Management Shares hereunder shall be deemed to
include such shares of Common Stock or other securities.]
<PAGE> 4
4
6. Representations and Warranties.
(a) The Participant has been advised that the [Management
Shares], Options and Option Shares have not been registered under the 1933 Act
and, therefore, cannot be resold unless they are registered or unless an
exemption from registration is available. The Participant is acquiring the
[Management Shares,] Options and Option Shares for his own account, for
investment and not with a view to, or for resale in connection with, the
distribution thereof, and the Participant has no present intention of selling,
assigning, transferring, distributing or otherwise disposing of, or causing the
sale, assignment, transfer, distribution or other disposition of, any thereof.
In making the foregoing representation, the Participant is aware that he must
bear the economic risk of an investment in the [Management Shares,] Options or
Options Shares for an indefinite period of time since, in the view of the
Commission, the statutory basis for exemption from registration under the 1933
Act would not be present if such representation meant merely that the
Participant's current intention is to hold these securities only for the
long-term capital gains period of the Code, or for a deferred sale, or for any
fixed period in the future.
(b) The Participant has been given the opportunity to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of the [Management Shares,] Options and Option Shares to be
transferred hereunder and other related matters. The Participant represents and
warrants that he has been furnished with and has carefully read the Plan and
this Agreement, and that the Company has made available to the Participant or
his agents all documents and information requested by him or on his behalf in
connection with his investment in the [Management Shares,] Options and Option
Shares and that he understands and has evaluated the merits and risks of an
investment in the [Management Shares,] Options and Option Shares. In evaluating
the suitability of an investment in such [Management Shares,] Options and Option
Shares, the Participant has not relied upon any other representations or other
information (whether oral or written) made by or on behalf of the Company other
than as contemplated by the two preceding sentences.
(c) The Participant is aware of and familiar with the
restrictions imposed on the transfer of any [Management Shares,] Options and
Option Shares, including, without limitation, the restrictions contained in this
Agreement and the Plan.
(d) The Participant represents that this Agreement has been
duly executed and delivered by the Participant and constitutes a legal, valid
and binding agreement of the Participant, enforceable against the Participant in
accordance with its terms.
7. Participant's Waiver. The Participant hereby waives any and
all rights he may have had with respect to the Old Options.
<PAGE> 5
5
8. Miscellaneous.
(a) No Rights to Grants or Continued Employment. The
Participant shall not have any claim or right to receive grants of Awards under
the Plan. Neither the Plan or this Agreement nor any action taken or omitted to
be taken hereunder or thereunder shall be deemed to create or confer on the
Participant any right to be retained in the employ of the Company or any
Subsidiary or other Affiliate thereof, or to interfere with or to limit in any
way the right of the Company or any Subsidiary or other Affiliate thereof to
terminate the employment of the Participant at any time.
(b) Tax Withholding. The Company and its Subsidiaries shall
have the right, prior to the delivery of any certificates evidencing shares of
Common Stock to be issued pursuant to this Agreement, to require the Participant
to remit to the Company any amount sufficient to satisfy any federal, state or
local tax withholding requirements. Prior to the Company's determination of such
withholding liability, the Participant may make an irrevocable election to
satisfy, in whole or in part, such obligation to remit taxes by directing the
Company to withhold shares of Common Stock that would otherwise be received by
the Participant. Such election may be denied by the Committee in its discretion,
or may be made subject to certain conditions specified by the Committee,
including, without limitation, conditions intended to avoid the imposition of
liability against the Participant under Section 16(b) of the 1934 Act. The
Company and its Subsidiaries shall also have the right to deduct from all cash
payments made pursuant to or in connection with any Award any federal, state or
local taxes required to be withheld with respect to such payments.
(c) No Restriction on Right of Company to Effect Corporate
Changes. Neither the Plan nor this Agreement shall affect in any way the right
or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of stock or of options, warrants or rights to purchase
stock or of bonds, debentures, preferred or prior preference stocks whose rights
are superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(d) 1934 Act. Notwithstanding anything contained in the Plan
or this Agreement to the contrary, if the consummation of any transaction under
the Plan or this Agreement would result in the possible imposition of liability
to the Participant pursuant to Section 16(b) of the 1934 Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated, to
defer such transaction to the extent necessary to avoid such liability, but in
no event for a period in excess of 180 days.
<PAGE> 6
6
(e) Restrictions on Transfer. Options [and Management Shares]
shall not be transferrable except as specifically provided in the Plan or this
Agreement.
9. Survival; Assignment,
(a) All agreements, representations and warranties made herein
and in the certificates delivered pursuant hereto shall survive the issuance to
the Participant of the [Management Shares,] the Options and any Option Shares
and, notwithstanding any investigation heretofore or hereafter made by the
Participant or the Company or on the Participant's or the Company's behalf,
shall continue in full force and effect. Without the prior written consent of
the Company, the Participant may not assign any of his rights hereunder except
as permitted by the Plan or by will or the laws of descent and distribution.
Whenever in this Agreement any of the parties hereto is referred to, such
reference shall be deemed to include the heirs and permitted successors and
assigns of such party; and all agreements herein by or on behalf of the Company,
or by or on behalf of the Participant, shall bind and inure to the benefit of
the heirs and permitted successors and assigns of such parties hereto.
(b) The Company shall have the right to assign any of its
rights and to delegate any of its duties under this Agreement to any of its
Affiliates , provided, however, that such assignment shall not release the
Company from any duty hereunder which remains unfulfilled by such an assignee.
10. Notices. All notices and other communications provided for
herein shall be in writing and shall be delivered by hand or sent by certified
or registered mail, return receipt requested, postage prepaid, addressed, if to
the Participant, to his attention at the mailing address set forth at the foot
of this Agreement (or to such other address as the Participant shall have
specified to the Company in writing) and, if to the Company, to the General
Counsel of the Company. All such notices shall be conclusively deemed to be
received and shall be effective, if sent by hand delivery, upon receipt, or if
sent by registered or certified mail, on the fifth day after the day on which
such notice is mailed.
11. Waiver. The waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
12. Entire Agreement; Governing Law. This Agreement and the
other related agreements expressly referred to herein set forth the entire
agreement and understanding between the parties hereto and supersede all prior
agreements and understandings relating to the subject matter hereof. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same agreement. The headings of sections and subsections herein are
included solely for
<PAGE> 7
7
convenience of reference and shall not affect the meaning of any of the
provisions of this Agreement. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware.
<PAGE> 8
8
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and the Participant has executed this
Agreement, both as of the day and year first above written.
KINETIC CONCEPTS, INC.
By:______________________________
Name:
Title:
PARTICIPANT
_________________________________
Name:
Address:
[Number of Old Management Shares:]
<TABLE>
<CAPTION>
NUMBER OF OPTION
EXCHANGE OPTIONS PRICE OLD DATE OF GRANT
<S> <C> <C>
</TABLE>
<PAGE> 1
MANAGEMENT EQUITY AGREEMENT, dated as of October 2, 1997,
between KINETIC CONCEPTS, INC., a Texas corporation (the "Company"), and the
other party signatory hereto (the "Participant").
WHEREAS, the Participant has agreed to exchange options (the
"Old Options") to purchase shares of Common Stock of the Company ("Common
Stock") under the Company's pre-existing equity based compensation plans for
nonqualified stock options (the "Exchange Options" or the "Options") to purchase
shares of Common Stock; and
WHEREAS, in connection with the foregoing, the Company's
Management Equity Plan (the "Plan") will govern the terms and conditions of the
Options;
NOW, THEREFORE, in consideration of the covenants and
agreements herein contained, the parties hereto agree as follows:
1. Definitions; Incorporation of Plan Terms. Capitalized terms
used herein without definition shall have the meanings assigned to them in the
Plan, a copy of which is attached hereto. This Agreement and the Options shall
be subject to the Plan, the terms of which are hereby incorporated herein by
reference, and in the event of any conflict or inconsistency between the Plan
and this Agreement, the Plan shall govern.
2. Surrender and Grant of Options. Subject to the terms and
conditions contained herein and in the Plan, (i) the Participant has surrendered
to the Company certain of the Old Options in exchange for an equal number of
Exchange Options as specified at the foot of the signature page hereof, at the
Option Prices so listed. The Options are not intended to qualify as Incentive
Stock Options under Section 422 of the Code. Each such Option shall entitle the
Participant to purchase, upon payment of the Option Price, one share of Common
Stock. The shares of Common Stock issuable upon exercise of the Options are from
time to time referred to herein as the "Option Shares". For purposes of the Plan
and this Agreement, the Date of Grant shall be as specified at the foot of this
Agreement. The Options shall be exercisable as hereinafter provided.
3. Terms and Conditions of Options. The Options evidenced
hereby are subject to the following terms and conditions in addition to the
terms of the Plan:
(a) Vesting. The Exchange Options shall be fully vested as of
the Date of Grant.
(b) Option Period. The Exchange Options shall not be
exercisable following the tenth anniversary of the date of grant of the
Old Options for which such Exchange Options were exchanged (the "Old
Date of Grant"), which shall be listed at the foot of this Agreement
next to the relevant Option Price. The Options shall be subject to
earlier
<PAGE> 2
2
termination as provided herein. Upon termination of the Participant's
employment with the Company and its Subsidiaries for any reason, the
Options, to the extent then vested, may be exercised in accordance with
Section 8(a)(iv) of the Plan. The Options shall be exercisable during
the Participant's lifetime only by the Participant. Upon termination of
the Participant's employment with the Company and its Subsidiaries for
any reason, all Options which have not theretofore vested (and which do
not vest by reason of Section 8(a)(ii)(B)of the Plan) shall terminate
and be canceled without any payment therefor.
(c) Notice of Exercise. Subject to Sections 3(d), 3(f) and
7(b) hereof, the Participant may exercise any or all of the Options (to
the extent vested and not forfeited) by giving written notice to the
Committee. The date of exercise of an Option shall be the later of (i)
the date on which the Committee receives such written notice or (ii)
the date on which the conditions provided in Sections 3(d), 3(f) and
7(b) hereof are satisfied.
(d) Payment. Prior to the issuance of a Legended Certificate
pursuant to Section 3(g) hereof evidencing Option Shares, the
Participant shall have paid to the Company the Option Price of all
Option Shares purchased pursuant to exercise of such Options in cash
or, with the consent of the Committee (which consent shall be granted
in the sole discretion of the Committee), in shares of Common Stock
already owned by the Participant (valued at their Applicable Value) or
in any combination of cash or shares of Common Stock.
(e) Stockholder Rights. The Participant shall have no rights
as a stockholder with respect to any shares of Common Stock issuable
upon exercise of the Options until a certificate or certificates
evidencing such shares shall have been issued to the Participant, and
no adjustment shall be made for dividends or distributions or other
rights in respect of any share for which the record date is prior to
the date upon which the Participant shall become the holder of record
thereof.
(f) Limitation on Exercise. The Options shall not be
exercisable unless the offer and sale of the shares of Common Stock
subject thereto have been registered under the 1933 Act and qualified
under applicable state "blue sky" laws, or the Company has determined
that an exemption from registration under the 1933 Act and from
qualification under such state "blue sky" laws is available. The
Company may require, as a condition to exercise of an Option, that the
Participant make certain representations and warranties as to the
Participant's investment intent with respect to the Option Shares.
(g) Delivery of Certificate. As soon as practicable following
the exercise of any Options, a Legended Certificate evidencing the
appropriate number of shares of Common Stock issued in connection with
such exercise shall be issued in the name of the Participant.
<PAGE> 3
3
(h) Dividends and Distributions. Any shares of Common Stock or
other securities of the Company received by the Participant as a result
of a stock dividend or other distribution in respect of Option Shares
shall be subject to the same restrictions as such Option Shares, and
all references to Option Shares hereunder shall be deemed to include
such shares of Common Stock or other securities.
4. Termination of Employment Provisions. Upon the
Participant's termination of employment for any reason on or following the
second anniversary of the Effective Date, the following provisions of this
Section 6 shall apply instead of Section 10 of the Plan.
(a) Company Call Right.
(i) Exercise of Call Right. If prior to the completion of an
IPO the employment of the Participant with the Company and its
Subsidiaries terminates for any reason, or an Involuntary Transfer
occurs, the Company shall have a Call Right, exercisable for a period
of 60 days after the date of such termination or Involuntary Transfer,
with respect to all of the Option Shares beneficially owned by such
Participant and his Permitted Transferees. The Company may exercise
such Call Right by giving written notice thereof to the Participant or
his Permitted Transferee, as the case may be, prior to the expiration
of such 60-day period. The Company's Call Right shall become null and
void subsequent to the completion of an IPO.
(ii) Purchase Price. With respect to any exercise of a Call
Right under this Section 4(a), the purchase price per Option Share to
be paid by the Company at the closing provided for in Section 8(c)
shall be the Applicable Option Share Value, determined as of the first
Valuation Date coincident with or following the date of termination of
the Participant's employment or status or Involuntary Transfer (the
"Termination Amount") less 20% of such Termination Amount (the
"Remaining Amount").
(b) Participant Put Right.
(i) Exercise of Put Right. If prior to the completion of an
IPO the employment of the Participant with the Company and its
Subsidiaries terminates for any reason, the Participant (or, in the
case of the Participant's death, his Beneficiary) shall have a Put
Right, exercisable for a period of 60 days after the date of such
termination, with respect to all of the Option Shares beneficially
owned by such Participant and his Permitted Transferees. The
Participant may exercise such Put Right by giving written notice
thereof to the Company prior to the expiration of such 60-day period.
The Participants' Put Rights shall be null and void subsequent to the
completion of an IPO.
<PAGE> 4
4
(ii) Purchase Price. The Put Right purchase price per Option
Share to be paid by the Company at the closing provided for in this
Section 4 shall be the Applicable Option Share Value, determined as of
the first Valuation Date coincident with or following the date of
termination of the Participant's employment or status (the "Termination
Amount") less 20% of such Termination Amount (the "Remaining Amount").
(iii) Payment Limitations. Anything in this Plan to the
contrary notwithstanding, if, at any time, the Board of Directors shall
determine, subject to the written opinion of the Appraiser (as
hereinafter defined) referred to below, the Company is not financially
capable of making some or all of the aggregate payments to be made
thereafter pursuant to the exercise of Put Rights (the "Put Right
Payments"), the Company shall have the right to defer such Put Right
Payments but only on the terms hereinafter provided in this Section 4.
In the event that the Board of Directors shall have made such
determination with respect to the Company's financial capability, the
Board of Directors shall, if so requested in writing by at least two
Participants within 10 business days of the date that notice of such
determination is given (the "Request Period"), promptly retain an
appraisal or investment banking firm, to be selected by one of the
independent Directors and reasonably satisfactory to the Board of
Directors (the "Appraiser"), to render a written opinion as to whether
the Company has the financial capability to make any of, or any portion
of, such Put Right Payments at such time as it would otherwise be
required to make such Put Right Payments. If the Board's determination,
or the Appraiser's written opinion, if so required, indicates that, at
the time a Put Right Payment would otherwise be required to be made to
a Participant, the Company would not have the financial capability to
make any of the Put Right Payments that would otherwise then be
required to be made, or shall have the financial capability to make
only a portion of such Put Right Payments, then payments with respect
to such Put Right Payments shall be made on the following basis: As of
the first day following a determination by the Appraiser of lack of
financial capability in respect of which Put Right Payments are
required to be made or, if no request for an Appraiser's appraisal is
made, on the day following the last day of the Request Period (each
such date being hereinafter called a "Payout Date"), all unpaid amounts
payable with respect to Put Rights exercised prior to such a date,
aggregated (the "Aggregate Payable Amount"), shall be, and the amount
payable to each Participant shall be determined by multiplying the full
amount owing to such Participant as of such date by a fraction, the
numerator of which shall be the amount that the Company, as indicated
by the Board of Directors' determination or the Appraiser's written
opinion, shall then be financially capable of paying (which may be zero
if, as indicated by the Board of Directors' determination or the
Appraiser's written opinion, the Company is not financially capable of
making any of the Put Right Payments then otherwise required to be
made) and the denominator of which shall be the Aggregate Payable
Amount. Elections to exercise Put Rights (or portions thereof) not
satisfied pursuant to such pro rata payment shall be deemed revoked,
<PAGE> 5
5
and the remaining Awards (or portions thereof) with respect thereto
shall thereafter be subject to the provisions of the Plan as if a Put
Right election had not been made, provided, however, that such Options
will not be canceled pursuant to Section 8(a)(iv) of the Plan as a
result of the expiration of such Options' term pursuant to Section
8(a)(iii) of the Plan. In acting pursuant to this Section 4, the
Appraiser shall be entitled to the rights and immunities of an
arbitrator.
(c) Election and Delivery Procedures.
(i) The closing of any exercise of any Call Right or Put Right
pursuant to this Section 4 shall take place at the offices of the
Company, or such other place as may be mutually agreed, not less than
15 nor more than 30 days after the Valuation Date coincident with or
following the relevant termination of employment. The exact date and
time of closing shall be specified by the party exercising such Call
Right or Put Right.
(ii) At such closing (the "Closing"), the Participant (or,
following the Participant's death, the Participant's Beneficiary or
Beneficiaries) shall deliver certificates for the shares of Common
Stock to be sold to the Company duly endorsed, or accompanied by
written instruments of transfer in form reasonably satisfactory to the
Company duly executed, by such transferor, free and clear of any
Encumbrances. The Company shall pay the Termination Amount less the
Remaining Amount for shares of Common Stock; provided, however, that
such payment may be deferred under the circumstances, and to the
extent, provided for in Section 12 of the Plan.
(d) Holdback Payment. Upon the fifth anniversary of the
Effective Date or, if earlier, upon the occurrence of an IPO, Sale of Stock or
Sale of Assets, the Company shall promptly pay the Participant an amount in cash
equal to the following:
(i) if the Applicable Management Share Value or the Applicable
Option Share Value as of such date (the "Liquidity Value") is equal to
or greater than the Applicable Management Share Value or the Applicable
Option Share Value, respectively, as of the Valuation Date coincident
with or immediately following the Participant's termination of
employment (the "Termination Value"), then the Company shall promptly
pay the Participant an amount in cash equal to the Remaining Amount
multiplied by a fraction, the numerator of which is the Liquidity Value
and the denominator of which is the Termination Value (the "Liquidity
Event Fraction"); and
(ii) if the Liquidity Value is less than the Termination
Value, then the Company shall promptly pay the Participant an amount in
cash equal to the excess, if any, of the Remaining Amount over an
amount equal to the Termination Amount multiplied by the Liquidity
Event Fraction.
<PAGE> 6
6
(e) Vesting of Options. If following a termination of
employment as described in this Section 4, the Participant has not become a
consultant to the Company on terms acceptable to the Company or a Director of
the Company, his Options will be subject to the provisions in Sections 8 and 10
of the Plan. If, prior to or immediately following a termination of employment
as described in this Section 4 the Participant becomes a Director of the Company
or a consultant to the Company on terms acceptable to the Company, such position
or status shall be considered employment with the Company for the purposes of
the treatment of the Participant's Options under the Plan; any termination of
such position or status shall be considered a termination of employment for the
purposes of the treatment of the Participant's Options under the Plan.
5. Representations and Warranties.
(a) The Participant has been advised that the Options and
Option Shares have not been registered under the 1933 Act and, therefore, cannot
be resold unless they are registered or unless an exemption from registration is
available. The Participant is acquiring the Options and Option Shares for his
own account, for investment and not with a view to, or for resale in connection
with, the distribution thereof, and the Participant has no present intention of
selling, assigning, transferring, distributing or otherwise disposing of, or
causing the sale, assignment, transfer, distribution or other disposition of,
any thereof. In making the foregoing representation, the Participant is aware
that he must bear the economic risk of an investment in the Options and Option
Shares for an indefinite period of time since, in the view of the Commission,
the statutory basis for exemption from registration under the 1933 Act would not
be present if such representation meant merely that the Participant's current
intention is to hold these securities only for the long-term capital gains
period of the Code, or for a deferred sale, or for any fixed period in the
future.
(b) The Participant has been given the opportunity to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of the Options and Option Shares to be transferred hereunder and
other related matters. The Participant represents and warrants that he has been
furnished with and has carefully read the Plan and this Agreement, and that the
Company has made available to the Participant or his agents all documents and
information requested by him or on his behalf in connection with his investment
in the Options and Option Shares and that he understands and has evaluated the
merits and risks of an investment in the Options and Option Shares. In
evaluating the suitability of an investment in such Option Shares, the
Participant has not relied upon any other representations or other information
(whether oral or written) made by or on behalf of the Company other than as
contemplated by the two preceding sentences.
(c) The Participant is aware of and familiar with the
restrictions imposed on the transfer of any Management Shares, including,
without limitation, the restrictions contained in this Agreement and the Plan.
<PAGE> 7
7
(d) The Participant represents that this Agreement has been
duly executed and delivered by the Participant and constitutes a legal, valid
and binding agreement of the Participant, enforceable against the Participant in
accordance with its terms.
6. Participant's Waiver. The Participant hereby waives any and
all rights he may have had with respect to the Old Options.
7. Miscellaneous.
(a) No Rights to Grants or Continued Employment. The
Participant shall not have any claim or right to receive grants of Awards under
the Plan. Neither the Plan or this Agreement nor any action taken or omitted to
be taken hereunder or thereunder shall be deemed to create or confer on the
Participant any right to be retained in the employ of the Company or any
Subsidiary or other Affiliate thereof, or to interfere with or to limit in any
way the right of the Company or any Subsidiary or other Affiliate thereof to
terminate the employment of the Participant at any time.
(b) Tax Withholding. The Company and its Subsidiaries shall
have the right, prior to the delivery of any certificates evidencing shares of
Common Stock to be issued pursuant to this Agreement, to require the Participant
to remit to the Company any amount sufficient to satisfy any federal, state or
local tax withholding requirements. Prior to the Company's determination of such
withholding liability, the Participant may make an irrevocable election to
satisfy, in whole or in part, such obligation to remit taxes by directing the
Company to withhold shares of Common Stock that would otherwise be received by
the Participant. Such election may be denied by the Committee in its discretion,
or may be made subject to certain conditions specified by the Committee,
including, without limitation, conditions intended to avoid the imposition of
liability against the Participant under Section 16(b) of the 1934 Act. The
Company and its Subsidiaries shall also have the right to deduct from all cash
payments made pursuant to or in connection with any Award any federal, state or
local taxes required to be withheld with respect to such payments.
(c) No Restriction on Right of Company to Effect Corporate
Changes. Neither the Plan nor this Agreement shall affect in any way the right
or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of stock or of options, warrants or rights to purchase
stock or of bonds, debentures, preferred or prior preference stocks whose rights
are superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
<PAGE> 8
8
(d) 1934 Act. Notwithstanding anything contained in the Plan
or this Agreement to the contrary, if the consummation of any transaction under
the Plan or this Agreement would result in the possible imposition of liability
to the Participant pursuant to Section 16(b) of the 1934 Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated, to
defer such transaction to the extent necessary to avoid such liability, but in
no event for a period in excess of 180 days.
(e) Restrictions on Transfer. Options shall not be
transferrable except as specifically provided in the Plan or this Agreement.
8. Survival; Assignment,
(a) All agreements, representations and warranties made herein
and in the certificates delivered pursuant hereto shall survive the issuance to
the Participant of the Options and any Option Shares and, notwithstanding any
investigation heretofore or hereafter made by the Participant or the Company or
on the Participant's or the Company's behalf, shall continue in full force and
effect. Without the prior written consent of the Company, the Participant may
not assign any of his rights hereunder except as permitted by the Plan or by
will or the laws of descent and distribution. Whenever in this Agreement any of
the parties hereto is referred to, such reference shall be deemed to include the
heirs and permitted successors and assigns of such party; and all agreements
herein by or on behalf of the Company, or by or on behalf of the Participant,
shall bind and inure to the benefit of the heirs and permitted successors and
assigns of such parties hereto.
(b) The Company shall have the right to assign any of its
rights and to delegate any of its duties under this Agreement to any of its
Affiliates, provided, however, that such assignment shall not release the
Company from any duty herunder which remains unfulfilled by such an assignee.
9. Notices. All notices and other communications provided for
herein shall be in writing and shall be delivered by hand or sent by certified
or registered mail, return receipt requested, postage prepaid, addressed, if to
the Participant, to his attention at the mailing address set forth at the foot
of this Agreement (or to such other address as the Participant shall have
specified to the Company in writing) and, if to the Company, to the General
Counsel of the Company. All such notices shall be conclusively deemed to be
received and shall be effective, if sent by hand delivery, upon receipt, or if
sent by registered or certified mail, on the fifth day after the day on which
such notice is mailed.
10. Waiver. The waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
<PAGE> 9
9
11. Entire Agreement; Governing Law. This Agreement and the
other related agreements expressly referred to herein set forth the entire
agreement and understanding between the parties hereto and supersede all prior
agreements and understandings relating to the subject matter hereof. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same agreement. The headings of sections and subsections herein are
included solely for convenience of reference and shall not affect the meaning of
any of the provisions of this Agreement. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
<PAGE> 10
10
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and the Participant has executed this
Agreement, both as of the day and year first above written.
KINETIC CONCEPTS, INC.
By: /s/ Dennis E. Noll
-----------------------------
Name: Dennis E. Noll
Title: Senior Vice President
PARTICIPANT
/s/ Raymond R. Hannigan
-----------------------------
Name: Raymond R. Hannigan
Address: 8023 Vantage Drive
San Antonio, TX 78230
<TABLE>
<CAPTION>
NUMBER OF OPTION
EXCHANGE OPTIONS PRICE OLD DATE OF GRANT
<S> <C> <C>
164,000 4.50 11/14/94
12,000 6.75 05/15/95
12,000 15.13 05/13/97
12,000 16.50 05/15/96
</TABLE>
<PAGE> 1
GUARANTEE
THIS GUARANTEE AGREEMENT (this "Guarantee") is dated as of October 2,
1997 and is given by Fremont Partners, L.P., a Delaware limited partnership (the
"Guarantor"), in favor of Kinetic Concepts, Inc., a Texas corporation ("KCI").
WHEREAS, the Guarantor is providing this Guarantee in order to induce
KCI to enter into a Transaction Agreement (the "Transaction Agreement"), dated
as of the date hereof, among Fremont Purchaser II, Inc., a Delaware corporation
and wholly owned indirect subsidiary of the Guarantor (the "Obligor"), RCBA
Purchaser I, L.P., a Delaware limited partnership and wholly owned subsidiary of
Richard C. Blum and Associates, L.L.P., and KCI; and
WHEREAS, the Guarantor has agreed to execute this Guarantee.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor, intending to be legally bound, hereby agrees, for the benefit and in
favor of KCI as follows:
SECTION 1. Guarantee. (a) The Guarantor hereby unconditionally and
irrevocably guarantees the punctual payment and performance of the obligations
of Obligor under the Transaction Agreement (without regard to Section 9.09
thereof) in an amount up to but not exceeding $138,197,020.50 million with
respect to the obligations of Obligor under Section 2.01, 2.02, 2.05 and 5.06 of
the Transaction Agreement and in an amount up to but not exceeding $30,000,000
with respect to all other obligations of Obligor under the Transaction Agreement
(such obligations being the "Guaranteed Obligation").
(b) In the event that KCI is seeking payment from the Guarantor on the
Guaranteed Obligation pursuant to this Section 1, KCI shall promptly cause
written notice of the demand of such payment to be provided to the Guarantor in
accordance with Section 5 hereof. Such written notice shall set forth in
reasonable detail the Guaranteed Obligation and the amount of payment.
SECTION 2. Construction of Guarantee. (a) Guarantor guarantees that the
Guaranteed Obligation shall be paid or performed, as the case may be, strictly
in accordance with the terms of the Transaction Agreement. The obligations of
the Guarantor under this Guarantee are independent of the Guaranteed Obligation
or any other obligations of any other person under the Transaction Agreement and
a separate action or actions may be brought and prosecuted against the Guarantor
to enforce this Guarantee in respect of the payment of the Guaranteed
Obligation. This guarantee is a guarantee of payment, not collection, and the
liability of the Guarantor under this Guarantee shall be unconditional and
absolute, irrespective of, and the Guarantor hereby irrevocably waives any
defenses it may now or hereafter have in any way relating to, any or all of the
following:
(i) any lack of validity or enforceability of the Transaction
Agreement or any other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or
in any other term of, all of the Guaranteed Obligation or any other
obligations of any other person under the Transaction Agreement, or any
other amendment or waiver of or any consent to departure from the
Transaction Agreement, including, without limitation, any increase in
any obligation of the Obligor under the Transaction Agreement;
<PAGE> 2
2
(iii) any change, restructuring or termination of the
corporate structure or existence of the Obligor or any of its
subsidiaries;
(iv) any requirement that, at any time, any action be taken by
any person against Obligor or any other person;
(v) any right to be subrogated to the rights of KCI hereunder
or thereunder unless and until all of the Guaranteed Obligation and all
other amounts payable under this Guarantee shall have been paid in
full;
(vi) any right arising from the stay for any reason of any of
the obligations of Obligor hereunder or of Obligor or any successor or
assign of Obligor thereunder; and/or
(vii) any other defense of a surety or guarantor.
This Guarantee shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of the Guaranteed Obligation is rescinded or must
otherwise be returned by KCI or any other person upon the insolvency, bankruptcy
or reorganization of the Obligor or any other person or otherwise, all as though
such payment had not been made.
(b) Notwithstanding any other provision of this Guarantee, KCI
and the Guarantor agree that the Guarantor is entitled to the benefit of, and
may assert as a defense to payment and performance of this Guarantee, any
defense available to the Obligor to the enforcement of the Obligor's obligation
under the terms of the Transaction Agreement.
(c) The Guarantor hereby waives (i) promptness, diligence,
notice of acceptance and any other notice (other than that required by Section
1(b) hereof) with respect to the Guaranteed Obligation and this Guarantee and
(ii) any act or omission of either party that would otherwise constitute a legal
or equitable discharge of the obligations set forth in this Guarantee.
SECTION 3. Continuing Guarantee. This Guarantee is a
continuing guaranty and shall (i) remain in full force and effect until Obligor
shall have performed in full the Guaranteed Obligation, (ii) be binding upon the
Guarantor and its successors and assigns and (iii) inure to the benefit of and
be enforceable by KCI and its successors and assigns.
SECTION 4. Representations and Warranties of Guarantor.
Guarantor hereby represents, warrants and covenants to KCI as follows:
(a) Guarantor is a limited partnership duly organized and
validly existing under the laws of the State of Delaware. Guarantor has the
necessary power and authority to own and operate its properties and assets and
to carry on its business as currently conducted.
(b) Guarantor has all requisite legal power and authority to
enter into this Guarantee. The Guarantor has all requisite legal power and
authority to carry out and perform its obligations under the terms of this
Guarantee. The Guarantee constitutes the valid and binding obligation of
Guarantor, enforceable against it in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization
or other laws or equitable principles relating to or affecting creditors' rights
generally.
<PAGE> 3
3
(c) All partnership action on the part of Guarantor and its
general partner and limited partners necessary to authorize the execution,
delivery and performance of this Guarantee has been taken.
(d) Guarantor has funds available to it sufficient to
purchase, or cause the purchase of, the F Shares in accordance with the terms of
the Transaction Agreement.
SECTION 5. Amendments, etc. No amendment or waiver of any
provision of this Guarantee, and no consent to any departure by the Guarantor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by KCI and the Guarantor, and then such waiver or consent shall be
effective only in the specific instance and for the specific purchase for which
given.
SECTION 6. Notices. Any notice, payment, demand, or
communication required or permitted to be given by any provision of this
Guarantee shall be duly given when delivered in writing or by telecopy:
If to the Guarantor or Obligor:
Fremont Partners, L.P.
50 Fremont Street, Suite 3700
San Francisco, California 94105-1895
Telecopy: (415) 284-8191
Attention: General Counsel
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Telecopy: (212) 848-7179
Attention: David W. Heleniak, Esq.
If to KCI:
The Company
8023 Vantage Drive
San Antonio, Texas 78230-4726
Telecopy: (210) 255-6331
Attention: Dennis E. Noll, Esq.
with a copy to:
Cox & Smith
112 East Pecan Street, Suite 1800
San Antonio, Texas 78205
Telecopy: (212) 554-5257
Attention: Stephen D. Seidel, Esq.
SECTION 7. No Waiver; Remedies. No failure on the part of KCI
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of
<PAGE> 4
4
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 8. Expenses. The Guarantor agrees that it will upon
demand pay to KCI the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents, that
KCI may incur in connection with the exercise or enforcement of any of the
rights of KCI hereunder as a result of the failure by the Guarantor to perform
or observe any of the provisions hereof.
SECTION 9. Severability. If any term or other provision of
this Guarantee is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Guarantee
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the Transactions is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Guarantee so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 10. Entire Agreement; Assignment. This Guarantee
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and undertakings, both written
and oral, among the parties, or any of them, with respect to the subject matter
hereof. This Guarantee shall not be assigned by operation of law or otherwise,
except that the Guarantor may assign all or any of its rights and obligations
hereunder to any affiliate or affiliates of the Guarantor provided that no such
assignment shall relieve the assigning party of its obligations hereunder if
such assignee does not perform such obligations.
SECTION 11. Parties in Interest. This Guarantee shall be
binding upon and inure solely to the benefit of KCI, and nothing in this
Guarantee, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Guarantee.
SECTION 12. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Guarantee
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 13. Governing Law. This Guarantee shall be governed
by, and construed in accordance with, the laws of the State of Delaware
applicable to contracts executed in and to be performed in that State. All
actions and proceeding arising out of or relating to this Guarantee shall be
heard and determined in any Delaware state or federal court. THE COMPANY AND
PURCHASERS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVER ANY RIGHT THEY MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF,
UNDER OR IN CONNECTION WITH, THIS GUARANTEE, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR PURCHASERS.
<PAGE> 5
5
SECTION 14. Headings. The descriptive headings contained in
this Guarantee are included for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Guarantee.
IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to
be duly executed and delivered as of the date first above written.
FREMONT PARTNERS, L.P.
By /s/ R.S. Kopf
---------------------------------
Name: R.S. Kopf
Title:
<PAGE> 1
OFFER TO PURCHASE FOR CASH BY
KINETIC CONCEPTS, INC.
ALL OUTSTANDING
SHARES OF ITS
COMMON STOCK
AT
$19.25 NET PER SHARE
------------------
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED.
------------------
KINETIC CONCEPTS, INC., A TEXAS CORPORATION (THE "COMPANY"), IS OFFERING TO
PURCHASE ALL OUTSTANDING SHARES OF ITS COMMON STOCK, $.001 PAR VALUE PER SHARE
("SHARES"), FOR $19.25 PER SHARE, NET TO SELLER IN CASH (SUCH AMOUNT, OR ANY
GREATER AMOUNT PER SHARE PAID PURSUANT TO THE OFFER, BEING REFERRED TO HEREIN AS
THE "PER SHARE AMOUNT"), UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH
IN THIS OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL (WHICH
TOGETHER CONSTITUTE THE "OFFER").
------------------
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED
AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST 27,500,000
SHARES (THE "MINIMUM CONDITION") AND THE COMPANY'S OBTAINING THE DEBT FINANCING
(AS DEFINED HEREIN). SEE "THE TENDER OFFER -- SECTION 11. CERTAIN CONDITIONS TO
THE OFFER".
------------------
THE BOARD OF DIRECTORS (THE "BOARD") AND THE DISINTERESTED DIRECTORS (AS DEFINED
HEREIN) OF THE COMPANY HAVE EACH UNANIMOUSLY DETERMINED, AFTER GIVING CAREFUL
CONSIDERATION TO A NUMBER OF FACTORS, THAT THE OFFER AND THE MERGER ARE FAIR TO,
AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AND HAVE EACH
UNANIMOUSLY APPROVED THE TRANSACTION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY INCLUDING THE OFFER AT THE PER SHARE AMOUNT, THE STOCK PURCHASE (AS
DEFINED HEREIN) AND THE MERGER (AS DEFINED HEREIN). THE BOARD AND THE
DISINTERESTED DIRECTORS RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT
THE OFFER AND TENDER THEIR SHARES PURSUANT TO THIS OFFER TO PURCHASE.
------------------
BT Alex. Brown Incorporated has delivered to the Board its written opinion,
dated October 1, 1997, to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein, the Per Share Amount
and the Merger Consideration (as defined herein) to be received in the Offer and
the Merger by the holders of Shares (other than Continuing Shareholders (as
defined herein)) was fair from a financial point of view to such holders.
IMPORTANT
ANY SHAREHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH SHAREHOLDER'S
SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL IN
ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND MAIL OR
DELIVER IT TOGETHER WITH THE CERTIFICATE(S) EVIDENCING TENDERED SHARES, AND ANY
OTHER REQUIRED DOCUMENTS, TO BOSTON EQUISERVE, L.P. (THE "DEPOSITARY") (AT THE
DEPOSITARY'S ADDRESS SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE) OR
TENDER SUCH SHARES PURSUANT TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH
IN "THE TENDER OFFER -- SECTION 3. PROCEDURES FOR ACCEPTING THE OFFER AND
TENDERING SHARES" OR (2) REQUEST SUCH SHAREHOLDER'S BROKER, DEALER, COMMERCIAL
BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH
SHAREHOLDER.
The Shares are listed and traded on the Nasdaq National Market ("Nasdaq").
On October 2, 1997, the last full day of trading prior to the announcement of
the Offer, the closing sale price of the Shares on Nasdaq was $18.625 per Share.
On October 7, 1997, the last full trading day prior to the commencement of the
Offer, the closing sale price of the Shares on Nasdaq was $19.000 per Share.
Shareholders are urged to obtain a current market quotation for the Shares.
Any shareholder who desires to tender Shares and whose certificates
evidencing such Shares are not immediately available, or who cannot comply with
the procedure for book-entry transfer on a timely basis, may tender such Shares
by following the procedure for guaranteed delivery set forth in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares".
Questions or requests for assistance may be directed to Georgeson & Company
Inc. (the "Information Agent") or BT Alex. Brown Incorporated (in such capacity,
the "Dealer Manager") at their respective addresses and telephone numbers set
forth on the back cover of this Offer to Purchase. Additional copies of this
Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Information Agent or from brokers, dealers,
commercial banks or trust companies.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL .
