SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
_______________________________________________________________
(Exact name of registrant as specified in its charter)
Texas 74-1891727
____________________________ _________________________________
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
___________________________ ______________________________
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 42,628,564 shares as of October 1, 1997
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
September 30, December 31,
1997 1996
------------- -----------
(unaudited)
Assets:
- -------
Current assets:
Cash and cash equivalents.............. $ 45,535 $ 59,045
Accounts and notes receivable, net..... 74,875 58,241
Inventories............................ 21,068 20,042
Prepaid expenses and other............. 10,653 6,860
------- -------
Total current assets................. 152,131 144,188
------- -------
Net property, plant and equipment........ 72,535 65,224
Notes receivable......................... 3,100 --
Goodwill, less accumulated amortization
of $13,202 in 1997 and $12,021 in 1996. 27,649 13,541
Other assets, less accumulated amorti-
zation of $2,942 in 1997 and $2,837 in
1996................................... 30,608 30,440
------- -------
$286,023 $253,393
======= =======
Liabilities and Shareholders' Equity:
- ------------------------------------
Current liabilities:
Accounts payable....................... $ 5,423 $ 3,974
Current installments of capital lease
obligations.......................... 137 118
Accrued expenses....................... 33,631 29,792
Income taxes payable................... 1,776 2,970
------- -------
Total current 40,967 36,854
------- -------
Capital lease obligations, net of current
installments........................... 340 396
Deferred income taxes, net............... 13,462 5,065
Other.................................... 208 --
------- -------
54,977 42,315
------- -------
Minority interest........................ 220 --
Shareholders' equity:
Common stock; issued and outstanding
42,486 in 1997 and 42,355 in 1996.... 42 42
Retained earnings...................... 235,579 210,816
Cumulative foreign currency translation
adjustment........................... (4,721) 555
Notes receivable from officers......... (74) (335)
------- -------
230,826 211,078
------- -------
$286,023 $253,393
======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
Rental and service..... $61,605 $56,638 $184,730 $167,523
Sales and other........ 14,694 11,332 39,781 32,306
------ ------ ------- -------
Total revenue........ 76,299 67,970 224,511 199,829
Rental expenses.......... 39,017 36,405 115,633 109,263
Cost of goods sold....... 6,065 3,856 16,077 11,685
------ ------ ------- -------
45,082 40,261 131,710 120,948
------ ------ ------- -------
Gross profit......... 31,217 27,709 92,801 78,881
Selling, general and
administrative expenses 15,052 14,080 44,196 38,791
------ ------ ------- -------
Operating earnings... 16,165 13,629 48,605 40,090
Net interest income...... 442 1,063 1,295 2,937
------ ------ ------- -------
Earnings before income
taxes and minority
interest........... 16,607 14,692 49,900 43,027
Income taxes............. 6,643 5,834 19,960 17,168
Minority interest........ 16 -- 37 --
------ ------ ------- -------
Net earnings......... $ 9,948 $ 8,858 $ 29,903 $ 25,859
====== ====== ======= =======
Earnings per common
and common equiva-
lent share........ $ 0.23 $ 0.19 $ 0.68 $ 0.56
====== ====== ======= =======
Shares used in earn-
ings per share
computations...... 44,091 45,553 43,772 45,923
====== ====== ======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended
September 30,
----------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net earnings................................ $ 29,903 $ 25,859
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization........... 17,144 16,487
Provision for uncollectible accounts
receivable............................ 2,533 2,327
Change in assets and liabilities:
Increase in accounts receivable....... (17,599) (3,159)
Increase in inventories............... (598) (2,174)
Increase in prepaid and other assets.. (3,693) (4,696)
Increase in accounts payable.......... 77 1,460
Increase in accrued expenses.......... 2,145 2,604
Increase (decrease) in income taxes
payable............................. (1,194) 968
Increase in deferred income taxes..... 8,397 613
------- ------
Net cash provided by operating
activities........................ 37,115 40,289
------- ------
Cash flows from investing activities:
Additions to property, plant, and equipment. (19,794) (18,287)
Increase in inventory to be converted into
equipment for short-term rental........... (4,210) (850)
Dispositions of property, plant, and
equipment................................. 1,809 1,400
Business acquired in purchase transactions,
net of cash acquired...................... (16,903) --
Decrease (increase) in note receivable from
principal shareholder..................... (3,000) 10,000
Increase in other assets.................... (1,115) (961)
------- ------
Net cash used by investing
activities........................ (43,213) (8,698)
------- -------
Cash flows from financing activities:
Proceeds (repayments) of capital lease
obligations............................... (307) 488
Proceeds from the exercise of stock options. 3,864 4,694
Purchase and retirement of treasury stock... (4,133) (16,599)
Cash dividends paid to shareholders......... (4,789) (4,988)
Other....................................... 607 (147)
------- -------
Net cash used by financing
activities........................ (4,758) (16,552)
------- -------
Effect of exchange rate changes on cash and
cash equivalents............................ (2,654) (457)
------- -------
Net increase (decrease) in cash and cash
equivalents................................. (13,510) 14,582
Cash and cash equivalents, beginning of year.. 59,045 52,399
------- -------
Cash and cash equivalents, end of period...... $ 45,535 $ 66,981
======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the first nine months for:
Interest.................................. 111 112
Income taxes.............................. 9,380 10,544
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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):
September 30, December 31,
1997 1996
------------ ------------
Finished goods............ $ 8,414 $ 5,586
Work in progress.......... 3,333 1,893
Raw materials, supplies
and parts............... 18,081 17,113
------- -------
29,828 24,592
Less amounts expected to be
converted into equipment for
short-term rental......... 8,760 4,550
------- ------
Total inventories.... $ 21,068 $ 20,042
======= =======
(3) NOTES RECEIVABLE
----------------
Notes receivable includes 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.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) ACQUISITIONS/DISPOSITIONS
-------------------------
On July 31, 1997, the Company acquired the outstanding
capital stock of Equi-Tron Mfg., Inc. located in Ontario, Canada,
for approximately $3.2 million in cash plus other consideration.
Equi-Tron Mfg., Inc. manufactures a line of products for bariatric
patients used primarily in the home care market. The operating
results of Equi-Tron Mfg., Inc. are not expected to have a
material impact on the Company's results of operations for 1997.
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 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 assets and technology
rights to the "Access" patient care device, an environmental
control system arm which is mountable on hospital beds. The
Company purchase price of the Access device was approximately
$2.0 million in cash plus other consideration.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Average outstanding
common shares...... 42,447 43,966 42,318 44,209
Average common
equivalent shares-
dilutive effect of
option shares...... 1,644 1,587 1,454 1,714
------ ------ ------ ------
Shares used in
earnings per share
computations....... 44,091 45,553 43,772 45,923
====== ====== ====== ======
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
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) NEW PRONOUNCEMENTS(continued)
-----------------------------
nine month periods ended September 30, 1997 and September 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.
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130, "Reporting Comprehensive Income"
which is effective for fiscal years beginning after December 15,
1997. This new pronouncement establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Under the
provisions of Statement No. 130, all revenue, expenses, gains
and losses recognized during the period are included in income,
regardless of whether they are considered to be results of
operations of the period. Items required by accounting standards
to be reported as direct adjustments to paid-in-capital, retained
earnings or other non-income equity accounts are not to be
included as components of comprehensive income. The Company plans
to adopt the provisions of Statement No. 130 effective with the
fiscal year beginning January 1, 1998, and estimates that any
impact on the Company's results of operations or financial
position will not be material.