------------------
The Dealer Manager for the Offer is:
[LOGO BT ALEX. BROWN]
OCTOBER 8, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
INTRODUCTION......................................................................... 2
SPECIAL FACTORS...................................................................... 5
Background of the Transactions..................................................... 5
Recommendation of the Disinterested Directors and the Board; Fairness of the
Transactions.................................................................... 9
Opinion of BT Alex. Brown Incorporated............................................. 11
Purposes and Reasons of the Company for the Transactions........................... 14
Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions.... 15
Position of Purchasers and Dr. James Leininger Regarding Fairness of the
Transactions.................................................................... 15
Interests of Certain Persons in the Transactions................................... 15
Cautionary Statement Concerning Forward-Looking Statements......................... 17
Company Financial Projections...................................................... 17
Plans for the Company After the Transactions; Certain Effects of the
Transactions.................................................................... 19
Rights of the Shareholders in the Transactions..................................... 19
The Transaction Agreement, the Support Agreement and the Agreement Among Bidders... 20
Related Party Transactions......................................................... 29
Beneficial Ownership of Common Stock............................................... 30
Transactions and Arrangements Concerning the Shares................................ 32
THE TENDER OFFER..................................................................... 33
1. Terms of the Offer; Expiration Date............................................ 33
2. Acceptance for Payment and Payment for Shares.................................. 35
3. Procedures for Accepting the Offer and Tendering Shares........................ 36
4. Withdrawal Rights.............................................................. 38
5. Certain U.S. Federal Income Tax Consequences................................... 38
6. Price Range of Shares; Dividends............................................... 39
7. Certain Information Concerning the Company..................................... 39
8. Financing of the Transactions.................................................. 41
9. Dividends and Distributions.................................................... 43
10. Effect of the Transactions on the Market for the Shares; Exchange Act
Registration.................................................................... 43
11. Certain Conditions to the Offer................................................ 44
12. Certain Legal Matters and Regulatory Approvals................................. 45
13. Fees and Expenses.............................................................. 47
14. Certain Information Concerning Purchasers...................................... 48
15. Recapitalization Accounting.................................................... 49
16. Miscellaneous.................................................................. 49
SCHEDULE I. Directors and Executive Officers of the Company.......................... I-1
SCHEDULE II. Opinion of BT Alex. Brown Incorporated.................................. II-1
SCHEDULE III. Articles 5.11 through 5.13 of the Texas Business Corporation Act....... III-1
SCHEDULE IV. Audited Financial Statements (and Related Notes) for the Company for the
Years Ended December 31, 1995 and December 31, 1996................................ IV-1
SCHEDULE V. Unaudited Financial Statements (and Related Notes) for the Company for
the Three-Month and Six-Month Periods Ended June 30, 1997 and 1996................. V-1
</TABLE>
<PAGE> 3
To the Holders of Common Stock of
Kinetic Concepts, Inc.:
INTRODUCTION
Kinetic Concepts, Inc., a Texas corporation (the "Company"), hereby offers
to purchase all outstanding shares of its common stock, $.001 par value per
share ("Shares"), at a price of $19.25 per Share, net to seller in cash (such
amount, or any greater amount per Share paid pursuant to the Offer, being
referred to herein as the "Per Share Amount"), upon the terms and subject to the
conditions set forth in the Offer. Tendering shareholders will not be obligated
to pay brokerage fees or commissions or, except as otherwise provided in
Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to
the purchase of Shares by the Company pursuant to the Offer. The Company will
pay all charges and expenses of BT Alex. Brown Incorporated ("BT Alex. Brown"),
which is acting as the dealer manager for the Offer (in such capacity, the
"Dealer Manager"), Boston EquiServe, L.P. (the "Depositary") and Georgeson &
Company Inc. (the "Information Agent") incurred in connection with the Offer.
See "THE TENDER OFFER -- Section 13. Fees and Expenses".
The Shares are currently listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "KNCI". On May 28, 1997, the last full day of
trading prior to the announcement by the Company that it was exploring strategic
options and alternatives for increasing shareholder value, the closing sale
price of the Shares on Nasdaq was $17.438 per Share. On October 2, 1997, the
last full day of trading prior to the announcement of the Offer, the closing
sale price of the Shares on Nasdaq was $18.625 per Share. On October 7, 1997,
the last full trading day prior to the commencement of the Offer, the closing
sale price of the Shares on Nasdaq was $19.000 per Share. Shareholders are urged
to obtain a current market quotation for the Shares. The consummation of the
Transactions (as defined herein) would result in: (i) the delisting of the
Shares from Nasdaq, (ii) the Shares becoming eligible for termination of
registration pursuant to Section 12(g)(4) of the Exchange Act (as defined
herein), (iii) a change in the composition of the present board of directors and
executive officers of the Company and (iv) a change in the capitalization of the
Company.
The purpose of the Transactions is (i) to enable Purchasers to obtain, in
the aggregate, majority ownership in the Company and (ii) to provide the
Company's shareholders with liquidity for their Shares by enabling them to sell
their Shares at a fair price and at a premium over recent market prices more
quickly than through alternative transaction structures that had been
considered. See "THE TENDER OFFER -- Section 6. Price Range of Shares;
Dividends" and "SPECIAL FACTORS -- Recommendation of the Disinterested Directors
and the Board; Fairness of the Transactions".
The Company, Fremont Purchaser II, Inc. ("F Purchaser"), a Delaware
corporation and a subsidiary of Fremont Acquisition Company II, L.L.C., RCBA
Purchaser I, L.P. ("B Purchaser" and, together with F Purchaser, "Purchasers"),
a Delaware limited partnership and an affiliate of Richard C. Blum & Associates,
L.P., entered into a Transaction Agreement dated as of October 2, 1997 (the
"Transaction Agreement"). Pursuant to the Transaction Agreement, Purchasers
agreed to purchase 8,083,712 newly-issued Shares (the "Stock Purchase") at a per
Share price equal to the Per Share Amount immediately prior to the consummation
of the Offer. The Stock Purchase will provide the Company with a portion of the
funds needed to consummate the Offer and the Merger (as defined herein) and it
is anticipated that the remainder of the funds needed to consummate the Offer
and the Merger and to pay all related fees and expenses will be obtained by the
Company through a combination of (i) borrowings under a $530,000,000 senior
secured credit facility and (ii) the proceeds from the sale of subordinated
notes in the aggregate amount of $200,000,000 to be issued by the Company
(collectively, the "Debt Financing"). See "SPECIAL FACTORS -- The Transaction
Agreement, the Support Agreement and the Agreement Among Bidders" and "THE
TENDER OFFER -- Section 8. Financing of the Offer and the Merger".
The Offer is being made pursuant to the Transaction Agreement which
provides that, among other things, as soon as practicable after the purchase of
Shares pursuant to the Offer and the satisfaction of the other conditions set
forth in the Transaction Agreement, in accordance with the requirements of the
General Corporation Law of the State of Delaware and the Revised Uniform Limited
Partnership Act of the State of
2
<PAGE> 4
Delaware (together, "Delaware Law") and the Texas Business Corporation Act
("Texas Law"), Purchasers will be merged with and into the Company (the "Merger"
and, together with the Offer and the Stock Purchase, the "Transactions"), with
the Company as the surviving corporation of the Merger (the "Surviving
Corporation"). At the effective time of the Merger (the "Effective Time"), each
Share issued and outstanding immediately prior to the Effective Time, other than
Shares owned by Richard C. Blum & Associates, L.P. and certain affiliated
parties (collectively, "RCBA"), Purchasers, James R. Leininger, M.D. ("Dr. James
Leininger") and Peter A. Leininger, M.D. ("Dr. Peter Leininger") (collectively,
"Continuing Shareholders") (see "SPECIAL FACTORS -- The Transaction Agreement,
the Support Agreement and the Agreement Among Bidders"), shall be cancelled and
shall be converted automatically into the right to receive $19.25 in cash, or
any higher price that may be paid per Share pursuant to the Offer, without
interest (the "Merger Consideration"), subject to dissenters' rights. Shares
held in the treasury of the Company, each Share owned by any wholly-owned
subsidiary of the Company and Shares owned by Purchasers will be cancelled. The
Transaction Agreement is more fully described in "SPECIAL FACTORS -- The
Transaction Agreement, the Support Agreement and the Agreement Among Bidders".
NO DISSENTERS' RIGHTS ARE AVAILABLE IN CONNECTION WITH THE OFFER. See "SPECIAL
FACTORS -- Rights of the Shareholders in the Transactions". Shareholders who
fully comply with the statutory dissenters' procedures set forth in Texas Law,
the relevant portions of which are attached to this Offer to Purchase as
SCHEDULE III, will be entitled to receive, in connection with the Merger, cash
for the fair value of their Shares as determined pursuant to the procedures
prescribed by Texas Law.
THE BOARD OF DIRECTORS (THE "BOARD") AND THE DISINTERESTED DIRECTORS (AS
DEFINED HEREIN) OF THE COMPANY HAVE EACH UNANIMOUSLY DETERMINED, AFTER GIVING
CAREFUL CONSIDERATION TO A NUMBER OF FACTORS, THAT THE OFFER AND THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AND HAVE
EACH UNANIMOUSLY APPROVED THE TRANSACTION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY INCLUDING THE OFFER AT THE PER SHARE AMOUNT, THE STOCK
PURCHASE AND THE MERGER. THE BOARD AND THE DISINTERESTED DIRECTORS RECOMMEND
THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES
PURSUANT TO THIS OFFER TO PURCHASE.
BT Alex. Brown has delivered to the Board its written opinion, dated
October 1, 1997, to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the Per Share Amount and the
Merger Consideration to be received in the Offer and the Merger by the holders
of Shares (other than Continuing Shareholders) was fair from a financial point
of view to such holders. See "SPECIAL FACTORS -- Opinion of BT Alex. Brown
Incorporated" for further information concerning the opinion of BT Alex. Brown
and SCHEDULE II attached hereto.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST
27,500,000 SHARES (THE "MINIMUM CONDITION") AND THE COMPANY'S OBTAINING THE DEBT
FINANCING. SEE "THE TENDER OFFER -- SECTION 11. CERTAIN CONDITIONS TO THE
OFFER".
F Purchaser and B Purchaser have entered into a Shareholder Support
Agreement with Dr. James Leininger, dated as of the date of the Transaction
Agreement (the "Support Agreement"), providing, subject to certain conditions,
for (i) the grant by Dr. James Leininger to F Purchaser of an irrevocable option
to purchase up to 2,529,197 Shares at $19.25 per Share, subject to the
conditions set forth therein, (ii) the grant by Dr. James Leininger to B
Purchaser of an irrevocable option to purchase up to 1,670,803 Shares at $19.25
per Share, subject to the conditions set forth therein, (iii) the tender of
13,792,211 Shares owned or controlled by Dr. James Leininger pursuant to the
Offer and (iv) the voting by Dr. James Leininger of all Shares owned or
controlled by him at the time of the Shareholders' Meeting (as defined herein)
in favor of the Merger. See "SPECIAL FACTORS -- The Transaction Agreement, the
Support Agreement and the Agreement Among Bidders".
3
<PAGE> 5
The receipt of cash for Shares pursuant to the Offer or in the Merger will
be a taxable transaction for U.S. federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"), and may also be a taxable
transaction under applicable state, local or foreign tax laws. See "THE TENDER
OFFER -- Section 5. Certain U.S. Federal Income Tax Considerations".
The consummation of the Merger is subject to the satisfaction or waiver of
certain conditions including the approval and adoption of the Transaction
Agreement by the requisite vote of the shareholders of the Company. See "SPECIAL
FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement
Among Bidders". Under the Company's articles of incorporation (the "Articles of
Incorporation") and Texas Law, the affirmative vote of the holders of two-thirds
of the outstanding Shares is required to approve the Transaction Agreement and
the Merger. If the Offer is consummated, the Purchasers and Dr. James Leininger
will be able to effect the Merger without the affirmative vote of any other
shareholder.
Following the consummation of the Transactions, Fremont Partners L.P. and
certain affiliated parties (collectively, "Fremont"), RCBA, Dr. James Leininger
and Dr. Peter Leininger would own 7,179,066, 4,742,536, 6,064,155 and 100,000
Shares, respectively representing 39.7%, 26.2%, 33.5% and 0.6% of the Shares
outstanding following such consummation. There would be no other shareholders at
such time but certain members of management would retain, and be guaranteed,
additional options to purchase Shares as described below.
As of October 2, 1997, there were 42,636,016 Shares issued and outstanding
and 186,824 Shares held in the treasury of the Company. Employee and director
stock options ("Employee Options") exercisable for 3,627,733 Shares were
outstanding pursuant to the Company's stock option plans and direct grants as of
October 2, 1997, of which 1,561,977 were vested as of such date. As of October
2, 1997, there were approximately 364 holders of record of the issued and
outstanding Shares (see "SPECIAL FACTORS -- Background of the Transactions"). As
of October 2, 1997, the Company's directors and executive officers (other than
Dr. James Leininger) as a group beneficially owned 4,277,291 Shares, or 9.8% of
the Shares, which includes 1,128,615 Shares issuable upon exercise of Employee
Options and 340,000 Shares which Raymond R. Hannigan, the Company's President
and Chief Executive Officer, has the right to acquire upon the exercise of a
stock option granted to him by Dr. James Leininger (the "Hannigan Option"), but
excludes Shares owned by the Company's employee stock ownership plan. Certain
members of the Company's management have entered or may enter into stock
retention agreements (collectively, "Stock Retention Agreements"), which Stock
Retention Agreements entered into to date provide that such individuals will
retain, in the aggregate, 100,000 Shares and options to purchase 821,550 Shares
upon consummation of the Transactions. The Company has been informed by its
directors and executive officers (other than Dr. James Leininger and as
otherwise provided in any Stock Retention Agreement) that they intend either to
tender all Shares beneficially owned by them to the Company pursuant to the
Offer or to vote such Shares in favor of the approval by the shareholders of the
Company of the Transaction Agreement and the Merger. Dr. James Leininger owns or
controls 21,413,396 Shares, or 50.2% of the Shares, and he will tender
13,792,211 Shares pursuant to the Offer and will vote his remaining Shares in
favor of approval and adoption by the shareholders of the Company of the
Transaction Agreement and the Merger.
This Offer to Purchase and the accompanying documents contain information
required to be disclosed by the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder (the "Exchange Act"), including
financial information regarding the Company, a description of the terms,
conditions and background of the Offer, and the procedures for tendering Shares
for purchase.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION
IS MADE WITH RESPECT TO THE OFFER.
4
<PAGE> 6
SPECIAL FACTORS
BACKGROUND OF THE TRANSACTIONS
On January 24, 1996, the Company completed a secondary public offering of
Shares pursuant to which Dr. James Leininger, certain other individuals and
certain entities affiliated with Dr. James Leininger sold approximately
8,800,000 Shares to the public at a price of $10.25 per Share. RCBA acquired
1,500,000 Shares in the secondary offering. During 1996, RCBA continued to
accumulate Shares. From time to time during 1996 and early 1997, RCBA and the
Company had various discussions concerning the Company's financial and operating
results which discussions were similar in nature and scope to numerous other
discussions the Company's senior management routinely had with other
institutional investors, industry analysts and potential investors.
On February 20, 1996, representatives of Fremont met with the Company for
the purpose of introducing Fremont to the Company and seeking a greater
understanding of the Company and its operations. In March 1996, the Company
entered into a confidentiality agreement with Fremont, and there were various
discussions between Fremont and the Company over the next year concerning the
Company's business and its financial and operating results. In early February
1997, Fremont requested another meeting with the Company. As a result, on
February 11, 1997, Robert Jaunich and James T. Farrell, each a Managing Director
of Fremont, met with Raymond R. Hannigan, the Company's President and Chief
Executive Officer ("Mr. Hannigan"), and Bianca A. Rhodes ("Ms. Rhodes"), who at
that time was the Company's Chief Financial Officer. At that meeting, Messrs.
Jaunich and Farrell informed Mr. Hannigan and Ms. Rhodes of Fremont's heightened
interest in the Company and desire to meet with other members of the Company's
senior management and indicated that Fremont, at some point in the future, might
have an interest in acquiring a significant position in the Company.
Discussions continued in March 1997 and, as a result, the Company entered
into a new confidentiality agreement with Fremont on March 10, 1997 which
included a standstill provision that restricted Fremont from trading in or
acquiring any of the Company's Shares for a period of two years without the
Company's consent. The Company also entered into a confidentiality agreement
with RCBA on March 11, 1997 which did not contain a standstill provision. It
also became apparent that discussions would need to be expanded to include not
just management but the Chairman and principal shareholder of the Company. On
March 24, 1997, representatives of RCBA and Fremont met with Dr. James
Leininger, Mr. Hannigan and Ms. Rhodes. During the course of the meeting, the
Fremont and RCBA representatives inquired as to whether the Company would be
receptive to an offer to acquire the Company's outstanding Shares. The RCBA and
Fremont representatives indicated that RCBA and Fremont were acting separately,
and each said that it was not in a position to make a formal offer until such
time as it had independently conducted a due diligence review. In this regard,
the Company agreed, for a 30-day period, to provide each of RCBA and Fremont
with the opportunity to conduct such a review. Prior to beginning the due
diligence review, representatives of RCBA indicated that it believed, on a
preliminary basis and based on various existing market factors, that an offer to
acquire the Company's Shares by a third party financial buyer in the $17.50 to
$18.50 range was possible. The two entities thereafter commenced independent due
diligence reviews of the Company.
The Company's management had for some time believed that the Shares were
undervalued in the public market and that a transaction such as that
preliminarily discussed with RCBA and Fremont could provide an opportunity to
maximize shareholder value. During the 30-day due diligence periods, the Company
further considered the fairness to the Company's shareholders of a transaction
in the $17.50 to $18.50 per Share range. After informal discussions with several
investment banking firms and its legal counsel, the Company concluded that it
would be appropriate, in considering a sale of the Company, for the Company to
conduct a process pursuant to which it could adequately evaluate the price range
reflected in the discussions with RCBA, as well as to determine if there were
other alternatives to be considered for maximizing shareholder value. In late
April 1997, Dr. James Leininger informed Mr. Jaunich of Fremont that the Company
intended to solicit other third party indications of interest after expiration
of the 30-day due diligence period. Dr. James Leininger and Dr. Peter Leininger
also met with Richard Blum, Chairman of RCBA, and N. Colin
5
<PAGE> 7
Lind, Managing Director of RCBA in late April 1997 and informed them of the
Company's position that a transaction in the $17.50 to $18.50 per Share range
would be inadequate.
After the Company's senior management interviewed several investment
banking firms, the Board of Directors of the Company met on May 13, 1997, to
consider the engagement of an investment banking firm to facilitate a process
pursuant to which the Company would examine its strategic alternatives, and
subsequently, the Board approved the engagement of BT Alex. Brown.
Representatives of BT Alex. Brown were present at the Board meeting and
discussed the scope and mechanics of a solicitation process with the Board. On
May 29, 1997, the Company publicly announced that it had retained BT Alex. Brown
to assist the Company in exploring strategic options and alternatives for
increasing shareholder value.
Between June 1, 1997 and July 10, 1997, approximately 38 parties (16 of
which were strategic buyers) were contacted to solicit indications of interest
in the Company. Of these parties, 30 parties requested, and received, materials
containing publicly available information relating to the Company. Confidential
financial projections prepared by the Company's management were subsequently
provided to 17 parties, including RCBA and Fremont, who expressed a continuing
interest in pursuing discussions with the Company and who entered into a
confidentiality agreement with the Company. Interested parties were requested to
submit indications of interest concerning the Company by July 10, 1997.
On July 8, 1997, representatives of Fremont and RCBA met, in light of the
approaching July 10, 1997 deadline, to discuss their respective views and
interests in the Company. At this meeting, it was determined that RCBA and
Fremont had similar views as to the prospects of the Company as well as what
they believed to be the appropriate valuation of the Company. The outcome of
this meeting was that, in light of their similar views, both RCBA and Fremont
would consider forming a group for purposes of making an offer to acquire the
Company. RCBA and Fremont agreed on July 10, 1997 to submit a joint preliminary
indication of interest to acquire the Company.
Indications of interest from nine parties, all of which were financial
buyers, including a joint proposal from RCBA and Fremont were received on July
10, 1997. Such proposals reflected prices ranging from $17 to $22 per Share,
with RCBA and Fremont submitting an offer indicating a price range of $18.50 to
$22 per Share. Based on the levels of interest indicated, seven parties,
specifically, AEA Investors, Investcorp International, Inc., Forstmann Little &
Co., Kohlberg Kravis Roberts & Co., Apollo Management, American Industrial
Partners, and RCBA and Fremont, were subsequently selected to attend due
diligence meetings with senior management of the Company and to perform
additional due diligence reviews of the Company in order to prepare final
offers. On July 22, 1997, the Board held a meeting at which the Board was
updated with respect to the status of the solicitation process. At such meeting,
BT Alex. Brown reviewed with the Board proposals that had been received and
provided background information on each prospective acquiror and informed the
Board that the Company had determined to invite the above seven parties for full
day meetings with senior management. Interested parties were notified that final
offers concerning a potential transaction with the Company would be due on
September 8, 1997. During the last week of July 1997 and the month of August
1997, each of the seven parties met with the Company's senior management and
received access to extensive due diligence materials concerning the Company.
By September 8, 1997, the Company had received two offers, the other
interested parties having declined to submit offers. One potential acquiror was
Health Care Capital Partners, a consultant previously retained by AEA Investors
to assist it in connection with its due diligence review of the Company. Health
Care Capital Partners made an offer for its own account, indicating an interest
in pursuing a transaction that would be structured as a partial recapitalization
of the Company involving an equity investment by the potential acquiror for 25%
to 35% of the Company's capital stock and the borrowing by the Company of
approximately $400 million. This offer contemplated that existing shareholders
of the Company would receive at least $10 in cash per Share and retain an equity
interest and that the Company would remain a public company. Such offer did not
contain any financing commitments and was ultimately rejected by the Company. A
joint offer also was received from RCBA and Fremont pursuant to which RCBA and
Fremont would acquire control of the Company in a leveraged transaction
structured to be treated as a recapitalization for accounting purposes in which
RCBA and Fremont would purchase 90% of the Company's outstanding Shares for
$19.25 per Share in
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cash. The effect of the consummation of such transaction was that the Company
would continue as a public company with the Company's existing shareholders
owning 10% of the surviving corporation of the merger. The proposal also
contemplated that management would have an ongoing equity investment in the
Company. RCBA and Fremont's proposal indicated that they had received acceptable
financing proposals which, when combined with existing equity sources, would
allow successful consummation of the proposed transaction in a timely manner.
RCBA and Fremont stated in their offer that they reserved the right to withdraw
their offer if it was not accepted by the close of business on September 12,
1997.
On September 9, 1997, the Board held a telephonic meeting at which the
Board was updated with respect to the proposals that had been received. The
Board instructed management and BT Alex. Brown to pursue RCBA and Fremont's
offer and to attempt to improve the terms of the offer. During the remainder of
that week, numerous discussions were held between representatives of RCBA and
Fremont and the Company concerning, among other things, the structure and price
of the proposed transaction. The Company's representatives attempted to obtain a
higher price per Share and indicated to RCBA and Fremont the interest of the
Company in structuring the transaction as a tender offer so that the Company's
shareholders could receive liquidity for their Shares as soon as possible. The
Company was further concerned that the structure originally proposed by RCBA and
Fremont would have left the Company with a small number of publicly held Shares
for which the Company believed there would be little or no market and would also
cause the Company to continue to bear the additional expenses associated with
continuing to have public shareholders. On September 12, 1997 RCBA and Fremont's
representatives restated their position to the Company that there would be no
concessions as to price but did indicate that RCBA and Fremont would be willing
to consider alternative transaction structures, including a tender offer. After
consultation with BT Alex. Brown, the Company determined to seek to structure,
in the form of a tender offer, an alternative transaction. Late in the afternoon
of September 12, 1997, Purchasers' representatives had several conversations
with the Company's advisors regarding alternative structures. The Company, after
discussions with Dr. James Leininger about his willingness to retain an equity
position in the recapitalized Company and receipt of his affirmative indication
that he would be willing to retain an equity position of 30% to 35%, proposed to
RCBA and Fremont that they restructure their offer to provide for a tender of
any and all outstanding Shares of the Company. RCBA and Fremont indicated that
they would be interested in pursuing such a transaction, but that they would
continue to require a commitment from senior management of the Company to either
retain Shares or options for Shares following consummation of the proposed
transaction.
On September 13, 1997, the parties preliminarily agreed, subject to
negotiation of satisfactory agreements and approval by the Company's Board, to a
leveraged transaction structured to be treated as a recapitalization for
accounting purposes pursuant to which Dr. James Leininger would retain a 30% to
35% interest in the Company, RCBA would retain its Shares in the Company, and
the remaining outstanding Shares of the Company would be acquired through a cash
tender offer commenced by the Company at a purchase price of $19.25 per Share.
Concurrently with the consummation of the tender offer, affiliates of RCBA and
Fremont also would purchase an aggregate of 8,083,712 Shares at a purchase price
of $19.25 per Share in cash from the Company. RCBA and Fremont informed the
Company that further negotiations with respect to a transaction would be
conditioned on RCBA and Fremont and the Company proceeding on an exclusive basis
through September 26, 1997.
On September 13, 1997, the outside members of the Board were individually
contacted by members of the Company's senior management and were updated as to
the status of negotiations with RCBA and Fremont, including the fact that RCBA
and Fremont had required that the Company enter into exclusive negotiations.
Each outside director approved the Company's proceeding on such basis and, on
September 14, 1997, the Company executed an agreement with RCBA and Fremont in
which the Company committed to negotiate exclusively with RCBA and Fremont until
September 26, 1997, and to a liquidated damages provision in the amount of $24
million if the Company violated the terms of such agreement. This agreement was
subsequently extended until October 3, 1997.
RCBA and Fremont and the Company subsequently directed their respective
advisors to commence the negotiation and preparation of a definitive agreement
for the proposed transaction. Commencing on
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September 15, 1997, and continuing through October 2, 1997, representatives of
the Company and RCBA and Fremont and their respective legal advisors negotiated
the terms of a definitive agreement including, among other things, (i) the
terms and conditions of the tender offer (including a modification to allow for
the tender of any and all Shares rather than a maximum number of Shares) and
the Merger, (ii) a limited guaranty by Fremont of the obligations of F
Purchaser under the agreement, (iii) that the number of Shares owned by Dr.
James Leininger which would be subject to options to be granted by Dr. James
Leininger to RCBA and Fremont would be 4,200,000 Shares and the circumstances
under which Dr. James Leininger was required to vote his Shares in favor of the
Merger, (iv) the scope of the representations and warranties of the Company,
(v) the circumstances under which the Board could terminate the agreement, (vi)
the amount of the proposed breakup fee, which was agreed to be $30 million,
together with an expense reimbursement limitation of $2 million to be paid by
the Company and the circumstances in which the breakup fee would be paid and
(vii) the amount of expenses payable by the Company in the event of termination
of the transaction. It was also ultimately agreed that Dr. James Leininger
would retain Shares comprising approximately 33.5% of the outstanding Shares
following the consummation of the transaction, that Dr. Peter Leininger would
retain 100,000 Shares, and that certain members of senior management would
retain Shares and/or options to acquire Shares in the Company following
consummation of the transaction. See "INTRODUCTION."
On September 19, 1997, a telephonic meeting of the Board was held and the
status of the pending negotiations was reviewed by the Board. At that time, the
outside members of the Board were given a separate opportunity to review the
proposed transaction with the Company's outside counsel and BT Alex. Brown. Two
outside members of the Board who were unable to attend the telephonic Board
meeting on September 19, 1997 were updated on September 20, 1997 as to the prior
day's meeting.
On September 24, 1997, the Board held a meeting at which the Company's
outside counsel and representatives of BT Alex. Brown reviewed for the Board the
structure and terms of the proposed transaction. During the course of this
meeting, the Company's outside counsel reviewed with the Board the reasons and
need for an opinion relating to solvency and related valuation matters and it
was determined that Houlihan Lokey Howard & Zukin ("Houlihan Lokey") be retained
to render such an opinion. In addition, the Company's outside counsel reviewed
with the Board its legal and fiduciary duties with respect to the transaction
and BT Alex. Brown reviewed with the Board the valuation methodologies to be
utilized by BT Alex. Brown in connection with its financial analysis of the
proposed transaction.
The Board held a telephonic meeting on October 1, 1997 for the purpose of
reviewing and considering the proposed transaction. After reviewing the terms of
the proposed transaction, the related documentation and certain legal
considerations with the Company's outside counsel, the Company's management made
a presentation to the Board with respect to the valuation of the Company's
assets and certain issues which had been raised by the Board during the previous
Board meeting. At the October 1, 1997, meeting, Houlihan Lokey reported to the
Board its preliminary views with respect to the solvency of the Company and
certain related valuation matters after the consummation of the proposed
transaction and delivered its negative assurance letter confirming these
preliminary views. The senior management of the Company also reported that it
had undertaken a review and analysis of the Company's assets and that, in their
opinion, a fair valuation of the assets would permit the Company to consummate
the proposed transactions. BT Alex. Brown then reviewed with the Board the
financial analyses performed by BT Alex. Brown in connection with its evaluation
of the proposed transaction and rendered to the Board an oral opinion (which
opinion was subsequently confirmed by delivery of a written opinion dated
October 1, 1997) to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the Per Share Amount was
fair from a financial point of view to the holders of Shares (other than
Continuing Shareholders).
Following the presentations described above at the October 1, 1997 meeting
Dr. James Leininger, Mr. Hannigan and Dr. Peter Leininger who were considered to
be interested directors were excused from the meeting. Thereafter, following
full discussion, the directors of the Company other than Dr. James Leininger,
Mr. Hannigan and Dr. Peter Leininger (the "Disinterested Directors"),
unanimously determined, after giving careful consideration to a number of
factors, that each of the Transactions were fair to, and in the best interests
of, the Company and its shareholders, and unanimously approved the Transactions.
Dr. James
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Leininger, Mr. Hannigan and Dr. Peter Leininger then rejoined the meeting, and
the full Board unanimously ratified and approved the vote previously taken.
On October 2, 1997, the Company entered into the Transaction Agreement with
Purchasers and publicly announced the proposed Transactions prior to the opening
of the market on October 3, 1997, and Purchasers and Dr. James Leininger entered
into the Support Agreement.
RECOMMENDATION OF THE DISINTERESTED DIRECTORS AND THE BOARD; FAIRNESS OF THE
TRANSACTIONS
Recommendation of the Disinterested Directors and the Board
On October 1, 1997, the Disinterested Directors unanimously voted to
approve the Transactions and determined that each of the Transactions was fair
to, and in the best interests of the Company and its shareholders, and the
Board, by a unanimous vote, ratified the vote previously taken by the
Disinterested Directors. See "SPECIAL FACTORS -- Interests of Certain Persons in
the Transactions."
The Disinterested Directors and the Board considered a number of factors
including, without limitation, the following:
(i) the premium represented by the Per Share Amount in relation to the
historical per share market value of the Shares prior to the announcement
on May 29, 1997 that the Board was exploring strategic alternatives to
maximize shareholder value. In that regard, the Board noted that the
closing market prices on April 29, 1997, the date approximately one month
prior to the announcement that the Company was exploring strategic options
and alternatives for increasing shareholder value, and October 1, 1997, the
day of the Board's meeting approving the Transactions and the date two days
before the announcement of the Transactions, were $14.875 and $18.625,
respectively. The Board also noted that the average market value of the
Shares for the 12-month period ended October 2, 1997 was $15.28 per Share
and for the year ended December 31, 1996 was $13.865 per share and that the
Per Share Amount represented a 26.0% premium over the average market value
for the 12-month period ended October 2, 1997 and a 38.8% premium over the
1996 average market value. See "THE TENDER OFFER -- Section 6. Price Range
of Shares; Dividends";
(ii) that the Company had issued a press release on May 29, 1997
announcing that it had retained BT Alex. Brown to assist the Company in
exploring strategic alternatives to maximize shareholder value, that the
Company then engaged in a thorough process for soliciting offers and that
none of the prospective purchasers that had been contacted or expressed an
interest in acquiring the Company had proposed a transaction with a price
equal to or in excess of the Per Share Amount. See "SPECIAL
FACTORS -- Background of the Transactions";
(iii) the opinion of BT Alex. Brown rendered to the Board on October
1, 1997 to the effect that, as of the date of such opinion and based upon
and subject to certain matters stated therein, the Per Share Amount and the
Merger Consideration to be received in the Offer and the Merger by the
holders of Shares (other than Continuing Shareholders) was fair from a
financial point of view to such holders and the financial analyses
presented to the Board and the Disinterested Directors in connection
therewith. See "SPECIAL FACTORS -- Opinion of BT Alex. Brown Incorporated";
(iv) the financial condition and historical and projected earnings for
the Company;
(v) the nature of the Company's business and the industry in which the
Company operates, including information received by the Board regarding
trends in the Company's industry and various uncertainties associated with
current and potential future industry consolidation, reimbursement,
regulatory and market conditions;
(vi) that the Offer would permit a substantial number of shareholders
to realize a premium for their Shares in the near future as compared to (a)
an alternative offer the terms of which were unclear, difficult to quantify
and subject to a variety of conditions such as financing and continued due
diligence and (b) the belief of the Board that absent the existence of a
possible transaction involving the Company, the Shares could well trade at
prices significantly below the Per Share Amount;
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(vii) the effect of the termination fee provisions in the Transaction
Agreement and the extent to which such provisions might increase the cost
of any alternative offers should they materialize. See "SPECIAL
FACTORS -- The Transaction Agreement, the Support Agreement and the
Agreement Among Bidders";
(viii) the requirement that shareholders tender sufficient Shares to
meet the Minimum Condition (which was considered in light of the Support
Agreement). See "SPECIAL FACTORS -- The Transaction Agreement, the Support
Agreement and the Agreement Among Bidders";
(ix) the nature and sources of the equity being funded by the
Purchasers and the financing contemplated in connection with the
Transactions, the institutions providing such financing commitments and the
conditions to the obligations of such institutions to fund such
commitments;
(x) the oral report to the Board, to be confirmed in writing prior to
the consummation of the Offer, of Houlihan Lokey as to the solvency of the
Company following the consummation of the Transactions and certain related
matters; and
(xi) the effect of protracted negotiations and due diligence
investigations with prospective purchasers on the management and employees
of the Company.
In view of the wide variety of factors considered in connection with their
evaluation of the Transaction Agreement and the Merger, the Disinterested
Directors and the Board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered in reaching
their determination. The Disinterested Directors and the Board, however, gave
significant weight to the factors specified in clauses (i) through (vi),
inclusive, above.
The Disinterested Directors carefully reviewed the interests of Dr. James
Leininger, Dr. Peter Leininger, Mr. Hannigan and certain members of the
Company's senior management in the Transactions, and do not believe that their
determination to recommend the Offer to the shareholders of the Company was
influenced by such interests.
The Disinterested Directors and the Board recognized that, upon
consummation of the Offer, the approval of the shareholders of the Company other
than Dr. Leininger and Purchasers will not be required to approve the Merger and
that Dr. James Leininger would enter into the Support Agreement, which provides
that he must vote the Shares he owns following the closing of the Offering in
favor of the Merger and pursuant to which he granted an option on certain of his
Shares (the "Option"). The Disinterested Directors and the Board also recognized
that it was still possible, under the terms of the Transaction Agreement and the
Support Agreement, for a third party to make an offer and obtain more than a
majority of the Shares (assuming the acquisition by a third party of
approximately 62% of the Shares not owned by RCBA and not subject to the Option)
if a third party purchaser were willing to make an offer which was more
attractive to the Company's shareholders than the Offer after taking into
account the payment of the Fee (as defined herein). The Disinterested Directors
and the Board acknowledged that the Transactions would eliminate the opportunity
for the shareholders, other than Dr. James Leininger, Dr. Peter Leininger, RCBA
and certain members of management, to participate in the future growth of the
Company, but they also further recognized that it would limit such shareholders'
exposure to the risk of any future decreases in the value of the Company.
Because the terms of the Transaction Agreement and the price to be paid to the
shareholders were determined through arms length negotiations among the Company,
Purchasers, and their respective advisors, and for the reasons set forth above,
it was the opinion of the Disinterested Directors that the Offer and the Merger
were fair to, and in the best interests of, the shareholders.
The Board and the Disinterested Directors determined that it was not
necessary to appoint a committee of independent directors or an unaffiliated
representative to act solely on behalf of the unaffiliated shareholders of the
Company for the purpose of negotiating the terms of the Transaction Agreement.
In making such determination, the Board and the Disinterested Directors
carefully considered the fact that proposals to acquire the Company were
solicited on behalf of the Company without regard to whether management would
retain an equity interest in the Surviving Corporation, and noted that the
Disinterested Directors are not employed by the Company and will have no
financial interest in the Company following consummation of the Merger. All of
the Directors, including the Disinterested Directors, voted to approve the
Transactions.
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In connection with its deliberations, the Board did not consider, and did
not request that BT Alex. Brown evaluate, the Company's liquidation value. The
Board did not view the Company's liquidation value to be a relevant measure of
valuation, given that the Per Share Amount significantly exceeded the book value
per Share of the Company on June 30, 1997, and it was the Board's view that the
Company is far more valuable as a going concern than its net book value per
share of $5.26 as of June 30, 1997. However, there can be no assurance that the
liquidation value would not produce a higher valuation of the Company than its
value as a going concern.
To the Company's knowledge after reasonable inquiry, each of the Company's
executive officers and directors (other than Dr. James Leininger and as
otherwise provided in any Stock Retention Agreement) presently intends either to
tender all Shares beneficially owned by him to the Company pursuant to the Offer
or to vote in favor of the Merger at a duly called shareholders' meeting, and,
to the Company's knowledge after reasonable inquiry, no executive officer,
director or affiliate of the Company has made a recommendation in support of or
opposed to the Merger. Pursuant to the Stock Retention Agreements, certain
members of management will retain Employee Options to purchase 821,550 Shares.
OPINION OF BT ALEX. BROWN INCORPORATED
The Company engaged Alex. Brown & Sons Incorporated (following the merger
of Alex. Brown & Sons Incorporated with BT Securities Corporation, "BT Alex.
Brown") to act as its exclusive financial advisor in connection with the Offer
and the Merger. On October 1, 1997, at a meeting of the Board held to evaluate
the proposed Offer and Merger, BT Alex. Brown rendered to the Board an oral
opinion (which opinion was subsequently confirmed by delivery of a written
opinion dated October 1, 1997) to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the Per Share Amount
and the Merger Consideration to be received in the Offer and the Merger by the
holders of Shares (other than Continuing Shareholders) was fair from a financial
point of view to such holders. No limitations were imposed by the Board upon BT
Alex. Brown with respect to the investigations made or the procedures followed
by it in rendering its opinion.
The full text of the written opinion of BT Alex. Brown dated October 1,
1997, which sets forth the assumptions made, matters considered and limitations
of the review undertaken, is attached as SCHEDULE II hereto and is incorporated
herein by reference. BT ALEX. BROWN'S OPINION IS DIRECTED TO THE BOARD,
ADDRESSES ONLY THE FAIRNESS OF THE PER SHARE AMOUNT TO BE RECEIVED IN THE OFFER
AND THE MERGER BY THE HOLDERS OF SHARES (OTHER THAN CONTINUING SHAREHOLDERS)
FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO WHETHER OR NOT SUCH SHAREHOLDER SHOULD TENDER SHARES IN THE
OFFER. The summary of the opinion of BT Alex. Brown set forth herein is
qualified in its entirety by reference to the full text of such opinion.
In connection with its opinion, BT Alex. Brown reviewed and analyzed
certain publicly available financial information and other information
concerning the Company and certain internal analyses and other information
furnished to BT Alex. Brown by the Company. BT Alex. Brown also held discussions
with members of senior management of the Company and representatives of
Purchasers regarding the business and prospects of the Company. In addition, BT
Alex. Brown (i) reviewed the reported prices and trading activity for the
Shares, (ii) compared certain financial and stock market information for the
Company with similar information for certain other companies whose securities
are publicly traded, (iii) reviewed the financial terms of certain recent
business combinations which BT Alex. Brown deemed comparable in whole or in
part, (iv) reviewed the terms of the Transaction Agreement as furnished to BT
Alex. Brown in draft form and (v) performed such other studies and analyses and
considered such other factors as BT Alex. Brown deemed appropriate.
As described in its opinion, BT Alex. Brown assumed and relied upon,
without independent verification, the accuracy, completeness and fairness of the
information furnished to or otherwise reviewed by or discussed with BT Alex.
Brown for purposes of its opinion. With respect to the information relating to
the prospects of the Company, BT Alex. Brown assumed that such information
reflected the best currently available judgments and estimates of the management
of the Company as to the likely future financial performance of the
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Company. BT Alex. Brown also assumed that the Merger would be treated as a
recapitalization for financial reporting purposes and that the final terms of
the Transaction Agreement as reviewed by BT Alex. Brown in draft form would not
vary materially from the draft reviewed by BT Alex. Brown. BT Alex. Brown did
not make nor was it provided with an independent evaluation or appraisal of the
assets or liabilities of the Company. In connection with its engagement to
provide financial advisory services to the Board concerning strategic
alternatives, BT Alex. Brown was requested to solicit, and did solicit, interest
from third parties with respect to the acquisition of the Company. In arriving
at its opinion, BT Alex. Brown considered the nature, scope and results of such
solicitation. BT Alex. Brown's opinion was based on market, economic and other
conditions as they existed and could be evaluated as of the date of its opinion.
Although BT Alex. Brown evaluated the Per Share Amount from a financial point of
view, the type and amount of consideration payable in the Offer and the Merger
was determined through negotiation between the Company and Purchasers.
The following is a summary of the material analyses and factors considered
by BT Alex. Brown in connection with its opinion to the Board dated October 1,
1997:
Analysis of Selected Public Company Trading and Financial Information. BT
Alex. Brown compared certain financial and stock market information for the
Company with similar information for seven selected publicly held companies in
the healthcare industry: Becton, Dickinson & Company, C.R. Bard, Inc.,
Hillenbrand Industries, Inc., Invacare Corporation, STERIS Corporation, Stryker
Corporation and Sunrise Medical, Inc. (collectively, the "Selected Companies").
BT Alex. Brown calculated market values relative to each company's earnings per
share ("EPS") for the latest 12 months and calendar years 1997 and 1998, and
adjusted market values (equity market value, plus debt, less cash and
equivalents) relative to each company's revenues, earnings before interest,
taxes, depreciation and amortization ("EBITDA") and earnings before interest and
taxes ("EBIT") for the latest 12 months. All multiples were based on closing
stock prices on September 30, 1997. EPS estimates for the Selected Companies
were based on analysts' estimates as reported by I/B/E/S, a market research
database, and EPS estimates for the Company were based both on analysts'
estimates as reported by I/B/E/S and internal estimates of the management of the
Company. This analysis indicated multiples for the Selected Companies of latest
12 months and estimated calendar 1997 and 1998 EPS of 16.6x to 41.0x (with a
mean of 24.0x), 16.8x to 33.9x (with a mean of 22.3x) and 14.4x to 28.2x (with a
mean of 18.6x), respectively, and latest 12 months revenues, EBITDA and EBIT of
0.8x to 4.4x (with a mean of 2.1x), 8.1x to 21.9x (with a mean of 12.0x) and
10.3x to 27.4x (with a mean of 16.0x), respectively. These multiples compare
with implied multiples for the Company based on the Per Share Amount of latest
12 months and estimated calendar 1997 and 1998 EPS of 22.0x (based on latest 12
months EPS), 20.5x (based on calendar 1997 EPS estimates as reported by
I/B/E/S), 18.2x (based on calendar 1998 EPS estimates as reported by I/B/E/S),
15.2x (based on calendar 1998 EPS estimates of the management of the Company)
and 17.6x (based on calendar 1998 EPS estimates of the management of the
Company, as adjusted based on discussions with potential acquirors),
respectively, and latest 12 months revenues, EBITDA and EBIT of 2.8x, 9.9x and
13.3x, respectively.
Analysis of Selected Merger and Acquisition Transactions. BT Alex. Brown
reviewed the purchase price and implied transaction multiples paid in 12
selected merger and acquisition transactions in the healthcare industry,
consisting of (acquiror/target): (i) eight transactions involving strategic
buyers: Nellcor Puritan Bennett, Inc./Acquetron Medical, Inc., Advanced Medical,
Inc./Ivac Medical Systems, Inc., STERIS Corporation/Amsco International, Inc.,
Getinge Industrier/Arjo AB, Thermo Electron Corporation/Bird Medical
Technologies, Inc., Nellcor, Inc./Puritan-Bennett Corporation, Tyco
International Ltd./Kendall International, Inc. and Marquette Electronics,
Inc./Corometrics Medical Systems, Inc. (the "Strategic Buyer Transactions") and
(ii) four transactions involving financial buyers: Thomas H. Lee Company/Fisher
Scientific International, Inc., Apollo Management, L.P./Living Centers of
America, Inc., Forstmann Little & Co./Community Health Systems, Inc. and
Warburg, Pincus Ventures L.P./Transition Systems, Inc. (the "Financial Buyer
Transactions" and, together with the Strategic Buyer Transactions, the "Selected
Merger and Acquisition Transactions"). All multiples were based on publicly
available information at the time of announcement of such transaction. This
analysis indicated multiples of latest 12 months and one-year forward EPS and
latest 12 months revenues, EBITDA and EBIT in the Strategic Buyer Transactions
of 19.0x to 47.6x (with a mean of 28.4x), 19.5x to 25.8x (with a mean of 21.6x),
0.9x to 2.0x (with a mean of 1.5x), 8.8x to
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13.4x (with a mean of 11.2x) and 11.3x to 21.4x (with a mean of 15.5x),
respectively, and latest 12 months net income, revenues, EBITDA, free cash flow
and EBIT in the Financial Buyer Transactions of 19.4x to 28.8x (with a mean of
24.1x), 0.7x to 4.3x (with a mean of 2.0x), 8.6x to 10.9x (with a mean of
10.0x), 15.9x to 16.4x (with a mean of 16.2x) and 12.2x to 16.2x (with a mean of
13.7x), respectively. These multiples compare with implied multiples for the
Company based on the Per Share Amount of latest 12 months EPS, revenues, EBITDA,
free cash flow and EBIT of 22.0x, 2.8x, 9.9x, 15.2x and 13.3x, respectively. BT
Alex. Brown also compared the premiums paid in the Selected Merger and
Acquisition Transactions with the premium payable in the Offer and Merger. The
premiums paid in the Selected Merger and Acquisition Transactions, based on the
target company's closing stock price 30 days prior, and one day prior, to public
announcement of such transaction were 15.5% to 89.5% (with a mean of 53.8% and a
median of 50.6%) and 13.8% to 44.1% (with a mean of 31.8% and a median of
38.9%), respectively, in the Strategic Buyer Transactions, and 10.9% to 18.9%
(with a mean of 14.3% and a median of 12.1%) and 0.2% to 19.9% (with a mean of
10.0% and a median of 5.0%), respectively, in the case of the Financial Buyer
Transactions. The premium payable in the Offer and the Merger based on the
closing stock price of the Shares 30 days prior, and one day prior, to the Board
meeting held on October 1, 1997 to evaluate the proposed Offer and Merger was
4.8% and 3.4%, respectively. The premium payable in the Offer and the Merger
based on the unaffected closing stock price of the Shares on April 29, 1997 (one
month prior to the Company's public announcement that it had retained BT Alex.
Brown to assist the Company in exploring strategic alternatives) was 30%.
Discounted Cash Flow Analysis. BT Alex. Brown performed a discounted cash
flow analysis of the Company to estimate the present value of the stand-alone,
unlevered, after-tax free cash flows that the Company could generate over the
years 1997 through 2001, based both on internal estimates of the management of
the Company ("Case I") and adjustments to such internal estimates based on
discussions with potential acquirors which assumed lower compound annual revenue
growth rates and EBITDA margins for the Company ("Case II"). The stand-alone
discounted cash flow analysis of the Company was determined by (i) adding (x)
the present value at September 30, 1997 of projected free cash flows over the
five-year period 1997 through 2001, and (y) the present value at September 30,
1997 of the estimated terminal value of the Company in year 2001 and (ii)
subtracting the current net debt of the Company at September 30, 1997. The range
of estimated terminal values for the Company at the end of the five-year period
was calculated by applying terminal value multiples ranging from 8.0x to 10.0x
to the projected 2001 EBITDA of the Company, representing the estimated value of
the Company beyond the year 2001. The cash flows and terminal values of the
Company were discounted to present value using discount rates ranging from 18%
to 22% for Case I and 14% to 18% for Case II. This analysis yielded an equity
reference range for the Company of approximately $22.21 to $29.86 per Share
(based on Case I) and $17.33 to $23.21 per Share (based on Case II), as compared
to the Per Share Amount.
Certain Other Factors. In connection with its opinion, BT Alex. Brown also
reviewed and considered, among other things, (i) the indications of interest of
third parties other than the Purchasers, (ii) the historical and pro forma
financial profile of the Company, (iii) the historical trading volumes and
market prices for the Shares, and movements in the Shares relative to the S&P
500 Index, the Nasdaq Composite and the common stock of the Selected Companies,
(iv) analysts' reports, including growth rate estimates, with respect to the
Company, and (v) the ownership profile of the Company.
The summary set forth above does not purport to be a complete description
of the opinion of BT Alex. Brown to the Board or the financial analyses
performed and factors considered by BT Alex. Brown in connection with its
opinion. A copy of BT Alex. Brown's written presentation to the Board with
respect to its opinion has been filed as an exhibit to the Schedule 13E-3 and
will be available for inspection and copying at the principal executive offices
of the Company during regular business hours by any interested shareholder of
the Company or representative of such shareholder who has been designated in
writing and may be inspected, copied and obtained by mail, from the Commission.
The preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. BT Alex. Brown believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses, without considering
13
<PAGE> 15
all analyses, or selecting portions of the above summary, without considering
all factors and analyses, could create a misleading or incomplete view of the
processes underlying such analyses and opinion. In performing its analyses, BT
Alex. Brown made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of the Company. No company, transaction or
business used in such analyses as a comparison is identical to the Company or
the proposed Offer or Merger, nor is an evaluation of the results of such
analyses entirely mathematical; rather, such analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty. BT
Alex. Brown's opinion and financial analyses were only one of many factors
considered by the Board in its evaluation of the proposed Offer and Merger and
should not be viewed as determinative of the views of the Board or management
with respect to the Offer or the Merger or the consideration payable in the
Offer and the Merger.
BT Alex. Brown is a nationally recognized investment banking firm and, as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for estate,
corporate and other purposes. The Company selected BT Alex. Brown to serve as
its financial advisor based on BT Alex. Brown's reputation, expertise and
familiarity with the Company. BT Alex. Brown also is acting as Dealer Manager
for the Offer. BT Alex. Brown previously acted as a co-managing underwriter in
connection with public offerings of the Shares and, with the consent of the
Board, will be acting as a joint co-lead managing underwriter, initial purchaser
or placement agent of the proposed offering of the Notes (as defined herein),
for which services BT Alex. Brown has received and will receive customary
compensation. Affiliates of BT Alex. Brown also will be participating, with the
consent of the Board, as documentation agent, syndication agent and lender in
the senior secured credit facility and as a lender under the bridge facility, if
any, for the financing of the Transactions, for which services such affiliates
will receive customary compensation. See "THE TENDER OFFER -- Financing of the
Transactions". BT Alex. Brown maintains a market in the Shares and regularly
publishes research reports regarding the health care industry and the businesses
and securities of the Company and other publicly owned companies in the health
care industry. In the ordinary course of business, BT Alex. Brown may actively
trade the securities of the Company for its own account and the accounts of its
customers and, accordingly, may at any time hold a long or short position in
securities of the Company.
Pursuant to the terms of BT Alex. Brown's engagement, the Company has
agreed to pay BT Alex. Brown upon consummation of the Offer an aggregate
financial advisory fee equal to 0.60% of the total consideration (including
liabilities assumed) payable in the Offer and the Merger for its services as
financial advisor and Dealer Manager. In addition, the Company has agreed to
reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including
reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown
and certain related parties against certain liabilities, including certain
liabilities under the federal securities laws, relating to, or arising out of,
its engagement.
PURPOSES AND REASONS OF THE COMPANY FOR THE TRANSACTIONS
The purpose of the Offer is to provide the Company's shareholders with
liquidity for their Shares by enabling them to sell their Shares at a fair price
and at a premium over recent market prices. Management believes that, even as a
public stock, primarily because of the large percentage of Shares held in a few
large blocks, there is a limited market for the Shares, especially for the sale
of large blocks of Shares. The limited supply of Shares traded in the public
market provides little opportunity for a shareholder to realize the true value
of such shareholder's investment in the Company. The Offer is intended to afford
shareholders the opportunity to sell their Shares in light of the current
relative illiquidity and lack of public float of the Shares.
14
<PAGE> 16
Following consummation of the Transactions, the Shares would no longer be traded
on Nasdaq and registration of the Shares would be terminated under the Exchange
Act.
The acquisition of the Shares has been structured as a cash tender offer
followed by a cash merger in order to (i) effect a prompt and orderly transfer
of ownership of the Company from the public shareholders to Purchasers and (ii)
provide shareholders with cash for all of their Shares more quickly than through
alternative transaction structures that had been considered by the Board.
PURPOSES AND REASONS OF PURCHASERS AND DR. JAMES LEININGER FOR THE TRANSACTIONS
Purchasers. Purchasers' purpose for engaging in the Transactions is to
enable Purchasers to obtain, in the aggregate, a majority ownership interest in
the Company, thereby becoming entitled to all benefits that result from such
ownership. Such benefits include management and investment discretion with
regard to the future conduct of the business of the Company, the benefits of the
profits generated by operations and any increase in the Company's value.
Similarly, Purchasers will also bear the risk of any decrease in the value of
the Company.
Dr. James Leininger. Dr. James Leininger's purpose for engaging in the
Transactions is to be able to obtain the Per Share Amount with respect to a
material portion of his holdings of the Shares while also maintaining an
ownership position in the Company.
Upon the consummation of the Transactions, Fremont, RCBA and Dr. James
Leininger will own approximately 39.7, 26.2 and 33.5% of the Shares,
respectively.
POSITION OF PURCHASERS AND DR. JAMES LEININGER REGARDING FAIRNESS OF THE
TRANSACTIONS
Purchasers. Purchasers have considered the analysis of and the factors
examined by the Board (described in detail in "SPECIAL FACTORS -- Recommendation
of the Board and the Disinterested Directors; Fairness of the Transactions") and
believe that these analyses and factors, in particular factors (i) through (vi)
of that section, provide a reasonable basis for them to believe, as they do,
that the Transactions are fair to the shareholders of the Company. This belief
should not, however, be construed as a recommendation by them to the Company's
shareholders to tender their Shares or vote to approve the Transaction Agreement
and the Merger.
Dr. James Leininger. Dr. James Leininger has considered the analyses of
and the factors examined by the Board (described in detail in "SPECIAL
FACTORS -- Recommendation of the Board and the Disinterested Directors; Fairness
of the Transactions") and believes that these analyses and factors, in
particular factors (i) through (vi) of that section, provide a reasonable basis
for him to believe, as he does, that the Transactions are fair to the
shareholders of the Company. This belief should not, however, be construed as a
recommendation by him to the Company's shareholders to tender their Shares or
vote to approve the Transaction Agreement and the Merger.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
RCBA. RCBA owns 4,040,250 Shares, or 9.0% of the Shares. RCBA will receive
$3,895,430 for the 202,360 Shares it is tendering pursuant to the Offer and will
retain the remaining 3,837,890 Shares owned by it.
Dr. James Leininger. Shareholders should be aware that Dr. James Leininger
has certain interests that present actual or potential conflicts of interest in
connection with the Offer and the Merger. As a result of Dr. James Leininger's
currently owning or controlling approximately 50.2% of the issued and
outstanding Shares and his position as Chairman of the Board of Directors of the
Company, Dr. James Leininger can exert significant influence over the Company.
Dr. James Leininger and certain other parties will receive approximately
$265,500,000 for the sale of the 13,792,211 Shares that he has agreed to tender
in the Offer pursuant to the Support Agreement. Additionally, Dr. James
Leininger will retain a 33.5% interest in the Company following consummation of
the Transactions.
15
<PAGE> 17
Directors and Officers. Shareholders should be aware in considering their
decision to participate in the Offer that each of the members of the Board has,
to some degree, interests which may present such directors with an actual or
potential conflict of interest in connection with the Offer. The directors and
executive officers of the Company (other than Dr. James Leininger) will receive
an aggregate of approximately $37,650,000 for their Shares and Employee Options
in the Transactions. As of October 2, 1997, the directors and executive officers
as a group beneficially owned 24,043,062 Shares, or 54.9% of the Shares, which
includes Shares issuable upon exercise of Employee Options and the Hannigan
Option but excludes Shares owned by the Company's employee stock ownership plan.
The Company has been informed by its directors and executive officers (other
than Dr. James Leininger and as otherwise provided in any Stock Retention
Agreement) that they intend either to tender all of the Shares beneficially
owned by them to the Company pursuant to the Offer or to vote such Shares in
favor of the approval and adoption by the shareholders of the Company of the
Transaction Agreement and the Merger. There would be no other shareholders upon
consummation of the Transactions, but certain members of management would
retain, and be guaranteed, additional options to purchase Shares. See
"INTRODUCTION" and "SPECIAL FACTORS -- Plans for the Company after the
Transactions; Certain Effects of the Transactions".
The Company has adopted a "stay" bonus and a "sale" bonus for certain
executive officers of the Company. The "stay" bonus includes a payment equal to
a percentage (up to 100%) of the officer's base pay and an early payment of the
officer's annual bonus, on a pro rata basis, in an amount equal to the greater
of such 100% of such officer's target bonus or the bonus due based on the
Company's performance year-to-date. The "sale" bonus was based on the Per Share
Amount and the officer's anticipated participation in the sale process. Pursuant
to the terms of these bonus plans, the executive officers of the Company named
below would receive the bonus amounts set forth opposite their names upon
consummation of the Offer.
<TABLE>
<CAPTION>
BONUS
NAME POSITION AMOUNT(1)
- ------------------------------ ------------------------------------------ -------------
<S> <C> <C>
Raymond R. Hannigan........... President and Chief Executive Officer $ 122,865(2)
Peter A. Leininger, M.D....... Executive Vice President 129,252
Dennis E. Noll................ Senior Vice President, General Counsel and
Secretary 302,962
Frank DiLazzaro............... President, KCI International, Inc. 307,303
Christopher M. Fashek......... President, KCI Therapeutic Services, Inc. 338,235
Larry P. Baker................ Vice President, Corporate 240,955
Michael J. Burke.............. Vice President, Manufacturing 290,044
Richard C. Vogel.............. Vice President and General Manager, KCI
New Technologies, Inc. 261,008
Michael C. Wells.............. Vice President and General Manager, KCI
Home Care 243,455
Martin J. Landon.............. Vice President, Accounting and Corporate
Controller 217,754
George P. Peace............... Vice President, Information Systems 146,251
Scott S. Brooks............... Vice President, National Accounts 185,353
John H. Vrzalik............... Vice President, Engineering 187,439
</TABLE>
- ---------------
(1) The Bonus Amount assumes that the Offer will close on November 5, 1997 and
that executive officers will receive 100% of their target bonus.
(2) The Bonus Amount for Mr. Hannigan does not include the amount of his "sale
bonus" which may be up to $340,000 and will be determined by the Board after
the closing of the Offer.
16
<PAGE> 18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements that
involve risks and uncertainties. Forward-looking statements include the
projections set forth below (collectively, the "Projections"). Such information
has been included in this Offer to Purchase for the limited purpose of giving
the Company's shareholders access to financial projections made by the Company's
management in connection with the Transactions and the Debt Financing. Such
information was prepared by the Company's management for internal use and not
with a view to publication. The Projections were based on assumptions concerning
the Company's products and business prospects in 1997 through 2002, including
the assumption that the Company would continue to operate under the same
ownership structure as then existed. The Projections were also based on other
revenue and operating assumptions. Information of this type is based on
estimates and assumptions that are inherently subject to significant economic
and competitive uncertainties and contingencies, all of which are difficult to
predict and many of which are beyond the Company's control. Accordingly, there
can be no assurance that the projected results would be realized or that actual
results would not be significantly higher or lower than those set forth above.
In addition, the Projections were not prepared with a view to public disclosure
or compliance with the published guidelines of the Securities and Exchange
Commission (the "Commission"), or the guidelines established by the American
Institute of Certified Public Accountants regarding projections and forecasts
and are included in this Offer to Purchase only because such information was
made available to Purchasers by the Company. Neither Purchasers' nor the
Company's independent accountants have examined, compiled or applied any agreed
upon procedures to this information and, accordingly, assume no responsibility
for this information. Neither the Company nor any other party assumes any
responsibility for the accuracy or validity of the Projections.
COMPANY FINANCIAL PROJECTIONS
The Company does not, as a matter of course, make public forecasts or
projections as to future revenues, earnings or other financial statement data.
However, in the course of discussions with potential acquirors, including
Purchasers, and in connection with the solicitation of a transaction or
transactions such as the Transactions and the Debt Financing, the Company
prepared various projections of its anticipated future operating performance for
the five calendar years ending December 31, 2001. Such projections were prepared
assuming that the Transactions had not occurred, that the Company's existing
ownership structure was maintained throughout such period and that there were
44,000,000 average shares outstanding in each of such years. Absent such
assumptions, the Company's projected operating performance would be materially
different. See "SPECIAL FACTORS -- Cautionary Statement Concerning
Forward-Looking Statements".
June Projections. In June 1997, the Company's management delivered certain
projections of the Company's anticipated future operating performance for the
five calendar years ending December 31, 2001, to each of Fremont and RCBA. The
1997 base year used in such projections was based on the Company's 1997 budget,
as approved by the Board, adjusted for known or pending acquisitions. The
revenue growth assumptions used in such projections were developed for each of
the Company's market segments, which growth assumptions were based on projected
(i) expansion of the Company's product lines, (ii) expansion of domestic and
international distribution networks and (iii) development of and focus on
higher-margin
17
<PAGE> 19
products. The profit projections reflect operating efficiencies anticipated to
result from improved systems and processes. The June projections are summarized
below:
PROJECTED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DEC. 31,
----------------------------------------------------
1997E 1998E 1999E 2000E 2001E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue....................... $311,902 $361,398 $425,568 $492,982 $548,517
Gross Profit........................ 130,667 157,203 187,611 224,949 254,967
Earnings Before Income Taxes........ 69,678 88,815 119,223 156,561 186,579
Pre-Tax Income...................... 73,000 93,461 125,959 166,285 198,156
-------- -------- -------- -------- --------
Net Income.......................... $ 43,645 $ 55,922 $ 75,421 $ 99,616 $118,739
======== ======== ======== ======== ========
Fully Diluted EPS................... $ 0.99 $ 1.27 $ 1.71 $ 2.26 $ 2.70
======== ======== ======== ======== ========
Average Shares Outstanding.......... 44,000 44,000 44,000 44,000 44,000
======== ======== ======== ======== ========
</TABLE>
October Projections. In October 1997, the Company's management prepared
certain projections of the Company's anticipated future operating performance
for the five calendar years ending December 31, 2001, for use in connection with
the Debt Financing. The 1997 base year used in such projections was established
using management's updated forecast of operating results for the fiscal year
ending December 31, 1997, as adjusted for the Company's recent acquisition of
RIK Medical, L.L.C. and also incorporates the projected effects of certain
operating synergies and cost reductions relating thereto. In addition, the data
reflect the effects of revised forecasts for new product introductions based on
management's most recent design and manufacturing estimates. The October
projections are summarized below:
PROJECTED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
----------------------------------------------------
1997E 1998E 1999E 2000E 2001E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue....................... 318,768 355,842 405,055 459,324 508,554
Gross Profit........................ 131,797 149,896 172,799 199,867 222,475
Earnings Before Income Taxes........ 70,675 80,969 95,296 117,599 134,477
Pre-Tax Income...................... 73,174 84,209 100,886 126,016 144,565
Net Income.......................... $ 43,750 $ 50,370 $ 60,377 $ 75,455 $ 86,584
======== ======== ======== ======== ========
Fully Diluted EPS................... $ 0.99 $ 1.14 $ 1.37 $ 1.71 $ 1.97
======== ======== ======== ======== ========
Average Shares Outstanding.......... 44,000 44,000 44,000 44,000 44,000
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 20
PLANS FOR THE COMPANY AFTER THE TRANSACTIONS; CERTAIN EFFECTS OF THE
TRANSACTIONS
Pursuant to the Transaction Agreement, upon completion of the Offer, the
Company and each of Purchasers intend to effect the Merger in accordance with
the Transaction Agreement. See "SPECIAL FACTORS -- The Transaction Agreement,
the Support Agreement and the Agreement Among Bidders".
Except as otherwise described in this Offer to Purchase, the Company has no
current plans or proposals which relate to or would result in: (a) other than
the Transactions, an extraordinary corporate transaction, such as a merger,
reorganization or liquidation involving the Company; (b) a sale or transfer of a
material amount of assets of the Company; (c) any change in the management of
the Company or any change in any material term of the employment contract of any
executive officer; or (d) any other material change in the Company's corporate
structure or business.
Nevertheless, Fremont, RCBA and Dr. James Leininger may initiate a review
of the Company and its assets, corporate structure, capitalization, operations,
properties, policies, management and personnel to determine what changes, if
any, would be desirable following the Merger in order best to organize the
activities of the Company. Fremont, RCBA and Dr. James Leininger expressly
reserve the right to make any changes that they deem necessary or appropriate in
light of their review or in light of future developments.
Successful consummation of the Transactions will enable Fremont, RCBA and
Dr. James Leininger to obtain or maintain, as appropriate, ownership of
approximately 39.7%, 26.2% and 33.5% of the Shares, respectively, thereby
becoming entitled to all benefits that result from such ownership. Such benefits
include management and investment direction with regard to the future conduct of
the business of the Company, the benefits of the profits generated by operations
and any increase in the Company's value. Similarly, Fremont, RCBA and Dr. James
Leininger will also bear the risk of any losses generated by operations and any
decrease in the value of the Company.
Upon consummation of the Transactions, the Company will become a privately
held corporation. Accordingly, shareholders will not have the opportunity to
participate in the earnings and growth of the Company after the consummation of
the Transactions and will not have any right to vote on corporate matters.
Similarly, shareholders will not face the risk of losses generated by the
Company's operations or any decrease in the value of the Company after the
consummation of the Transactions.
FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS, THE SHARES WILL NO LONGER
BE QUOTED ON NASDAQ. In addition, the registration of the Shares under the
Exchange Act will be terminated. Accordingly, following the consummation of the
Transactions there will be no publicly-traded Shares outstanding. See "THE
TENDER OFFER -- Section 10. Effect of the Transactions on the Market for the
Shares; Exchange Act Registration". It is expected that, if Shares are not
accepted for payment by the Company pursuant to the Offer and the Transactions
are not consummated, the Company's current management, under the general
direction of the Board, will continue to manage the Company as an ongoing
business.
RIGHTS OF THE SHAREHOLDERS IN THE TRANSACTIONS
NO DISSENTERS' RIGHTS ARE AVAILABLE IN CONNECTION WITH THE OFFER. HOWEVER,
PERSONS WHO CONTINUE TO HOLD SHARES FOLLOWING COMPLETION OF THE OFFER WILL HAVE
THE RIGHT TO DISSENT TO THE MERGER IN ACCORDANCE WITH ARTICLES 5.11 THROUGH 5.13
OF TEXAS LAW IN LIEU OF RECEIVING THE CONSIDERATION PROPOSED UNDER THE
TRANSACTION AGREEMENT. IF THE STATUTORY PROCEDURES ARE COMPLIED WITH AND THE
MERGER IS CONSUMMATED, DISSENTING HOLDERS WOULD BE ENTITLED TO RECEIVE CASH
EQUAL TO A JUDICIAL DETERMINATION OF THE "FAIR VALUE" OF THE SHARES AS
DETERMINED BY APPRAISAL. SEE "SCHEDULE III. ARTICLES 5.11 THROUGH 5.13 OF THE
TEXAS BUSINESS CORPORATION ACT". SUCH "FAIR VALUE" IS DETERMINED AS OF THE DAY
IMMEDIATELY PRECEDING THE SHAREHOLDERS' MEETING AT WHICH THE MERGER IS APPROVED
(EXCLUDING ANY APPRECIATION OR DEPRECIATION IN ANTICIPATION OF THE MERGER). IN
ADDITION, DISSENTING SHAREHOLDERS MAY BE ENTITLED TO RECEIVE PAYMENT OF INTEREST
BEGINNING 91 DAYS FROM THE DATE OF CONSUMMATION OF THE MERGER TO THE DATE OF
SUCH JUDICIAL DETERMINATION ON THE AMOUNT DETERMINED TO BE THE FAIR VALUE OF
THEIR SHARES. ANY SUCH JUDICIAL DETERMINATION OF THE FAIR VALUE OF THE SHARES
COULD BE BASED UPON CONSIDERATIONS OTHER THAN OR IN ADDITION TO THE PER SHARE
AMOUNT, THE MERGER CONSIDERATION AND THE MARKET VALUE OF THE SHARES, INCLUDING
ASSET VALUES, THE
19
<PAGE> 21
INVESTMENT VALUE OF THE SHARES AND ANY OTHER VALUATION CONSIDERATIONS GENERALLY
ACCEPTED IN THE INVESTMENT COMMUNITY. THE VALUE SO DETERMINED FOR DISSENTING
SHARES COULD BE MORE OR LESS THAN THE PER SHARE AMOUNT OR THE MERGER
CONSIDERATION, AND PAYMENT OF SUCH CONSIDERATION WOULD TAKE PLACE SUBSEQUENT TO
PAYMENT PURSUANT TO THE OFFER OR THE MERGER.
Texas Law provides that, in the absence of fraud in the transaction, the
statutory dissenters' rights remedy provided under Texas Law to a shareholder
objecting to the Merger is the exclusive remedy for the recovery of the value of
such shareholder's Shares or for money damages to such shareholder with respect
to the Merger. If the Company complies with the requirements of Article 5.12 of
Texas Law, any shareholder who fails to comply with the requirements of that
Article shall not be entitled to bring suit for the recovery of the value of his
Shares or for money damages to the shareholder with respect to the Merger.
The statutory procedures regarding the exercise of dissenters' rights will
be included in the proxy statement sent to holders of Shares for the
shareholders' meeting to be held to approve the Merger. Holders of Shares who
seek to assert their dissenters' rights must follow the statutory procedures
precisely. Failure to follow any of the statutory procedures may result in a
termination or waiver of such rights.
THE TRANSACTION AGREEMENT, THE SUPPORT AGREEMENT AND THE AGREEMENT AMONG BIDDERS
The Transaction Agreement.
The following is a summary of the Transaction Agreement, a copy of which is
filed as an exhibit to the Schedule 13E-4 filed by the Company with the
Commission in connection with the Offer. Such summary is qualified in its
entirety by reference to the Transaction Agreement.
The Offer. The Transaction Agreement provides for the commencement of the
Offer as promptly as reasonably practicable after the date thereof. The
obligation of the Company to accept for payment and pay for Shares tendered
pursuant to the Offer is subject to the Minimum Condition and is also subject to
the satisfaction of certain other conditions described in "THE TENDER
OFFER -- Section 11. Certain Conditions to the Offer" hereof. The Per Share
Amount shall, subject to applicable withholding of taxes, be net to the seller
in cash, upon the terms and subject to the conditions of the Offer. Subject to
the terms and conditions of the Offer (including, without limitation, the
Minimum Condition), the Company shall pay, as promptly as practicable after
expiration of the Offer, for all Shares validly tendered and not withdrawn. The
Company shall, if Purchasers so direct, extend the Offer one or more times for a
period not to exceed 10 business days in the aggregate.
The Stock Purchase. Pursuant to the Transaction Agreement, F Purchaser
will purchase from the Company 7,179,066 Shares (the "F Shares") at a per Share
price equal to the Per Share Amount and B Purchaser will purchase from the
Company 904,646 Shares (the "B Shares") at a per Share price equal to the Per
Share Amount.
Pursuant to the Transaction Agreement and subject to the conditions set
forth therein the Stock Purchase shall take place at a closing (the "Closing")
on the day the Offer is scheduled to expire, or at such other place or at such
other time or on such other date as the Company and Purchasers may mutually
agree upon in writing (the day on which the Closing takes place being the
"Closing Date").
The Transaction Agreement provides that the respective obligations of each
party to effect the Stock Purchase are subject to the satisfaction at or prior
to the Closing Date of the following conditions: (i) no United States or state
governmental authority or other agency or commission or United States or state
court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which is
then in effect and has the effect of making the acquisition of Shares by
Purchasers or any affiliate of any of them illegal or otherwise restricting,
preventing or prohibiting consummation of the Transactions and (ii) the
conditions to the Offer shall have been satisfied and the Company shall
simultaneously with the Closing purchase all Shares validly tendered and not
withdrawn pursuant to the Offer.
20
<PAGE> 22
The Transaction Agreement provides that the obligation of the Company to
effect the Stock Purchase is also subject to the satisfaction at or prior to the
Closing Date of each of the following additional conditions, unless waived by
the Company: all representations and warranties made by Purchasers in the
Transaction Agreement shall be true and correct in all material respects (except
for representations qualified by materiality or Material Adverse Effect (as
defined therein) which shall be correct in all respects) on the Closing Date,
with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date, except for changes permitted or
contemplated by the Transaction Agreement and except for representations and
warranties that are made as of a specified date or time, which shall be true and
correct in all material respects (except for representations qualified by
materiality or Material Adverse Effect which shall be correct in all respects)
only as of such specific date or time; each Purchaser shall have performed in
all material respects all obligations and agreements, and complied in all
material respects with covenants, contained in the Transaction Agreement to be
performed or complied with by it prior to or on the Closing Date; and the
Company shall have received such certificates of each Purchaser, dated as of the
Closing Date, signed by an executive officer of such Purchaser to evidence
satisfaction of the conditions set forth in the Transaction Agreement (insofar
as it relates to Purchasers) as may be reasonably requested by the Company.
The Transaction Agreement provides that the obligation of Purchasers to
effect the Stock Purchase is also subject to the satisfaction at or prior to the
Closing Date of each of the following additional conditions, unless waived by
Purchasers: all representations and warranties made by the Company in the
Transaction Agreement shall be true and correct in all material respects (except
for representations qualified by materiality or Material Adverse Effect which
shall be correct in all respects) on the Closing Date, with the same force and
effect as though such representations and warranties had been made on and as of
the Closing Date, except for changes permitted or contemplated by the
Transaction Agreement and except for representations and warranties that are
made as of a specified date or time, which shall be true and correct in all
material respects (except for representations qualified by materiality or
Material Adverse Effect which shall be correct in all respects) only as of such
specific date or time; the Company shall have performed in all material respects
all obligations and agreements, and complied in all material respects with
covenants, contained in the Transaction Agreement to be performed or complied
with by it prior to or on the Closing Date; each Purchaser shall have received
such certificates of the Company, dated as of the Closing Date, signed by an
executive officer of the Company to evidence satisfaction of the conditions set
forth in the Transaction Agreement (insofar as it relates to the Company) as may
be reasonably requested by the Company; and all directors of the Company shall
have tendered their resignations effective as of the Closing and shall have been
replaced by nominees acceptable to Purchasers.
The Merger. The Transaction Agreement provides that, upon the terms and
subject to the conditions set forth therein, and in accordance with Texas Law
and Delaware Law, at the Effective Time each Purchaser shall be merged with and
into the Company. As a result of the Merger, the separate existence of each
Purchaser shall cease and the Company shall continue as the Surviving
Corporation of the Merger. At the Effective Time, by virtue of the Merger:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than any Shares to be cancelled pursuant to Section
(b) below, any Shares to remain outstanding pursuant to Section (c) below
and any Dissenting Shares (as defined therein)) shall be cancelled and
shall be converted automatically into the right to receive the Merger
Consideration;
(b) (i) Each Share held in the treasury of the Company and each Share
owned by any direct or indirect wholly owned subsidiary of the Company and
each Share owned by Purchasers immediately prior to the Effective Time
shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto;
(ii) Each (A) share of common stock of F Purchaser outstanding
immediately prior to the Effective Time shall be converted and exchanged
for a number of validly issued, fully paid and nonassessable shares of
common stock, par value $.001 per share, of the Surviving Corporation equal
to the quotient obtained by dividing the number of F Shares by the number
of outstanding shares of common stock of the F Purchaser and (B) limited or
general partnership interest of B Purchaser shall be
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converted and exchanged for a number of validly issued, fully paid and non
assessable shares of common stock, par value $.001 per share, of the
Surviving Corporation equal to the quotient obtained by dividing the number
of B Shares by the number of outstanding partnership interests; and
(c) The 6,064,155 Shares held by and registered in the name of Dr.
James Leininger at the Effective Time, 3,837,890 Shares held by and
registered in the names of Stinson Capital Partners, L.P., BK Capital
Partners IV, L.P., the Carpenters Pension Trust for Southern California,
United Brotherhood of Carpenters and Joiners of America Local Unions and
Councils Pension Fund, Insurance Company Supported Organizations Pension
Plan, Richard C. Blum & Associates, L.P., Richard C. Blum & Associates,
Inc., Richard C. Blum, Prism Partners I, L.P., Weintraub Capital
Management, Fremont Partners L.P., FP Advisors, L.L.C., Fremont Group,
L.L.C., and Fremont Investors Inc. and the 100,000 Shares held by Dr. Peter
Leininger shareholders who have entered into Stock Retention Agreements
shall not be cancelled and shall remain outstanding (all such Shares
described in paragraphs (a) and (b) and this paragraph (c) not converted
into the right to receive the Merger Consideration are collectively
referred to as "Excluded Shares").
Directors and Officers. The Transaction Agreement provides that the
directors of the Company immediately prior to the Effective Time shall be the
initial directors of the Surviving Corporation, each to hold office in
accordance with the Articles of Incorporation and By-laws of the Surviving
Corporation, and the officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation, in each case
until their respective successors are duly elected or appointed and qualified.
Articles of Incorporation and By-laws. The Transaction Agreement provides
that the Articles of Incorporation and By-laws attached as exhibits to the
Transaction Agreement shall be, at the Effective Time, the Articles of
Incorporation and By-laws of the Surviving Corporation.
Employee Stock Options. The Transaction Agreement provides that, except as
may otherwise be agreed by Purchasers and any holder of any outstanding Employee
Options to purchase Shares, including any tandem stock appreciation right
(collectively, "Old Options"), granted under the Company's 1997 Stock Incentive
Plan (the "1997 Plan"), 1995 Senior Executive Stock Option Plan (the "1995
Plan"), 1988 Directors Stock Option Plan (the "Directors Plan" and, together
with the 1997 Plan, the 1995 Plan and the Directors Plan, the "Option Plans"),
(i) each of such holder's Old Options under the Option Plans shall become fully
exercisable, according to its terms, (ii) each of such holder's Old Options
under the Option Plans shall be exercisable until the last day provided in such
notice (the "Notice Date"), (iii) each of such holder's Old Options may be
surrendered prior to the Notice Date for the right to receive cash in the amount
of such Old Option's exercise price, as provided in the applicable Option Plan;
provided, however, that Old Options granted under the 1997 Plan may be so
surrendered on or prior to the last day in the applicable 90 day period (the "EP
Date"), and (iv) all Old Options remaining unexercised that have not been
surrendered as of the Effective Time (or, in the case of Old Options granted
under the 1997 Plan, the EP Date) shall be canceled for the right to receive, as
soon as practicable following the Effective Time (or in the case of Old Options
granted under the 1997 Plan the later of the Effective Time or the EP Date), an
amount in cash equal to the product of (x) the excess of the Merger
Consideration over the exercise price per Share of such Option times (y) the
number of Shares subject to such Option. All applicable withholding taxes
attributable to payments made under the Transaction Agreement or to
distributions contemplated thereby shall be deducted from the amounts payable
thereunder and all such taxes attributable to the exercise of Options shall be
withheld from the proceeds received in respect of the Shares issuable upon such
exercise.