Also, effective for periods beginning after December 15,1997,
the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This statement
establishes standards for the way that public companies report
information about operating segments in annual financial
statements as well as interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources
and in assessing performance. The Company plans to adopt the
provisions of Statement No. 131 effective with the fiscal year
beginning January 1, 1998 and estimates that adoption of
these provisions will not have a material adverse impact on the
Company's financial position or results of operations.
(8) SUBSEQUENT EVENTS
-----------------
Subsequent to September 30, 1997, the Company consummated
the acquisition of substantially all of the assets of RIK Medical,
L.L.C. ("RIK"), a Delaware limited liability company. The Company
paid approximately $23.3 million for the acquisition plus an
earn-out of up to $2.0 million. RIK is a manufacturer of
non-powered therapeutic support surfaces based in Boulder,
Colorado. The RIK products incorporate several unique and
patented components and features.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) SUBSEQUENT EVENTS(continued)
----------------------------
Subsequent to September 30, 1997, the Company and Fremont
Partners, L.P. and Richard C. Blum & Associates, L.P. (the
"Investors") entered into a Transaction Agreement (the
"Transaction Agreement") pursuant to which the Investors will
participate in the recapitalization (the "Recapitalization")
of the Company. The Transaction Agreement provides, among other
things, that the Investors would purchase in the aggregate
8,083,712 newly-issued shares of the Company's common stock,
$.001 par value per share, at a per Share price equal to $19.25
(the "Stock Purchase"). The proceeds of the Stock Purchase,
together with approximately $540.2 million of aggregate proceeds
from certain financings, will be used by the Company to
(i) purchase all of the Shares tendered to the Company pursuant
to the terms of that certain Offer to Purchase dated October 8,
1997 (the "Tender Offer") at a price of $19.25 per Share, net
to seller in cash and (ii) pay all related fees and expenses.
The Transaction Agreement provides that, among other things,
as soon as practicable after the consummation of the Stock Purchase,
the purchase of Shares pursuant to the Tender Offer, the
satisfaction of the other conditions set forth in the Transaction
Agreement, and in accordance with the requirements of the Delaware
General Corporation Law and the Revised Uniform Limited Partnership
Act of the State of Delaware (together, "Delaware Law") and the
Texas Business Corporation Act ("Texas Law"), the Investors will be
merged with and into the Company (the "Merger") with the Company as
the surviving corporation of the Merger. The consummation of
the Merger is subject to the satisfaction or waiver of certain
conditions including the approval of the Transaction Agreement and
the Merger by the requisite vote of the shareholders of the Company.
Under the Company's articles of incorporation and Texas Law, the
affirmative vote of the holders of two-thirds of the outstanding
Shares is required to approve the Transaction Agreement and the
Merger. If the Tender Offer is consummated, the Investors and
Dr. James Leininger will be able to effect the Merger without
the affirmative vote of any other shareholder.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Third Quarter of 1997 Compared to Third Quarter of 1996
- -------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as
the change in each line item as compared to the third quarter of
the prior year ($ in thousands):
Three Months Ended September 30,
-----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1997 1996 $ Pct
--------- -------- --------- -------
Revenue:
Rental and service....... 81% 83% $4,967 9%
Sales and other.......... 19% 17% 3,362 30%
--- --- -----
Total revenue.......... 100% 100% 8,329 12%
Rental expenses.......... 51% 54% 2,611 7%
Cost of goods sold....... 8% 5% 2,209 57%
--- --- -----
Gross profit........... 41% 41% 3,509 13%
Selling, general and
administrative expenses 20% 21% 972 7%
--- --- -----
Operating earnings..... 21% 20% 2,537 19%
Interest income, net..... 1% 2% (621) (58%)
--- --- -----
Earnings before income
taxes and minority
interest............. 22% 22% 1,916 13%
Income taxes............. 9% 9% 810 14%
Minority interest.... -% -% 16 -
--- --- -----
Net earnings......... 13% 13% $1,090 12%
=== === =====
The Company's revenue is derived from three primary markets. The
following table sets forth the amount of revenue derived from each of
these markets for the periods indicated ($ in millions):
Three months ended
September 30,
-------------------
1997 1996
------- -------
Domestic Specialty Surfaces...... $ 49.0 $ 46.0
International.................... 17.5 17.4
Medical Devices.................. 9.6 4.5
Other............................ .2 .1
------ ------
$ 76.3 $ 68.0
====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the third quarter of 1997 increased 12.3% to
$76.3 million, from $68.0 million in the third quarter of 1996.
Revenue from the Company's domestic specialty surface business was
$49.0 million, up $3.0 million, or 6.6% from the third quarter of
1996. The increased revenue was derived from core business growth,
due primarily to higher patient therapy days, and the addition of
H.F. Systems, which the Company acquired in February 1997.
Revenue from the Company's international operations was $17.5
million, up approximately $100,000 or just under 1.0%, from the third
quarter of 1996. The international revenue increase reflects higher
therapy days in virtually all mid and lower-tier markets, e.g., the
Netherlands, Canada and Switzerland, which were largely offset by
softness in Germany and the United Kingdom and by unfavorable currency
exchange fluctuations of $2.0 million. Revenue from Ethos Medical Group
operations, which the Company acquired in April 1997, contributed
approximately $945,000 during the period.
Revenue from medical device operations increased $5.1 million, or
113.3%, to $9.6 million in the third quarter of 1997 due to the
continued success of The V.A.C. wound closure device and increased
rental revenue for the PlexiPulse foot/calf pump resulting from the
distribution agreement signed with Mediq/PRN at the beginning of
this year.
Rental, or field, expenses were 63.3% of total rental revenue in
the third quarter of 1997 compared to 64.3% in the third quarter of
1996. This relative decrease is primarily attributable to the increase
in rental revenue, as the majority of rental expenses are relatively
fixed, e.g. facility and service costs.
Cost of goods sold increased $2.2 million, or 57.3%, to $6.1
million in the third quarter of 1997 from $3.9 million in the third
quarter of 1996. Cost of goods sold has increased primarily due to
increased sales volumes and businesses acquired in 1997.
Gross profit increased $3.5 million, or 12.7%, to $31.2 million
in the third quarter of 1997 from $27.7 million in the third quarter of
1996 due to increased rental revenue as well as increased sales
volumes of disposables used with the Company's medical devices.
Selling, general and administrative expenses increased $1.0
million, or 6.9%, to $15.1 million in the third quarter of 1997 from
$14.1 million in the third quarter of 1996. The increase is due in part
to costs associated with certain key investments (e.g. improved
marketing and information systems) as well as increased legal and
professional fees. As a percentage of total revenue, selling, general
and administrative expenses were at 19.7% in the third quarter of 1997
as compared with 20.7% in the third quarter of 1996.
Operating earnings for the period increased 18.6% to $16.2
million compared to $13.6 million in the prior-year quarter resulting
largely from the revenue growth discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Net interest income for the three months ended September 30, 1997
was approximately $400,000 compared to approximately $1.1 million in
the prior year. The decrease in interest income resulted from lower
invested cash balances due primarily to acquisition activities in the
first nine months of 1997.
The Company's effective income tax rate in the third quarter of
1997 was 40.0% compared to 39.7% in the third quarter of 1996.
Net earnings increased $1.1 million, or 12.3%, to $9.9 million
in the third quarter of 1997. This increase was due to the increase
in revenue as discussed above combined with controlled spending levels.