Agreements of the Company and Purchasers. Pursuant to the Transaction
Agreement, if required by applicable law in order to consummate the Merger, the
Company, acting through the Board, shall, in accordance with applicable law and
the Company's Articles of Incorporation and By-laws, (i) duly call, give notice
of, convene and hold an annual or special meeting of its shareholders as soon as
practicable following consummation of the Offer for the purpose of considering
and taking action on the Transaction Agreement and the Merger (the
"Shareholders' Meeting") and (ii) subject to its fiduciary duties under
applicable law as advised in writing by outside counsel, (A) include in the
Company Statement (as defined below) the unanimous recommendation of the Board
that the shareholders of the Company approve and adopt the
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<PAGE> 24
Transaction Agreement and the Merger and (B) use its best efforts to obtain such
approval and adoption. At the Shareholders' Meeting, Purchasers shall cause all
Shares then owned by them and their subsidiaries to be voted in favor of the
approval and adoption of the Transaction Agreement and the Merger.
The Transaction Agreement provides that the Company shall file the Offer
Documents (as defined below) and, if required by law, the proxy statement to be
sent to shareholders in connection with the shareholders' meeting of (the
"Company Statement") with the SEC. Each Purchaser shall cooperate with the
Company in connection with the preparation of the Schedule 13E-4, the Schedule
13E-3, the Offer to Purchase and other documents related to the Offer (the
"Offer Documents") and the Company Statement including, but not limited to,
furnishing to the Company any and all information regarding such Purchaser and
any of its affiliates as may be required to be disclosed therein. The Company
shall use its commercially reasonable efforts to cause the Offer Documents and
the Company Statement to be mailed to the Company's shareholders as promptly as
practicable after the date of the Transaction Agreement in the case of the Offer
Documents or after the consummation of the Offer in the case of the Company
Statement.
The Transaction Agreement provides that from the date thereof until the
Effective Time, the Company shall conduct the business of the Company and each
of its subsidiaries in all material respects only in the ordinary course
consistent with past practice, shall use all reasonable efforts to preserve
intact the business organization of the Company and keep available the services
of its present key officers and employees, provided, however, that to satisfy
the foregoing obligation, the Company shall not be required to make any payments
or enter into or amend any contractual arrangements or understandings (except in
the ordinary course of business consistent with past practice) and shall use all
reasonable efforts to preserve the current relationships of the Company and each
of its subsidiaries with customers and suppliers with which the Company or such
subsidiary has significant business relations.
Debt Financing. The Transaction Agreement provides that Purchasers shall
use their reasonable best efforts to obtain Debt Financing or other alternative
financing on substantially comparable or more favorable terms. The Company shall
use its reasonable best efforts to cooperate with Purchasers in obtaining the
Debt Financing, including, without limitation, by participating in roadshows and
meeting with, and providing information to, potential sources of financing
identified by Purchasers.
Acquisition Proposals. Under the Transaction Agreement, neither the
Company nor any of its subsidiaries shall, directly or indirectly, through any
officer, director, agent or otherwise, solicit, initiate or encourage the
submission of any proposal or offer from any person relating to any acquisition
or purchase of all or (other than in the ordinary course of business) any
portion of the assets of, or any equity interest in, the Company or any of its
subsidiaries or any recapitalization, business combination or similar
transaction with the Company or any of its subsidiaries (any communication with
respect to the foregoing being an "Acquisition Proposal") or participate in any
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other person to do or seek
any of the foregoing; provided, however, that, at any time prior to the purchase
of Shares by the Company pursuant to the Offer, the Company may furnish
information to, and negotiate or otherwise engage in discussions with, any party
who delivers a written Acquisition Proposal which was not solicited or
encouraged after the date of the Transaction Agreement if the Board determines
in good faith by a majority vote (i) after consultation with and receipt of
advice from its outside legal counsel, that failing to take such action is
reasonably determined to constitute a breach of the fiduciary duties of the
Board under applicable law, (ii) after consultation with and receipt of advice
from a nationally recognized investment banking firm, that such proposal is more
favorable to the Company's shareholders from a financial point of view than the
Transactions (including any adjustment to the terms and conditions proposed by
Purchasers in response to such Acquisition Proposal), (iii) that sufficient
commitments have been obtained with respect to such Acquisition Proposal that
the Board reasonably expects a transaction pursuant to such Acquisition Proposal
could be consummated and (iv) that such Acquisition Proposal is not subject to
any regulatory approvals that could reasonably be expected to prevent
consummation.
D&O Indemnification and Insurance. The Transaction Agreement provides that
from the Effective Time through the sixth anniversary of the date on which the
Effective Time occurs, Purchasers shall cause the
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<PAGE> 25
Surviving Corporation to indemnify and hold harmless each present and former
officer, director, employee or agent of the Company, including, without
limitation, each Person controlling any of the foregoing Persons (the
"Indemnified Parties"), against all claims, losses, liabilities, damages,
judgments, fines, fees, costs or expenses, including, without limitation,
attorneys' fees and disbursements (collectively, "Costs"), incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time (including,
without limitation, the Transaction Agreement and the transactions and actions
contemplated thereby and giving effect to the consummation of such transactions
and actions), whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent permitted under the Articles of Incorporation or
By-laws of the Company or indemnification agreements in effect on the date
hereof, including provisions relating to advancement of expenses incurred in the
defense of any claim, action, suit, proceeding or investigation. Without
limiting the foregoing, in the event that any claim, action, suit, proceeding or
investigation is brought against an Indemnified Party (whether arising before or
after the Effective Time), the Indemnified Party may retain counsel satisfactory
to such Indemnified Party and Purchasers shall, or shall cause the Surviving
Corporation to, advance the fees and expenses of such counsel for the
Indemnified Party in accordance with the Articles of Incorporation or By-laws of
the Company in effect on the date of the Transaction Agreement. For a period of
six years from the Effective Time, Purchasers shall, or shall cause the
Surviving Corporation to, keep in effect provisions in its Articles of
Incorporation and By-laws of the Company providing for exculpation of director
and officer liability and its indemnification of the Indemnified Parties to the
fullest extent permitted under Texas Law, which provisions shall not be amended
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties' right to indemnification.
Purchasers shall cause the Surviving Corporation to maintain, at no expense
to the beneficiaries, directors' and officers' liability insurance ("D&O
Insurance") for the Indemnified Parties with respect to matters occurring at or
prior to the Effective Time, issued by a carrier or carriers assigned a
claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher,
providing at least the same coverage as the D&O Insurance currently maintained
by the Company and containing terms and conditions which are not materially less
favorable to the beneficiaries, for a period of at least six years from the
Effective Time; provided, however, that in no event shall the Surviving
Corporation be required to expend pursuant to the Transaction Agreement more
than an amount per year equal to 200% of current annual premiums paid by the
Company for such insurance.
In the event that the Surviving Corporation or Purchasers or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each such case, to
the extent necessary to effectuate the purposes set forth above, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation or Purchasers shall succeed to the obligations set forth above.
Further Actions. Pursuant to the terms of the Transaction Agreement and
subject to the conditions thereof and subject to applicable law, each of the
parties thereto shall act in good faith and use commercially reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
Transactions as soon as practicable, including such actions or things as any
other party may reasonably request in order to cause any of the conditions to
such other party's obligation to consummate the Transactions to be fully
satisfied. If at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of the Transaction Agreement,
the proper officers and directors of each party to the Transaction Agreement
shall use their commercially reasonable efforts to take all such action.
Representations and Warranties. The Transaction Agreement contains various
customary representations and warranties of the parties thereto, including
representations by the Company, F Purchaser and B Purchaser as to the
enforceability of the Transaction Agreement and by the Company as to compliance
with law, corporate status and capitalization and the accuracy of financial
statements and filings with the Commission.
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<PAGE> 26
Conditions to the Merger. Under the Transaction Agreement, the respective
obligations of each party to effect the Merger are subject to the satisfaction
at or prior to the Effective Time of the following conditions: the Transaction
Agreement and the transactions contemplated thereby shall have been approved and
adopted by the affirmative vote of the shareholders of the Company to the extent
required by Texas Law and the Articles of Incorporation of the Company; no
United States or state governmental authority or other agency or commission or
United States or state court of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any law, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is then in effect and has the effect of making the acquisition
of Shares by Purchasers or any affiliate of any of them illegal or otherwise
restricting, preventing or prohibiting consummation of the Transactions; and
Purchasers shall have purchased, respectively, the F Shares and the B Shares
pursuant to the Stock Purchase.
Under the Transaction Agreement, the obligation of the Company to effect
the Merger is also subject to the satisfaction at or prior to the Closing Date
of each of the following additional conditions, unless waived by the Company:
all representations and warranties made by Purchasers therein shall be true and
correct in all material respects (except for representations qualified by
materiality or Material Adverse Effect which shall be correct in all respects)
at the Effective Time, with the same force and effect as though such
representations and warranties had been made on and as of the Effective Time;
each Purchaser shall have performed in all material respects all obligations and
agreements, and complied in all material respects with covenants, contained in
the Transaction Agreement to be performed or complied with by it prior to or as
of the Effective Time; and the Company shall have received such certificates of
Purchasers, dated as of the Effective Time, signed by an executive officer of
each Purchaser to evidence satisfaction of the conditions to the Merger set
forth in the Transaction Agreement.
Under the Transaction Agreement, the obligation of Purchasers to effect the
Merger is also subject to the satisfaction at or prior to the Closing Date of
each of the following additional conditions, unless waived by Purchasers: all
representations and warranties made by the Company herein shall be true and
correct in all material respects (except for representations qualified by
materiality or Material Adverse Effect which shall be correct in all respects)
as of the Effective Time, with the same force and effect as though such
representations and warranties had been made on and as of the Effective Time;
the Company shall have performed in all material respects all obligations and
agreements, and complied in all material respects with covenants, contained in
the Transaction Agreement to be performed or complied with by it prior to or as
of the Effective Time; and each Purchaser shall have received such certificates
of the Company, dated as of the Effective Time, signed by an executive officer
of the Company to evidence satisfaction of the conditions to the Merger set
forth in the Transaction Agreement.
Termination. The Transaction Agreement may be terminated and the
Transactions may be abandoned at any time prior to the Effective Time, as the
case may be, notwithstanding any requisite approval and adoption of the
Transaction Agreement and the transactions contemplated hereby by the
shareholders of the Company:
(a) By mutual written consent duly authorized by the Board of
Directors or Managers of each Purchaser and the Company; or
(b) By either Purchaser or the Company if (i) the Closing shall not
have occurred by January 31, 1998 or (ii) the Effective Time shall not have
occurred on or before May 31, 1998; provided, however, that the right to
terminate the Transaction Agreement shall not be available pursuant to this
provision to any party whose failure to fulfill any obligation under the
Transaction Agreement has been the cause of, or resulted in, the failure of
the Closing or the Effective Time, as the case may be, to occur on or
before such dates or (ii) any court of competent jurisdiction in the United
States or other United States governmental authority shall have issued an
order, decree, ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; or
(c) By either Purchaser if (i) due to an occurrence or circumstance
that would result in a failure to satisfy any condition set forth in "THE
TENDER OFFER -- Section 11. Certain Conditions to the
25
<PAGE> 27
Offer", the Company shall have (A) failed to commence the Offer within 10
business days following the date of the Transaction Agreement, (B)
terminated the Offer without having accepted any Shares for payment
thereunder or (C) failed to pay for Shares pursuant to the Offer within 60
days following the commencement of the Offer, unless such failure to pay
for Shares shall have been caused by or resulted from the failure of
Purchasers to perform in any material respect any material covenant or
agreement of either of them contained in the Transaction Agreement or the
material breach by Purchasers of any material representation or warranty of
either of them contained in the Transaction Agreement or (ii) prior to the
purchase of Shares pursuant to the Offer, the Board or any committee
thereof shall have withdrawn or modified in a manner adverse to Purchasers
its approval or recommendation of the Offer, the Transaction Agreement, the
Transactions or shall have recommended another transaction pursuant to any
Acquisition Proposal, or shall have resolved to do any of the foregoing; or
(d) By the Company, upon approval of the Board, if (i) due to an
occurrence or circumstance that would result in a failure to satisfy any of
the conditions set forth in "THE TENDER OFFER -- Section 11. Certain
Conditions to the Offer", the Company shall have (A) failed to commence the
Offer within 10 business days following the date of the Transaction
Agreement, (B) terminated the Offer without having accepted any Shares for
payment thereunder or (C) failed to pay for Shares pursuant to the Offer
within 60 days following the commencement of the Offer, unless such failure
to pay for Shares shall have been caused by or resulted from the failure of
the Company to perform in any material respect any material covenant or
agreement of it contained in the Transaction Agreement or the material
breach by the Company of any material representation or warranty of it
contained in the Transaction Agreement or (ii) prior to the purchase of
Shares pursuant to the Offer, the Board shall have withdrawn or modified in
a manner adverse to Purchasers its approval or recommendation of the Offer,
the Transaction Agreement or the Transactions in order to approve the
execution by the Company of a definitive agreement concerning a transaction
pursuant to an Acquisition Proposal.
Fee. In the event that
(a) any Person shall have commenced, publicly proposed or communicated
to the Company a proposal that is publicly disclosed for a tender or
exchange offer for 20% or more (or which, assuming the maximum amount of
securities which could be purchased, would result in any Person
beneficially owning 20% or more) of the then outstanding Shares or
otherwise for the direct or indirect acquisition of the Company or all or
substantially all of its assets for per Share consideration having a value
greater than the Per Share Amount and (w) the Offer shall have remained
open for at least 20 business days, (x) the Minimum Condition shall not
have been satisfied, (y) the Transaction Agreement shall have been
terminated pursuant to the provisions of the Transaction Agreement and (z)
within 12 months of any such termination a transaction such as the
transaction contemplated by this paragraph (a) shall have been consummated
or definitive documentation shall have been entered into with respect
thereto; or
(b) the Transaction Agreement is terminated pursuant to Section
(c)(ii) or (d)(ii) of the Termination section above;
then, in any such event, the Company shall pay Purchasers (i) prior to such
consummation or entering into of definitive documentation in the case of
paragraph (a) or (ii) prior to such withdrawal or modification in the case of
termination pursuant to paragraph (b), a fee of $30 million (the "Fee").
Expenses. In the event the Merger is consummated, all costs and expenses
incurred by each party to the Transaction Agreement in connection with the
Transaction Agreement and the Transactions (including, without limitation, fees
and disbursements of counsel, financial advisors and accountants) and
transaction fees of $5,119,000 to F Purchaser and $3,381,000 to B Purchaser
shall be paid by the Company or the Company shall promptly reimburse such party,
as the case may be. In the event the Fee is paid by the Company to Purchasers to
the Transaction Agreement, the Company shall promptly reimburse Purchasers for
all costs and expenses incurred by Purchasers in connection with the Transaction
Agreement and the Transactions (including, without limitation, fees and
disbursements of counsel, financial advisors and accountants) in an amount not
to exceed $2,000,000. In all other events, all costs and expenses incurred in
connection with the Transaction Agreement and the transactions contemplated
thereby (including, without limitation, fees and
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<PAGE> 28
disbursements of counsel, financial advisors and accountants) shall be borne by
the party which incurs such cost or expense, provided that all costs and
expenses related to the preparation, printing, filing and mailing (as
applicable) of the Offer Documents, the Company Statement and all SEC and other
regulatory filing fees incurred in connection with the Company Statement shall
be borne equally by the Company, on the one hand, and Purchasers, on the other
hand.
Amendment and Waiver. The Transaction Agreement may be amended by the
parties thereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
after the approval and adoption of the Transaction Agreement and the
transactions contemplated thereby by the shareholders of the Company, no
amendment may be made which would reduce the amount or change the type of
consideration into which each Share shall be converted upon consummation of the
Merger. At any time prior to the Effective Time, any party to the Transaction
Agreement may (i) extend the time for the performance of any obligation or other
act of any other party hereto, (ii) waive any inaccuracy in the representations
and warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained therein.
Joint and Several Obligations. The Transaction Agreement provides that the
obligations of Purchasers thereunder are joint and several.
Guarantee.
Fremont has provided the Company with a guarantee of the obligations of F
Purchaser under the Transaction Agreement, subject to certain limitations. A
copy of the Guarantee is filed as an exhibit to the Schedule 13E-4 filed by the
Company with the Commission in connection with the Offer.
Agreement Among Shareholders.
The following is a summary of the Agreement Among Shareholders, the form of
which is attached as an exhibit to the the Transaction Agreement, which is filed
as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in
connection with the Offer. Such summary is qualified in its entirety by
reference to the Agreement Among Shareholders Agreement.
Fremont, RCBA and Dr. James Leininger have agreed to enter into an
agreement upon the consummation of the Offer (the "Agreement Among
Shareholders") governing the respective obligations and relationship of each
party as shareholders of the Company. The Agreement Among Shareholders provides
that until six months after a public offering of Shares, Fremont, RCBA and Dr.
James Leininger will not sell, transfer, pledge or hypothecate any shares of the
Company then held by them, subject to certain exceptions. In particular, Dr.
James Leininger is permitted to make any transfers of up to 10.5% of the
Company's then outstanding Common Stock.
The Agreement Among Shareholders provides that (i) if any of Fremont, RCBA
or Dr. James Leininger wishes to sell shares, then such party shall offer to
include in the proposed sale certain Shares designated by any of the other
parties and (ii) if Fremont and RCBA propose to sell all (but not less than all)
of the Shares they own, then Fremont and RCBA may require Dr. James Leininger to
include in such sale all of the Shares held by him, unless he holds less than
10% of the then outstanding Shares. Pursuant to the agreement, the Company
grants to each of Fremont, RCBA and Dr. James Leininger the preemptive right to
purchase shares of the Company in an amount up to the percentage of all
outstanding fully diluted stock of the Company owned by such party.
At any time after the fifth anniversary of the agreement, if there has not
been a public offering of the Company's Shares, Fremont, RCBA or Dr. Leininger
may request that the Company register at least 33% of the Shares held by such
party. In addition, each party will have the right to request additional
registration of at least 33% of the Shares then held by such party at any time
after one year, but before three years, following the completion of a public
offering of the Shares. If the Company shall proceed with a filing of a
registration statement in connection with the Company's proposed offer and sale
of Shares, the Company will notify
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<PAGE> 29
Fremont, RCBA and Dr. James Leininger and shall include in such registration the
number of Shares requested by such parties.
The Agreement Among Shareholders further provides that until there is a
public offering of Shares, Fremont, RCBA and Dr. James Leininger will take all
steps to insure that the Board of Directors of the Company shall have eight
members and (iii) that the Nominating Committee of the Board of Directors will
consist of Dr. James Leininger, one director designated by Fremont and one
director designated by RCBA. The eight-member board will consist of Dr. James
Leininger, the Company's then current Chief Executive Officer, two persons
designated by Fremont, two persons designated by RCBA and two or more
independent directors designated by the Nominating Committee.
The Support Agreement.
The following is a summary of the Support Agreement, a copy of which is
filed as an exhibit to the Schedule 13E-4 filed by the Company with the
Commission in connection with the Offer. Such summary is qualified in its
entirety by reference to the Support Agreement.
Pursuant to the Support Agreement, Dr. James Leininger has agreed, subject
to the terms and conditions thereof, (i) to grant to Purchasers an option to
purchase from him at the Per Share Amount, 4,200,000 Shares owned or controlled
by him, (ii) to tender 13,792,211 Shares owned (either beneficially or of
record) by Dr. James Leininger pursuant to the Offer and (iii) vote all Shares
owned (either beneficially or of record) at the time of the Shareholders'
Meeting in favor of the Merger. Dr. James Leininger thereby granted to F
Purchaser an irrevocable option (the "F Option") to purchase 2,529,197 Shares at
a price per Share equal to $19.25 (the "Purchase Price") and Dr. James Leininger
thereby granted to B Purchaser an irrevocable option (the "B Option"; and
together with the F Option, the "Support Agreement Options"; and each
individually, a "Support Agreement Option") to purchase 1,670,803 Shares at a
price per Share equal to the Purchase Price. The Support Agreement Options shall
expire if not exercised prior to the earlier of (i) the close of business on the
180th day following termination of the Transaction Agreement, if the Transaction
Agreement is terminated because the Company (a) withdraws or modifies its
approval or recommendation of the offer or (b) recommends another proposal or
(ii) the consummation of the Merger.
The Purchasers may exercise their Support Agreement Options, provided that
(a) to the extent necessary, any applicable waiting periods (and any extension
thereof) under the HSR Act with respect to the exercise of an option shall have
expired or been terminated and (b) no preliminary or permanent injunction or
other order, decree or ruling issued by any court or governmental or regulatory
authority, domestic or foreign, of competent jurisdiction prohibiting the
exercise of the Support Agreement Options or the delivery of Shares shall be in
effect. Either Purchaser may exercise its Support Agreement Option at any time
following termination of the Transaction Agreement pursuant to a termination, if
the Transaction Agreement is terminated because the Company (a) withdraws or
modifies its approval or recommendation of the offer or (b) recommends another
proposal until the expiration of such Support Agreement Option. In the event
that either Purchaser wishes to exercise its Support Agreement Option, such
Purchaser shall give written notice (the date of such notice being herein called
the "Notice Date"), to Dr. James Leininger specifying a place and date (not
later than ten business days and not earlier than three Business Days following
the Notice Date) for closing such purchase (the "Closing").
The Support Agreement provides that Dr. James Leininger thereby undertakes
to validly tender or cause to be validly tendered an aggregate of 13,792,211
Shares owned or controlled pursuant to the Offer by the tenth business day
following the commencement of the Offer and thereafter not to withdraw from the
Offer any such Shares prior to the expiration or termination of the Offer.
The Support Agreement provides that Dr. James Leininger, with respect to
those Shares that he owns of record, appoints Purchasers, or any nominee of
Purchasers, with full power of substitution, as his true and lawful attorney and
proxy, for and in its name, place and stead, to vote each of such Shares as his
proxy, at every annual, special or adjourned meeting of the shareholders of the
Company (including the right to sign his name (as shareholder) to any consent,
certificate or other document relating to the Company that may be permitted or
required by applicable law) (i) in favor of the adoption of the Transaction
Agreement and approval of the Merger and the other transactions contemplated by
the Transaction Agreement, (ii) against
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<PAGE> 30
any transaction pursuant to an Acquisition Proposal or any other action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under the
Transaction Agreement or which could result in any of the conditions to the
Company's obligations under the Transaction Agreement not being fulfilled, and
(iii) in favor of any other matter relating to consummation of the transactions
contemplated by the Transaction Agreement. Dr. James Leininger further agrees to
cause the Shares owned by him beneficially to be voted in accordance with the
foregoing.
The Support Agreement provides that, until the earlier of (i) the
consummation of the Merger or (ii) 180 days after the termination of the
Transaction Agreement, Dr. James Leininger shall not, directly or indirectly,
through any representative, agent or otherwise, solicit, initiate or encourage
the submission of any proposal or offer from any person or entity relating to
any acquisition or purchase of all or (other than in the ordinary course of
business) any portion of the assets of, or any equity interest in, the Company
or any of its subsidiaries or any recapitalization, business combination or
similar transaction with the Company or any of its subsidiaries (any
communication with respect to the foregoing being an "Proposal") or participate
in any negotiations regarding, or furnish to any other person or entity any
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing. Dr. James Leininger will immediately
cease all existing activities, discussions and negotiations with any parties
conducted heretofore with respect to any Proposal. From and after the execution
of the Support Agreement, Dr. James Leininger shall immediately advise
Purchasers in writing of the receipt, directly or indirectly, of any inquiries,
discussions, negotiations, or proposals relating to a Proposal that Dr. James
Leininger receives in his capacity as a shareholder of the Company (including
the specific terms thereof and the identity of the other party or parties
involved) and furnish to Purchasers within 48 hours of such receipt an accurate
description of all material terms (including any changes or adjustments to such
terms as a result of negotiations or otherwise) of any such written proposal in
addition to any information provided to any third party relating thereto.
Agreement Among Bidders.
The following is a summary of the Agreement Among Bidders, a copy of which
is filed as an exhibit to the Schedule 13E-4 filed by the Company with the
Commission in connection with the Offer. Such summary is qualified in its
entirety by reference to the Agreement Among Bidders Agreement.
On October 2, 1997, Fremont and RCBA entered into an agreement (the
"Agreement Among Bidders") governing the respective obligations and relationship
of each party in connection with the Transaction Agreement and the transactions
contemplated thereby. The Agreement Among Bidders provides that Fremont and RCBA
will (i) confer on all decisions relating to the transactions and reach all
decisions jointly, (ii) be responsible for all funding for the transactions and
(iii) assume joint and several liability, if any, relating to the transactions.
RELATED PARTY TRANSACTIONS
In August 1995, the Company loaned $10.0 million to Dr. James Leininger.
This loan was secured by a stock pledge agreement covering 1,000,000 Shares
owned by Dr. James Leininger. The interest on the loan accrued at 7.94% per
annum. In January 1996, the loan was repaid in full.
On December 18, 1996, a company controlled by Dr. James Leininger acquired
a tract of land (the "Property") from the Company for $395,000. The Property is
comprised of approximately 2.2 acres and is adjacent to the Company's corporate
headquarters. The purchase price was based on the aggregate cost of the Property
to the Company (including acquisition expenses). The Company believes that the
acreage was transferred to Dr. James Leininger at a price equal to its fair
market value. In connection with the purchase of the Property, the Company
loaned Dr. James Leininger $3,000,000 in February 1997 to develop the Property.
The loan bears interest at a rate equal to the prime rate of Texas Commerce Bank
(but such rate shall not be less than 6.25% or greater than 10.25%) and matures
on the fifth anniversary of the loan. The loan is non-recourse to Dr. James
Leininger but is secured by the Property, the improvements on the Property and
300,000 Shares owned by Dr. James Leininger.
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<PAGE> 31
Pursuant to the provisions of the Executive Committee Stock Ownership
Policy, the Company loaned funds to Christopher M. Fashek, the President of KCI
Therapeutic Services, Inc. (a wholly-owned subsidiary of the Company), Bianca A.
Rhodes, the Company's Chief Financial Officer at the time and Dennis E. Noll,
the Company's Senior Vice President and General Counsel. These loans were
utilized by such executive officers to acquire Shares in order to meet the
standards set forth in the Company's Executive Committee Stock Ownership Policy.
The loans bear interest at the applicable federal rate established by the
Internal Revenue Service and have a term of five years. At the option of each
such executive officer, the loans are repayable on a biweekly basis through
payroll deduction or in equal installments of principal and interest on an
annual basis. The initial loans made to Mr. Fashek, Ms. Rhodes and Mr. Noll were
$107,672, $170,672 and $86,310, respectively, and the outstanding balance of
principal and accrued interest on such loans as of December 31, 1996 were
$87,076, $166,003 and $81,888, respectively. Mr. Noll repaid his loan in
February 1997 and Ms. Rhodes repaid the principal amount of her loan in July
1997. The Board has amended the Executive Committee Stock Ownership Policy to
make the ownership thresholds in the policy voluntary and, as a result, the
Company will not be making loans to executive officers under the policy in the
future.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Based upon information received upon request from the persons concerned,
each person known to be the beneficial owner (as defined in Rule 13d-3
promulgated under the Exchange Act) of more than five percent of the Shares,
each director, named executive officer and all directors and executive officers
of the Company as a group, owned beneficially as of October 2, 1997, the number
and percentage of outstanding Shares indicated in the following table:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AS OF PERCENT
NAMES OF INDIVIDUALS OCTOBER 2, 1997(1) OF CLASS
-------------------------------------------------------- ------------------- --------
<S> <C> <C>
James R. Leininger, M.D.(2)(3)(4)(5)(6)(13)............. 21,413,396 50.22%
8023 Vantage Drive
San Antonio, TX 78230
Richard C. Blum & Associates, L.P....................... 4,040,250 9.48%
and certain related parties(7)
909 Montgomery St., Suite 400
San Francisco, CA 94133
Wellington Management Company, LLP(8)................... 3,053,400 7.16%
75 State Street
Boston, MA 02109
Peter A. Leininger, M.D.(5)(6)(9)(13)................... 2,603,147 6.10%
Raymond R. Hannigan(10)(13)............................. 1,014,400 2.35%
Sam A. Brooks(3)(11).................................... 179,000 *
Frank A. Ehmann(11)..................................... 30,000 *
Wendy L. Gramm, Ph.D.(11)............................... 24,000 *
Bernhard T. Mittemeyer, M.D.(11)........................ 25,200 *
Christopher M. Fashek(12)(13)........................... 55,573 *
Frank DiLazzaro(12)(13)................................. 48,510 *
All directors and executive officers as a group (18
persons)(13)(14)...................................... 24,043,062 54.94%
</TABLE>
- ---------------
* Less than one (1%) percent
(1) Except as otherwise indicated in the following notes, the persons named in
the table directly own the number of Shares indicated in the table and have
the sole voting power and investment power with respect to all of such
Shares. Shares beneficially owned include options exercisable prior to
December 1, 1997.
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<PAGE> 32
(2) The Shares shown for Dr. James Leininger include beneficial ownership of
27,572 Shares held by Dr. James Leininger as trustee for the children of
Dr. Peter Leininger. Dr. James Leininger disclaims beneficial ownership of
the aforesaid Shares. The Shares shown also include an aggregate of 555,000
Shares with respect to which Dr. James Leininger has granted stock options
to certain persons, all of which are currently exercisable. The Shares
shown for Dr. James Leininger do not include any Shares owned by any
"Reporting Person," as that term is defined in the Schedule 13D/A filed
with the Securities and Exchange Commission by Dr. James Leininger,
Purchasers and certain other parties on October 6, 1997. As a result of Dr.
James Leininger's entering into the Support Agreement, Dr. James Leininger
and the Reporting Persons may be deemed a group, in which case Dr. James
Leininger would be deemed to have beneficial ownership of 25,453,646
Shares. Please refer to such Schedule 13D/A for a complete description of
such beneficial ownership and the Reporting Persons.
(3) The board of directors of Children's Covenant Foundation, Inc., which
consists of Dr. James Leininger, Cecelia A. Leininger (Dr. James
Leininger's wife), Sam A. Brooks and Dan A. Brooks, has voting and
dispositive power over the Shares owned by this charitable foundation. The
Shares shown for Dr. James Leininger and Sam A. Brooks include the 40,000
Shares owned by Children's Covenant Foundation, Inc. Dr. James Leininger
and Sam A. Brooks disclaim beneficial ownership of the aforesaid Shares.
(4) The board of directors of Covenant Foundation, Inc., which consists of Dr.
James Leininger, Cecelia A. Leininger and Charles A. Staffel, has voting
and dispositive power over the Shares owned by this charitable foundation.
The Shares shown for Dr. James Leininger include the 2,221,833 Shares owned
by Covenant Foundation, Inc. Dr. James Leininger disclaims beneficial
ownership of the aforesaid Shares.
(5) The board of directors of JCL Foundation, which consists of Dr. James
Leininger, Cecelia A. Leininger, Dr. Peter Leininger and Thomas W. Lyles,
Jr., has voting and dispositive power over the Shares owned by this
charitable foundation. The Shares shown for Dr. James Leininger and Dr.
Peter Leininger include the 1,160,125 Shares owned by JCL Foundation. Dr.
James Leininger and Dr. Peter Leininger disclaim beneficial ownership of
the aforesaid Shares.
(6) The board of directors of The PAL Foundation, which consists of Dr. James
Leininger, Dr. Peter Leininger, Dr. John H. Leininger and Daniel E.
Leininger, has voting and dispositive power over the Shares owned by this
charitable foundation. The Shares shown for Dr. James Leininger and Dr.
Peter Leininger include the 107,500 Shares owned by The PAL Foundation. Dr.
James Leininger and Dr. Peter Leininger each disclaim beneficial ownership
of the aforesaid Shares.
(7) As reported in the Schedules 13D/A filed on September 10, 1997 and October
6, 1997, and as otherwise reported to the Company by RCBA, Richard C. Blum
& Associates, L.P. is the general partner of or investment advisor for
limited partnerships and managed accounts (collectively, the "Blum
Reporting Persons") that own in the aggregate 3,837,890 Shares. In
addition, because the Blum Reporting Persons acquired certain of the Shares
in block transactions with other persons, the Blum Reporting Persons and
such other persons (collectively, the "Reporting Persons") may be deemed a
group, in which case they would be deemed to have beneficial ownership of
4,040,250 Shares. The Shares shown for the Reporting Persons do not include
the Shares designated as being beneficially owned by Dr. James Leininger.
As a result of Purchasers' entering into the Support Agreement with Dr.
James Leininger, the Related Persons and Dr. James Leininger may be deemed
a group, in which case the Reporting Persons would be deemed to have
beneficial ownership of 25,453,646 Shares. Please refer to such Schedule
13D/A for a complete description of the nature of such beneficial
ownership.
(8) As reported in the Schedule 13G/A filed on February 14, 1997, Wellington
Management Company LLP ("WMC") reported that, in its capacity as an
investment advisor, it may be deemed to beneficially own the Shares
indicated, with shared voting power over 999,300 of the Shares indicated
and shared dispositive power over 3,053,400 of the Shares indicated.
(9) The Shares shown for Dr. Peter Leininger include beneficial ownership of
155,091 Shares held by Dr. Peter Leininger as trustee for the children of
Dr. James Leininger, 17,000 Shares held by Dr. Peter Leininger as trustee
for the children of John H. Leininger and 20,000 Shares held by Dr. Peter
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<PAGE> 33
Leininger as trustee for the children of Daniel E. Leininger. Dr. Peter
Leininger disclaims beneficial ownership of the aforesaid Shares. The
Shares shown also include 42,332 Shares which he has the right to acquire
under stock options granted by the Company.
(10) The Shares shown for Mr. Hannigan include 340,000 Shares which he has the
right to acquire upon the exercise of a stock option granted to him by Dr.
James Leininger. The Shares shown also include 574,400 Shares that Mr.
Hannigan has the right to acquire under stock options granted by the
Company.
(11) The Shares shown for Messrs. Brooks, Ehmann and Mittemeyer and Ms. Gramm
include 110,000, 20,000, 20,000 and 24,000 Shares, respectively, which they
have the right to acquire under stock options granted by the Company. Mr.
Ehmann's stock options are held in the name of The Frank Ehmann Trust.
(12) The Shares shown for Mr. Fashek and Mr. DiLazzaro include 38,150 and 28,510
Shares, respectively, which such persons have the right to acquire under
stock options granted by the Company.
(13) The Shares shown exclude the approximately 6,432 Shares held by The Frost
National Bank, as trustee of the Company's employee stock ownership plan,
for the benefit of the executive officers of the Company, of which
approximately 1,092, 1,092, 33, 33 and 825 Shares are held for the benefit
of Dr. James Leininger, Dr. Peter Leininger, Raymond R. Hannigan,
Christopher M. Fashek and Frank DiLazzaro, respectively.
(14) The Shares shown include 1,128,615 Shares which the directors and executive
officers have the right to acquire under stock options granted by the
Company. With respect to the 340,000 Shares which Mr. Hannigan has the
right to acquire under currently exercisable stock options granted by Dr.
James Leininger and the 1,307,625 Shares owned by charitable foundations of
which Dr. James Leininger and either Dr. Peter 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, 5, 6 and 10 above.
TRANSACTIONS AND ARRANGEMENTS CONCERNING THE SHARES
On February 1, 1995, Mr. Hannigan acquired 43,500 Shares from Dr. James
Leininger at a price of $5.74 per Share pursuant to the exercise of an option
and on May 7, 1996, Mr. Hannigan acquired an additional 56,500 Shares from Dr.
James Leininger at a price of $5.74 per Share pursuant to the exercise of an
option.
On January 24, 1996, Dr. James Leininger, Dr. Peter Leininger, and certain
charitable foundations affiliated with Dr. James Leininger, sold a total of
5,809,183 shares in an underwritten public offering at a price of $10.25 per
share with aggregate net proceeds of $56,755,717.91.
On May 17, 1996, Dr. Peter Leininger acquired 1,200,000 Shares from Dr.
James Leininger at a price of $3.50 per Share pursuant to the exercise of an
option.
Since January 1995, the Company has purchased a total of 3,193,618 Shares
in various individual transactions. The price paid by the Company for such
purchases of Shares has ranged from $6.75 per Share in June 1995 to $17.75 per
Share in June 1996.
The Option Plans maintained by the Company prior to the consummation of the
Offer, granted participants Old Options at defined exercise prices. Upon
consummation of the Offer, the Old Options that have not yet vested will be
accelerated in their vesting to become fully exercisable. The Old Options, with
the exception of Old Options granted under the 1997 Plan, may, until the
termination of the notice period (which will occur before the end of the Offer),
be exercised for Shares or exchanged for cash. Old Options granted under the
1997 Plan may be exercised for Shares until the end of the notice period, or
exchanged for cash until the EP Date. Certain directors and members of
management will exchange certain of their Old Options for options ("Exchange
Options") governed by the Company's Management Equity Plan (the "MEP"). Old
Options that are not exercised to purchase Shares prior to the consummation of
the Offer or exchanged for cash or Exchange Options will be canceled at the end
of their respective notice periods.
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<PAGE> 34
In conjunction with the Transactions, the Company anticipates adopting the
MEP, under which the Company will grant awards of Shares (the "Management
Shares") or nonqualified stock options (the "New Options" and together with the
Exchange Options, the "Employee Options") to purchase Shares to certain
employees of the Company and its subsidiaries, subject to the execution of an
award agreement ("Stock Award Agreement") by each employee. The MEP also
provides for the exchange of Old Options for Exchange Options and the retention
of Shares held prior to the effective date of the MEP, with such Shares becoming
subject to the terms of the MEP and considered Management Shares. Certain
directors and members of management have agreed to exchange, in the aggregate,
Old Options to purchase 821,550 Shares for Exchange Options to purchase an equal
number of Shares pursuant to the terms of the MEP. The MEP will be administered
by a Committee of the Board of Directors (the "Committee"). The option price of
the Exchange Options ranges from $3.50 to $16.75.
Mr. Hannigan, the Chief Executive Officer of the Company, will recommend
for approval by the Board individuals to whom Management Shares and Employee
Options (the "Awards") may be granted (the "Participants"). The terms and
conditions of each grant or sale of Awards will be embodied in a Stock Award
Agreement in a form approved by the Committee, which will contain terms and
conditions not inconsistent with the MEP and which will incorporate the MEP by
reference. The MEP provides that no Management Share, Employee Option or Share
received upon the exercise of an Employee Option (an "Option Share") whose terms
are governed by the MEP may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of to any third party other than the Company except as
provided in the MEP or a Stock Award Agreement or to a Permitted Transferee (as
defined in the MEP).
The maximum number of Shares that may be issued in connection with Awards
granted under the MEP (together with any Shares issued in connection with
Management Shares and Employee Options) is 6.5% of the initial Shares
outstanding as of the consummation of the Merger, subject to adjustment. Copies
of the Kinetic Concepts, Inc. Management Equity Plan, the Form of Stock
Retention Agreement, and the Management Equity Agreement for Raymond R.
Hannigan, dated October 2, 1997 are attached as exhibits to the Schedule 13E-4
filed by the Company with the Commission in connection with the Offer.