First Nine Months of 1997 Compared to First Nine Months of 1996
- ---------------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the first nine months
of the prior year ($ in thousands):
Nine Months Ended September 30,
----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- ------------------
1997 1996 $ Pct
--------- -------- -------- -------
Revenue:
Rental and service....... 82% 84% $17,207 11%
Sales and other.......... 18% 16% 7,475 23%
--- --- ------
Total revenue.......... 100% 100% 24,682 12%
Rental expenses.......... 52% 55% 6,370 6%
Cost of goods sold....... 7% 6% 4,392 38%
--- --- ------
Gross profit........... 41% 39% 13,920 18%
Selling, general and
administrative expenses 20% 19% 5,405 14%
--- --- ------
Operating earnings..... 21% 20% 8,515 21%
Interest income,net...... 1% 2% (1,642) (56%)
--- --- ------
Earnings before income
taxes and minority
interest............. 22% 22% 6,873 16%
Income taxes............. 9% 9% 2,792 16%
Minority interest...... -% -% 37 -
--- --- ------
Net earnings........... 13% 13% $ 4,044 16%
=== === ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
The Company's revenue is derived from three primary markets. The
following table sets forth the amount of revenue derived from each of
these markets for the periods indicated ($ in millions):
Nine months ended
September 30,
------------------
1997 1996
------- --------
Domestic Specialty Surfaces $146.9 $134.4
International.............. 51.3 51.6
Medical Devices............ 25.6 13.6
Other...................... .7 .2
----- -----
$224.5 $199.8
===== =====
Total revenue for the first nine months of 1997 increased by $24.7
million, or 12.4%, to $224.5 million. Revenue from the Company's domestic
specialty surface business was $146.9 million, up $12.5 million, or 9.3%,
from the nine months ended September 30, 1996 as all major product lines
grew. Revenue from the Company's international operations of $51.3
million declined less than 1.0% compared to the nine months ended
September 30,1996 despite unfavorable currency exchange rate fluctuations
of approximately $4.4 million for the period. Revenue from medical
device operations in the first nine months of 1997 was $25.6 million,
up $12.0 million, or 88.2%, primarily due to increased rental revenue
from both the V.A.C. wound closure device and the PlexiPulse foot/calf
pump.
Rental expenses were 62.6% of total rental revenue in the nine
months ended September 30, 1997 compared to 65.2% in the nine months of
1996. This decrease is primarily attributable to the increase in rental
revenue, as the majority of rental expenses are fixed, combined with
certain operating efficiencies associated with implementation of the
Genesis service delivery system and processes. Overall, rental expenses
increased $6.4 million, or 5.8% compared to the first nine months of
1996.
Cost of goods sold increased $4.4 million, or 37.6%, to $16.1
million for the nine months ended September 30, 1997 from $11.7 million
for the nine months of 1996. This increase is primarily due to increased
sales volumes and lower margin sales associated primarily with business
acquisitions made in 1997.
Gross profit increased $13.9 million, or 17.6%, to $92.8 million in
the nine months ended September 30, 1997 due to the increase in revenue,
controlled growth in rental expenses and improved sales volumes.
Selling, general and administrative expenses increased $5.4 million,
or 13.9%, to $44.2 million in the first nine months of 1997 from $38.8
million in the first nine months of 1996. Key investments in marketing
programs and information systems as well as higher legal and professional
fees accounted for the majority of this increase.
Operating earnings for the period increased $8.5 million, or 21.2%,
to $48.6 million compared to $40.1 million in the prioryear resulting
largely from the above-mentioned revenue growth.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Net interest income for the nine months ended September 30, 1997
was $1.3 million compared to $2.9 million in the prior year. The
decrease in interest income resulted from lower invested cash balances
due to acquisition activities in 1997 and the early payment in October
1996 of all remaining notes receivable from Mediq/PRN.
The Company's effective income tax rate in the first nine months
ended September 30, 1997 was 40.0%, compared to 39.9% in the first nine
months of 1996.
Net earnings increased $4.0 million, or 15.6%, to $29.9 million
in the first nine months of 1997 from $25.9 million in the first nine
months of 1996. This increase was due to the relative decrease in
rental expenses and the change in revenue as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the nine months ended September 30, 1997 and other factors
resulted in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $45.5 million at September 30,
1997, a decrease of $13.5 million from December 1996. The cash
decrease is primarily attributable to business/asset acquisitions
totaling $16.9 million and a temporary increase in accounts receivable
resulting from a recent billing systems conversion, offset by lower
spending for repurchases of common stock.
Accounts receivable at September 30, 1997 were $74.9 million, a
$16.6 million or 28.6%, increase from year-end. On January 2, 1997,
the Company converted to a new billing and accounts receivable system.
Implementation activities had a negative timing impact on collections
for the period. The Company expects receivable balances to decrease
over time. Business acquisition activities during the first nine months
of 1997 have also increased accounts receivable by approximately $2.4
million.
Inventory at September 30, 1997 increased 5.1% to $21.1 million
from $20.0 million at December 31, 1996 primarily due to the recent
acquisition of Ethos Medical Group, which had inventory of approximately
860,000.
Prepaid expenses increased $3.8 million, or 55.3%, to $10.7 million
for the nine months ended September 30, 1997 as compared to the year
ended December 31, 1996. This change primarily resulted from payment
timing differences in insurance, product development, commissions and
vacation accruals related to business acquisitions during 1997 which are
amortized over the year.
Net property, plant and equipment at September 30, 1997 increased
11.2% to $72.5 million from $65.2 million at December 31, 1996 due
in part to asset acquisitions such as H.F. Systems. Capital expenditures
were $22.2 million during the first nine months of 1997 as the Company
invested in new products for its rental fleet and new computer systems.
Depreciation and amortization for the first nine months of 1997
totaled $17.1 million, up 4.0% from the same period in 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Financial Condition (continued)
- ------------------------------
Notes receivable consisted of a $3.0 million note received from
James R. Leininger, M.D., the Company's principal shareholder and
chairman of the Board of Directors. The note is secured by a Deed of
Trust/Security Agreement, Vendor's Lien and 300,000 shares of KCI
Common Stock. The note bears interest at market rates and has a final
maturity of February 3, 2002.
Goodwill increased $14.1 million during the period, to $27.6
million, due primarily to the Company's four business acquisitions in
the period.
Accrued expenses at September 30, 1997 increased $3.8 million,
or 12.9%, to $33.6 million from December 31, 1996. Accruals for
payments in connection with the H.F. Systems acquisition earn-out
along with increases in insurance claim reserves, vacation and payroll
tax accruals accounted for the majority of this increase.
Deferred income taxes were $13.5 million at September 30, 1997,
an increase of $8.4 million from December 31, 1996. The increase is
primarily attributable to tax deferral strategies implemented from
December of 1996 through the second quarter of 1997.
Market Trends
- -------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities
and rehabilitation centers) and home care settings, the
consolidation of health care providers and national and regional
group purchasing organizations and the growing demand for clinically
proven therapies which lower the total cost of providing care.
In an effort to reduce the federal deficit and lower overall
federal health care expenditures, President Clinton recently signed
into law the Balanced Budget Act of 1997 (the "BBA"). The BBA
contains a number of provisions which will impact the federal
reimbursement of health care and reduce projected payments under the
Medicare system by $115 billion over the next five years. The majority
of the savings are scheduled for the fourth and fifth years of this
plan. The provisions include (i)a reduction exceeding $30 billion
in the level of payments made to acute care hospitals under Medicare
Part A over the next five years (which will be funded primarily through
a reduction in future consumer price index increases); (ii) a change on
July 1, 1998 in the manner in which skilled nursing facilities ("SNFs")
are reimbursed from a cost-based system to a prospective payment system
under which the SNFs will receive an all inclusive, casemix-adjusted per
diem payment for each of their Medicare patients; and (iii) a five-year
freeze on consumer price index updates for Medicare Part B services
in the home and the implementation of competitive bidding trials for five
categories of home care products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends(continued)
- ------------------------
Less than 10% of the Company's revenue is received directly from
the Medicare system. However, many of the health care providers who
pay the Company for its products are reimbursed, either directly or
indirectly, by the Federal government under the Medicare system for
the use of those products. The Company does not believe that the changes
introduced by the BBA will have a material impact on our hospital
customers or the dealers we partner with in home health care.
However, the changes to the Medicare system introduced by the BBA may
have an impact on the manner in which the Company's extended care
customers make purchasing decisions. Because the Company has focused
on providing clinically efficacious and cost effective products, it
believes it is well positioned for the changes in extended care
reimbursement introduced by the BBA. Although these changes may impact
revenue in the short term as the Company's extended care customers begin
to understand the impact of the changes on their respective businesses,
the Company does not believe that any of the changes introduced by the
BBA will have a material adverse impact on its business.
The Company's market continues to increase based upon demographic
trends as most of the Company's patients are over 50 years old.
Further, its broad product line and national distribution system
enable it to compete effectively in the changing healthcare environment.
More recently, sales have increased as a portion of the Company's
revenue. The Company believes this trend will continue because certain
U.S. health care providers are purchasing products that are less
expensive and easier to maintain such as medical devices and related
disposables, mattress overlays and mattress replacement systems. In
addition, international health care providers tend to purchase products
more often than U.S. health care providers.
Legal Proceedings
- -----------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for
the Western District of Texas. Novamedix manufactures the
principal product which directly competes with the PlexiPulse. The
suit alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship
with Novamedix and a variety of ancillary claims. Novamedix seeks
injunctive relief and monetary damages. 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
adverse 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. Specifically, the
allegations set forth in the suit include a claim that Hill-Rom
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products
over which they have monopoly power -- hospital beds and head wall
units. The suit further alleges that Hill-Rom engaged in
activities which constitute predatory pricing and refusals to deal.
Hill-Rom has filed an answer denying the allegations in the suit.
Although discovery has not been completed 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 KCI 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 bed infringes a patent issued to HillRom
December 24, 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 preliminary
investigation, the Company believes that its defenses to the lawsuit
are meritorious and that this lawsuit will not have a material adverse
impact on the marketing of the TriaDyne bed.
The Company is a party to several lawsuits arising in the ordinary
course of its business and is contesting adjustments proposed by the
Internal Revenue Service to prior years' tax returns. To the extent
management believes reserves are justified, reserves, have been made in
the Company's financial statements for estimated exposures related
to these lawsuits and adjustments. In the opinion of management, the
disposition of these matters will not have a material adverse effect on
the Company's business, financial condition or results of operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain product liability claims pending for
which provision has been made in the Company's financial statements.
Management believes that resolution of these claims will not have a
material adverse effect on the Company's business, financial condition
or results of operations. The Company has not experienced any
significant losses due to product liability claims and currently
maintains adequate liability insurance coverage.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1997, the Company
generated net cash provided by operating activities of $37.1 million
compared to $40.3 million in the prior year period. The majority of this
decrease was attributable to the temporary increase in accounts
receivable, which increased $16.6 million from year-end 1996. The
Company also made four business acquisitions during the period for an
aggregate purchase price of approximately $16.9 million in cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- ------------------------------------------
At September 30, 1997, cash and cash equivalents totaling $45.5
million were available for general corporate purposes. Additionally,
the Company maintains a Credit Agreement with a bank as an agent
for itself and certain other financial institutions. The Credit
Agreement currently permits borrowings of up to $50 million. At
September 30, 1997, the entire amount of the Credit Agreement was
unused. Furthermore, in connection with the recapitalization the
Company is negotiating with the same bank as agent for itself
and certain other financial institutions to secure two (2) credit
facilities each in the amount of $50 million. The first facility
will in effect replace the existing revolving credit facility and
extend the commitment from said banks beyond the next twelve
months. The second facility will be for the express purpose of
financing acquisitions. The Company expects these facilities to be
secured before the end of the year. The Company believes that current
cash reserves combined with operating cash flows and available credit
facilities (either currently existing or to be secured)during the next
twelve month period will be sufficient to provide for new investments,
e.g., business acquisitions, technology or equipment, and any working
capital needed during the period.
Subsequent to September 30, 1997, the Company used approximately
$23.3 million of its available cash to effect the purchase of
substantially all of the assets of RIK Medical.
At September 30, 1997, the Company was committed to purchase
approximately $1.1 million of inventory associated with new
products over the remainder of this year. The Company did not have
any other material purchase commitments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
Exhibit Description
------- -----------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Reistration
Statement on Form S-1 as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to
the Annual Report on Form 10-K
for the year ended December 31,
1988, and incorporated herein by
reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company, Inc.
(filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed as
Exhibit 10.10 to the Company's Registration
Statement on Form S-1, as amended (Registration
No. 33-21353), and incorporated herein by
reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery trucks
(filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1, 1989
(filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein by
reference).
EXHIBITS (continued)
--------------------
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989,
and incorporated herein by reference).
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support Services-
I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form 8K dated
October 17, 1994, and incorporated herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic Services,
Inc. and Voluntary Hospitals of America,
Inc.(filed as Exhibit 10.18 to the Company's
Amended Annual Report on Form 10K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P. (filed as Exhibit 10.19 to the Company's
Amended Annual Report on Form 10-K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.20 KCI Management 1994 Incentive Program (filed
as Exhibit 10.20 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
10.21 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining the
terms of his employment (filed as Exhibit
10.23 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan (filed as
Exhibit 10.24 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23, 1996,
for the year ended December 31, 1994, and
incorporated herein by reference).
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes (filed as
Exhibit 10.25 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23, 1996,
for the year ended December 31, 1994,
and incorporated herein by reference).
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
EXHIBITS (continued)
--------------------
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).
10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.33 Asset Purchase Agreement dated January 3,
1997 by and among Trac Medical, Inc., a North
Carolina corporation, Terry Williams, David
Mattis, George Parrish and KCI Therapeutic
Services, Inc., a Delaware corporation(filed
as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.34 Asset Purchase Agreement dated January 27,
1997 by and among Hydrothermic Floatation
Systems, Inc., a California corporation, Y.
Jeremy Levy and KCI Therapeutic Services,
Inc., a Delaware corporation (filed as Exhibit
10.34 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference).
10.35 Agreement for the sale and purchase of 80% of
the issued share capital of Ethos Medical
Group Limited by KCI International, Inc. dated
April 18, 1997 (filed as Exhibit 10.35 to the
Company's Quarterly Report on Form 10Q for the
quarter ended June 30, 1997 and incorporated
herein by reference.)
*10.36 Asset Purchase Agreement made as of July 31,
1997 between KCI Equi-Tron, Inc. as Purchaser
and James H. Alexander, Elleanor Alexander and
Scott Alexander as vendors.