Except as set forth in this Offer to Purchase, neither the Company nor, to
the Company's knowledge, any of its affiliates, directors or executive officers
or any person controlling the Company, is a party to any contract, arrangement,
understanding or relationship with any other person relating, directly or
indirectly, to, or in connection with, the Offer with respect to any securities
of the Company (including, but not limited to, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any such
securities, joint ventures, loan or option arrangements, puts or calls,
guarantees of loans, guarantees against loss or the giving or withholding of
proxies, consents or authorizations). Except as described in this Offer to
Purchase, since the commencement of the Company's second full fiscal year
preceding the date of this Offer to Purchase, no contracts or negotiations
concerning a merger, consolidation, or acquisition, a tender offer for or other
acquisition of any securities of the Company, an election of directors of the
Company, or a sale or other transfer of a material amount of assets of the
Company, has been entered into or has occurred between any affiliates of the
Company or between the Company or any of its affiliates and any unaffiliated
person.
The Company has been informed by its directors and executive officers
(other than Dr. James Leininger and as otherwise provided in any Stock Retention
Agreement) that they intend either to tender all shares beneficially owned by
them to the Company pursuant to the Offer or to vote such Shares in favor of the
approval and adoption by the shareholders of the Company of the Transaction
Agreement and the Merger.
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will accept for payment, and will pay for all
outstanding Shares validly tendered prior to the Expiration Date (as hereinafter
defined) and not withdrawn as specified in "THE TENDER OFFER -- Section 4.
Withdrawal Rights". The term "Expiration
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<PAGE> 35
Date" means 12:00 midnight, New York City time, on Wednesday, November 5, 1997,
unless and until the Company, at the direction of Purchasers (but subject to the
terms and conditions of the Transaction Agreement), shall have extended the
period during which the Offer is open, in which event the term "Expiration Date"
shall mean the latest time and date at which the Offer, as so extended by the
Company, shall expire.
The Company shall, at the direction of Purchasers (but subject to the terms
and conditions of the Transaction Agreement), at any time and from time to time,
extend for any reason the Offer for one or more times during which the Offer is
open (such period not to exceed 10 business days in the aggregate), including
the occurrence of any of the conditions specified in "THE TENDER
OFFER -- Section 11. Certain Conditions to the Offer", by giving oral or written
notice of such extension to the Depositary. During any such extension, all
Shares previously tendered and not withdrawn will remain subject to the Offer,
subject to the rights of a tendering shareholder to withdraw such shareholder's
Shares. See "THE TENDER OFFER -- Section 4. Withdrawal Rights".
The Offer is conditioned upon, among other things, the satisfaction of the
Minimum Condition and the Company's obtaining the Debt Financing. See "THE
TENDER OFFER -- Section 11. Certain Conditions to the Offer".
Subject to the applicable regulations of the Commission, the Company also
expressly reserves the right, in its sole discretion (but subject to the terms
and conditions of the Transaction Agreement), at any time and from time to time,
(i) to delay acceptance for payment of, or, regardless of whether such Shares
were theretofore accepted for payment, payment for, any Shares, pending receipt
of any regulatory approval specified in "THE TENDER OFFER -- Section 12. Certain
Legal Matters and Regulatory Approval", (ii) to terminate the Offer and not
accept for payment any Shares upon the occurrence of any of the conditions
specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer"
and (iii) to waive any condition, other than the Minimum Condition, or otherwise
amend the Offer in any respect, by giving oral or written notice of such delay,
termination, waiver or amendment to the Depositary and by making a public
announcement thereof. The Company acknowledges that (i) Rule 14e-1(c) under the
Exchange Act requires the Company to pay the consideration offered or return the
Shares tendered promptly after the termination or withdrawal of the Offer and
(ii) the Company may not delay acceptance for payment of, or payment for (except
as provided in clause (i) of the first sentence of this paragraph), any Shares
upon the occurrence of any of the conditions specified in "THE TENDER
OFFER--Section 11. Certain Conditions to the Offer" without extending the period
of time during which the Offer is open.
Any such extension, delay, termination, waiver or amendment will be
followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be made no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Subject to applicable law (including Rules 13e-4(e) and 14e-1
under the Exchange Act, which require that material changes be promptly
disseminated to shareholders in a manner reasonably calculated to inform them of
such changes) and without limiting the manner in which the Company may choose to
make any public announcement, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a press release to the Dow Jones News Service.
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-4(e) and 13e-3(e) under the Exchange Act.
Subject to the terms of the Transaction Agreement, if, prior to the
Expiration Date, the Company should decide to decrease the number of Shares
being sought or to increase or decrease the consideration being offered in the
Offer, such decrease in the number of Shares being sought or such increase or
decrease in the consideration being offered will be applicable to all
shareholders whose Shares are accepted for payment pursuant to the Offer and, if
at the time notice of any such decrease in the number of Shares being sought or
such increase or decrease in the consideration being offered is first published,
sent or given to holders of such Shares, the Offer is scheduled to expire at any
time earlier than the period ending on the tenth business day from and including
the date that such notice is first so published, sent or given, the Offer will
be extended at
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<PAGE> 36
least until the expiration of such ten business day period. For purposes of the
Offer, a "business day" means any day other than a Saturday, Sunday or United
States federal holiday and consists of the time period from 12:01 a.m. through
12:00 midnight, New York City time.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares whose names appear on the Company's shareholder list
and will be furnished, for subsequent transmittal to beneficial owners of
Shares, to brokers, dealers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the shareholder
list or, if applicable, who are listed as participants in a clearing agency's
security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Company will accept for payment, and will pay for, all
outstanding Shares validly tendered prior to the Expiration Date and not
properly withdrawn, promptly after the latest to occur of (i) the Expiration
Date and (ii) the satisfaction or waiver of the conditions to the Offer
specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer".
Subject to applicable rules of the Commission, the Company expressly reserves
the right to delay acceptance for payment of, or payment for, Shares pending
receipt of any regulatory approvals specified in "THE TENDER OFFER -- Section
12. Certain Legal Matters and Regulatory Approvals" or in order to comply in
whole or in part with any other applicable law.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (A) the
certificates evidencing such Shares (the "Share Certificates") or timely
confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such
Shares into the Depositary's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures specified in "THE
TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering
Shares", (B) the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees or, in the
case of a book-entry transfer, an Agent's Message (as defined below) in lieu of
the Letter of Transmittal and (C) any other documents required under the Letter
of Transmittal.
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to the
Depositary of the Company's acceptance for payment of such Shares pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Shares accepted for payment pursuant to the Offer will be made by deposit of
the Per Share Amount with the Depositary, which will act as agent for tendering
shareholders for the purpose of receiving payments from the Company and
transmitting such payments to tendering shareholders whose Shares have been
accepted for payment. Under no circumstances will the Company pay interest on
the Per Share Amount, regardless of any delay in making such payment.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense to the tendering
shareholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at the Book-Entry Transfer Facility pursuant to the
procedure specified in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and Tendering Shares", such Shares will be credited to an account
maintained at the Book-Entry Transfer Facility), as promptly as practicable
following the expiration or termination of the Offer.
If, prior to the Expiration Date, the Company increases the consideration
offered to any holders of Shares pursuant to the Offer, such increased
consideration shall be paid to all holders of Shares that are purchased pursuant
to the Offer, whether or not such Shares were tendered prior to such increase in
consideration.
The Company reserves the right to transfer or assign, in whole or from time
to time in part, to one or more of its affiliates, the right to purchase all or
any portion of the Shares tendered pursuant to the Offer, but
35
<PAGE> 37
any such transaction or assignment will not relieve the Company of its
obligations under the Offer and will in no way prejudice the rights of tendering
shareholders to receive payment for Shares validly tendered and accepted for
payment pursuant to the Offer.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES
In order for a holder of Shares to validly tender Shares pursuant to the
Offer, the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message in lieu of the Letter of
Transmittal) and any other documents required by the Letter of Transmittal, must
be received by the Depositary at one of its addresses set forth on the back
cover of this Offer to Purchase and either (i) the Share Certificates evidencing
tendered Shares must be received by the Depositary at such address or such
Shares must be tendered pursuant to the procedure for book-entry transfer
described below and a Book-Entry Confirmation must be received by the Depositary
(including an Agent's Message if the tendering shareholder has not delivered a
Letter of Transmittal), in each case prior to the Expiration Date, or (ii) the
tendering shareholder must comply with the guaranteed delivery procedures
described below. The term "Agent's Message" means a message, transmitted by a
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Shares which are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Book-Entry Transfer. The Depositary will establish an account with respect
to the Shares at the Book-Entry Transfer Facility for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any financial
institution that is a participant in the system of the Book-Entry Transfer
Facility may make a book-entry delivery of Shares by causing the Book-Entry
Transfer Facility to transfer such Shares into the Depositary's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for such transfer. However, although delivery of Shares
may be effected through book-entry transfer at the Book-Entry Transfer Facility,
either the Letter of Transmittal, properly completed and duly executed, together
with any required signature guarantees, or an Agent's Message in lieu of the
Letter of Transmittal, and any other required documents, must, in any case, be
received by the Depositary at one of its addresses set forth on the back cover
of this Offer to Purchase prior to the Expiration Date, or the tendering
shareholder must comply with the guaranteed delivery procedure described below.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE
DELIVERY TO THE DEPOSITARY.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm which is a member of the Medallion Signature Guarantee
Program, or by any other "eligible guarantor institution", as such term is
defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing, an
"Eligible Institution"), except in cases where Shares are tendered (i) by a
registered holder of Shares who has not completed either the box entitled
"Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If a Share Certificate is registered in the name of a
person other than the signer of the Letter of Transmittal, or if payment is to
be made, or a Share Certificate not accepted for payment or not tendered is to
be returned, to a person other than the registered holder(s), then the Share
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appear(s)
36
<PAGE> 38
on the Share Certificate, with the signature(s) on such Share Certificate or
stock powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of
the Letter of Transmittal.
Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such shareholder's Shares are
not immediately available or such shareholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such shareholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered, provided that all the following conditions are satisfied:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company, is
received prior to the Expiration Date by the Depositary as provided below;
and
(iii) the Share Certificates (or a Book-Entry Confirmation) evidencing
all tendered Shares, in proper form for transfer, in each case together
with the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees, and any other
documents required by the Letter of Transmittal are received by the
Depositary within three Nasdaq trading days after the date of execution of
such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or mail to the
Depositary and must include a guarantee by an Eligible Institution in the form
set forth in the form of Notice of Guaranteed Delivery made available by the
Company.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of the
Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal, properly completed and
duly executed, with any required signature guarantees, and any other documents
required by the Letter of Transmittal.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company in its sole discretion, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. The Company also reserves the absolute right to waive any
condition of the Offer or any defect or irregularity in the tender of any Shares
of any particular shareholder, whether or not similar defects or irregularities
are waived in the case of other shareholders. No tender of Shares will be deemed
to have been validly made until all defects and irregularities have been cured
or waived. None of the Company, the Dealer Manager, the Depositary, the
Information Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification. The Company's interpretation of the
terms and conditions of the Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding.
Cancellation. Promptly following the purchase of the Shares pursuant to
the Offer, the Company intends to cancel any such Shares purchased in the Offer.
The acceptance for payment by the Company of Shares pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering shareholder and the Company upon the terms and subject to the
conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH SHAREHOLDER'S
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH SHAREHOLDER IS NOT
SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE
FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH
RESPECT TO A SHAREHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY
PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF
TRANSMITTAL.
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<PAGE> 39
4. WITHDRAWAL RIGHTS
Tenders of Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for payment by the Company pursuant to the Offer,
may also be withdrawn at any time after Friday, December 5, 1997. If the Company
extends the Offer, is delayed in its acceptance for payment of Shares or is
unable to accept Shares for payment pursuant to the Offer for any reason, then,
without prejudice to the Company's rights under the Offer, the Depositary may,
nevertheless, on behalf of the Company, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering shareholders are
entitled to withdrawal rights as described in this Section 4.
For a withdrawal to be effective, a written notice of withdrawal must be
timely received by the Depositary at one of its addresses set forth on the back
cover page of this Offer to Purchase. Any such notice of withdrawal must specify
the name of the person who tendered the Shares to be withdrawn, the number of
Shares to be withdrawn and the name of the registered holder of such Shares, if
different from that of the person who tendered such Shares. If Share
Certificates evidencing Shares to be withdrawn have been delivered or otherwise
identified to the Depositary, then, prior to the physical release of such Share
Certificates, the serial numbers shown on the such Share Certificates must be
submitted to the Depositary and the signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution, unless such Shares have been
tendered for the account of an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer as set forth in "THE
TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering
Shares", any notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. None of the Company,
the Dealer Manager, the Depositary, the Information Agent or any other person
will be under any duty to give notification of any defects or irregularities in
any notice of withdrawal or incur any liability for failure to give any such
notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and Tendering Shares".
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
U.S. Federal Income Tax. The receipt of cash for Shares pursuant to the
Offer or in the Merger will be a taxable transaction for U.S. federal income tax
purposes under the Code and may also be a taxable transaction under applicable
state, local or foreign tax laws. In general, a shareholder will recognize gain
or loss for U.S. federal income tax purposes equal to the difference between the
amount of cash received in exchange for the Shares sold and such shareholder's
adjusted tax basis in such Shares. Assuming the Shares constitute capital assets
in the hands of the shareholder, such gain or loss will be capital gain or loss.
In the case of an individual shareholder, such capital gain generally will be
subject to a maximum federal income tax rate of 20% if the individual has held
the Shares for more than 18 months, or 28%, if the individual has held the
Shares for more than one year and up to 18 months. Gain or loss will be
calculated separately for each block of Shares tendered pursuant to the Offer or
converted pursuant to the Merger. The deductibility of capital losses is subject
to certain limitations. Prospective investors should consult their own tax
advisors in this regard.
In general, in order to prevent backup federal income tax withholding at a
rate of 31% on the cash consideration to be received in the Offer or pursuant to
the Merger, each shareholder who is not otherwise exempt from such requirements
must provide such shareholder's correct taxpayer identification number (and
certain other information) by completing the Substitute Form W-9 in the Letter
of Transmittal.
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<PAGE> 40
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
SHAREHOLDERS, INCLUDING BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION,
INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN
CORPORATIONS.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW, WHICH IS SUBJECT TO
CHANGE POSSIBLY WITH RETROACTIVE EFFECT. SHAREHOLDERS ARE URGED TO CONSULT THEIR
TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER AND THE
MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
TAX LAWS.
6. PRICE RANGE OF SHARES; DIVIDENDS
The Shares are quoted on the Nasdaq National Market under the symbol
"KNCI". The following table sets forth the high and low closing sale prices of
the Shares for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter.................................................. $ 8.250 $ 6.563
Second Quarter................................................. 8.125 6.625
Third Quarter.................................................. 11.625 7.000
Fourth Quarter................................................. 13.000 10.000
1996
First Quarter.................................................. $13.875 $10.438
Second Quarter................................................. 17.375 13.125
Third Quarter.................................................. 16.063 13.500
Fourth Quarter................................................. 15.000 11.875
1997
First Quarter.................................................. $15.875 $11.375
Second Quarter................................................. 18.375 13.500
Third Quarter.................................................. 19.938 16.875
Fourth Quarter (through October 7, 1997)....................... 19.000 18.438
</TABLE>
The Board declared quarterly cash dividends on the Shares in 1996 and 1995.
The cash dividends totaled $0.15 per Share in each of 1996 and 1995. The Credit
Facility (as hereinafter defined) to be executed and delivered in connection
with the Offer will contain certain covenants which limit the Company's ability
to declare and pay cash dividends. For the first and second fiscal quarters of
1997, the Company paid dividends of $0.0375 per Share on June 2, 1997 to holders
of record as of May 23, 1997 and $0.0375 per Share on August 11, 1997 to holders
of record as of August 1, 1997, respectively. In the third fiscal quarter of
1997, the Company intends to pay a dividend of $0.0375 per Share.
As of October 1, 1997, the approximate number of holders of record of the
Shares was 364.
7. CERTAIN INFORMATION CONCERNING THE COMPANY
The Company designs, manufactures, markets and distributes therapeutic
products, primarily specialty hospital beds and mattress overlays, that treat
and prevent the complications of immobility and medical devices that treat
chronic wounds and help prevent deep vein thrombosis. By preventing these
complications or accelerating the healing process, the Company's therapies and
services can significantly reduce the cost of patient care while improving
clinical outcomes.
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, the Company has developed
innovative medical devices to treat chronic wounds and help prevent deep vein
thrombosis. The Company has also developed a product line to aid in the care of
obese patients.
39
<PAGE> 41
Founded by Dr. James Leininger, 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.
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. Sales are generated by a sales force of
approximately 300 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 in
both care 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, in some cases on a 24-hours-a-day,
seven-days-a-week basis. The Company distributes its specialty patient support
products to acute and extended care facilities through a network of 143 domestic
service centers. The KCTS service centers are organized as profit centers and
the general managers who supervise the service centers are responsible for both
sales and service operations. Each center has an inventory of specialty beds and
overlays which are delivered to the individual hospitals or nursing homes on an
as-needed basis.
The KCTS sales and support staff is comprised of approximately 300
employees with medical or clinical backgrounds. The principal responsibility of
approximately 140 of these clinicians is making product rounds and participating
in treatment protocols. These clinicians help to educate 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 200,000 patient rounds annually. KCTS
accounted for approximately 64%, 61% and 53%, respectively, of the Company's
total revenue in the years ended December 31, 1996, 1995 and 1994.
KCI Home Care. KCI Home Care rents and sells products that address the
unique demands of the home healthcare market. In January 1995, KCI Home Care
started a transition from a combined direct/dealer distribution system to
distributing its products through home medical equipment providers. The Company
believes that selling through the home care provider network gives it access to
a larger patient population and improves the overall contribution from this
business segment despite a reduction in per patient revenue. KCI Home Care
accounted for approximately 5% of the Company's total revenue in 1996.
KCI International. KCI International offers the Company's therapies and
services in a number of foreign countries including Germany, Austria, the United
Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy and
Denmark. The Denmark office has recently been 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. KCI International accounted for
approximately 25%, 25% and 17%, respectively, of the Company's total revenue in
1996, 1995 and 1994.
NuTech. NuTech manufactures and markets the PlexiPulse and PlexiPulse
All-in-1 System. The products are sold through the Company's direct sales force
and rented through an alliance with Mediq/PRN a company with a national
presence. NuTech accounted for approximately 6% of the Company's total revenue
in 1996.
RECENT DEVELOPMENTS
On October 1, 1997, the Company consummated the acquisition of
substantially all of the assets of RIK Medical, L.L.C., a Delaware limited
liability company ("RIK"). The Company paid approximately $23.3 million for the
acquisition of such assets plus an earnout of up to $2.0 million. RIK is a
manufacturer of non-powered therapeutic patient support surfaces based in
Boulder, Colorado.
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<PAGE> 42
SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary financial information for the Company for the years ended
December 31, 1996 and 1995, set forth below has been derived from, and should be
read in conjunction with, the audited financial statements (including the
related notes thereto) included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the "Form 10-K"). The summary financial
information for the six month periods ended June 30, 1997 and 1996, has been
derived from, and should be read in conjunction with, the unaudited financial
statements for such periods included in the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (the "Form 10-Q"). Such summary
financial information is qualified in its entirety by reference to such reports
and all financial statements and related notes contained therein. The Form 10-K
and the Form 10-Q are available for examination, and copies may be obtained, in
the manner set forth below under "Additional Information".
The financial information for the six-month periods ended June 30, 1997 and
1996, has not been audited and, in the opinion of management, reflects all
adjustments (consisting of normal recurring adjustments) which are necessary for
a fair presentation of such information. Results for the six-month periods are
not necessarily indicative of results for the full year.
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE COMPANY
(IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- -------------------
1997 1996 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................ $148,212 $131,859 $269,881 $243,443
Income from continuing operations................... 32,440 26,462 55,354 43,792
Income before income taxes.......................... 33,293 28,336 64,441 48,346
BALANCE SHEET DATA (at end of period):
Working capital..................................... $101,997 $116,216 $107,334 $109,413
Total assets........................................ 271,257 251,951 253,393 243,726
Total long-term indebtedness........................ -- -- -- --
Shareholders' equity................................ 222,514 216,677 211,078 210,324
PER SHARE DATA:
Net income per common
and common share equivalents -- continuing.......... $ 0.46 $ 0.37 $ 0.86 $ 0.63
Ratio of earnings to fixed charges.................. 26.6x 26.9x 29.3x 21.9x
Book value per share................................ $ 5.26 $ 4.90 $ 4.98 $ 4.74
Shares used in earnings per share computations...... 43,737 46,015 45,489 45,457
</TABLE>
8. FINANCING OF THE TRANSACTIONS
The total amount of funds required to consummate the Offer and Merger and
to pay all related fees and expenses is $699,356,000, which will be provided
through a combination of (i) the approximately $155,611,000 in proceeds from the
Stock Purchase, (ii) borrowings under a $530,000,000 senior secured credit
facility to be provided to the Company (the "Credit Facility") and (iii) either
the proceeds from the sale of $200,000,000 of senior subordinated high-yield
notes to be issued by the Company (the "Notes") or borrowings under the Bridge
Loan (as defined below).
The Company has received a commitment letter dated October 1, 1997 from
Bank of America National Trust and Savings Association, BancAmerica Robertson
Stephens, Bankers Trust Company and BT Alex. Brown (collectively, the "Banks")
with respect to the Credit Facility pursuant to which up to $300,000,000 will be
available in three tranches as term loans (the "Term Loan Facility"),
$130,000,000 will be available as a tender facility (the "Tender Facility"),
$50,000,000 will be available as a six-year revolving credit facility
41
<PAGE> 43
(the "Revolving Facility"), and $50,000,000 will be available as an acquisition
facility (the "Acquisition Facility"). If the Company is unable to complete the
sale of Notes by the time of the closing of the Offer, the Company intends to
use the proceeds of the Tender Facility, Acquisition Facility and Revolving
Facility to finance the Offer and Merger and pay related fees and expenses.
Indebtedness of the Company under the Credit Facility will be guaranteed by
certain of the subsidiaries of the Company and will be secured by (i) a first
priority security interest in all, subject to certain customary exceptions, of
the tangible and intangible assets of the Company and its domestic subsidiaries,
including, without limitation, intellectual property and real estate owned by
the Company and its subsidiaries, (ii) a first priority perfected pledge of all
capital stock of the Company's domestic subsidiaries and (iii) a first priority
perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned
directly by the Company or its domestic subsidiaries. The Credit Facility will
contain customary affirmative and negative covenants including financial
covenants regarding the Company's earnings before interest, depreciation and
amortization, interest coverage ratio and maximum leverage ratio. The Tender
Facility, if borrowed, will be repayable within 21 days thereafter, and the Term
Loan Facility and Acquisition Facility will have various amortization schedules
with final maturities ranging from six to eight years after funding. Interest
will accrue at various rates above the fluctuating eurodollar rate or bank
reference rate as is customary in these types of financings. Amounts outstanding
under the Credit Facility will bear interest at a base rate plus a margin that
ranges initially from 1.25% to 1.75% or a Eurodollar rate plus a margin that
ranges initially from 2.25% to 2.75%.
The Company has retained BT Alex. Brown and BancAmerica Robertson Stephens
to act as joint co-lead managing underwriters, initial purchasers or placement
agents for the Notes. It is currently anticipated that the Notes would be issued
in a Rule 144A transaction and pursuant to a customary purchase agreement, would
mature in 2007, would be unsecured and would be guaranteed by certain of the
Company's domestic subsidiaries. The interest rate on the Notes will be
determined by market factors when the Notes are sold. It is also anticipated
that the indenture governing the Notes would contain provisions with respect to
redemption and affirmative and negative covenants customary for a transaction of
this nature. The Company has also received a commitment letter from Bankers
Trust New York Corporation and Bank of America National Trust and Savings
Association (collectively, the "Lenders") pursuant to which the Lenders have
committed, subject to customary conditions precedent, to make available to the
Company a $200,000,000 unsecured senior subordinated bridge loan (the "Bridge
Loan") to refinance in part, the Credit Facility, in the event that the Notes
are not issued by the Company. The Bridge Loan would, subject to certain limited
conditions, be available to the Company, on two business days' prior notice,
following the closing of the Credit Facility (but in no event later than 21 days
thereafter) and would bear interest at a cash rate between 9% and 14%.
The following table sets forth the anticipated approximate sources and uses
of funds in connection with the Offer and the Merger.
<TABLE>
<S> <C>
SOURCES
Revolving and Acquisition Facility............................................ $43,745,000
Term Loan Facility............................................................ 300,000,000
Senior Subordinated Notes..................................................... 200,000,000
Fremont Equity Financing...................................................... 138,197,000
RCBA Equity Financing......................................................... 17,414,000
-----------
Total Sources of Funds................................................ 699,356,000
==========
USES
Purchase of Primary Shares.................................................... 628,204,000
Net Purchase of Options....................................................... 25,600,000
Fees and Expenses............................................................. 45,552,000
-----------
Total Uses of Funds................................................... 699,356,000
==========
</TABLE>
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<PAGE> 44
9. DIVIDENDS AND DISTRIBUTIONS
For the first and second fiscal quarters of 1997, the Company paid
dividends of $0.0375 per Share on June 2, 1997 to holders of record as of May
23, 1997 and $0.0375 per Share on August 11, 1997 to holders of record as of
August 1, 1997, respectively. The Company intends to pay a cash dividend in
their third fiscal quarter of $0.0375. If, after the payment of such dividend,
the Company should declare or pay any dividend on the Shares or make any other
distribution (including the issuance of additional shares of capital stock
pursuant to a stock dividend or stock split, the issuance of other securities or
the issuance of rights for the purchase of any securities) with respect to the
Shares that is payable or distributable to shareholders of record on a date
prior to the transfer to the name of the Company or its nominee or transferee on
the Company's stock transfer records of the Shares pursuant to the Offer, then,
without prejudice to the Company's rights specified in "THE TENDER
OFFER -- Section 11. Certain Conditions to the Offer", (i) the purchase price
per Share payable by the Company pursuant to the Offer will be reduced (subject
to the Transaction Agreement) to the extent any such dividend or distribution is
payable in cash and (ii) any non-cash dividend, distribution or right shall be
received and held by the tendering shareholder for the account of the Company
and will be required to be promptly remitted and transferred by each tendering
shareholder to the Depositary for the account of the Company, accompanied by
appropriate documentation of transfer. Pending such remittance and subject to
applicable law, the Company will be entitled to all the rights and privileges as
owner of any such non-cash dividend, distribution or right and may withhold the
entire purchase price or deduct from the purchase price the amount or value
thereof, as determined by the Company in its sole discretion.
10. EFFECT OF THE TRANSACTIONS ON THE MARKET FOR THE SHARES; EXCHANGE ACT
REGISTRATION
The purchase of Shares by the Company pursuant to the Offer will reduce the
number of Shares that might otherwise trade publicly and will reduce the number
of holders of Shares, which could adversely affect the liquidity and market
value of the remaining Shares held by the public.
Depending upon the number of Shares purchased pursuant to the Offer, the
Shares may no longer meet the standards for continued listing on Nasdaq.
According to Nasdaq's published guidelines, the Shares would not be
eligible to be included for listing if, among other things, the number of Shares
publicly held falls below 100,000, the number of holders of Shares falls below
300 or the market value of such publicly held Shares is not at least $200,000.
If, as a result of the purchase of Shares pursuant to the Offer, the Merger or
otherwise, the Shares no longer meet the requirements of Nasdaq for continued
listing, the listing of the Shares will be discontinued. In such event, the
market for the Shares would be adversely affected. In the event the Shares were
no longer eligible for listing on Nasdaq, quotations might still be available
from other sources. The extent of the public market for the Shares and the
availability of such quotations would, however, depend upon the number of
holders of such Shares remaining at such time, the interest in maintaining a
market in such Shares on the part of securities firms, the possible termination
of registration of such Shares under the Exchange Act as described below and
other factors.
The Shares are currently "margin securities", as such term is defined under
the rules of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), which has the effect, among other things, of allowing brokers
to extend credit on the collateral of such securities. Depending upon factors
similar to those described above regarding listing and market quotations,
following the Offer it is possible that the Shares might no longer constitute
"margin securities" for purposes of the margin regulations of the Federal
Reserve Board, in which event such Shares could no longer be used as collateral
for loans made by brokers.
The Shares are currently registered under the Exchange Act. Such
registration may be terminated upon application by the Company to the Commission
if the Shares are not listed on a national securities exchange and there are
fewer than 300 record holders. The termination of the registration of the Shares
under the Exchange Act would substantially reduce the information required to be
furnished by the Company to holders of Shares and to the Commission and would
make certain provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b), the requirement of furnishing a proxy
statement in connection with shareholders' meetings and the requirements of Rule
13e-3 under the Exchange Act with
43
<PAGE> 45
respect to the "going private" transactions, no longer applicable to the Shares.
In addition, "affiliates" of the Company and persons holding "restricted
securities" of the Company may be deprived of the ability to dispose of such
securities pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended. If registration of the Shares under the Exchange Act were terminated,
the Shares would no longer be "margin securities" or be eligible for Nasdaq
reporting. Purchaser currently intends to seek to cause the Company to terminate
the registration of the Shares under the Exchange Act as soon as practicable
after consummation of the Offer if the requirements for termination of
registration are met.
11. CERTAIN CONDITIONS TO THE OFFER
Notwithstanding any other provision of the Offer, the Company shall not be
required to accept for payment or pay for any Shares tendered pursuant to the
Offer, if (v) the Minimum Condition shall not have been satisfied, (w) any
applicable waiting period under the HSR Act (as defined herein) shall not have
expired or been terminated prior to the expiration of the Offer, (x) the Debt
Financing shall not have been obtained, (y) the Closing shall not have occurred
or (z) at any time on or after the date of the Transaction Agreement, and prior
to the acceptance for payment of Shares, any of the following conditions shall
exist:
(a) there shall be instituted or be pending any action or proceeding
before any court or governmental, administrative or regulatory authority or
agency, domestic or foreign, in each case that has a reasonable likelihood
of success notwithstanding the reasonable efforts of the Company and
Purchasers to dismiss or otherwise terminate such action or proceeding; (i)
challenging or seeking to make illegal, materially delay or otherwise
directly or indirectly restrain or prohibit or make materially more costly
the making of the Offer, the acceptance for payment of, or payment for, any
Shares by the Company, Purchasers or any affiliate of either of Purchasers,
or the consummation of any other Transaction, or seeking to obtain material
damages in connection with any Transaction; (ii) seeking to prohibit or
limit materially the ownership or operation by the Company, Purchasers or
any of their affiliates of all or any material portion of the business or
assets of the Company, Purchasers or any of their affiliates, or to compel
the Company, Purchasers or any of their affiliates to dispose of or hold
separate all or any material portion of the business or assets of the
Company, Purchasers or any of their affiliates, as a result of the
Transactions; (iii) seeking to impose or confirm limitations on the ability
of Purchasers or any of their affiliates to exercise effectively full
rights of ownership of any Shares, including, without limitation, the right
to vote any Shares acquired by Purchaser pursuant to the Stock Purchase or
the Shareholder Support Agreement or otherwise on all matters properly
presented to the Company's shareholders, including, without limitation, the
approval and adoption of the Transaction Agreement and the transactions
contemplated hereby; or (iv) seeking to require divestiture by Purchasers
or any of their affiliates;
(b) there shall have been any action taken, or any statute, rule,
regulation, legislation, interpretation, judgment, order or injunction
enacted, entered, enforced, promulgated, amended, issued or deemed
applicable to (i) Purchasers, the Company or any of their affiliates or
(ii) any Transaction, by any legislative body, court, government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, other than the routine application of the waiting period
provisions of the HSR Act to the Offer, which is reasonably likely to
result, directly or indirectly, in any of the consequences referred to in
clauses (i) through (v) of paragraph (a) above;
(c) there shall have occurred any change, condition, event or
development that has a Material Adverse Effect on the Company;
(d) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on any national securities
exchange, the Nasdaq National Market, or the over-the-counter market in the
United States, (ii) any decline, measured from the date hereof, in the
Standard & Poor's 500 Index by an amount in excess of 15%, (iii) a
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iv) any limitation (whether or not
mandatory) by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, on, or other event that, in the
reasonable judgment of Purchasers, might affect, the extension of credit by
44
<PAGE> 46
banks or other lending institutions, (v) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States or (vi) in the case of any of the
foregoing existing on the date hereof, a material acceleration or worsening
thereof;
(e) (i) it shall have been publicly disclosed or Purchasers shall have
otherwise learned that beneficial ownership (determined for the purposes of
this paragraph as set forth in Rule 13d-3 of the Exchange Act) of 20% or
more of the then outstanding Shares has been acquired by any person, other
than Purchasers or any of either of their affiliates or (ii) (A) the Board
or any committee thereof shall have withdrawn or modified in a manner
adverse to Purchasers the approval or recommendation of the Offer or the
Transactions, or approved or recommended any takeover proposal or any other
acquisition of Shares other than pursuant to the Transactions or (B) the
Board or any committee thereof shall have resolved to do any of the
foregoing;
(f) the Transaction Agreement shall have been terminated in accordance
with its terms;
(g) Purchasers and the Company shall have agreed that the Company
shall terminate the Offer or postpone the acceptance for payment of or
payment for Shares thereunder; or
(h) the Company shall not have received Houlihan Lokey's written
opinion, which opinion shall not have been withdrawn, addressed to the
Board and the Purchasers with respect to solvency and related matters.
Purchasers and the Company acknowledge that the Conditions to the Offer set
forth above are for the benefit of the Purchasers and the Company and that the
Company shall not assert failure of, or waive, any such condition without the
prior written consent of each Purchaser (which consent shall not be unreasonably
withheld).
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
General. Except as set forth in this Offer to Purchase, the Company is not
aware of any license or regulatory permit that appears to be material to its
business that might be adversely affected by its acquisition of Shares as
contemplated in the Offer or of any approval or other action by any government
or governmental, administrative or regulatory authority or agency, domestic or
foreign, that would be required for the Company's acquisition of Shares pursuant
to the Offer. Should any such approval or other action be required, the Company
currently contemplates that it will seek such approval or other action. The
Company cannot predict whether it may determine that it is required to delay the
acceptance for payment of Shares tendered pursuant to the Offer pending the
outcome of any such matter. There can be no assurance that any such approval or
other action, if needed, would be obtained or would be obtained without
substantial conditions or that the failure to obtain any such approval or other
action might not result in adverse consequences to the Company's business. The
Company intends to make all required filings under the Exchange Act. The
Company's obligation under the Offer to accept Shares for payment is subject to
certain conditions. See "THE TENDER OFFER -- Section 11. Certain Conditions to
the Offer".
Antitrust. Under the Hart-Scott-Rodino Antitrust Act of 1976, as amended
(the "HSR Act"), and the rules and regulations that have been promulgated
thereunder by the Federal Trade Commission (the "FTC"), certain acquisition
transactions may not be consummated until certain information and documentary
material have been furnished for review by the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the FTC and certain waiting
period requirements have been satisfied. The Stock Purchase is subject to such
requirements; however, the Offer and the Merger are not subject to such
requirements.
Under the provisions of the HSR Act applicable to the Transactions, the
Stock Purchase may not be consummated until the expiration of a 30 calendar-day
waiting period following the filing by the Company and each of the Purchasers
(or their ultimate parent entities) of certain required information and
documentary material with respect to the Stock Purchase with the FTC and the
Antitrust Division, unless such waiting period is earlier terminated by the FTC
and the Antitrust Division. The Company and each of the Purchasers filed a
Premerger Notification and Report Form with the Antitrust Division and the FTC
in connection with the Merger under the HSR Act on October 6, 1997; and,
accordingly, the required waiting period with respect
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<PAGE> 47
to the Stock Purchase will expire on or about November 5, 1997, unless earlier
terminated by the Antitrust Division or the FTC or the Company or Purchasers
receives a request for additional information or documentary material prior
thereto. If, within such 30 calendar-day waiting period, either the FTC or the
Antitrust Division were to request additional information or documentary
material from the Company or Purchasers, the waiting period with respect to the
Stock Purchase would be extended for an additional period of 20 calendar days
following the date of substantial compliance with such request by the Company
and Purchasers. One extension of the waiting period pursuant to a request for
additional information is authorized by the rules promulgated under the HSR Act.
Thereafter, the waiting period could be extended only by court order or with the
consent of the Company and Purchasers. The additional 20 calendar-day waiting
period may be terminated sooner by the FTC or the Antitrust Division.
At any time before or after the Stock Purchase, the Antitrust Division or
the FTC could take such action under the antitrust laws as either deems
necessary or desirable in the public interest, including seeking to enjoin the
purchase of Shares pursuant to the Stock Purchase, the divestiture of Shares
purchased pursuant to the Stock Purchase or the divestiture of substantial
assets of Purchasers, the Company or any of their respective subsidiaries or
affiliates. Private parties as well as state attorneys general may also bring
legal actions under the antitrust laws under certain circumstances.
Based upon an examination of publicly available information relating to the
businesses in which the Company is engaged, management and Purchasers believe
that the acquisition of Shares by Purchasers pursuant to the Stock Purchase
should not violate the applicable antitrust laws. Nevertheless, there can be no
assurance that a challenge to the Stock Purchase on antitrust grounds will not
be made, or, if such challenge is made, what the result will be.
State Takeover Laws. A number of states have adopted laws and regulations
applicable to attempts to acquire securities of corporations which are
incorporated, or have substantial assets, shareholders, principal executive
offices or principal places of business, or whose business operations otherwise
have substantial economic effects, in such states. In Edgar v. MITE Corp., the
Supreme Court of the United States invalidated on constitutional grounds the
Illinois Business Takeover Statute, which, as a matter of state securities law,
made takeovers of corporations meeting certain requirements more difficult.
However, in 1987 in CTS Corp. v. Dynamics Corp. of America, the Supreme Court
held that the State of Indiana may, as a matter of corporate law and, in
particular, with respect to those aspects of corporate law concerning corporate
governance, constitutionally disqualify a potential acquiror from voting on the
affairs of a target corporation without the prior approval of the remaining
shareholders. The state law before the Supreme Court was by its terms applicable
only to corporations that had a substantial number of shareholders in the state
and were incorporated there.
The Company conducts business in a number of states throughout the United
States, some of which have enacted takeover laws. The Company does not know
whether any of these laws will, by their terms, apply to the Transactions and
has not complied with any such laws. Should any person seek to apply any state
takeover law, the Company will take such action as then appears desirable, which
may include challenging the validity or applicability of any such statute in
appropriate court proceedings. In the event it is asserted that one or more
state takeover laws are applicable to the Transactions, and an appropriate court
does not determine that it is inapplicable or invalid as applied to the
Transactions, the Company might be required to file certain information with, or
receive approvals from, the relevant state authorities. In addition, if
enjoined, the Company might be unable to accept for payment any Shares tendered
pursuant to the Offer, or be delayed in continuing or consummating the Offer and
the Merger. In such case, the Company may not be obligated to accept for payment
any Shares tendered. See "THE TENDER OFFER -- Section 11. Certain Conditions to
the Offer".