10.37 Transaction Agreement, dated as of October 2,
1997, among Fremont Purchaser II, Inc., RCBA
Purchaser I, L.P. and the Company (filed as
Exhibit (c)(1) to the Company's Schedule 13E3
dated October 8, 1997, and incorporated herein
by reference.)
EXHIBITS (continued)
-------------------
10.38 Kinetic Concepts, Inc. Management Equity Plan
(filed as Exhibit (c)(4) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
10.39 Management Equity Agreement for Raymond R.
Hannigan, dated October 2, 1997 (filed as
Exhibit (c)(6) to the Company's Schedule 13E3
dated October 8, 1997, and incorporated herein
by reference.)
10.40 Offer to Purchase, dated October 8, 1997
(filed as Exhibit (d)(1) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
11.1 Earnings Per Share Computation (filed as
Exhibit 11.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
13.1 Kinetic Concepts, Inc. 1996 Annual Report to
Shareholders (furnished for the information of
the Commission and not deemed to be "filed,"
except for those portions expressly
incorporated herein by reference)(filed as
Exhibit 13.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
16.1 Letter from KPMG Peat Marwick LLP to the
Securities and Exchange Commission regarding
agreement with statements made by Registrant
under Item 9 of its Form 10-K dated March 28,
1997 (filed as Exhibit 16.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
22.1 List of Subsidiaries (filed as Exhibit 22.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and
incorporated herein by reference).
*27.1 Financial Data Schedule.
Note: (*) Exhibits filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /s/ JAMES R. LEININGER, M.D.
-----------------------------------
James R. Leininger, M.D.
Chairman of the Board
By: /s/ RAYMOND R. HANNIGAN
-----------------------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /s/ MARTIN J. LANDON
-----------------------------------
Martin J. Landon
Vice President, Accounting and
Corporate Controller
Date: October 28, 1997
SHARE PURCHASE AGREEMENT
Made as of July 31, 1997
Between
KCI EQUI-TRON INC.
as Purchaser
and
JAMES H. ALEXANDER
ELLEANOR ALEXANDER and
SCOTT ALEXANDER
as Vendors
TABLE OF CONTENTS
RECITALS 1
SECTION 1 - INTERPRETATION
1.1 Definitions......................................... 1
(1) Affiliate...................................... 2
(2) Agreement...................................... 2
(3) Applicable Law................................. 2
(4) Annual Financial Statements.................... 2
(5) Benefit Plans.................................. 2
(6) Business....................................... 2
(7) Business Day................................... 2
(8) Canadian Dollars and the symbol C$............. 2
(9) Claim.......................................... 2
(10) Closing Date................................... 3
(11) Closing Financing Statements................... 3
(12) Closing Time................................... 3
(13) Contaminant.................................... 3
(14) Corporation.................................... 3
(15) Encumbrance.................................... 3
(16) Environmental Claim............................ 3
(17) Environmental Law.............................. 3
(18) Equi-US........................................ 4
(19) Environmental Permits.......................... 4
(20) Escrow Agent................................... 4
(21) Escrow Agreement............................... 4
(22) Escrow Amount.................................. 4
(23) Excluded Property.............................. 4
(24) First Refusal Property......................... 4
(25) GAAP........................................... 4
(26) Governmental Authority......................... 4
(27) Gross Revenue.................................. 4
(28) Intellectual Property.......................... 5
(29) Invacare Rights................................ 5
(31) Lease.......................................... 5
(32) Leased Premises................................ 5
(33) Notice......................................... 5
(34) Offered Property............................... 5
(35) Person......................................... 5
(36) Property....................................... 5
(37) Purchase....................................... 6
(38) Purchase Price................................. 6
(39) Purchased Shares............................... 6
(40) Release........................................ 6
(41) Shareholders' Equity........................... 6
(42) Statement Date................................. 6
(43) Tax or Taxes................................... 6
(44) Third Party Offer.............................. 7
(45) United States Dollars and the symbol US$....... 7
1.2 Headings and References............................. 7
1.3 Extended Meanings................................... 7
1.4 Best of Knowledge................................... 7
1.5 Schedules........................................... 7
SECTION 2 - PURCHASE AND SALE
2.1 Purchase and Sale................................... 8
2.2 Payment............................................. 8
2.3 Allocation of Purchase Price........................ 9
2.4 Closing Financial Statements........................ 9
2.5 Disputes Concerning Closing Financial Statements.... 10
2.6 Purchase Price Adjustment........................... 10
2.7 Calculation of Gross Revenue........................ 11
SECTION 3 - REPRESENTATIONS AND WARRANTIES OF THE VENDORS
3.1 Corporate Matters................................... 11
(1) Status and Capacity of Corporation............. 11
(2) Capacity of Vendor............................. 11
(3) Enforceability................................. 12
(4) Residence...................................... 12
(5) Investments.................................... 12
(6) Corporate Records.............................. 12
(7) Transfer Taxes................................. 12
(8) Shareholders' Agreements, etc.................. 12
(9) Licences and Permits........................... 12
(10) Operations and Assets.......................... 12
3.2 Share Capital and Dividends and Shares.............. 13
(1) Authorized and Issued Share Capital............ 13
(2) Title to Shares................................ 13
(3) No Other Purchase Agreements................... 13
(4) Dividends...................................... 13
(5) Contractual and Regulatory Approvals........... 13
3.3 Financial Matters................................... 14
(1) Books and Records.............................. 14
(2) Financial Statements........................... 15
(3) Liabilities of the Corporation................. 15
(4) Outstanding Agreements......................... 15
(5) Product Guarantees, Warranties and Discounts... 15
(6) Accounts Receivable............................ 16
(7) Inventories.................................... 17
(8) Absence of Certain Changes or Events........... 17
(9) Tax Matters.................................... 19
(10) Bank Accounts and Authorizations............... 20
(11) Insurance...................................... 20
(12) Capital Expenditures........................... 21
(13) Non-Arm=s Length Matters....................... 21
3.4 Property of Corporation............................. 21
(1) Title to Assets................................ 21
(2) Real Properties................................ 22
(3) Leases and Leased Premises..................... 22
(4) Status of Property............................. 23
(5) Environmental Matters.......................... 23
(6) Personal Property.............................. 24
(7) Work Orders and Deficiencies................... 24
(8) Plants, Facilities and Equipment............... 24
(9) Intellectual Property.......................... 24
3.5 Conduct of Business................................. 25
(1) Suppliers...................................... 25
(2) Customers...................................... 25
(3) Necessary Assets............................... 25
(4) Restrictions on Doing Business................. 25
(5) Contracts...................................... 25
3.6 Employment Matters.................................. 26
(1) Employees...................................... 26
(2) Benefit Plans.................................. 26
(3) Remuneration................................... 26
(4) Labour Matters and Employee Contracts.......... 26
(5) Employee Legislation........................... 27
3.7 General Matters..................................... 27
(1) Compliance with Constating Documents, Agreements
and Laws....................................... 27
(2) Litigation..................................... 27
3.8 Equitron, Inc....................................... 28
(1) Jurisdiction and Ownership..................... 28
(2) Business....................................... 28
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
4.1 Status.............................................. 28
4.2 Due Authorization................................... 28
4.3 Enforceability...................................... 28
4.4 Contractual and Regulatory Approvals................ 28
4.5 Compliance with Constating Documents, Agreements
and Laws............................................ 29
SECTION 5 - FIRST RIGHT OF REFUSAL
5.1 First Right of Refusal.............................. 29
SECTION 6 - CONDITIONS
6.1 Closing Conditions in Favour of the Purchaser....... 30
(1) Vendors' Obligations........................... 30
(2) Adverse Proceedings............................ 30
(3) Status of Lease................................ 30
(4) Employment Agreements.......................... 30
(5) Indebtedness of Shareholders, Directors etc.... 30
(6) Releases and Resignations...................... 30
(7) Corporate Action............................... 31
(8) Approvals, Consents, Etc....................... 31
(9) Invacare Rights................................ 31
(10) Purchaser's Approval........................... 31
(11) Approval of Counsel and Opinion................ 31
6.2 Closing Conditions in Favour of the Vendor.......... 31
(1) Purchaser's Obligations........................ 31
(2) Adverse Proceedings............................ 31
(3) Personal Guarantees............................ 31
(4) Corporate Action............................... 31
(5) Approvals, Consents, Etc....................... 31
(6) Approval of Counsel and Opinions............... 32
SECTION 7 - SURVIVAL AND INDEMNITY
7.1 Survival............................................ 32
7.2 Indemnity of the Vendors............................ 33
7.3 Indemnity of the Purchaser.......................... 33
7.4 Limitations......................................... 34
7.5 Notice of Claim..................................... 34
7.6 Direct Claims....................................... 34
7.7 Third Party Claims.................................. 35
7.8 Settlement of Third Party Claims.................... 35
7.9 Co-operation........................................ 35
7.10 Exclusivity......................................... 36
SECTION 8 - CLOSING
8.1 Closing............................................. 36
SECTION 9 - ARBITRATION
9.1 Rules............................................... 36
SECTION 10 - MISCELLANEOUS
10.1 Shareholder Loans................................... 37
10.2 Dissolution of Equi-US.............................. 37
10.3 Further Assurances.................................. 37
10.4 Preservation of Books and Records................... 37
10.5 Brokers............................................. 37
10.6 Notice.............................................. 37
10.7 Time................................................ 39
10.8 Governing Law....................................... 39
10.9 Entire Agreement.................................... 39
10.10 Severability....................................... 39
10.11 Assignment and Enurement........................... 39
10.12 Counterparts....................................... 39
SHARE PURCHASE AGREEMENT
This Agreement is made as of July 31, 1997, between
KCI EQUI-TRON INC., a corporation formed
under the laws of Ontario
as Purchaser
and
JAMES H. ALEXANDER
ELLEANOR ALEXANDER
SCOTT ALEXANDER, each of the
town of Milton, province of Ontario
as Vendors
RECITALS
A. The Vendors are the registered and beneficial owners of the
Purchased Shares.
B. The Purchaser wishes to purchase and the Vendors wish to
sell the Purchased Shares on the terms and conditions of this
Agreement.
C. The Purchaser is a wholly-owned subsidiary of Kinetic
Concepts, Inc., a Delaware corporation ("KCI").
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 - INTERPRETATION
1.1 Definitions. In this Agreement:
(1) Affiliate means any Person that directly or indirectly
controls, is controlled by, or is under common control with,
another Person and for greater certainty includes a Subsidiary.
For the purposes of this definition, a Person Acontrols@ another
Person if that Person directly or indirectly possesses the power
to direct or cause the direction of the management and policies
of that other Person, whether through the ownership of
securities, by contract or by any other means and "controlled by"
and "under common control with" have corresponding meanings.
(2) Agreement means this agreement including any recitals and
schedules to this agreement, as amended, supplemented or restated
from time to time.
(3) Applicable Law, in respect of any Person, property,
transaction or event, means all laws, statutes, regulations,
treaties, judgments and decrees applicable to that Person,
property, transaction or event and all legally effective
directives, rules and orders of any Governmental Authority of
competent jurisdiction having authority over that Person,
property, transaction or event.
(4) Annual Financial Statements means the unaudited financial
statements of the Corporation as at and for the twelve month
period ended February 28, 1997 consisting of a balance sheet,
statement of loss, statement of deficit and statement of changes
in financial position for the period then ended, together with
the notes thereto, as reviewed by Lorne C. Wallace, Chartered
Accountant.
(5) Benefit Plans has the meaning given to it in Section 3.6(1).
(6) Business means the business of designing, developing,
manufacturing, distributing and selling of health care related
products including beds and bed systems as now conducted by the
Corporation.
(7) Business Day means a day on which banks are open for
business in Toronto, Ontario and San Antonio, Texas but does not
include a Saturday, Sunday or any other day which is a legal
holiday in any such city.
(8) Canadian Dollars and the symbol C$ each means lawful money
of Canada.
(9) Claim has the meaning given to it in Section 7.2.
(10) Closing Date means July 31, 1997 or such other date as may
be agreed by the parties.
(11) Closing Financing Statements has the meaning given to it in
Section 2.4.
(12) Closing Time has the meaning given to it in Section 8.1.
(13) Contaminant means any hazardous product, dangerous good,
chemical waste, toxic substance, contaminant, pollutant or
deleterious substance.
(14) Corporation means Equi-tron Mfg. Inc., a corporation
subsisting under the laws of Ontario.
(15) Encumbrance means any charge, mortgage, lien, pledge, claim,
restriction, security interest or other encumbrance whether
created or arising by agreement, statute or otherwise at law,
attaching to property, interests or rights and shall be construed
in the widest possible terms and principles known under the law
applicable to such property, interests or rights and whether or
not they constitute specific or floating charges as those terms
are understood under the laws of the Province of Ontario.
(16) Environmental Claim means a written claim, notice,
enforceable administrative order, citation, complaint, summons,
writ, proceeding or demand relating to remediation,
investigation, monitoring, emergency response, decontamination,
restoration or other action required by a Governmental Authority
of competent jurisdiction under any Environmental Law or any
notice, claim, demand or other communication alleging or
asserting liability of the Corporation, for investigatory,
monitoring or cleanup costs, Governmental Authority response
costs, damages, personal injuries, fines, penalties or for other
relief, and arising out of, based on or resulting from (i) the
presence, or Release into the environment, of any Contaminant in
violation of any Environmental Law, or (ii) any non-compliance or
alleged non-compliance by the Corporation with any Environmental
Law.
(17) Environmental Law means all Applicable Laws to the extent
relating to the protection and preservation of the environment or
the manufacture, processing, distribution, use, treatment,
storage, disposal, discharge, packaging, transport, handling,
containment, clean-up or other remediation or corrective action
of any Contaminant, including the Environmental Protection Act,
(Ontario), as amended from time to time, and the Canadian
Environmental Protection Act, as amended from time to time.
(18) Equi-US has the meaning given to it in Section 3.8.
(19) Environmental Permits means all permits, certificates,
approvals, consents, registrations and licences issued by any
Governmental Authority of competent jurisdiction under
Environmental Laws.
(20) Escrow Agent means McMillan Binch.
(21) Escrow Agreement means the escrow agreement of even date
herewith between the Vendors, the Purchaser and the Escrow Agent.
(22) Escrow Amount means US$115,000.
(23) Excluded Property means the Corporation=s interest in the
research and development projects conducted by the Corporation
and James Alexander relating to: (i) the breast pump project,
(ii) the patient quad control project, (iii) the chest percussor
project, and (iv) the postual drainage table project, including
all Intellectual Property related exclusively thereto and all
rights with respect to the manufacture, sale and distribution of
any future products resulting from such projects.