Texas Business Combination Law. The State of Texas recently enacted Part
Thirteen (Article 13.01 et seq.) of Texas Law (the "Business Combination Law")
which has application to "issuing public corporations" formed under Texas Law,
such as the Company. The Business Combination Law imposes a three year
moratorium on certain business combination transactions between an issuing
public corporation and an "affiliated shareholder" (generally, a beneficial
owner of 20% or more of the then outstanding voting shares
46
<PAGE> 48
of the issuing public corporation) or any affiliate or associate of the
affiliated shareholder unless (i) the proposed business combination, or the
purchase or acquisition of voting shares on the date such person became an
affiliated shareholder (the "share acquisition date"), was approved by the board
of directors of the issuing public corporation prior to the affiliated
shareholder's share acquisition date or (ii) the proposed business combination
is approved by the affirmative vote of at least two-thirds of the outstanding
voting shares (excluding the shares owned by the affiliated shareholder and its
affiliates and associates) at a meeting of shareholders (and not by written
consent) duly called for that purpose not less than six months after the
affiliated shareholder's share acquisition date of such affiliated shareholder.
Application of the Business Combination Law is subject to a number of
exceptions.
Because the Transactions have been approved by the Disinterested Directors
and the Board, the restrictions under the Business Combination Law will not
affect the Merger and other transactions contemplated under the Transaction
Agreement. The Business Combination Law will apply to the Company for so long as
it has (i) 100 or more shareholders of record, (ii) any class of voting
securities registered under Exchange Act or (iii) any class of voting securities
qualified for trading in a national market system, but not thereafter.
The Business Combination Law also permits a corporation's board of
directors, when considering the best interests of the corporation, to consider
the long-term as well as the short-term interests of the corporation and its
shareholders, including the possibility that those interests may be best served
by the continued independence of the corporation.
13. FEES AND EXPENSES
The Company has retained BT Alex. Brown as its financial advisor in
connection with the Offer and the Merger and as Dealer Manager for the Offer.
Pursuant to the terms of BT Alex. Brown's engagement, the Company has agreed to
pay BT Alex. Brown upon consummation of the Offer an aggregate financial
advisory fee equal to 0.60% of the total consideration (including liabilities
assumed) payable in the Offer and the Merger for its services as financial
advisor and Dealer Manager. In addition, the Company has agreed to reimburse BT
Alex. Brown for its reasonable out-of-pocket expenses, including reasonable fees
and disbursements of counsel, and to indemnify BT Alex. Brown and certain
related parties against certain liabilities, including certain liabilities under
the federal securities laws, relating to, or arising out of, its engagement.
The Company has retained Georgeson & Company Inc. as Information Agent and
Boston EquiServe, L.P. as Depositary in connection with the Offer. The
Information Agent and the Depositary will each receive reasonable and customary
compensation for customary services in connection with the Offer and will be
reimbursed for customary and reasonable out-of-pocket expenses. The Company has
agreed to indemnify the Information Agent and the Depositary against certain
liabilities in connection with the Offer, including certain liabilities under
the federal securities laws. Neither the Information Agent nor the Depositary
has been retained to, or is authorized to, make solicitations or recommendations
in connection with the Offer.
The Company will not pay any fees or commissions to any broker, dealer,
commercial bank, trust company or other person for soliciting Shares pursuant to
the Offer. The Company will, however, on request, reimburse such persons for
customary handling and mailing expenses incurred in forwarding materials in
respect of the Offer to the beneficial owners for which they act as nominees. No
broker, dealer, commercial bank or trust company has been authorized to act as
an agent for the Company for the purpose of the Offer. The Company will not pay
(or cause to be paid) any stock transfer taxes on its purchase of Shares
pursuant to the Offer, except as otherwise provided in Instruction 6 of the
Letter of Transmittal.
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<PAGE> 49
Estimated costs and fees in connection with the Transactions, all of which
are the obligation of the Company if the Transactions is consummated, are as
follows:
<TABLE>
<S> <C>
Financing and commitment costs................................. $19,150,000
Legal, accounting and other professional fees.................. 5,225,000
Financial advisory fees........................................ 5,582,000
Filing fees.................................................... 221,000
Printing and distribution costs................................ 500,000
Severance, incentive payments and related expenses............. 5,944,000
Transaction fee................................................ 8,500,000
Miscellaneous.................................................. 435,000
--------
TOTAL.......................................................... $45,552,000
========
</TABLE>
See "SPECIAL FACTORS--The Transaction Agreement, the Support Agreement and
the Agreement Among Bidders" for a description of certain provisions for the
reimbursement by the Company of certain fees and expenses, incurred by
Purchasers. See "SPECIAL FACTORS--Opinion of BT Alex. Brown Incorporated" for a
description of the fees payable to BT Alex. Brown.
14. CERTAIN INFORMATION CONCERNING PURCHASERS
RCBA.
RCBA Purchaser I, L.P. is a Delaware limited partnership formed for the
purpose of effecting the Offer and Merger and has conducted no business
otherwise. Its principal executive office is located at 909 Montgomery Street,
Suite 400, San Francisco, California 94133.
Richard C. Blum & Associates, Inc., a California corporation ("RCBA Inc."),
is the general partner of Richard C. Blum & Associates, L.P., a California
limited partnership ("RCBA L.P."), which is the sole partner of the partnership
at this time. RCBA Inc. is in turn controlled, for purposes of the federal
securities laws, by Richard C. Blum, the Chairman and a substantial shareholder
of RCBA Inc.
RCBA L.P. is the general partner or investment adviser to Stinson Capital
Partners, L.P., a California limited partnership ("Stinson"); BK Capital
Partners IV, L.P., a California limited partnership ("BK IV"); the Carpenters
Pension Trust for Southern California (the "Carpenters Trust"); United
Brotherhood of Carpenters and Joiners of America Local Unions and Councils
Pension Fund ("UBC"); and Insurance Company Supported Organizations Pension Plan
("ICSOPP"). Stinson and BK IV are each a California limited partnership whose
principal business is investing in securities, and whose principal office is
located at 909 Montgomery Street, Suite 400, San Francisco, California 94133.
RCBA L.P. is a California limited partnership whose principal business is
acting as general partner for investment partnerships and providing investment
advisory and financial consulting services. RCBA L.P. is a registered investment
adviser with the Securities and Exchange Commission. The sole general partner of
RCBA L.P. is RCBA Inc. The principal business office address of RCBA L.P. and
RCBA Inc. is 909 Montgomery Street, Suite 400, San Francisco, California 94133.
Richard C. Blum, Nils Colin Lind, Jeffrey W. Ubben, William C. Johnston,
John C. Walker, Murray A. Indick, George F. Hamel, Jr., Marc T. Scholvinch and
Thomas L. Kempner are the directors and executive officers of RCBA Inc. Messrs.
Blum, Ubben, Johnston, Walker, Indick, Hamel, Schlolvinch and Kempner is each a
citizen of the United States of America and Mr. Lind is a citizen of Norway.
Messrs. Blum, Lind, Ubben, Johnston, Walker, Indich, Hamel and Schlolvinch
each has as his principal business address 909 Montgomery Street, Suite 400, San
Francisco, California 94133. Mr. Kempner has as his business address 40 Wall
Street, New York, New York 10005.
RCBA is a strategic equity investor, based in San Francisco, with more than
$1.2 billion in domestic assets under management and a twenty year investment
performance record. RCBA's investment strategy is to
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<PAGE> 50
source negotiated private equity transactions with minority strategic block
investments through the public market. RCBA sources its investments by
identifying companies (or industries) undergoing change, which represent good
businesses available at compelling values and where the opportunity exists to
build relationships with management and subsequently implement strategies or
extraordinary transactions to provide a superior return on investments.
Fremont.
Fremont Purchaser II, Inc. is a Delaware Corporation formed for the purpose
of effecting the Transactions and has conducted no business otherwise. Its
principal office is located at 50 Fremont Street, Suite 3700, San Francisco,
California 94105.
Fremont Acquisition Company II, L.L.C. is the parent of Fremont Purchaser
II, Inc. Its principal office is located at 50 Fremont Street, Suite 3700, San
Francisco, California 94105.
Fremont Partners, L.P., a Delaware limited partnership and the managing
member of Fremont Acquisition II, L.L.C., is a private investment fund
headquartered in San Francisco with committed capital of approximately $605
million. Its principal office is located at 50 Fremont Street, Suite 3700, San
Francisco, California 94105.
FP Advisors, L.L.C., a Delaware limited liability company is the sole
general partner of Fremont Partners, L.P. Its principal office is located at 50
Fremont Street, Suite 3700, San Francisco, California 94105.
Fremont Group, L.L.C., a Delaware limited liability company, is the sole
managing member of FP Advisors, L.L.C. Its principal office is located at 50
Fremont Street, Suite 3700, San Francisco, California 94105.
Fremont Investors, Inc., a Nevada corporation, is the sole managing member
of Fremont Group, L.L.C. Its principal office is located at 50 Fremont Street,
Suite 3700, San Francisco, California 94105.
Fremont is a private investment company managing over $7.4 billion of
assets.
Alan M. Dachs, Stephen D. Bechtel, Jr., Richard E. Cavanagh, Harold J.
Haynes, Cordell W. Hull, Robert Jaunich II, Gilbert H. Lamphere, David L. Redo,
George P. Shultz, John W. Weiser, Joseph D. Mahaffey, Jon S. Higgins, Richard S.
Kopf and David W. Aronson are the directors and/or executive officers of Fremont
Investors, Inc. Each is citizen of the United States and each has as his
principal place of business 50 Fremont Street, Suite 3700, San Francisco,
California 94105.
15. RECAPITALIZATION ACCOUNTING
The Transactions will be accounted for as a recapitalization, consisting of
Debt Financing, an equity investment by Purchasers of $155.6 million and the
cancellation of certain Shares in the Offer for the Per Share Amount and in the
Merger in exchange for the Merger Consideration.
16. MISCELLANEOUS
The Company is not aware of any jurisdiction in which the making of the
Offer is prohibited by any administrative or judicial action pursuant to any
valid state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of Shares pursuant
thereto, the Company will make a good faith effort to comply with any such state
statute. If, after such good faith effort, the Company cannot comply with any
such state statute, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of Shares in such state. In any jurisdiction
where the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer shall be deemed to be made on behalf of the
Company by the Dealer Manager or by one or more registered brokers or dealers
licensed under the laws of such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO
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<PAGE> 51
PURCHASE OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Pursuant to Section 13(e)(1) of the Exchange Act, the Company has filed
with the Commission the Schedule 13E-4 together with exhibits, furnishing
additional information with respect to the Offer. The Company has filed a
statement on Schedule 13E-3 with respect to the Offer and may file amendments to
the Schedule 13E-3. Such statements, including exhibits and any amendments
thereto, which furnish certain additional information with respect to the Offer
may be inspected at, and copies may be obtained from, the same places and in the
same manner as set forth in "THE TENDER OFFER -- Section 7. Certain Information
Concerning the Company" (except that they will not be available at the regional
offices of the Commission).
Kinetic Concepts, Inc.
October 8, 1997
50
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SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information is set forth below concerning the executive officers of
the Company, each of whom has been elected to serve until the 1998 annual
meeting of directors and until his successor is duly elected and qualified. The
executive officers of the Company and their ages and positions as of October 1,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
James R. Leininger, M.D................ 53 Chairman of the Board
of Directors
Raymond R. Hannigan.................... 58 Director, President and
Chief Executive Officer
Peter A. Leininger, M.D................ 54 Director and Executive Vice
President
Sam A. Brooks.......................... 58 Director
Frank A. Ehmann........................ 63 Director
Wendy L. Gramm......................... 52 Director
Bernhard T. Mittemeyer................. 66 Director
Dennis E. Noll......................... 42 Senior Vice President,
General Counsel and Secretary
Frank DiLazzaro........................ 39 President, KCI International
Christopher M. Fashek.................. 48 President, KCI Therapeutic
Services
Richard C. Vogel....................... 43 Vice President and General
Manager, NuTech
Michael C. Wells....................... 45 Vice President and General
Manager, KCI Home Care
John H. Vrzalik, Sr. .................. 54 Vice President, Engineering
Martin J. Landon....................... 38 Vice President, Accounting
and Corporate Controller
Michael J. Burke....................... 50 Vice President,
Manufacturing
Scott S. Brooks........................ 49 Vice President, National
Accounts
Larry P. Baker......................... 43 Vice President, Corporate
Services
George P. Peace........................ 42 Vice President, Information
Systems
</TABLE>
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. James Leininger served as President and Chief Executive Officer of the
Company. From 1975 until October 1986, Dr. James Leininger was also the Chairman
of the Emergency Department of the Baptist Hospital System in San Antonio,
Texas.
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
I-1
<PAGE> 53
the southeast regional distributor for the Company's products. Peter A.
Leininger, M.D. is the brother of James R. Leininger, M.D.
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), Renal Care Group, Inc. (a nephrology
practice management company), Quorum Health Group, Inc. (a hospital management
company) and PhyCor, Inc. (a physician management company), each of which has
securities registered under the Exchange Act. Mr. Brooks has served as the
Chairman of the Board of MedSolutions, Inc. (a radiology medical management
company) since 1992, President and Chief Executive Officer of the Renal Care
Group, Inc. (a nephrology practice management company) since July 1995 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 (an automotive parts manufacturer), American Health
Corp., Inc. (a diabetes treatment provider) and AHA Investment Funds, Inc. (an
investment advisory company). SPX Corporation, American Health Corp. and AHA
Investment Funds have securities registered under the Exchange Act. 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).
Wendy L. Gramm, Ph.D. has served as a Director of the Company since 1996.
Dr. Gramm is an economist, holding a Ph.D from Northwestern University and a
B.A. from Wellesley College, both in economics. She chaired the Commodity
Futures Trading Commission from 1988-1993. Prior to 1988, Dr. Gramm served as
Administrator for Information and Regulatory Affairs at the Office of Management
and Budget, Executive Director of the Presidential Task Force on Regulatory
Relief, Director of the Bureau of Economics at the Federal Trade Commission and
research economist at the Institute for Defense Analyses. She also was a
professor of economics at Texas A&M University. Dr. Gramm currently directs the
Regulatory Analysis Program at the Center for Study of Public Choice at George
Mason University in Virginia. She has also been named to the Boards of Directors
of the Chicago Merchantile Exchange (a commodities exchange), Enron Corp. (an
energy company), IBP, Inc. (a meat processing company), and State Farm Insurance
Companies (an insurance company) and Invesco Funds Group, Inc. (a mutual fund
company). Enron Corp. and IBP, Inc. have securities registered under the
Exchange Act.
Bernhard T. Mittemeyer, M.D. has served as a Director of the Company since
1987. Dr. Mittemeyer currently is a Professor of Urological Surgery at the Texas
Tech University School of Medicine. Dr. Mittemeyer served as Executive Vice
President and Provost of the Texas Tech University Health Science Center from
1986 until 1996. 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.
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.
Frank DiLazzaro joined the Company in 1988 as General Manager, KCI Medical
Canada. Mr. DiLazzaro served as Vice President, KCI International from June 1989
to December 1992. Mr. DiLazzaro has served as President, KCI International since
January 1993 and was Vice President, Marketing from April 1993 to September
1995.
I-2
<PAGE> 54
Christopher M. Fashek joined the Company in February 1995 as President of
KCI Therapeutic Services. 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.
Richard C. Vogel joined the Company as its Vice President and General
Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr. Vogel served as
Executive Vice President of Vestar, Inc., a California-based biotechnology
company.
Michael C. Wells joined the Company as Regional Vice President, KCI
Therapeutic Services, in August 1994 and served in that role until June 1996
when he was promoted to the position of Vice President and General Manager, KCI
Home Care. Prior to joining the Company, he served in Sales Management and
Infusion Management roles from 1988 to August 1994 with Homedco, which currently
operates today as the Apria Healthcare Group. From 1978 to 1988, Mr. Wells held
Marketing and Sales Management positions with Baxter Healthcare, formerly
American Hospital Supply Corporation.
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.
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.
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, where he
served as Vice President, Manufacturing and as General Manager, Sterling Health
HK/China since 1992.
Scott S. Brooks joined the Company in July of 1989 as Director of Sales and
Marketing for Simmons Healthcare. In November of 1989, he was promoted to the
position of Vice President, Sales and Marketing for Simmons Healthcare. In July
of 1990, Mr. Brooks served as Vice President of Sales and Marketing for Medical
Services. From April 1991 to March 1993, Mr. Brooks served as Regional Vice
President of KCI Therapeutic Services. From April 1993 to February 1994, Mr.
Brooks served as Vice President, National Accounts of the Company. From March
1994 to March 1995, Mr. Brooks served as the President of Medical Retro Design,
a subsidiary of the Company. Since 1975, Mr. Brooks has held the position of
Vice President of National Accounts.
Larry P. Baker joined the Company in 1987 as the Director of Human
Resources. Since 1993, Mr. Baker has held the position of Vice President,
Corporate Services.
George P. Peace joined the Company in November 1994 as Vice President of
Information Systems. From October 1992 to October 1994, Mr. Peace served as Vice
President of Information Systems of La Quinta Inns, Inc. Prior to October 1992,
Mr. Peace served as Director of Information Systems Operations of La Quinta
Inns, Inc.
I-3
<PAGE> 55
SCHEDULE II
[BT ALEX. BROWN INCORPORATED LETTERHEAD]
October 1, 1997
Board of Directors
Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, Texas 78230
Members of the Board:
Kinetic Concepts, Inc., a Texas corporation ("KCI"), Fremont Purchaser II,
Inc., a Delaware corporation ("F Purchaser"), and RCBA Purchaser I, L.P., a
Delaware limited partnership ("B Purchaser" and, together with F Purchaser, the
"Purchasers"), have proposed to enter into a Transaction Agreement (the
"Agreement"). Pursuant to the Agreement, the implementation of which is
contingent on, among other things, completion of debt and equity financing, KCI
will commence a tender offer to purchase all outstanding shares of the common
stock, par value $0.001 per share, of KCI (the "KCI Common Stock"), other than a
portion of such shares held by B Purchaser and its affiliates and certain other
shareholders of KCI who will retain an equity interest in KCI (the "Roll-over
Shareholders"), at a purchase price of $19.25 per share, net to the seller in
cash (the "Tender Offer"). The Agreement also provides that, following such
Tender Offer, each Purchaser will be merged with and into KCI (the "Merger" and,
together with the Tender Offer, the "Transaction") pursuant to which each
outstanding share of KCI Common Stock not previously tendered (other than those
shares held by Roll-over Shareholders) will be converted into the right to
receive $19.25 in cash. We have assumed, with your consent, that the Transaction
will be treated as a recapitalization for financial reporting purposes. You have
requested our opinion as to whether the cash consideration to be received in the
Transaction by the holders of KCI Common Stock (other than Roll-over
Shareholders) is fair, from a financial point of view, to such holders.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of KCI in
connection with the Transaction and will be acting as dealer manager for the
Tender Offer and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Transaction and a portion of
which is payable upon the delivery of this opinion. We previously have acted as
a co-managing underwriter in connection with public offerings of KCI Common
Stock and, with your consent, will be acting as a lead managing underwriter of
the proposed offering of senior subordinated debt securities to be issued to
finance the Transaction, for which services we have received and will receive
compensation. Affiliates of BT Alex. Brown also will be participating, with your
consent, as documentation agent and a syndicated lender in the senior secured
credit facility for the financing of the Transaction, for which services such
affiliates will receive compensation. BT Alex. Brown maintains a market in KCI
Common Stock and regularly publishes research reports regarding the health care
industry and the businesses and securities of KCI and other publicly owned
companies in the health care industry. In the ordinary course of business, BT
Alex. Brown may actively trade the securities of KCI for our own account and the
account of our customers and, accordingly, may at any time hold a long or short
position in securities of KCI.
In connection with this opinion, we have reviewed and analyzed certain
publicly available financial information and other information concerning KCI
and certain internal analyses and other information furnished to us by KCI. We
have also held discussions with the members of the senior management of KCI and
representatives of the Purchasers regarding the business and prospects of KCI.
In addition, we have (i) reviewed the reported prices and trading activity for
KCI Common Stock, (ii) compared certain financial and stock market information
for KCI with similar information for certain other companies whose securities
II-1
<PAGE> 56
Board of Directors
Kinetic Concepts, Inc.
October 1, 1997
Page 2
are publicly traded, (iii) reviewed the financial terms of certain recent
business combinations which we deemed comparable in whole or in part, (iv)
reviewed the terms of the Agreement as furnished to us in draft form, and (v)
performed such other studies and analyses and considered such other factors as
we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of KCI, we
have assumed that such information reflects the best currently available
judgments and estimates of the management of KCI as to the likely future
financial performance of KCI. We also have assumed, with your consent, that the
final terms of the Agreement reviewed by us in draft form will not vary
materially from the draft reviewed by us. In addition, we have not made an
independent evaluation or appraisal of the assets or liabilities of KCI, nor
have we been furnished with any such evaluations or appraisals. Our opinion is
based on market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
In connection with our engagement to provide financial advisory services to
the Board of Directors concerning strategic alternatives, we were authorized to
solicit, and did solicit, interest from third parties with respect to the
acquisition of KCI. In arriving at our opinion, we have considered the nature,
scope and results of such solicitation.
Our advisory services and the opinion expressed herein were prepared for
the use of the Board of Directors of KCI and do not constitute a recommendation
to any shareholder as to whether or not any such shareholder should tender
shares of KCI Common Stock in the Tender Offer or how such shareholder should
vote on the proposed Merger. We hereby consent to the inclusion of this opinion
in its entirety as an exhibit to the tender offer or proxy statement of KCI
distributed in connection with the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the cash consideration to be received in the Transaction by
the holders of KCI Common Stock (other than Roll-over Shareholders) is fair,
from a financial point of view, to such holders.
Very truly yours,
/s/ BT ALEX. BROWN INCORPORATED
--------------------------------------
BT ALEX. BROWN INCORPORATED
II-2
<PAGE> 57
SCHEDULE III
TEXAS BUSINESS CORPORATION ACT
ARTICLES 5.11-5.13
DISSENTER'S RIGHTS
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation if
special authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation
system) or designated as a national market security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any
consideration that is different than the consideration (other than cash in
lieu of fractional shares that the shareholder would otherwise be entitled
to receive) to be provided to any other holder of shares of the same class
or series of shares held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any
consideration other than:
(a) shares of a domestic or foreign corporation that, immediately
after the effective time of the merger or exchange, will be part of a
class or series, shares of which are:
(i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange;
(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be
received; or
(c) any combination of the securities and cash described in
Subdivisions (a) and (b) of this subsection.
III-1
<PAGE> 58
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90)
III-2
<PAGE> 59
days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to
have any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
III-3
<PAGE> 60
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
III-4
<PAGE> 61
SCHEDULE IV
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Annual Financial Statements
Report of Independent Auditors...................................................... IV-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ IV-3
Consolidated Statements of Earnings for the Years Ended December 31, 1996, 1995 and
1994............................................................................. IV-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995
and 1994......................................................................... IV-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1996, 1995 and 1994.............................................................. IV-6
Notes to Consolidated Financial Statements.......................................... IV-7
</TABLE>
IV-1
<PAGE> 62
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, 1996 and 1995, and the
related consolidated statements of earnings, cash flows and shareholders' equity
for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company changed its method of applying overhead to inventory in 1994.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 5, 1997
IV-2
<PAGE> 63
CONSOLIDATED BALANCE SHEETS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 59,045 $ 52,399
Accounts receivable, net............................................. 58,241 56,032
Inventories.......................................................... 20,042 18,854
Note receivable from principal shareholder........................... -- 10,291
Prepaid expenses and other........................................... 6,860 4,865
-------- --------
Total current assets......................................... 144,188 142,441
-------- --------
Net property, plant and equipment...................................... 65,224 62,276
Other notes receivable, net............................................ -- 3,187
Goodwill, less accumulated amortization of $12,021 in 1996 and
$10,625 in 1995...................................................... 13,541 13,968
Other assets, less accumulated amortization of $5,614 in 1996 and
$5,638 in 1995....................................................... 30,440 21,854
-------- --------
$253,393 $243,726
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 3,974 $ 2,512
Current installments of capital lease obligations.................... 118 --
Accrued expenses..................................................... 29,792 26,490
Income tax payable................................................... 2,970 4,026
-------- --------
Total current liabilities.................................... 36,854 33,028
-------- --------
Capital lease obligations, excluding current installments.............. 396 --
Deferred income taxes, net............................................. 5,065 374
-------- --------
42,315 33,402
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock; issued and outstanding 42,355 in 1996 and 44,331 in
1995................................................................. 42 44
Additional paid-in capital............................................. -- 12,123
Retained earnings...................................................... 210,816 197,290
Cumulative foreign currency translation adjustment..................... 555 1,052
Notes receivable from officers......................................... (335) (185)
-------- --------
211,078 210,324
-------- --------
$253,393 $243,726
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-3
<PAGE> 64
CONSOLIDATED STATEMENT OF EARNINGS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Rental and service....................................... $225,450 $206,653 $228,832
Sales and other.......................................... 44,431 36,790 40,814
-------- -------- --------
Total revenue......................................... 269,881 243,443 269,646
-------- -------- --------
Rental expenses............................................ 146,205 137,420 159,235
Cost of goods sold......................................... 16,315 13,729 19,388
-------- -------- --------
162,520 151,149 178,623
-------- -------- --------
Gross profit.......................................... 107,361 92,294 91,023
Selling, general and administrative expenses............... 52,007 48,502 51,813
Unusual items.............................................. -- -- (84,868)
-------- -------- --------
Operating earnings.................................... 55,354 43,792 124,078
Interest income (expense), net............................. 9,087 4,554 (4,528)
-------- -------- --------
Earnings before income taxes, minority interest and
cumulative effect of change in accounting
principle........................................... 64,441 48,346 119,550
Income taxes............................................... 25,454 19,905 55,949
-------- -------- --------
Earnings before minority interest and cumulative
effect of change in accounting principle............ 38,987 28,441 63,601
Minority interest in subsidiary loss....................... -- -- 40
Cumulative effect of change in accounting for inventory.... -- -- 742
-------- -------- --------
Net earnings.......................................... $ 38,987 $ 28,441 $ 64,383
======== ======== ========
Earnings per common and common equivalent share:
Earnings before cumulative effect of change in accounting
principle............................................. $ 0.86 $ 0.63 $ 1.44
Cumulative effect of change in accounting for
inventory............................................. -- -- 0.02
-------- -------- --------
Earnings per share.................................... $ 0.86 $ 0.63 $ 1.46
======== ======== ========
Shares used in earnings per share computations............. 45,489 45,457 44,143
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-4
<PAGE> 65
CONSOLIDATED STATEMENTS OF CASH FLOWS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 38,987 $ 28,441 $ 64,383
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 21,794 22,760 38,795
Provision for uncollectible accounts receivable...... 2,457 1,883 1,100
Noncash portion of unusual items..................... -- -- 4,797
Loss (gain) on KCIFS and Medical Services
dispositions....................................... -- 2,933 (10,121)
Gain on early repayment of notes receivable.......... (5,180) -- --
Change in assets and liabilities net of effects from
purchase of subsidiaries and unusual items:
Decrease (increase) in accounts receivable, net.... (4,626) (2,695) 7,316
Decrease (increase) in notes receivable............ 3,187 6,014 (9,201)
Decrease (increase) in inventory................... (1,034) (998) 2,735
Decrease (increase) in prepaid and other assets.... (1,927) (593) 3,947
Increase (decrease) in accounts payable............ 1,525 (895) (3,672)
Increase (decrease) in accrued expenses............ 3,349 (520) 2,781
Increase (decrease) in income taxes payable........ (1,056) (3,999) 5,378
Increase (decrease) in deferred income taxes....... 4,691 4,451 (11,787)
-------- -------- ---------
Net cash provided by operating activities....... 62,167 56,782 96,451
-------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.............. (27,783) (36,104) (13,814)
Decrease (increase) in inventory to be converted into
equipment for short-term rental...................... 700 (1,000) 4,250
Dispositions of property, plant and equipment........... 5,400 3,231 2,869
Proceeds from sale of KCIFS and Medical Services
divisions............................................ -- 7,182 65,300
Excess principal repayment on discounted notes
receivable........................................... 5,180 -- --
Business acquired in purchase transactions, net of cash
acquired............................................. (1,146) -- --
Decrease (increase) in finance lease receivables, net... -- 339 (1,561)
Note (received) repaid from principal shareholder....... 10,000 (10,000) --
Increase in other assets................................ (9,960) (6,531) (9,230)
-------- -------- ---------
Net cash provided (used) by investing
activities.................................... (17,609) (42,883) 47,814
-------- -------- ---------
Cash flows from financing activities:
Repayments of notes payable and long-term obligations... -- (800) (102,625)
Borrowing (repayments)of capital lease obligations...... 457 (64) (2,382)
Proceeds from the exercise of stock options............. 4,264 4,919 915
Purchase and retirement of treasury stock............... (35,241) (2,849) (1,157)
Cash dividends paid to shareholders..................... (6,607) (6,631) (6,588)
Other................................................... (150) (185) (791)
-------- -------- ---------
Net cash used by financing activities........... (37,277) (5,610) (112,628)
-------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................. (635) 869 1,324
-------- -------- ---------
Net increase in cash and cash equivalents................. 6,646 9,158 32,961
Cash and cash equivalents, beginning of year.............. 52,399 43,241 10,280
-------- -------- ---------
Cash and cash equivalents, end of year.................... $ 59,045 $ 52,399 $ 43,241
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-5
<PAGE> 66
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION TREASURY LOAN TO
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK ESOP
------ ---------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993................. $ 46 $ 18,803 $117,685 $ (1,602) $(8,510) $(655)
Net earnings................................ -- -- 64,383 -- -- --
Exercise of stock options................... -- 803 -- -- -- --
Forgiveness of officer receivable........... -- -- -- -- -- --
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
preferred stock -- $0.15 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................................ -- -- 28,441 -- -- --
Exercise of stock options................... -- 4,024 -- -- -- --
Tax benefit realized from stock
option plan............................... -- 895 -- -- -- --
Treasury stock purchased.................... -- -- -- -- (2,849) --
Treasury stock retired...................... -- (2,849) -- -- 2,849 --
Cash dividends on common stock -- $0.15 per
share..................................... -- -- (6,631) -- -- --
Foreign currency translation adjustment..... -- -- -- 1,206 -- --
--- ------- -------- ------- ------- -----
Balances at December 31, 1995................. 44 12,123 197,290 1,052 -- --
--- ------- -------- ------- ------- -----
Net earnings................................ -- -- 38,987 -- -- --
Exercise of stock options................... -- 2,098 -- -- -- --
Tax benefit realized from stock
option plan............................... -- 2,166 -- -- -- --
Treasury stock purchased.................... -- -- -- -- (35,241) --
Treasury stock retired...................... (2) (16,387) (18,854) -- 35,241 --
Cash dividends on common stock -- $0.15 per
share..................................... -- -- (6,607) -- -- --
Foreign currency translation adjustment..... -- -- -- (497) -- --
--- ------- -------- ------- ------- -----
Balances at December 31, 1996................. $ 42 $ -- $210,816 $ 555 $ -- $ --
=== ======= ======== ======= ======= =====
<CAPTION>
NOTES RECEIVABLE FROM TOTAL
OFFICERS FOR EXERCISE SHAREHOLDERS'
OF STOCK OPTIONS EQUITY
--------------------- -------------
<S> <<C> <C>
Balances at December 31, 1993................. $ (60) $ 125,707
Net earnings................................ -- 64,383
Exercise of stock options................... -- 803
Forgiveness of officer receivable........... 60 60
Tax benefit realized from stock option
plan...................................... -- 112
Treasury stock purchased.................... -- (1,157)
Treasury stock retired...................... -- --
Cash dividends on common and preferred
preferred stock -- $0.15 per share........ -- (6,588)
Payments on loan to ESOP.................... -- 655
Foreign currency translation adjustment..... -- 1,448
----- --------
Balances at December 31, 1994................. -- 185,423
----- --------
Net earnings................................ -- 28,441
Exercise of stock options................... (185) 3,839
Tax benefit realized from stock
option plan............................... -- 895
Treasury stock purchased.................... -- (2,849)
Treasury stock retired...................... -- --
Cash dividends on common stock -- $0.15 per
share..................................... -- (6,631)
Foreign currency translation adjustment..... -- 1,206
----- --------
Balances at December 31, 1995................. (185) 210,324
----- --------
Net earnings................................ -- 38,987
Exercise of stock options................... (150) 1,948
Tax benefit realized from stock
option plan............................... -- 2,166
Treasury stock purchased.................... -- (35,241)
Treasury stock retired...................... -- (2)
Cash dividends on common stock -- $0.15 per
share..................................... -- (6,607)
Foreign currency translation adjustment..... -- (497)
----- --------
Balances at December 31, 1996................. $(335) $ 211,078
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-6
<PAGE> 67
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 1996 presentation.
(b) Nature of Operations and Customer Concentration
The Company designs, manufactures, markets and distributes therapeutic
products, primarily specialty hospital beds, mattress overlays and medical
devices that treat and prevent the complications of immobility. The principal
markets for the Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities throughout the
U.S. and Western Europe. Receivables from these customers are unsecured.
The Company contracts with both proprietary and voluntary purchasing
organizations ("GPOs"). Proprietary GPOs own all of the hospitals which they
represent and, as a result, can ensure complete compliance with an executed
national agreement. Voluntary GPOs negotiate contracts on behalf of member
hospital organizations but cannot ensure that their members will comply with the
terms of an executed national agreement. Approximately 47% of the Company's
revenue during 1996 was generated under national agreements with GPOs.
The Company operates directly in ten foreign countries including Germany,
Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland,
Australia, Sweden and Italy (see Note 13).
(c) 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 (see Note 2).
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
(e) 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.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments which extend
the useful life of the equipment are capitalized.
IV-7
<PAGE> 68
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) 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.
(h) 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.
(i) Other Assets
Other assets consist principally of patents, trademarks, system development
costs, long-term investments, cash and investments restricted for use by the
Company's captive insurance company, and the estimated residual value of assets
subject to leveraged leases. Patents and trademarks are amortized over the
estimated useful life of the respective asset using the straight-line method.
(j) 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.
(k) Common Stock and Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed by dividing
net earnings 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.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) Insurance Programs
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
IV-8
<PAGE> 69
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company's wholly-owned captive insurance company, KCI Insurance
Company, Ltd. (the "Captive"), reinsures the primary layer of commercial general
liability, workers' compensation and auto liability insurance for certain
operating subsidiaries. Provisions for losses expected under these programs are
recorded based upon 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.
(n) 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.
(o) Stock Options
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". The new Statement allows companies to continue accounting for
stock-based compensation under the provisions of APB Opinion 25, "Accounting for
Stock Issued to Employees"; however, companies are encouraged to adopt a new
accounting method based on the estimated fair value of employee stock options.
Companies that do not follow the new fair value based method will be required to
provide expanded disclosures in footnotes to the financial statements. The
Company has elected to continue accounting for stock-based compensation under
the provisions of APB Opinion 25 and has provided the required by disclosures
(See Note 9).
NOTE 2. ACQUISITIONS AND DISPOSITIONS
On June 15, 1995, the Company sold KCI Financial Services ("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 in 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.
In December of 1994, the Company adopted a plan to liquidate the assets of
Medical Retro Design, Inc. ("MRD"). Pursuant to that plan, the Company sold
certain operating assets of MRD to HBR Healthcare Co. under an Asset Purchase
Agreement effective March 27, 1995. The sales price was approximately $250,000.
In conjunction with the sale, KCI and its affiliates agreed not to refurbish
certain hospital beds and related furniture for a period of three years.
Goodwill of $1.5 million associated with MRD was written off in 1994. The
write-off was treated as an unusual item. The operating results of MRD for 1995
and 1994 were immaterial to the overall results of the Company.
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.
IV-9
<PAGE> 70
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.
During the second quarter of 1996, the Company acquired Astec Medical, a
small overlay company in the United Kingdom. This firm produces a well-received
product which will enable the Company to further penetrate the community
hospital market throughout Europe.
Subsequent to December 31, 1996, the Company acquired H.F. Systems, Inc. of
Los Angeles. H.F. Systems offers a complete line of therapeutic specialty
support surfaces primarily to the West Coast extended care marketplace. The
purchase price was approximately $8 million in cash and other considerations.
NOTE 3. NOTES RECEIVABLE
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 was secured by a Stock Pledge Agreement covering one million
shares of common stock in Kinetic Concepts, Inc. Interest was payable in annual
installments at the rate of 7.94%. In January 1996, the note receivable was
collected in full.
Other notes receivable included notes received from Mediq/PRN as part of
the proceeds on the sale of Medical Services effective September 30, 1994. 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. In October of 1996, the Company negotiated the early repayment
of all remaining notes for $8.5 million, plus interest accrued through closing.
As a result of this transaction, the Company recognized a one-time gain of $5.2
million before income taxes which has been included as interest income as of
IV-10
<PAGE> 71
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996. The values of the various notes receivable at December 31,
1995 for accounting purposes are described below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PRINCIPAL BALANCE
-------------------
1996 1995
------- -------
<S> <C> <C>
Note from PRN Holding, Inc. with 10% interest due
quarterly in arrears beginning March 1996 and principal
due
September 1999......................................... $ -- $10,000
Less discount and valuation allowance.................... -- (6,813)
------- -------
Notes receivable, noncurrent............................. $ -- $ 3,187
======= =======
</TABLE>
NOTE 4. SUPPLEMENTAL BALANCE SHEET DATA
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Trade accounts receivable................................ $63,613 $60,149
Employee and other receivables........................... 2,160 2,060
------- -------
65,773 62,209
Less allowance for doubtful receivables.................. 7,532 6,177
------- -------
$58,241 $56,032
======= =======
</TABLE>
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods........................................... $ 5,586 $ 2,890
Work in process.......................................... 1,893 1,040
Raw materials, supplies and parts........................ 17,113 20,174
------- -------
24,592 24,104
Less amounts expected to be converted into equipment for
short-term rental...................................... 4,550 5,250
------- -------
$20,042 $18,854
======= =======
</TABLE>
Net property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land................................................... $ 1,007 $ 742
Buildings.............................................. 14,254 13,418
Equipment for short-term rental........................ 133,896 110,858
Machinery, equipment and furniture..................... 36,821 27,610
Leasehold improvements................................. 1,388 1,042
Inventory to be converted into equipment............... 4,550 5,250
-------- --------
191,916 158,920
Less accumulated depreciation and amortization......... 126,692 96,644
-------- --------
$ 65,224 $ 62,276
======== ========
</TABLE>
IV-11
<PAGE> 72
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
-------------------
1996 1995
------- -------
<S> <C> <C>
Payroll, commissions and related taxes................... $13,162 $12,589
Insurance accruals....................................... 2,887 3,470
Other accrued expenses................................... 13,743 10,431
------- -------
$29,792 $26,490
======= =======
</TABLE>
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. NOTE PAYABLE AND LONG-TERM OBLIGATIONS
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 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
December 31, 1996, the entire $50 million balance 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, or (ii) the London
inter-bank 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, 1996, the Company was in compliance with all covenants.
Interest paid on debt during 1996, 1995 and 1994 amounted to $0.2 million,
$0.4 million and $5.4 million, respectively.
NOTE 6. LEASING OBLIGATIONS
The Company is obligated for equipment under various capital leases which
expire at various dates during the next four years. At December 31, 1996 the
gross amount of equipment under capital leases totaled $619,000 and related
accumulated depreciation totaled $175,000.