(24) First Refusal Property has the meaning given to it in
Section 5.1.
(25) GAAP means generally accepted accounting principles in
effect in Canada at the relevant time, including the accounting
recommendations published in the Handbook of the Canadian
Institute of Chartered Accountants.
(26) Governmental Authority means any domestic or foreign
government, including any federal, provincial, state, territorial
or municipal government, and any government agency, tribunal,
commission or other authority exercising executive, legislative,
judicial or regulatory functions of, or pertaining to,
government.
(27) Gross Revenue means, in respect of any year, the revenues
received by the Corporation and its Affiliates during such year
from the sale of the Corporation's products existing or under
development on the Closing Date and identified in Schedule
1.1(27) (other than the Excluded Property) less:
(a) quantity, trade and cash discounts provided by the
Corporation or its Affiliates to its customers in
respect of such products;
(b) an allowance for returns in respect of such sales,
consistent with the past experience of the Corporation
and its Affiliates;
(c) freight, transportation and other delivery expenses
incurred by the Corporation or its Affiliates in
respect of such sales; and
(d) all sales, withholding or other Taxes incurred by the
Corporation or its Affiliates in respect of such sales.
(28) Intellectual Property means all patents, patent applications
and registrations, inventions, trade marks, trade names, trade
mark applications and registrations, trade name registrations,
service marks, designs, copyrights, copyright applications and
registrations, industrial designs, trade secrets, know how,
inventions and other intellectual property domestic or foreign,
owned or used by the Corporation or relating to the Business but
not relating to Excluded Property.
(29) Invacare Rights means the proprietary rights described in
Schedule 6.1(9).
(30) KCI has the meaning given to it in the recitals to this
agreement.
(31) Lease has the meaning given to it in Section 3.4(3).
(32) Leased Premises has the meaning given to it in Section
3.4(3).
(33) Notice means any notice, approval, demand, direction,
consent, designation, request, document, instrument, certificate
or other communication required or permitted to be given under
this Agreement.
(34) Offered Property has the meaning given to it in Section 5.1.
(35) Person means any natural person, sole proprietorship,
partnership, corporation, trust, joint venture, any Governmental
Authority or any incorporated or unincorporated entity or
association of any nature.
(36) Property means the Leased Premises, the Corporation's
interest in the Lease, and any real property now or previously
owned or occupied by the Corporation or any of its predecessors.
(37) Purchase means the transaction of purchase and sale of the
Purchased Shares contemplated by this Agreement.
(38) Purchase Price has the meaning given to it in Section 2.1.
(39) Purchased Shares means all the shares in the capital of the
Corporation outstanding as at the opening of business on the
Closing Date.
(40) Release means any release, spill, leak, emission, pumping,
injection, deposit, discharge, dispersal, leaching, migration,
spraying, abandonment, pouring, emptying, throwing, dumping,
placing or exhausting of a Contaminant, and when used as a verb
has a like meaning.
(41) Shareholders' Equity means the aggregate of the following
amounts, each determined in accordance with GAAP as shown on the
Closing Financial Statements:
(a) stated capital,
(b) retained earnings (other than retained earnings arising
from a revaluation of assets) or deficit, and
(c) contributed surplus.
(42) Statement Date means the date of the Annual Financial
Statements, which for greater certainty is February 28, 1997.
(43) Tax or Taxes includes all present and future taxes,
surtaxes, duties, levies, imposts, rates, fees, assessments,
withholdings, dues and other charges of any nature imposed by any
Governmental Authority, including income, capital (including
large corporations), withholding, consumption, sales, use,
transfer, goods and services or other value-added, excise,
customs, anti-dumping, countervail, net worth, stamp,
registration, franchise, payroll, employment, health, education,
business, school, property, local improvement, development,
education development and occupation taxes, surtaxes, duties,
levies, imposts, rates, fees, assessments, withholdings, dues and
charges, together with all fines, interest, penalties on or in
respect of, or in lieu of or for non-collection of, those taxes,
surtaxes, duties, levies, imposts, rates, fees, assessments,
withholdings, dues and other charges.
(44) Third Party Offer has the meaning given to it in Section
5.1.
(45) United States Dollars and the symbol US$ each means lawful
money of the United States of America.
1.2 Headings and References. The division of this Agreement
into sections and subsections and the insertion of headings are
for convenience of reference only and shall not affect the
construction or interpretation of this Agreement. The terms
"this Agreement", "hereof", "hereunder" and similar expressions
refer to this Agreement and not to any particular section,
subsection or other portion hereof and include any agreement
supplemental hereto. Unless something in the subject matter or
context is inconsistent therewith, references herein to
"Sections" are to sections, subsections and further subdivisions
of sections of this Agreement.
1.3 Extended Meanings. Unless otherwise specified, words
importing the singular include the plural and vice versa and
words importing gender include all genders. The term "including"
means "including without limitation".
1.4 Best of Knowledge. Any statement in this Agreement
expressed to be made to "the best of the Vendors' knowledge" and
any other references to the knowledge of the Vendors shall be
understood to be made on the basis of the Vendors' actual
knowledge, after diligent inquiry, of the relevant subject matter
or on the basis of such knowledge of the relevant subject matter
as the Vendors would have had if they had conducted such diligent
inquiry.
1.5 Schedules. The following are the schedules annexed to this
Agreement and incorporated by reference and deemed to be part
hereof:
Schedule 1.1(27) - Products of the Corporation
Schedule 2.3 - Allocation of Purchase Price
Schedule 3.1(10) - Operations and Assets
Schedule 3.2(5) - Contractual and Regulatory
Approvals
Schedule 3.3(4) - Outstanding Agreements
Schedule 3.3(5) - Product Guarantees, Warranties
and Discounts
Schedule 3.3(6) - Accounts Receivable
Schedule 3.3(8)(n) - Employee Compensation
Schedule 3.3(10) - Bank Accounts and Authorizations
Schedule 3.3(11) - Insurance
Schedule 3.3(13) - Non-Arm's Length Matters
Schedule 3.4(1) - Encumbrances
Schedule 3.4(3) - Leased Premises
Schedule 3.4(6) - Personal Property
Schedule 3.4(9) - Intellectual Property
Schedule 3.5(1) - Suppliers
Schedule 3.5(2) - Customers
Schedule 3.5(5) - Contracts
Schedule 3.6(1) - Employees and Benefit Plans
Schedule 3.6(5) - Occupational Health and Safety Matters
Schedule 4.4 - Contractual and Regulatory Approvals
Schedule 6.1(3) - Form of Lease
Schedule 6.1(9) - Invacare Rights
Schedule 6.2(7) - KCI Indemnity
Schedule 6.2(8) - Employee Bonus
SECTION 2 - PURCHASE AND SALE
2.1 Purchase and Sale.
(1) The Vendors shall sell and the Purchaser shall purchase
all but not part of the Purchased Shares upon and
subject to the terms and conditions of this Agreement
for a purchase price (the "Purchase Price") equal to
the aggregate of:
(a) U.S.$3,000,000 (the "Fixed Dollar Portion"); and
(b) the amount (the "Earnout Portion") determined in
accordance with Section 2.1(2).