The Company 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 $13.5 million, $12.0 million and
$10.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
IV-12
<PAGE> 73
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997...................................................... $ 208 $10,498
1998...................................................... 160 7,947
1999...................................................... 160 5,221
2000...................................................... 93 3,771
2001...................................................... -- 1,073
Later years............................................... -- --
---- -------
Total minimum lease payments.............................. 621 $28,510
=======
Less amount representing interest......................... 107
----
Present value of net minimum capital lease payments....... 514
Less current portion...................................... 118
----
Obligations under capital leases excluding current
installments............................................ $ 396
====
</TABLE>
NOTE 7. INCOME TAXES
Earnings before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Domestic............................................. $51,771 $37,542 $110,287
Foreign.............................................. 12,670 10,804 9,263
------- ------- --------
$64,441 $48,346 $119,550
======= ======= ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal.............................................. $14,363 $4,464 $18,827
State................................................ 2,569 552 3,121
International........................................ 3,831 (325) 3,506
------- ------ -------
$20,763 $4,691 $25,454
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal.............................................. $ 8,148 $4,174 $12,322
State................................................ 2,140 277 2,417
International........................................ 5,166 -- 5,166
------- ------ -------
$15,454 $4,451 $19,905
======= ====== =======
</TABLE>
IV-13
<PAGE> 74
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the statutory tax rate of 35
percent to pre-tax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Computed "expected" tax expense....................... $22,554 $ 16,921 $41,843
Goodwill.............................................. 442 533 9,307
State income taxes, net of Federal benefit............ 2,028 1,571 4,846
Tax-exempt interest from municipal bonds.............. (445) -- --
Foreign income taxed at other than U.S. rates......... 1,145 1,836 350
Utilization of foreign net operating loss
carryforwards....................................... (123) (231) (814)
Nonconsolidated foreign net operating loss............ 67 492 566
Foreign, other........................................ (441) (1,450) 271
Effect of change in inventory accounting method....... -- -- 455
Other, net............................................ 227 233 (420)
------- ------- -------
$25,454 $ 19,905 $56,404
======= ======= =======
</TABLE>
IV-14
<PAGE> 75
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,
1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable, principally due to allowance for
doubtful accounts......................................... $ 4,458 $ 3,591
Intangible assets, deducted for book purposes but capitalized
and amortized for tax purposes............................ 1 323
Net operating loss carryforwards............................. 67 492
Inventories, principally due to additional costs capitalized
for tax purposes pursuant to the Tax Reform Act of 1986... 664 702
Notes receivable, basis difference........................... -- 397
Legal fees, capitalized and amortized for tax purposes....... 670 402
Accrued liabilities.......................................... 1,015 519
Deferred foreign tax asset................................... 325 --
Other........................................................ 1,089 41
-------- --------
Total gross deferred tax assets........................... 8,289 6,467
Less valuation allowance.................................. (67) (492)
-------- --------
Net deferred tax assets................................... 8,222 5,975
Deferred Tax Liabilities:
Plant and equipment, principally due to differences in
depreciation and basis.................................... (11,722) (5,686)
Deferred state tax liability................................. (973) (421)
Investments, principally due to differences in tax treatment
of certain components..................................... (506) --
Other........................................................ (86) (242)
-------- --------
Total gross deferred tax liabilities.................... (13,287) (6,349)
-------- --------
Net deferred tax liability........................... $ (5,065) $ (374)
======== ========
</TABLE>
At December 31, 1996, the Company had $1.1 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 $712,000 can be used
indefinitely and the remainder expire from 1997 through 2001.
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. In accordance with
the Company's accounting policy, U.S. deferred taxes have not been provided on
undistributed earnings of foreign subsidiaries at the end of 1996, as the
Company intends to reinvest these earnings permanently in the foreign operations
or to repatriate such earnings only when it is advantageous for the Company to
do so. The amount of the unrecognized tax liability for these undistributed
earnings was not material at the end of 1996 due to the availability of foreign
tax credits.
Income taxes paid during 1996, 1995 and 1994 were $15.4 million, $15.1
million and $57.3 million, respectively.
IV-15
<PAGE> 76
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. 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 the end of 1996 and 1995 was 42,355,000 and
44,331,000, respectively.
Treasury Stock:
In July, 1995, the Company's Board of Directors approved a program to
repurchase up to 3,000,000 shares of its Common Stock. The Company repurchased
2,563,000 shares during 1996 and 77,000 shares during 1995. As of December 31,
1996, there were 360,000 remaining shares to be repurchased in the program. 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 2,563,000 and 77,000
treasury shares in 1996 and 1995, respectively. Subsequent to 1996, the
Company's Board of Directors approved a program which authorizes the Company to
purchase up to an additional 3 million shares.
Preferred Stock:
The Company is authorized to issue up to 20 million shares of Redeemable
Preferred Stock, par value $0.001 per share, in one or more series. As of
December 31, 1996 and December 31, 1995, none were issued.
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, 1996, all shares of stock owned by the ESOP have been
allocated to employees. Based on the number of shares planned to be allocated
for the year, ESOP expense recorded during 1996, 1995 and 1994 amounted to $0,
$263,000 and $476,000, 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 1996, 1995 and 1994,
$498,000, $265,000 and $314,000, respectively, was charged to expense for
matching contributions.
NOTE 9. STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation". While the new
accounting standard encourages the adoption of a new fair-value method for
expense recognition, Statement 123 allows companies to continue accounting for
stock options and other stock-based awards as provided in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
Company has elected to follow the provisions of APB 25 and related
interpretations in accounting for its stock options plans because, as discussed
below, the alternative fair-value method prescribed by FASB Statement No. 123
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
IV-16
<PAGE> 77
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 1995 Kinetic Concepts, Inc. Senior Executive Management Stock Option
Plan (the "Senior Executive Stock Option Plan") covers a total of 1,400,000
shares of the Company's Common Stock and may be granted to certain senior
executives of the Company at the recommendation of the Chief Executive Officer
and discretion of the Company's Board of Directors. The exercise price for each
share of common stock covered by an option shall be established by the Board of
Directors but may not in any case be less than the fair market value of the
shares of common stock of the Company on the date of grant. Vesting of options
granted is subject to certain terms and conditions. The Senior Executive Stock
Option Plan is subject to final approval by the Company's shareholders.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair-value method of that
statement. The fair value for options granted during the two fiscal years ended
December 31, 1996 and 1995, respectively, was estimated using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates of 6.1% and 6.0%, dividend yields of 0.9% and 2.1%, volatility
factors of the expected market price of the Company's common stock of .32 and
.33, and a weighted-average expected option life of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
underlying assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net Earnings as Reported................................. $38,987 $28,441
Pro Forma Net Earnings................................... $37,996 $28,238
Earnings Per Share as Reported........................... $ 0.86 $ 0.63
Pro Forma Earnings Per Share............................. $ 0.84 $ 0.62
</TABLE>
The Company is not required to apply the method of accounting prescribed by
Statement 123 to stock options granted prior to January 1, 1995. As such, the
pro forma compensation cost reflected above may not be representative of future
results.
IV-17
<PAGE> 78
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summaries information about stock options outstanding
at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
OPTIONS CONTRACT AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 (YRS) PRICE AT 12/31/96 PRICE
- ----------------------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00 to $ 4.63................... 1,166 6.9 $ 4.22 594 $ 4.23
$ 5.00 to $ 9.50................... 1,272 7.5 $ 6.26 435 $ 6.14
$11.13 to $17.00................... 901 9.2 $15.61 292 $14.23
----- --- ------ ----- ------
3,339 8.0 $ 8.68 1,321 $ 7.07
===== === ====== ===== ======
</TABLE>
A summary of the Company's stock option activity, and related information,
for years ended December 31, 1996, 1995 and 1994 follows (options in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding -- Beginning of
Year................................ 2,833 $ 5.21 3,029 $ 4.50 2,668 $ 5.35
Granted............................. 1,317 $14.47 873 $ 6.89 2,124 $ 4.15
Exercised........................... (628) $ 5.05 (792) $ 4.56 (199) $ 4.07
Forfeited........................... (183) $ 9.34 (277) $ 4.57 (1,564) $ 5.53
----- ------ ----- ----- ------ -----
Options Outstanding -- End of Year.... 3,339 $ 8.68 2,833 $ 5.21 3,029 $ 4.50
===== ====== ===== ===== ====== =====
Exercisable at End of Year............ 1,321 $ 7.07
===== ======
Weighted-Average Fair Value of Options
Granted During the Year............. $ 5.80 $ 2.19
====== =====
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $17.00. The weighted average remaining contractual life of those
options is 8.0 years.
The following table summarizes the activity in the Company's 1987 Key
Contributor Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ ----------------------
<S> <C> <C>
Outstanding, January 1, 1994...................................... 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
----------------
------
Granted......................................................... 865 $5.50 to $11.75
Canceled........................................................ (277) $3.375 to $8.1875
Exercised....................................................... (760) $3.375 to $6.75
----------------
------
Outstanding, December 31, 1995.................................... 2,795 $3.00 to $11.75
----------------
------
Granted......................................................... 806 $11.75 to $17.00
Canceled........................................................ (183) $3.625 to $16.50
Exercised....................................................... (618) $3.50 to $16.50
----------------
------
Outstanding, December 31, 1996.................................... 2,800 $3.00 to $17.00
====== ================
</TABLE>
IV-18
<PAGE> 79
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in the Company's 1988 Eligible
Directors Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ ----------------------
<S> <C> <C>
Outstanding, January 1, 1994...................................... 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
------------------
---
Granted......................................................... 8 $ 8.125 to $ 9.25
Exercised....................................................... (32) $ 4.125 to $ 5.875
Lapsed.......................................................... -- $ --
------------------
---
Outstanding, December 31, 1995.................................... 38 $ 3.75 to $ 9.375
------------------
---
Granted......................................................... 31 $14.625 to $16.125
Exercised....................................................... (10) $ 4.375 to $ 9.375
Lapsed.......................................................... -- $ --
------------------
---
Outstanding, December 31, 1996.................................... 59 $ 3.75 to $16.125
=== ==================
</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,
1996, 20,000 options are exercisable and expire ten years from the grant date.
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. At December 31, 1996, 340,000 options are exercisable and expire three
years from the grant date.
NOTE 10. OTHER ASSETS
A summary of other long-term assets follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Investment in assets subject to leveraged leases........... $14,766 $ 7,566
Information systems development projects................... 3,124 5,601
Investment in long-term securities......................... 4,989 4,872
Intangible assets.......................................... 3,660 3,475
Deposits and other......................................... 8,529 5,978
------- -------
$35,068 $27,492
(Less) Accumulated amortization............................ 4,628 5,638
------- -------
$30,440 $21,854
======= =======
</TABLE>
Long-term securities consist primarily of government backed securities held
by the Company's wholly owned captive insurance company and are carried at
market value, which is not significantly different than cost. The carrying value
of the long-term securities approximates fair value.
On December 30, 1996, the Company acquired beneficial ownership of a
Grantor Trust. The Trust assets consist of a McDonnell Douglas DC-10 aircraft
and three engines. In connection with the acquisition, KCI paid cash equity of
$7.2 million and assumed non-recourse debt of $47.0 million. The DC-10 aircraft
is on lease to the Federal Express Corporation through June 2012. Federal
Express pays monthly rent to a third
IV-19
<PAGE> 80
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
party who, in turn, pays this entire amount to the holders of the non-recourse
certificated indebtedness, which is secured by the aircraft. Recourse to the
certificate holders is limited to the Trust assets only.
NOTE 11. 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. Initial 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
effect on the Company's business, financial condition or results of operations.
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.
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.
On October 31, 1996 the Company received a counterclaim which had been
filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company
filed in 1995. The counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable Kinetic Concepts to monopolize the bed
market. Although it is not possible to predict the outcome of this litigation,
the Company believes that the counterclaim is without merit.
On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries,
Inc. filed a lawsuit against the Company alleging that the Company's
TriaDyne(TM) bed infringes a patent issued to Hill-Rom in December 1996. This
suit was filed in the United States District Court for the District of South
Carolina. Substantive discovery in the case has not begun. Based upon its
initial investigation, the Company does not believe that the TriaDyne(TM) bed
infringes the Hill-Rom patent or that this lawsuit will materially impact the
marketing of the TriaDyne(TM) bed.
The Company is party to several lawsuits generally incidental to its
business, including product 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 leases at Note 6.
NOTE 12. 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 $84.75 million. Net of legal expenses, this transaction added $81.6 million
of pre-tax 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 under-utilized rental
assets and over-stocked inventories of $6.8 million. These items together total
$84 million and are included in Unusual Items on the 1994 Statement of Earnings.
IV-20
<PAGE> 81
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one industry segment: the distribution of
specialty therapeutic beds and medical devices to select health care providers.
A summary of financial information by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers...................... $201,116 $68,765 $ -- $269,881
Intercompany transfers...................... 7,272 -- (7,272) --
-------- ------- -------- --------
Total............................... $208,388 $68,765 $ (7,272) $269,881
======== ======= ======== ========
Operating earnings............................ $ 40,810 $15,197 $ (653) $ 55,354
======== ======= ======== ========
Total assets:
Identifiable assets......................... $156,273 $49,622 $(11,547) $194,348
======== ======= ========
Corporate assets............................ 59,045
--------
Total assets........................ $253,393
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers...................... $182,754 $60,689 $ -- $243,443
Intercompany transfers...................... 6,991 -- (6,991) --
-------- ------- -------- --------
Total............................... $189,745 $60,689 $ (6,991) $243,443
======== ======= ======== ========
Operating earnings............................ $ 33,779 $10,845 $ (832) $ 43,792
======== ======= ======== ========
Total assets:
Identifiable assets......................... $157,615 $43,787 $(10,075) $191,327
======== ======= ========
Corporate assets............................ 52,399
--------
Total assets........................ $243,726
========
</TABLE>
<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>
IV-21
<PAGE> 82
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 unaffiliated customers
and have been eliminated from consolidated net revenues. Corporate assets
consist of cash and cash equivalents.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated results of operations by quarter are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $67,587 $64,272 $67,970 $70,052
Operating earnings.................................. $13,741 $12,721 $13,629 $15,263
Net earnings........................................ $ 8,814 $ 8,187 $ 8,858 $13,128
Earnings per common and common equivalent share..... $ 0.19 $ 0.18 $ 0.19 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $57,027 $59,790 $61,606 $65,020
Operating earnings.................................. $ 9,577 $ 8,717 $12,734 $12,764
Net earnings........................................ $ 6,098 $ 5,716 $ 8,535 $ 8,092
Earnings per common and common equivalent share..... $ 0.14 $ 0.13 $ 0.19 $ 0.18
</TABLE>
Earnings per share for the full year may differ from the total of the
quarterly earnings per share due to rounding differences.
IV-22
<PAGE> 83
SCHEDULE V
INDEX TO INTERIM FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Interim Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997 (Unaudited)................. V-2
Condensed Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 1997 and 1996 (Unaudited).......................................... V-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1996 (Unaudited)......................................................... V-4
Notes to Condensed Consolidated Financial Statements (Unaudited)..................... V-5
</TABLE>
V-1
<PAGE> 84
CONDENSED CONSOLIDATED BALANCE SHEETS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
(UNAUDITED)
-----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 38,388 $ 59,045
Accounts and notes receivable, net................................ 74,129 58,241
Inventories....................................................... 21,173 20,042
Prepaid expenses and other........................................ 8,722 6,860
-------- --------
Total current assets...................................... 142,412 144,188
-------- --------
Net property, plant and equipment................................... 72,060 65,224
Notes receivable.................................................... 3,250 --
Goodwill, less accumulated amortization of $12,510 in 1997
and $12,021 in 1996............................................... 23,047 13,541
Other assets, less accumulated amortization of $2,906 in 1997
and $2,837 in 1996................................................ 30,488 30,440
-------- --------
$ 271,257 $ 253,393
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.................................................. $ 4,740 $ 3,974
Current installments of capital lease obligations................. 134 118
Accrued expenses.................................................. 32,299 29,792
Income tax payable................................................ 3,242 2,970
-------- --------
Total current liabilities................................. 40,415 36,854
-------- --------
Capital lease obligations, net of current installments.............. 378 396
Deferred income taxes, net.......................................... 7,528 5,065
Other............................................................... 218 --
-------- --------
48,539 42,315
-------- --------
Minority interest................................................... 204 --
Shareholders' equity:
Common stock; issued and outstanding 42,305 in 1997 and 42,355 in
1996........................................................... 42 42
Retained earnings................................................. 225,314 210,816
Cumulative foreign currency translation adjustment................ (2,602) 555
Notes receivable from officers.................................... (240) (335)
-------- --------
222,514 211,078
-------- --------
$ 271,257 $ 253,393
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
V-2
<PAGE> 85
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental and service.............................. $61,300 $54,095 $123,125 $110,885
Sales and other................................. 13,731 10,177 25,087 20,974
------- ------- -------- --------
Total revenue................................ 75,031 64,272 148,212 131,859
Rental expenses................................... 38,904 35,611 76,616 72,857
Cost of goods sold................................ 5,770 3,786 10,012 7,829
------- ------- -------- --------
44,674 39,397 86,628 80,686
------- ------- -------- --------
Gross profit................................. 30,357 24,875 61,584 51,173
Selling, general and administrative expenses...... 14,134 12,154 29,144 24,711
------- ------- -------- --------
Operating earnings........................... 16,223 12,721 32,440 26,462
Net interest income............................... 399 904 853 1,874
------- ------- -------- --------
Earnings before income taxes and minority
interest................................... 16,622 13,625 33,293 28,336
Income taxes...................................... 6,649 5,438 13,317 11,335
Minority interest................................. 21 -- 21 --
------- ------- -------- --------
Net earnings................................. $ 9,952 $ 8,187 $ 19,955 $ 17,001
======= ======= ======== ========
Earnings per common and common equivalent
share...................................... $ 0.23 $ 0.18 $ 0.46 $ 0.37
======= ======= ======== ========
Shares used in earnings per share
computations............................... 43,806 46,459 43,737 46,015
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
V-3
<PAGE> 86
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................... $19,955 $17,001
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 10,974 11,709
Provision for uncollectible accounts receivable..................... 1,434 1,187
Change in assets and liabilities:
Increase in accounts receivable................................... (15,656) (1,736)
Increase in inventories........................................... (643) (1,983)
Increase in prepaid and other assets.............................. (1,816) (2,395)
Increase (decrease) in accounts payable........................... (291) 597
Increase (decrease) in accrued expenses........................... 1,065 (99)
Increase in income taxes payable.................................. 272 630
Increase in deferred income taxes................................. 2,463 492
------- -------
Net cash provided by operating activities...................... 17,757 25,403
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment............................ (13,533) (12,480)
Increase in inventory to be converted into equipment for short-term
rental.............................................................. (3,645) (150)
Dispositions of property, plant, and equipment......................... 1,096 750
Business acquired in purchase transactions, net of cash acquired....... (12,445) --
Decrease in note receivable from principal shareholder................. -- 10,000
Increase in other assets............................................... (3,223) (1,340)
------- -------
Net cash used by investing activities.......................... (31,750) (3,220)
------- -------
Cash flows from financing activities:
Repayments of capital lease obligations................................ (53) --
Proceeds from the exercise of stock options............................ 1,963 4,276
Purchase and retirement of treasury stock.............................. (4,133) (10,363)
Cash dividends paid to shareholders.................................... (3,205) (3,331)
Other.................................................................. 217 (138)
------- -------
Net cash used by financing activities.......................... (5,211) (9,556)
------- -------
Effect of exchange rate changes on cash and cash equivalents............. (1,453) (160)
------- -------
Net increase in cash and cash equivalents................................ (20,657) 12,467
Cash and cash equivalents, beginning of year............................. 59,045 52,399
------- -------
Cash and cash equivalents, end of period................................. $38,388 $64,866
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the first six months for:
Interest............................................................ 84 82
Income taxes........................................................ 8,783 6,160
</TABLE>
See accompanying notes to condensed consolidated financial statements.
V-4
<PAGE> 87
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial statements presented herein include the accounts of Kinetic
Concepts, Inc. and all subsidiaries (the "Company"). The condensed consolidated
financial statements appearing in this quarterly report on Form 10-Q should be
read in conjunction with the financial statements and notes thereto included in
the Company's latest annual report. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The foregoing
financial information reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of operations for the
interim periods presented. Interim period operating results are not necessarily
indicative of the results to be expected for the full fiscal year.
(2) INVENTORY COMPONENTS
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value). Inventories are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Finished goods........................................ $ 4,006 $ 5,586
Work in process....................................... 3,143 1,893
Raw materials, supplies and parts..................... 22,219 17,113
------- -------
29,368 24,592
Less amounts expected to be converted into equipment
for short-term rental............................... 8,195 4,550
------- -------
Total inventories........................... $ 21,173 $ 20,042
======= =======
</TABLE>
(3) NOTES RECEIVABLE
Notes receivable included a $3.0 million note received from James R.
Leininger, M.D., the principal shareholder and chairman of the Company's Board
of Directors, the proceeds of which were used to finance a construction project
for Home Dome, L.L.C., a third party affiliated with Dr. Leininger. The note
carries a variable interest rate which will fluctuate between 6.25% and 10.25%
per annum, and requires quarterly interest payments beginning May 3, 1997.
Monthly principal payments commence March 3, 1998 based on a 20-year note
amortization. The note has a final maturity date of February 3, 2002, at which
time the entire amount of unpaid principal and interest shall be due. The note
is secured by 300,000 shares of the Company's Common Stock and a mortgage on the
property under construction.
(4) ACQUISITIONS/DISPOSITIONS
On April 18, 1997, the Company acquired 80% of the outstanding capital
stock of Ethos Medical Group, Ltd. located in Athlone, Ireland, for
approximately $2.3 million in cash plus other consideration. Ethos manufactures
the Keene Roto Rest (R) trauma bed and other medical devices and rents specialty
support surfaces to caregivers throughout Ireland. Ethos Medical's operating
results are not expected to have a material impact on the Company's results of
operations for 1997.
On February 1, 1997, the Company acquired the assets of H.F. Systems, Inc.
of Los Angeles. H.F. Systems offers a complete line of therapeutic specialty
support surfaces primarily to the California extended care marketplace. The
Company acquired the assets of H.F. Systems in a single transaction for
approximately $8.0 million in cash plus other consideration. H.F. Systems will
be integrated into Kinetic Concepts' extensive
V-5
<PAGE> 88
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES -- (CONTINUED)
distribution system and, as a result, the Company expects to benefit from the
elimination of certain redundant expenses. H.F. Systems recorded revenue of
approximately $7.0 million for 1996 and is not expected to have a material
impact on the Company's results of operations for 1997.
On January 3, 1997 the Company purchased from Trac Medical, Inc., a North
Carolina corporation, all of the assets and technology rights related to the
"Access" patient care device, an environmental control system which is mountable
on hospital beds. The purchase price of the Access device was approximately $2.0
million in cash plus other consideration.
(5) SHARES USED IN EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE COMPUTATIONS
The weighted average number of common and common equivalent shares used in
the computation of earnings per share is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average outstanding common shares....................... 42,317 44,307 42,322 44,332
Average common equivalent shares-dilutive effect of
option shares......................................... 1,489 2,152 1,415 1,683
------- ------- ------- -------
Shares used in earnings per share computations.......... 43,806 46,459 43,737 46,015
======= ======= ======= =======
</TABLE>
Earnings per common and common equivalent share are computed by dividing
net earnings 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.
(6) COMMITMENTS AND CONTINGENCIES
The Company is party to several lawsuits generally incidental to its
business 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 financial statements.
(7) NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary ("basic") earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in basic earnings per share for the six month period ended
June 30, 1997 and June 30, 1996 of $0.01 and $0.01 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these periods is not expected to be material.
V-6
<PAGE> 89
The Letter of Transmittal and certificates evidencing Shares and any other
required documents should be sent or delivered by each shareholder or his
broker, dealer, commercial bank, trust company or other nominee to the
Depositary at one of its addresses set forth below.
The Depositary for the Offer is:
BOSTON EQUISERVE, L.P.
<TABLE>
<CAPTION>
By Mail: By Hand: By Overnight Courier:
<S> <C> <C>
BOSTON EQUISERVE, L.P. BANKBOSTON, N.A. BANKBOSTON, N.A.
CORPORATE REORGANIZATION SECURITIES TRANSFER & BOSTON EQUISERVE, L.P.
POST OFFICE BOX 8029 REPORTING SERVICES, INC. CORPORATE REORGANIZATION
BOSTON, MA 02266-8029 55 BROADWAY, 3RD FLOOR 150 ROYALL STREET
NEW YORK, NY 10006 MAIL STOP 45-01-40
ATTN: DELIVERY WINDOW CANTON, MA 02021
</TABLE>
------------------
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
listed below. Additional copies of this Offer to Purchase, the Letter of
Transmittal and the Notice of Guaranteed Delivery may be obtained from the
Information Agent. A shareholder may also contact brokers, dealers, commercial
banks or trust companies for assistance concerning the Offer.
The Information Agent for the Offer is:
[Georgeson & Co. Inc. LOGO]
Wall Street Plaza
New York, New York 10005
Bankers and Brokers Call Collect:
(212) 440-9800
ALL OTHERS CALL TOLL FREE:
(800) 223-2064
The Dealer Manager for the Offer is:
[LOGO BT ALEX. BROWN]
One South Street
Baltimore, Maryland 21202
(410) 895-4525
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
KINETIC CONCEPTS, INC.
PURSUANT TO ITS OFFER TO PURCHASE
DATED OCTOBER 8, 1997
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK
CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED.
The Depositary for the Offer is:
BOSTON EQUISERVE, L.P.
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Courier:
Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A.
Corporate Reorganization Securities Transfer & Reporting Boston EquiServe, L.P.
Post Office Box 8029 Services, Inc. Corporate Reorganization
Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street
New York, NY 10006 Mail Stop 45-01-40
Attn: Delivery Window Canton, MA 02021
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE> 2
This Letter of Transmittal is to be completed by shareholders either if
certificates evidencing Shares (as defined below) are to be forwarded herewith
or if delivery of Shares is to be made by book-entry transfer to the
Depositary's account at The Depository Trust Company (the "DTC") pursuant to the
book-entry transfer procedure described in "THE TENDER OFFER -- Section 3.
Procedures for Accepting the Offer and Tendering Shares" of the Offer to
Purchase (as defined below). DELIVERY OF DOCUMENTS TO THE DTC DOES NOT
CONSTITUTE DELIVERY TO THE DEPOSITARY.
Shareholders whose certificates evidencing Shares ("Share Certificates")
are not immediately available or who cannot deliver their Share Certificates or
deliver confirmation of the book entry transfer of the Shares into the
Depositary's Account at the DTC ("Book-Entry Confirmation") and all other
documents required hereby to the Depositary prior to the Expiration Date (as
defined in "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date"
of the Offer to Purchase) and who wish to tender their Shares must do so
pursuant to the guaranteed delivery procedure described in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of
the Offer to Purchase. See Instruction 2.
[ ] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE
DEPOSITARY'S ACCOUNT AT THE DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
--------------------------------------------------------------------------
Account Number
-------------------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------------------------
[ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
-------------------------------------------------------------------------
Window Ticket No. (if any)
-------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-------------------------------------------------------------------------
Name of Institution which Guaranteed Delivery
-------------------------------------------------------------------------
If delivery is by book-entry transfer, give the following:
DTC Account Number
-------------------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------------------------
<PAGE> 3
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) SHARE CERTIFICATE(S) AND SHARE(S) TENDERED
APPEAR(S) ON SHARE CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY)
------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER
OF SHARES NUMBER
SHARE CERTIFICATE EVIDENCED BY OF SHARES
NUMBER(S) SHARE CERTIFICATE(S) TENDERED
---------------------------------------------------------------
---------------------------------------------------------------
===============================================================
Total Shares................................
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by shareholders delivering Shares by book-entry
transfer.
** Unless otherwise indicated, it will be assumed that all Shares evidenced by
each Share Certificate delivered to the Depositary are being tendered
hereby. See Instruction 4.
================================================================================
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Kinetic Concepts, Inc., a Texas
corporation (the "Company"), the above-described shares of common stock, $.001
par value per share (the "Shares"), pursuant to the Company's offer to purchase
all outstanding Shares, at a price of $19.25 per Share, net to the seller in
cash (such amount, or any greater amount per Share paid pursuant to the Offer
(as defined below), being referred to herein as the "Per Share Amount"), upon
the terms and subject to the conditions set forth in the Offer to Purchase,
dated October 8, 1997 (the "Offer to Purchase"), receipt of which is hereby
acknowledged, and in this Letter of Transmittal (which, together with the Offer
to Purchase, constitute the "Offer").
Subject to, and effective upon, acceptance for payment of the Shares
tendered herewith, in accordance with the terms of the Offer, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to all the Shares tendered herewith and all
dividends and distributions (including, without limitation, distributions of
additional Shares) made in respect of such Shares on or after October 2, 1997
(collectively, "Distributions") and irrevocably appoints the Depositary the true
and lawful agent and attorney-in-fact of the undersigned with respect to such
Shares and all Distributions, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(i) deliver Share Certificates evidencing such Shares and all Distributions, or
transfer ownership of such Shares and all Distributions on the account books
maintained by the DTC, together, in either case, with all accompanying evidences
of transfer and authenticity, to or upon the order of the Company, (ii) present
such Shares and all Distributions for transfer on the books of the Company and
(iii) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Shares and all Distributions, all in accordance with the terms
of the Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Shares
tendered herewith and all Distributions, that when such Shares are accepted for
payment by the Company, the Company will acquire good, marketable and
unencumbered title thereto and to all Distributions, free and clear of all
liens, restrictions, charges and encumbrances, and that none of such Shares and
Distributions will be subject to any adverse claim. The undersigned, upon
request, shall execute and deliver all additional documents deemed by the
Depositary or the Company to be necessary or desirable to complete the
assignment and transfer of the Shares tendered herewith and all Distributions.
In addition, the undersigned shall remit and transfer promptly to the Depositary
for the account of the Company all Distributions, accompanied by appropriate
documentation of transfer, and pending such remittance and transfer or
appropriate assurance thereof, the Company shall be entitled to all rights and
privileges as owner of each such Distribution and may withhold the entire
purchase price of the Shares tendered hereby, or deduct from such purchase
price, the amount or value of such Distribution as determined by the Company in
its sole discretion.
No authority herein conferred or agreed to be conferred shall be affected
by, and all such authority shall survive, the death or incapacity of the
undersigned. All obligations of the undersigned hereunder shall be binding upon
the heirs, personal representatives, successors and assigns of the undersigned.
Except as stated in the Offer to Purchase, this tender is irrevocable.
The undersigned understands that tenders of Shares pursuant to any one of
the procedures described in "THE TENDER OFFER--Section 3. Procedures for
Accepting the Offer and Tendering Shares" of the Offer to Purchase and in the
instructions hereto will constitute the undersigned's acceptance of the terms
and conditions of the Offer. The Company's acceptance of such Shares for payment
will constitute a binding agreement between the undersigned and the Company upon
the terms and subject to the conditions of the Offer.
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions", please issue the check for the purchase price of all Shares
purchased, and return all Share Certificates evidencing Shares not
<PAGE> 5
purchased or not tendered in the name(s) of the registered holder(s) appearing
above under "Description of Shares Tendered". Similarly, unless otherwise
indicated in the box entitled "Special Delivery Instructions", please mail the
check for the purchase price of all Shares purchased and all Share Certificates
evidencing Shares not tendered or not purchased (and accompanying documents, as
appropriate) to the address(es) of the registered holder(s) appearing above
under "Description of Shares Tendered". In the event that the boxes entitled
"Special Payment Instructions" and "Special Delivery Instructions" are both
completed, please issue the check for the purchase price of all Shares purchased
and return all Share Certificates evidencing Shares not purchased or not
tendered in the name(s) of, and mail such check and Share Certificates to, the
person(s) so indicated. Unless otherwise indicated herein in the box entitled
"Special Payment Instructions", please credit any Shares tendered hereby and
delivered by book-entry transfer, but which are not purchased by crediting the
account at the DTC. The undersigned recognizes that the Company has no
obligation pursuant to the Special Payment Instructions to transfer any Shares
from the name of the registered holder(s) thereof if the Company does not
purchase any of the Shares tendered hereby.
<PAGE> 6
------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the check for the purchase price of Shares or
Share Certificates evidencing Shares not tendered or not purchased is to
be issued in the name of someone other than the undersigned, or if Shares
tendered hereby and delivered by book-entry transfer which are not
purchased are to be returned by credit to an account at the DTC other than
that designated above.
Issue: [ ] Check [ ] Share Certificate(s) to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
--------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE)
[ ] Credit Shares delivered by book-entry transfer and not purchased to
the account set forth below:
------------------------------------------------------------
(ACCOUNT NUMBER)
============================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the check for the purchase price of Shares
purchased or Share Certificates evidencing Shares not tendered or not
purchased are to be mailed to someone other than the undersigned, or the
undersigned at an address other than that shown under "Description of
Shares Tendered".
Mail: [ ] Check [ ] Share Certificate(s) to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
--------------------------------------------------
------------------------------------------------------------
(ZIP CODE)
------------------------------------------------------------
(TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE)
------------------------------------------------------------
<PAGE> 7
IMPORTANT
SHAREHOLDERS: SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) OF HOLDER(S)
Dated:
- ---------------------------, 199_
(Must be signed by registered holder(s) exactly as name(s) appear(s) on Share
Certificates or on a security position listing by a person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian, attorney-
in-fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, please provide the following information and see
Instruction 5).
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCLUDE ZIP CODE
Area Code and Telephone No.:
- -------------------------------------------------------------------------
Taxpayer Identification or Social Security No.:
- -------------------------------------------------------------------------
(SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE)
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5)
FOR USE BY FINANCIAL INSTITUTIONS ONLY.
FINANCIAL INSTITUTIONS: PLACE MEDALLION GUARANTEE IN SPACE BELOW.
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Guarantee of Signatures. All signatures on this Letter of Transmittal
must be guaranteed by a firm which is a member of the Medallion Signature
Guarantee Program, or by any other "eligible guarantor institution", as such
term is defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of
1934, as amended (each of the foregoing being referred to as an "Eligible
Institution"), unless (i) this Letter of Transmittal is signed by the registered
holder(s) of the Shares (which term, for purposes of this document, shall
include any participant in the DTC whose name appears on a security position
listing as the owner of Shares) tendered hereby and such holder(s) has (have)
completed neither the box entitled "Special Payment Instructions" nor the box
entitled "Special Delivery Instructions" on the reverse hereof or (ii) such
Shares are tendered for the account of an Eligible Institution. See Instruction
5.
2. Delivery of Letter of Transmittal and Share Certificates. This Letter
of Transmittal is to be used either if Share Certificates are to be forwarded
herewith or if Shares are to be delivered by book-entry transfer pursuant to the
procedure set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and Tendering Shares" of the Offer to Purchase. Share Certificates
evidencing all physically tendered Shares, or a confirmation of a book-entry
transfer into the Depositary's account at the DTC of all Shares delivered by
book-entry transfer as well as a properly completed and duly executed Letter of
Transmittal and any other documents required by this Letter of Transmittal, must
be received by the Depositary at one of its addresses set forth on the reverse
hereof prior to the Expiration Date (as defined in "THE TENDER OFFER -- Section
1. Terms of the Offer; Expiration Date" of the Offer to Purchase). If Share
Certificates are forwarded to the Depositary in multiple deliveries, a properly
completed and duly executed Letter of Transmittal must accompany each such
delivery. Shareholders whose Share Certificates are not immediately available,
who cannot deliver their Share Certificates and all other required documents to
the Depositary prior to the Expiration Date or who cannot complete the procedure
for delivery by book-entry transfer on a timely basis may tender their Shares
pursuant to the guaranteed delivery procedure described in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of
the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made
by or through an Eligible Institution; (ii) a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form made available
by the Company, must be received by the Depositary prior to the Expiration Date;
and (iii) the Share Certificates evidencing all physically delivered Shares in
proper form for transfer by delivery, or a confirmation of a book-entry transfer
into the Depositary's account at the DTC of all Shares delivered by book-entry
transfer, in each case together with a Letter of Transmittal, properly completed
and duly executed, with any required signature guarantees (or, in the case of a
book-entry transfer, a Book-Entry Confirmation (as defined in "THE TENDER
OFFER -- Section 2. Acceptance for Payment and Payment for Shares" of the Offer
to Purchase)), and any other documents required by this Letter of Transmittal,
must be received by the Depositary within three Nasdaq National Market
("Nasdaq") trading days after the date of execution of such Notice of Guaranteed
Delivery, all as described in "THE TENDER OFFER -- Section 3. Procedures for
Accepting the Offer and Tendering Shares" of the Offer to Purchase.
The method of delivery of this Letter of Transmittal, Share Certificates
and all other required documents, including delivery through the DTC, is at the
option and risk of the tendering shareholder, and the delivery will be deemed
made only when actually received by the Depositary. If delivery is by mail,
registered mail with return receipt requested, properly insured, is recommended.
In all cases, sufficient time should be allowed to ensure timely delivery.
No alternative, conditional or contingent tenders will be accepted and no
fractional Shares will be purchased. By execution of this Letter of Transmittal
all tendering shareholders waive any right to receive any notice of the
acceptance of their Shares for payment.
3. Inadequate Space. If the space provided herein under "Description of
Shares Tendered" is inadequate, the Share Certificate numbers, the number of
Shares evidenced by such Share Certificates and the number of Shares tendered
should be listed on a separate schedule and attached hereto.
<PAGE> 9
4. Partial Tenders (not applicable to shareholders who tender by book-entry
transfer). If fewer than all the Shares evidenced by any Share Certificate
delivered to the Depositary herewith are to be tendered hereby, fill in the
number of Shares which are to be tendered in the box entitled "Number of Shares
Tendered". In such cases, new Share Certificate(s) evidencing the remainder of
the Shares that were evidenced by the Share Certificates delivered to the
Depositary herewith will be sent to the person(s) signing this Letter of
Transmittal, unless otherwise provided in the box entitled "Special Delivery
Instructions" on the reverse hereof, as soon as practicable after the expiration
or termination of the Offer. All Shares evidenced by Share Certificates
delivered to the Depositary will be deemed to have been tendered unless
otherwise indicated.
5. Signatures on Letter of Transmittal; Stock Powers and Endorsements. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered herewith, the signature(s) must correspond with the name(s) as written
on the face of the Share Certificates evidencing such Shares without alteration,
enlargement or any other change whatsoever.
If any Shares tendered herewith are owned of record by two or more persons,
all such persons must sign this Letter of Transmittal.
If any of the Shares tendered herewith are registered in the names of
different holders, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations of such
Shares.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of Share Certificates or separate stock
powers are required, unless payment is to be made to, or Share Certificates
evidencing Shares not tendered or not purchased are to be issued in the name of,
a person other than the registered holder(s), in which case, the Share
Certificate(s) evidencing the Shares tendered herewith must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name(s) of the registered holder(s) appear(s) on such Share Certificate(s).
Signatures on such Share Certificate(s) and stock powers must be guaranteed by
an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered herewith, the Share Certificate(s)
evidencing the Shares tendered herewith must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear(s) on such Share Certificate(s). Signatures on such
Share Certificate(s) and stock powers must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Share Certificate or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to the Company of such person's authority so to act must be
submitted.
6. Stock Transfer Taxes. Except as otherwise provided in this Instruction
6, the Company will pay all stock transfer taxes with respect to the sale and
transfer of any Shares to it or its order pursuant to the Offer. If, however,
payment of the purchase price of any Shares purchased is to be made to, or Share
Certificate(s) evidencing Shares not tendered or not purchased are to be issued
in the name of, a person other than the registered holder(s), the amount of any
stock transfer taxes (whether imposed on the registered holder(s), such other
person or otherwise) payable on account of the transfer to such other person
will be deducted from the purchase price of such Shares purchased, unless
evidence satisfactory to the Company of the payment of such taxes, or exemption
therefrom, is submitted. Except as provided in this Instruction 6, it will not
be necessary for transfer tax stamps to be affixed to the Share Certificates
evidencing the Shares tendered herewith.
7. Special Payment and Delivery Instructions. If a check for the purchase
price of any Shares tendered herewith is to be issued, or Share Certificate(s)
evidencing Shares not tendered or not purchased are to be issued, in the name of
a person other than the person(s) signing this Letter of Transmittal or if such
check or any such Share Certificate is to be sent to someone other than the
person(s) signing this Letter of Transmittal or to the person(s) signing this
Letter of Transmittal but at an address other than that shown in the box
entitled "Description of Shares Tendered" on the reverse hereof, the appropriate
boxes on the reverse of this
<PAGE> 10
Letter of Transmittal must be completed. Shareholders delivering Shares tendered
herewith by book-entry transfer may request that Shares not purchased be
credited to such account maintained at the DTC as such shareholder may designate
in the box entitled "Special Payment Instructions" on the reverse hereof. If no
such instructions are given, all such Shares not purchased will be returned by
crediting the account at the DTC as the account from which such Shares were
delivered.
8. Questions and Requests for Assistance or Additional Copies. Questions
and requests for assistance may be directed to the Information Agent or the
Dealer Manager at their respective addresses or telephone numbers set forth
below. Additional copies of the Offer to Purchase, this Letter of Transmittal
and the Notice of Guaranteed Delivery may be obtained from the Information Agent
or from brokers, dealers, commercial banks or trust companies.
9. Substitute Form W-9. Each tendering shareholder is required to provide
the Depositary with a correct Taxpayer Identification Number ("TIN") on the
Substitute Form W-9 which is provided under "Important Tax Information" below,
and to certify, under penalty of perjury, that such number is correct and that
such shareholder is not subject to backup withholding of federal income tax. If
a tendering shareholder has been notified by the Internal Revenue Service that
such shareholder is subject to backup withholding, such shareholder must cross
out item (2) of the Certification box of the Substitute Form W-9, unless such
shareholder has since been notified by the Internal Revenue Service that such
shareholder is no longer subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the tendering shareholder to
31% federal income tax withholding on the payment of the purchase price of all
Shares purchased from such shareholder. If the tendering shareholder has not
been issued a TIN and has applied for one or intends to apply for one in the
near future, such shareholder should write "Applied For" in the space provided
for the TIN in Part I of the Substitute Form W-9, and sign and date the
Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is
not provided with a TIN within 60 days, the Depositary will withhold 31% on all
payments of the purchase price to such shareholder until a TIN is provided to
the Depositary.
IMPORTANT: THIS LETTER OF TRANSMITTAL PROPERLY COMPLETED AND DULY EXECUTED
(TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND SHARE CERTIFICATES OR
CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A
PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN "THE
TENDER OFFER -- SECTION 1. TERMS OF THE OFFER; EXPIRATION DATE" OF THE OFFER TO
PURCHASE).
IMPORTANT TAX INFORMATION
Under the federal income tax law, a shareholder whose tendered Shares are
accepted for payment is required by law to provide the Depositary (as payer)
with such shareholder's correct TIN on Substitute Form W-9 below. If such
shareholder is an individual, the TIN is such shareholder's social security
number. If the Depositary is not provided with the correct TIN, the shareholder
may be subject to a $50 penalty imposed by the Internal Revenue Service and
payments that are made to such shareholder with respect to Shares purchased
pursuant to the Offer may be subject to backup withholding of 31%. In addition,
if a shareholder makes a false statement that results in no imposition of backup
withholding, and there was no reasonable basis for such statement, a $500
penalty may also be imposed by the Internal Revenue Service.
Certain shareholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such individual must submit a statement, signed under penalties of
perjury, attesting to such individual's exempt status. Forms of such statements
can be obtained from the Depositary. See the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions. A shareholder should consult his or her tax advisor as
to such shareholder's qualification for exemption from backup withholding and
the procedure for obtaining such exemption.
<PAGE> 11
If backup withholding applies, the Depositary is required to withhold 31%
of any payments made to the shareholder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a shareholder
with respect to Shares purchased pursuant to the Offer, the shareholder is
required to notify the Depositary of such shareholder's correct TIN by
completing the form below certifying that the TIN provided on Substitute Form
W-9 is correct (or that such shareholder is awaiting a TIN), and that (i) such
shareholder has not been notified by the Internal Revenue Service that he is
subject to backup withholding as a result of a failure to report all interest or
dividends or (ii) the Internal Revenue Service has notified such shareholder
that such shareholder is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE DEPOSITARY
The shareholder is required to give the Depositary the social security
number or employer identification number of the record holder of the Shares
tendered hereby. If the Shares are in more than one name or are not in the name
of the actual owner, consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 for additional guidance on
which number to report. If the tendering shareholder has not been issued a TIN
and has applied for a number or intends to apply for a number in the near
future, the shareholder should write "Applied For" in the space provided for the
TIN in Part I, and sign and dated the Substitute Form W-9. If "Applied For" is
written in Part I and the Depositary is not provided with a TIN within 60 days,
the Depositary will withhold 31% of all payments of the purchase price to such
shareholder until a TIN is provided to the Depositary.
<PAGE> 12
PAYER'S NAME: BOSTON EQUISERVE, L.P.
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- Taxpayer Identification -------------------------------
FORM W-9 Number -- For all accounts, enter Social Security Number
your taxpayer identification number OR
in the box at right. (For most ---------------------------------
individuals, this is your social Taxpayer Identification
security number. If you do not have Number
a number, see Obtaining a Number in (If awaiting TIN write
the enclosed Guidelines.) Certify by "Applied For")
signing and dating below. Note: If
the account is in more than one
name, see the chart in the enclosed
Guidelines to determine which number
to give the payer.
----------------------------------------------------------------------
Payer's Request for PART II -- For Payees Exempt From Backup Withholding, see the
Taxpayer enclosed Guidelines and complete as instructed therein.
Identification Number
(TIN)
- ----------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been notified by the
Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result
of failure to report all interest or dividends, or the IRS has notified me that I am no
longer subject to backup withholding.
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
the IRS that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that you were
subject to backup withholding you received another notification from the IRS that you are no
longer subject to backup withholding, do not cross out item (2). (Also see instructions in
the enclosed Guidelines.)
- ----------------------------------------------------------------------------------------------
SIGNATURE DATE , 199
------------------------------------------------ ---------------------- --
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THIS OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE> 13
The Depositary for the Offer is:
BOSTON EQUISERVE, L.P.
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Courier:
Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A.
Corporate Reorganization Securities Transfer & Reporting Boston EquiServe, L.P.
Post Office Box 8029 Services, Inc. Corporate Reorganization
Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street
New York, NY 10006 Mail Stop 45-01-40
Attn: Delivery Window Canton, MA 02021
</TABLE>
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
listed below. Additional copies of this Offer to Purchase, the Letter of
Transmittal and the Notice of Guaranteed Delivery may be obtained from the
Information Agent. A shareholder may also contact brokers, dealers, commercial
banks or trust companies for assistance concerning the Offer.
The Information Agent for the Offer is:
[Georgeson & Co. Inc. LOGO]
Toll Free: 1-800-223-2064
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect:
(212) 440-9800
All others call toll free:
(800) 223-2064
The Dealer Manager for the Offer is:
[LOGO BT ALEX. BROWN]
ONE SOUTH STREET
BALTIMORE, MARYLAND 21202
(410) 895-4525
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF SHARES OF COMMON STOCK
OF
KINETIC CONCEPTS, INC.
(NOT TO BE USED FOR SIGNATURE GUARANTEES)
This Notice of Guaranteed Delivery, or one substantially in the form
hereof, must be used to accept the Offer (as defined below) (i) if certificates
("Share Certificates") evidencing shares of common stock, $.001 par value per
share ("Shares"), are not immediately available, (ii) if Share Certificates and
all other required documents cannot be delivered to Boston EquiServe, L.P., as
Depositary (the "Depositary"), prior to the Expiration Date (as defined in "THE
TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" of the Offer to
Purchase) or (iii) if the procedure for delivery by book-entry transfer cannot
be completed on a timely basis. This Notice of Guaranteed Delivery may be
delivered by hand or mail to the Depositary. See "THE TENDER OFFER -- Section 3.
Procedures for Accepting the Offer and Tendering Shares" of the Offer to
Purchase.
The Depositary for the Offer is:
BOSTON EQUISERVE, L.P.
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Courier:
Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A.
Corporate Reorganization Securities Transfer & Boston EquiServe, L.P.
Post Office Box 8029 Reporting Services, Inc. Corporate Reorganization
Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street
New York, NY 10006 Mail Stop 45-01-40
Attn: Delivery Window Canton, MA 02021
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION,
WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Kinetic Concepts Inc., a Texas
corporation, upon the terms and subject to the conditions set forth in the Offer
to Purchase, dated October 8, 1997 (the "Offer to Purchase"), and the related
Letter of Transmittal (which, together with the Offer to Purchase, constitute
the "Offer"), receipt of each of which is hereby acknowledged, the number of
Shares specified below pursuant to the guaranteed delivery procedure described
in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and
Tendering Shares" of the Offer to Purchase.
<TABLE>
<S> <C>
Number of Shares: ---------------------------------------------
--------------------------------- ---------------------------------------------
SIGNATURE(S) OF HOLDER(S)
Certificate Nos. (If Available):
- ---------------------------------------------
Dated: , 199
-------------------------------- --
[ ] Check box if Shares will be
delivered by book-entry transfer Name(s) of Holders:
Account No. ---------------------------------------------
- ---------------------------------------
---------------------------------------------
PLEASE TYPE OR PRINT
---------------------------------------------
ADDRESS
---------------------------------------------
ZIP CODE
---------------------------------------------
AREA CODE AND TELEPHONE NO.
</TABLE>
2
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of the Medallion Signature
Guarantee Program, guarantees to deliver to the Depositary, at one of its
addresses set forth above, either Share Certificates evidencing the Shares
tendered hereby, in proper form for transfer, or confirmation of book-entry
transfer of such Shares into the Depositary's account at The Depository Trust
Company, in each case with delivery of a Letter of Transmittal properly
completed and duly executed with any required signature guarantees or a
Book-Entry Confirmation (as defined in "THE TENDER OFFER -- Section 2.
Acceptance for Payment and Payment for Shares" of the Offer to Purchase) in the
case of a book-entry delivery, and any other required documents, all within
three Nasdaq National Market trading days of the date hereof.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
NAME OF FIRM AUTHORIZED SIGNATURE
- -------------------------------------------- --------------------------------------------
ADDRESS TITLE
- -------------------------------------------- Name:
--------------------------------------------
ZIP CODE PLEASE TYPE OR PRINT
- -------------------------------------------- Dated: , 199
AREA CODE AND TELEPHONE NO. -------------------------------- --
</TABLE>
DO NOT SEND SHARE CERTIFICATES WITH THIS NOTICE.
SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE> 1
OFFER BY
KINETIC CONCEPTS, INC.
TO PURCHASE FOR CASH
ALL OUTSTANDING SHARES OF ITS COMMON STOCK AT
$19.25 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS
EXTENDED.
October 8, 1997
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We have been appointed by Kinetic Concepts, Inc., a Texas corporation (the
"Company"), to act as Dealer Manager in connection with the Company's offer to
purchase for cash all outstanding shares of its common stock, $.001 par value
per share ("Shares"), at a price of $19.25 per Share, net to seller in cash,
upon the terms and subject to the conditions set forth in the Company's Offer to
Purchase, dated October 8, 1997 (the "Offer to Purchase"), and the related
Letter of Transmittal (which, together with the Offer to Purchase, constitute
the "Offer") enclosed herewith. Please furnish copies of the enclosed materials
to those of your clients for whose accounts you hold Shares registered in your
name or in the name of your nominee.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (i) THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST
27,500,000 SHARES (THE "MINIMUM CONDITION") AND (ii) THE COMPANY'S OBTAINING THE
DEBT FINANCING (AS DEFINED IN "INTRODUCTION" OF THE OFFER TO PURCHASE).
Enclosed for your information and use are copies of the following
documents:
1. Offer to Purchase, dated October 8, 1997;
2. Letter of Transmittal to be used by holders of Shares in accepting
the Offer and tendering Shares;
3. Notice of Guaranteed Delivery to be used to accept the Offer if the
Shares and all other required documents are not immediately available or
cannot be delivered to Boston EquiServe, L.P. (the "Depositary") by the
Expiration Date (as defined in "THE TENDER OFFER -- Section 1. Terms of the
Offer; Expiration Date" of the Offer to Purchase) or if the procedure for
book-entry transfer cannot be completed by the Expiration Date;
4. A letter dated October 8, 1997 to shareholders of the Company from
Raymond R. Hannigan, President and Chief Executive Officer of the Company;
5. A letter that may be sent to your clients for whose accounts you
hold Shares registered in your name or in the name of your nominee, with
space provided for obtaining such clients' instructions with regard to the
Offer;
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
7. Return envelope addressed to the Depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED.
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of certificates
evidencing such Shares (or a confirmation of a book-entry
<PAGE> 2
transfer of such Shares into the Depositary's account at The Depository Trust
Company, a Letter of Transmittal properly completed and duly executed and any
other required documents.
If holders of Shares wish to tender, but cannot deliver their certificates
or other required documents or cannot comply with the procedure for book-entry
transfer, prior to the expiration of the Offer, a tender may be effected by
following the guaranteed delivery procedure described in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of
the Offer to Purchase.
The Company will not pay any fees or commissions to any broker, dealer or
other person (other than BT Alex. Brown Incorporated (the "Dealer Manager"), the
Depositary and Georgeson & Company Inc. (the "Information Agent") as described
in the Offer) in connection with the solicitation of tenders of Shares pursuant
to the Offer. However, the Company will reimburse you for customary mailing and
handling expenses incurred by you in forwarding any of the enclosed materials to
your clients. The Company will pay or cause to be paid any stock transfer taxes
payable with respect to the transfer of Shares to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to
BT Alex. Brown Incorporated or Georgeson & Company Inc. at their respective
addresses and telephone numbers set forth on the back cover page of the Offer to
Purchase.
Additional copies of the enclosed material may be obtained from the
Information Agent, at the address and telephone number set forth on the back
cover page of the Offer to Purchase.
Very truly yours,
BT ALEX. BROWN INCORPORATED
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY, THE DEALER MANAGER, THE INFORMATION
AGENT OR THE DEPOSITARY, OR OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY
OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE
STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
OFFER BY
KINETIC CONCEPTS, INC.
TO PURCHASE FOR CASH
ALL OUTSTANDING SHARES OF ITS COMMON STOCK AT
$19.25 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK
CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED.
October 8, 1997
To Our Clients:
Enclosed for your consideration are an Offer to Purchase, dated October 8,
1997 (the "Offer to Purchase"), and a related Letter of Transmittal in
connection with the offer by Kinetic Concepts, Inc., a Texas corporation (the
"Company"), to purchase for cash all outstanding shares of its common stock,
$.001 par value per share ("Shares"), at a price of $19.25 per Share, net to
seller in cash (such amount, or any greater amount per Share paid pursuant to
the Offer (as defined below), being referred to herein as the "Per Share
Amount"), upon the terms and subject to the conditions set forth in the Offer to
Purchase and the related Letter of Transmittal (which, together with the Offer
to Purchase, constitute the "Offer"). We are the holder of record of Shares held
by us for your account. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE
HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
SHARES HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to have us tender on your
behalf any or all of the Shares held by us for your account, upon the terms and
subject to the conditions set forth in the Offer.
Your attention is invited to the following:
1. The tender price is $19.25 per Share, net to you in cash.
2. The Offer is being made for all outstanding Shares.
3. The Board of Directors (the "Board") and the Disinterested
Directors (as defined in "SPECIAL FACTORS -- Recommendation of the
Disinterested Directors and the Board; Fairness of the Transactions" of the
Offer to Purchase) of the Company have each unanimously determined, after
giving careful consideration to a number of factors, that the Offer and the
Merger are fair to, and in the best interests of, the shareholders of the
Company, and have each unanimously approved the Transaction Agreement and
the transactions contemplated thereby, including the Offer at the Per Share
Amount, the Stock Purchase (as defined in "INTRODUCTION" of the Offer to
Purchase) and the Merger (as defined in "INTRODUCTION" of the Offer to
Purchase). The Board and the Disinterested Directors recommend that the
shareholders of the Company accept the Offer and tender their Shares
pursuant to the Offer.
4. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS
EXTENDED.
5. The Offer is conditioned upon, among other things, (i) there being
validly tendered and not withdrawn prior to the expiration of the Offer at
least 27,500,000 Shares and (ii) the Company's obtaining the Debt Financing
(as defined in "INTRODUCTION" of the Offer to Purchase).
6. The Company will pay all stock transfer taxes with respect to the
sale and transfer of any Shares to it or its order pursuant to the Offer.
<PAGE> 2
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing and returning to us the instruction form contained
in this letter. An envelope in which to return your instructions to us is
enclosed. If you authorize the tender of your Shares, all such Shares will be
tendered unless otherwise specified in your instructions. YOUR INSTRUCTIONS
SHOULD BE FORWARDED TO US AS SOON AS POSSIBLE SO THAT WE WILL HAVE AMPLE TIME TO
PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE
OFFER.
The Offer is made solely by the Offer to Purchase and the related Letter of
Transmittal, and is being made to all holders of Shares. The Company is not
aware of any state where the making of the Offer is prohibited by administrative
or judicial action pursuant to any valid state statute. If the Company becomes
aware of any valid state statute prohibiting the making of the Offer or the
acceptance of Shares pursuant thereto, the Company will make a good faith effort
to comply with such state statute. If, after such good faith effort, the Company
cannot comply with such state statute, the Offer will not be made to (nor will
tenders be accepted from or on behalf of) the holders of Shares in such state.
In any jurisdiction where the securities, blue sky or other laws require the
Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be
made on behalf of the Company by BT Alex. Brown Incorporated or one or more
registered brokers or dealers licensed under the laws of such jurisdiction.
2
<PAGE> 3
INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR
CASH ALL THE OUTSTANDING SHARES OF COMMON STOCK
OF KINETIC CONCEPTS, INC.
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offer to Purchase, dated October 8, 1997, and the related Letter of Transmittal
(which, together with the Offer to Purchase, constitute the "Offer") in
connection with the offer by Kinetic Concepts, Inc., a Texas corporation, to
purchase for cash all outstanding shares of its common stock, $.001 par value
per share ("Shares").
This will instruct you to tender the number of Shares indicated below (or,
if no number is indicated below, all Shares) that are held by you for the
account of the undersigned, upon the terms and subject to the conditions set
forth in the Offer.
SIGN HERE
------------------------------------
------------------------------------
SIGNATURE(S)
Dated:
--------------------------, 199
------------------------------------
- ----------------------------------------
PLEASE TYPE OR PRINT NAME(S)
- ----------------------------------------
- ----------------------------------------
PLEASE TYPE OR PRINT ADDRESS
- ----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------- -----------------------------------------
AREA CODE AND TELEPHONE NUMBER
Number of Shares to be Tendered:
-----------------------------------------
------------ Shares* TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NUMBER
- -----------------------------------------
</TABLE>
- ---------------
* Unless otherwise indicated, it will be assumed that all Shares held by us for
your account are to be tendered.
3
<PAGE> 1
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------
GIVE THE NAME AND
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF --
=========================================================
GIVE THE NAME AND
FOR THIS TYPE OF ACCOUNT: EMPLOYER
IDENTIFICATION
NUMBER OF --
- ---------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Husband and wife (joint The actual owner of
account) the account or, if
joint funds, either
person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult or, if
the minor is the
only contributor,
the minor(1)
6. Account in the name of guardian The ward, minor, or
or committee for a designated incompetent
ward, minor, or incompetent person(3)
person
7. a. The usual revocable savings The grantor-
trust account (grantor is trustee(1)
also trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid trust
under state law
8. Sole proprietorship account The owner(4)
- ---------------------------------------------------------
9. A valid trust, estate, or The legal entity
pension trust (Do not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held in the The partnership
name of the business
13. Association, club, or other tax The organization
exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state
or local government, school
district, or prison) that
receives agricultural program
payments
- ---------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's Social Security number or employer identification number.
(4) Show your individual name. You may also enter your business name. You may
use your Social Security number or employer identification number.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under Section 501(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), or an individual retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- An international organization or any of its agencies or instrumentalities.
- A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- A futures commission merchant registered with the Commodity Futures Trading
Commission.
- A real estate investment trust.
- A common trust fund operated by a bank under Section 584(a) of the Code.
- An exempt charitable remainder trust, or a non-exempt trust described in
Section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to non-resident aliens subject to withholding under Section 1441 of
the Code.
- Payments to partnerships not engaged in a trade or business in the United
States and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to an appropriate nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
Section 852 of the Code).
- Payments described in Section 6049(b)(5) of the Code to non-resident aliens.
- Payments on tax-free covenant bonds under Section 1451 of the Code.
- Payments made by certain foreign organizations.
- Payments made to an appropriate nominee.
Exempt payees described above should file Substitute Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR
TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND
DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NON-RESIDENT ALIEN OR A
FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED
INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS).
Certain payments other than interest, dividends and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under Sections 6041, 6041A(a),
6042, 6044, 6045, 6049, and 6050N of the Code.
PRIVACY ACT NOTICE. -- Section 6109 of the Code requires most recipients of
dividends, interest, or other payments to give taxpayer identification numbers
to payers who must report the payments to IRS. IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold 31%
of taxable interest, dividend, and certain other payments to a payee who does
not furnish a taxpayer identification number to a payer. Certain penalties may
also apply.
PENALTIES
(1) FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you fail to furnish
your correct taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
<PAGE> 1
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER
TO SELL SHARES (AS DEFINED BELOW). THE OFFER (AS DEFINED BELOW) IS MADE SOLELY
BY THE OFFER TO PURCHASE DATED OCTOBER 8, 1997 AND THE RELATED LETTER OF
TRANSMITTAL, AND IS BEING MADE TO ALL HOLDERS OF SHARES. THE COMPANY IS NOT
AWARE OF ANY STATE WHERE THE MAKING OF THE OFFER IS PROHIBITED BY ADMINISTRATIVE
OR JUDICIAL ACTION PURSUANT TO ANY VALID STATE STATUTE. IF THE COMPANY BECOMES
AWARE OF ANY VALID STATE STATUTE PROHIBITING THE MAKING OF THE OFFER OR THE
ACCEPTANCE OF SHARES PURSUANT THERETO, THE COMPANY WILL MAKE A GOOD FAITH EFFORT
TO COMPLY WITH SUCH STATE STATUTE. IF, AFTER SUCH GOOD FAITH EFFORT, THE COMPANY
CANNOT COMPLY WITH SUCH STATE STATUTE, THE OFFER WILL NOT BE MADE TO (NOR WILL
TENDERS BE ACCEPTED FROM OR ON BEHALF OF) THE HOLDERS OF SHARES IN SUCH STATE.
IN ANY JURISDICTION WHERE THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE
OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE
MADE ON BEHALF OF THE COMPANY BY BT ALEX. BROWN INCORPORATED OR ONE OR MORE
REGISTERED BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION.
Notice of Offer to Purchase for Cash
by
KINETIC CONCEPTS, INC.
All Outstanding Shares of its Common Stock
At $19.25 Net Per Share
Kinetic Concepts, Inc., a Texas corporation (the "Company"), is offering to
purchase all outstanding shares of its Common Stock, $.001 par value per share
("Shares"), at a price of $19.25 per Share, net to the seller in cash (the "Per
Share Amount"), upon the terms and subject to the conditions set forth in the
Company's Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"),
and the related Letter of Transmittal (which, together with the Offer to
Purchase, constitute the "Offer"). Following the Offer, the Company intends to
effect the Merger (as defined below).
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED.
The Offer is conditioned upon, among other things, (i) there being validly
tendered and not withdrawn prior to the expiration of the Offer at least
27,500,000 Shares (the "Minimum Condition") and (ii) the Company's obtaining the
Debt Financing (as defined in "INTRODUCTION" of the Offer to Purchase).
The Offer is being made pursuant to a Transaction Agreement dated as of
October 2, 1997 (the "Transaction Agreement") among Fremont Purchaser II, Inc.,
a Delaware corporation ("F Purchaser"), RCBA Purchaser I, L.P., a Delaware
limited partnership ("B Purchaser" and together with F Purchaser, "Purchasers"),
and the Company. The Transaction Agreement provides that, among other things,
upon the terms and subject to the conditions set forth in the Transaction
Agreement, and in accordance with the General Corporation Law of the State of
Delaware, the Revised Uniform Limited Partnership Act of the State of Delaware
and the Texas Business Corporation Act, Purchasers will be merged with and into
the Company (the "Merger"). Following consummation of the Merger, the separate
existence of both Purchasers will cease and the Company will continue as the
surviving corporation. At the effective time of the Merger (the "Effective
Time"), each Share issued and outstanding immediately prior to the Effective
Time, other than Excluded Shares (as defined in "SPECIAL FACTORS--The
Transaction Agreement, the Support Agreement and the Agreement Among Bidders" of
the Offer to Purchase), will be cancelled and converted automatically into the
right to receive $19.25 in cash, or any higher price that may be paid per Share
in the Offer, without interest.
The Board of Directors and the Disinterested Directors (as defined in
"SPECIAL FACTORS--Recommendation of the Disinterested Directors and the Board;
Fairness of the Offer and Merger" of the Offer to Purchase) of the Company have
each unanimously determined, after giving careful consideration to a number of
factors, that the Offer and the Merger are fair to, and in the best interests
of, the shareholders of the Company, and have each unanimously approved the
Transaction Agreement and the transactions contemplated thereby, including the
Offer at the Per Share Amount, the Stock Purchase (as defined in "INTRODUCTION"
of the Offer to Purchase) and the Merger. The Board and Disinterested Directors
recommend that the shareholders of the Company accept the Offer and tender their
Shares pursuant to the Offer.
The Board of Directors has received a written opinion, dated October 1, 1997,
of BT Alex. Brown Incorporated to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the Per Share Amount
and the Merger Consideration (as defined in "INTRODUCTION" of the Offer to
Purchase) to be received in the Offer and the Merger by holders of Shares (other
than Continuing Shareholders (as defined in "INTRODUCTION" of the Offer to
Purchase)) was fair from a financial point of view to such holders.
Simultaneously with entering into the Transaction Agreement, Purchasers
entered into a Shareholder Support Agreement with James R. Leininger, M.D. ("Dr.
James Leininger") dated as of October 2, 1997 (the "Support Agreement").
Pursuant to the Support Agreement, Dr. James Leininger granted to Purchasers an
irrevocable option (the "Stock Option") to purchase 4,200,000 Shares (the
"Option Shares") owned by Dr. James Leininger, at a cash purchase price per
Option Share equal to $19.25 (the "Purchase Price"), subject to the terms and
conditions set forth in the Support Agreement. In addition, Dr. James Leininger
has agreed, subject to the terms and conditions set forth in the Support
Agreement, to tender 13,792,211 Shares pursuant to the Offer and to vote all
Shares owned or controlled by him at the time of the Shareholder's Meeting (as
defined in "SPECIAL FACTORS--The Transaction Agreement, the Support Agreement
and the Agreement Among Bidders" of the Offer to Purchase) in favor of the
Merger.
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to Boston
EquiServe, L.P. (the "Depositary") of the Company's acceptance for payment of
such Shares pursuant to the Offer. Upon the terms and subject to the conditions
of the Offer, payment for Shares accepted for payment pursuant to the Offer will
be made by deposit of the purchase price therefor with the Depositary, which
will act as agent for tendering shareholders for the purpose of receiving
payments from the Company and transmitting such payments to tendering
shareholders whose Shares have been accepted for payment. Under no circumstances
will interest on the purchase price for Shares be paid, regardless of any
extension of the Offer or delay in making such payment. In all cases, payment
for Shares tendered and accepted for payment pursuant to the Offer will be made
only after timely receipt by the Depositary of (i) the certificates evidencing
such Shares ("Share Certificates") or timely confirmation of a book-entry
transfer of such Shares into the Depositary's account at the Book-Entry Transfer
Facility (as defined in "THE TENDER OFFER--Section 2. Acceptance for Payment and
Payment for Shares" of the Offer to Purchase) pursuant to the procedure set
forth in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and
Tendering Shares" of the Offer to Purchase, (ii) the Letter of Transmittal,
properly completed and duly executed, with any required signature guarantees,
or, in the case of a book-entry transfer, an Agent's Message (as defined in "THE
TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering
Shares" of the Offer to Purchase) and (iii) any other documents required under
the Letter of Transmittal.
The Company shall, if directed by Purchasers (subject to the terms and
conditions of the Transaction Agreement), extend for any reason the time period
during which the Offer is open (such period not to exceed 10 business days in
the aggregate), including the occurrence of any condition specified in "THE
TENDER OFFER--Section 11. Certain Conditions to the Offer" of the Offer to
Purchase, by giving oral or written notice of such extension to the Depositary.
Any such extension will be followed as promptly as practicable by public
announcement thereof, such announcement to be made no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date (as defined below) of the Offer. During any such extension, all
Shares previously tendered and not withdrawn will remain subject to the Offer,
subject to the rights of a tendering shareholder to withdraw his Shares.
The term "Expiration Date" means 12:00 Midnight, New York City time, on
Wednesday, November 5, 1997, unless and until the Company, at the direction of
Purchasers (but subject to the terms and conditions of the Transaction
Agreement), shall have extended the period of time during which the Offer is
open, in which event the term "Expiration Date" shall mean the latest time and
date at which the Offer, as so extended by the Company, will expire.
Tenders of Shares made pursuant to the Offer are irrevocable except that such
Shares may be withdrawn at any time prior to the Expiration Date and, unless
theretofore accepted for payment by the Company pursuant to the Offer, may also
be withdrawn at any time after Friday, December 5, 1997. For the withdrawal to
be effective, a written notice of withdrawal must be timely received by the
Depositary at one of its addresses set forth on the back cover page of the Offer
to Purchase. Any such notice of withdrawal must specify the name of the person
who tendered the Shares to be withdrawn, the number of Shares to be withdrawn
and the name of the registered holder of such Shares, if different from that of
the person who tendered such Shares. If Share Certificates evidencing Shares to
be withdrawn have been delivered or otherwise identified to the Depositary,
then, prior to the physical release of such Share Certificates, the serial
numbers shown on such Share Certificates must be submitted to the Depositary and
the signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution (as defined in "THE TENDER OFFER--Section 3. Procedures for
Accepting the Offer and Tendering Shares" of the Offer to Purchase), unless such
Shares have been tendered for the account of an Eligible Institution. If Shares
have been tendered pursuant to the procedure for book-entry transfer as set
forth in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and
Tendering Shares" of the Offer to Purchase, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
and otherwise comply with the Book-Entry Facility's procedures. All questions as
to the form and validity (including the time of receipt) of any notice of
withdrawal will be determined by the Company, in its sole discretion, which
determination will be final and binding.
The purpose of the Transactions (as defined in "INTRODUCTION" of the Offer to
Purchase) is (i) to enable Purchasers to obtain, in the aggregate, majority
ownership in the Company and (ii) to provide the Company's shareholders with
liquidity for their Shares by enabling them to sell their Shares at a fair price
and at a premium over recent market prices more quickly than through alternative
transaction structures that had been considered. Following consummation of the
Transactions, the Shares will no longer be traded on the Nasdaq National Market
and registration of the Shares will likely be terminated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
The information required to be disclosed by Rule 13e-4(d)(1) under the
Exchange Act is contained in the Offer to Purchase and is incorporated herein by
reference.
The Offer to Purchase and the related Letter of Transmittal will be mailed to
record holders of Shares whose names appear on the Company's shareholder list
and will be furnished to brokers, dealers, commercial banks, trust companies and
similar persons whose names, or the names of whose nominees, appear on the
shareholder list or, if applicable, who are listed as participants in a clearing
agency's security position listing for subsequent transmittal to beneficial
owners of Shares.
The Offer to Purchase and the related Letter of Transmittal contain important
information which should be read before any decision is made with respect to the
Offer.
Questions and requests for assistance or for additional copies of the Offer
to Purchase and the related Letter of Transmittal and other tender offer
materials may be directed to the Information Agent or the Dealer Manager as set
forth below, and copies will be furnished promptly at the Company's expense. No
fees or commissions will be paid to brokers, dealers or other persons (other
than the Information Agent and the Dealer Manager) for soliciting tenders of
Shares pursuant to the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
[Georgeson
& Company Logo]
Wall Street Plaza
New York, New York 10005
Banks and Brokers
Call Collect: (212) 440-9800
Call Toll Free: 1-800-223-2064
THE DEALER MANAGER FOR THE OFFER IS:
[BT Alex. Brown logo]
One South Street
Baltimore, Maryland 21202
(410) 895-4525
OCTOBER 8, 1997
<PAGE> 1
PRESS RELEASE
CONTACT RAYMOND HANNIGAN
(210) 524-9000
KCI ENTERS TENDER OFFER AGREEMENT
WITH BLUM & ASSOCIATES AND FREMONT PARTNERS
SAN ANTONIO, TEXAS, OCTOBER 3, 1997 -- Kinetic Concepts, Inc. ("KCI")
(NASDAQ: KNCI) today announced that it has entered into an agreement with
Richard C. Blum and Associates, L.P. ("RCBA") and Fremont Partners, L.P.
("Fremont") in which RCBA and Fremont, in conjunction with management, will
acquire all of the outstanding common stock of KCI.
Raymond Hannigan, KCI President and Chief Executive Officer, said the
transaction will take the form of a tender offer by KCI for all of its shares at
a price of $19.25 in cash net per share and a simultaneous purchase of shares by
RCBA and Fremont. This transaction will be followed by a merger in which the
remaining public shareholders of KCI would receive the same per share cash
consideration. The total consideration to be offered for all KCI shares is
between $850 million and $875 million. The tender offer is subject to customary
terms and conditions including a minimum of 27.5 million shares of KCI common
stock being tendered, representing 67 percent of the outstanding common shares.
KCI intends to commence the tender as soon as practicable.
James R. Leininger, M.D., KCI's Board Chairman and holder of approximately
19 million common shares, has agreed to retain approximately 6 million of those
shares, representing approximately a 33.5 percent post-closing interest in the
Company; and has committed to tender the balance of his shares. After completion
of the transactions, Fremont will own approximately 40.0 percent and RCBA will
own approximately 26.5 percent of the Company. Dr. Leininger has also agreed to
grant an option to Fremont and RCBA on 4.2 million common shares which he owns.
KCI's Board of Directors has unanimously recommended that shareholders
accept the offer and has received a fairness opinion from BT Alex. Brown
Incorporated.
Hannigan said, "The expertise and success record that our two new investors
bring to the table will enable us to continue building on the traditional
strengths of the Company while also exploring new possibilities. We will stay on
course with our existing senior management team and will continue marketing our
medically proven products and valuing the support and commitment of our 2,000
KCI team members.
-more -
<PAGE> 2
"Of course, this is good news for San Antonio, too. We are proud of our
record as a good corporate citizen in this city and will continue to support the
community efforts of our employees in San Antonio."
Dr. James Leininger said, "As founder and Chairman of the Board of KCI, I
am so pleased that all our shareholders can share in the success of the Company.
In supporting this transaction, I have committed to retain a significant
interest in the Company and have been asked to continue on the Board. Both
Fremont and RCBA will be good partners for KCI's management, its employees, and
customers."
Fremont Partners, L.P. is a private equity fund based in San Francisco. It
is part of The Fremont Group, a private investment company with more than $7
billion in assets under management. Among other operating companies where
Fremont has had significant roles are Caldwell Banker; Crown Pacific (NYSE:
CRO), a major timber and forest products company; and Kerr (NYSE: KGM). Fremont
also manages publicly traded mutual funds (Fremont Funds) and real estate,
energy and venture capital assets.
Robert Jaunich II, Managing Director of Fremont Partners, said, "KCI has
explored for many months the issues of strategic options and shareholder value
optimization. We are pleased that Fremont and RCBA will have the opportunity to
partner with management and Dr. Leininger as the Company faces the challenges
ahead."
Richard C. Blum & Associates, L.P., also based in San Francisco, is a
private investment company specializing in strategic block relationship
investing with assets of approximately $2 billion under management.
Richard Blum said, "As a substantial shareholder for the past two years,
this transaction expresses our confidence in management and the principals, and
the growth prospects for the business."
KCI develops and markets innovative therapeutic healing systems that
address skin breakdown, circulatory problems, and pulmonary complications
associated with patient immobility. The Company's healing systems include
specialty beds, mattress replacement systems, and related devices. KCI serves
hospitals, long-term and home care settings throughout the United States and in
30 countries.
<PAGE> 1
[KCI LETTERHEAD]
October 8, 1997
Dear Shareholder:
On behalf of the Board of Directors of Kinetic Concepts, Inc. (the
"Company" or "KCI"), I am pleased to inform you that KCI has entered into a
Transaction Agreement, dated as of October 2, 1997 (the "Transaction
Agreement"), with Fremont Purchaser II, Inc. ("F Purchaser") and RCBA Purchaser
I, L.P. ("B Purchaser" and, together with F Purchaser, the "Purchasers"),
pursuant to which KCI has commenced a tender offer (the "Offer") to purchase for
cash all outstanding shares of its Common Stock, $.001 par value per share
("Shares"), at $19.25 per Share, net to seller in cash.
Following the successful completion of the Offer, upon the terms and
subject to the conditions contained in the Transaction Agreement, the Purchasers
will be merged with and into the Company (the "Merger"), with the Company as the
surviving corporation. At the effective time of the Merger, each remaining
issued and outstanding Share (other than those held by Purchasers, any direct or
indirect subsidiary of Purchasers or certain other parties described in the
enclosed Offer to Purchase) shall, subject to dissenters' rights if any, be
converted into the right to receive $19.25 in cash, or any higher price that may
be paid per Share pursuant to the Offer, without interest.
The Board of Directors of the Company (the "Board"), by unanimous vote of
all directors present and voting based upon, among other things, the unanimous
recommendation of the directors of the Company who are not members of the
Company's management (the "Disinterested Directors"), has determined that the
Transaction Agreement and the transactions contemplated thereby, including the
Offer and the Merger, are fair to, and in the best interests of, the Company.
The Board has also unanimously approved the Offer, the Merger and the
Transaction Agreement and recommends that shareholders accept the Offer and
tender their Shares to the Company pursuant to the Offer.
In arriving at their decisions, the Disinterested Directors and the Board
gave careful consideration to a number of factors described in the enclosed
Offer to Purchase, which is an exhibit to the Company's Tender Offer Statement
on Schedule 13E-4 being filed today with the Securities and Exchange Commission.
The enclosed Offer to Purchase describes the Disinterested Directors' and the
Board's decisions and contains other important information relating to such
decisions.
Also accompanying this letter is a Letter of Transmittal to be used for
tendering your Shares. The Offer to Purchase and Letter of Transmittal set forth
the terms and conditions of the Offer and provide instructions as to how to
tender your Shares. We urge you to read the enclosed materials carefully and
consider all factors set forth therein before making your decision with respect
to the Offer.
On behalf of the Board of Directors, management and employees of KCI, I
thank you for the support you have given KCI.
Very truly yours,
/s/ Raymond R. Hannigan
Raymond R. Hannigan
President and
Chief Executive Officer
[KCI Letterhead]