(2) The Earnout Portion will be equal to the aggregate of
5% of the Gross Revenue (stated in United States
dollars) received by the Corporation and its
Affiliates in respect of each twelve month period
ending on July 31 commencing with the fiscal year
ending July 31, 1998 and terminating with the fiscal
year ending on July 31, 2004. If the Earnout Portion
otherwise determined (the "Aggregate Earnout") is less
than US$750,000 (the "Minimum Earnout"), the Purchaser
shall pay to the Vendors the difference between the
Minimum Earnout and the Aggregate Earnout (the "Earnout
Difference").
2.2 Payment.
(1) The Fixed Dollar Portion of the Purchase Price less the
Escrow Amount shall be paid and satisfied by the
Purchaser by wire transfer of immediately available
funds to such account of the Vendors as may be
designated in writing by the Vendors to the Purchaser
no later than three Business Days prior to the Closing
Date.
(2) The Escrow Amount shall be paid by the Purchaser to the
Escrow Agent by wire transfer of immediately available
funds, to be held by the Escrow Agent in escrow in
accordance with the terms of the Escrow Agreement.
(3) The Earnout Portion of the Purchase Price in respect of
a twelve month period shall be paid by the Purchaser to
the Vendors, on or before October 29 in the calendar
year following the end of such twelve month period.
(4) The Purchaser shall pay to the Vendors, the Earnout
Difference, if any, on or before October 29, 2002, with
the Earnout Difference being credited against any
remaining payment of the Earnout Portion of the
Purchase Price.
(5) From time to time after the Closing Date, the Purchaser
shall be entitled to set-off against and deduct from
any amount payable under this Section 2.2 the aggregate
amount of claims made by the Purchaser under Section 7
subject to the limitation contained in Section 7.4.
2.3 Allocation of Purchase Price. The Purchaser and the Vendors
shall allocate the Purchase Price among the Purchased Shares as
set out in Schedule 2.3. The Vendors and the Purchaser agree
that the values so attributed to the Purchased Shares are the
respective fair market values thereof, and each party shall file
in mutually agreeable form all returns and elections required or
desirable under the Income Tax Act (Canada) in a manner
consistent with the foregoing allocations.
2.4 Closing Financial Statements. As soon as is practicable, and
in any event not later than 45 days following the Closing Date,
the Vendors shall deliver to the Purchaser an unaudited balance
sheet for the Corporation as of the close of business on the
Closing Date (the "Closing Balance Sheet") and an unaudited
income or loss statement for the Corporation for the period from
March 1, 1997 to the Closing Date (the "Closing Income
Statement") each of which shall be reviewed by Lorne C. Wallace,
Chartered Accountant. The Closing Balance Sheet and the Closing
Income Statement (collectively, the "Closing Financial
Statements") shall be prepared in accordance with GAAP applied on
a basis consistent with the Annual Financial Statements and shall
present fairly the financial position of the Corporation as at
the Closing Date and the sales, income or loss and net income or
loss for the period from March 1, 1997 to the Closing Date. For
greater certainty, the Closing Financial Statements shall include
an accrual for the employee bonus paid pursuant to Section 6.2(8)
and an accrual for products warranty obligations of the
Corporation determined in accordance with GAAP.
2.5 Disputes Concerning Closing Financial Statements. The
Purchaser or its auditors, Ernst & Young, Chartered Accountants,
may dispute any aspect of the Closing Financial Statements by
notice in writing given to the Vendors within 30 days following
delivery of the Closing Financial Statements to the Purchaser.
During such time, the Purchaser shall, if it so requests, have
access to Lorne C. Wallace's working papers. Unless such dispute
is not resolved promptly by agreement, the Vendors and the
Purchaser may request Coopers & Lybrand (the "Independent
Accountant") to arbitrate the dispute. The Independent
Accountant shall designate a partner (the "Arbitrator") to
determine the matter in dispute as a single arbitrator in
accordance with the Arbitrations Act, 1991 (Ontario). The cost
of the arbitration shall be borne by the parties in accordance
with the discretion of the Arbitrator having due regard to the
outcome of the arbitration. The decision of the Arbitrator with
respect to any matter in dispute (including as to all procedural
matters and as to any decision as to costs) shall be final and
binding on the Vendors and the Purchaser and shall not be subject
to appeal by any party. Upon agreement with respect to all
matters in dispute, or upon a decision of the Arbitrator with
respect to all matters in dispute, such amendments shall be made
to the Closing Financial Statements as may be necessary to
reflect such agreement or such decision, as the case may be. In
such event, references in this Agreement to the Closing Financial
Statements, will refer to the Closing Financial Statements, as so
amended.
2.6 Purchase Price Adjustment. If the Shareholders Equity shown
on the Closing Balance Sheet is less than C$160,000, the Fixed
Dollar Portion of the Purchase Price payable for the Purchased
Shares shall be decreased by an amount equal to the difference
between C$160,000 and the Shareholders Equity with such
difference being converted to US dollars at the spot rate quoted
by Royal Bank of Canada on the Closing Date. In the event that
such a reduction in the Fixed Dollar Portion of the Purchase
Price occurs, James Alexander (on his own behalf and on behalf of
the other Vendors) and the Purchaser shall jointly direct the
Escrow Agent to pay such amount out of the Escrow Amount (plus
any interest accumulated on such amount) to the Purchaser, and
the remaining portion, if any, of the Escrow Amount (plus any
interest accumulated on such remaining portion) to James
Alexander (on his own behalf and on behalf of the other Vendors).
In the event that the reduction in the Fixed Dollar Portion of
the Purchase Price exceeds the Escrow Amount, the Vendors shall
forthwith pay such difference to the Purchaser by certified
cheque or banker's draft in US dollars in immediately available
funds to or to the order of the Purchaser. If the Shareholder=s
Equity shown on the Closing Balance Sheet is equal to or greater
than C$160,000, James Alexander (on his own behalf and on behalf
of the other Vendors) and the Purchaser shall jointly direct the
Escrow Agent to pay the Escrow Amount (plus interest accumulated
thereon) to James Alexander (on his own behalf and on behalf of
the other Vendors).
2.7 Calculation of Gross Revenue. Within 75 days following the
twelve month period in respect of which the Earnout Portion of
the Purchase Price is payable, the Purchaser shall cause its
accountants, Ernst & Young, to determine the Gross Revenue
received by the Corporation and its Affiliates in respect of such
12 month period and to deliver a written notice (the "Gross
Revenue Notice") to the Vendors setting forth such determination
including a breakdown of Gross Revenue by product. The Vendors
may dispute any aspect of the Gross Revenue Notice by notice in
writing given to the Purchaser within 14 days following delivery
of the Gross Revenue Notice to the Vendors. During such time,
the Vendors shall, if they so request, have access to Ernst &
Young's working papers. If the Purchaser has not received a
notice of a dispute within the 14-day period referred to in this
Section 2.7, the Purchaser shall pay the Earnout Portion of the
Purchase Price in accordance with Section 2.2(3). If the Vendors
and the Purchaser cannot resolve a dispute relating to the Gross
Revenue Notice promptly by agreement, the Vendors and the
Purchaser may request the Independent Accountant to arbitrate the
dispute in accordance with the provisions of Section 2.5. On
agreement with respect to all matters in dispute or upon a
decision of the Arbitrator with respect to all matters in
dispute, the Purchaser shall forthwith pay the amount of the
Earnout Portion of the Purchase Price, if any, to the Vendors.
SECTION 3 - REPRESENTATIONS AND WARRANTIES OF THE VENDORS
The Vendors jointly and severally represent and warrant to
the Purchaser as stated below and acknowledge that the Purchaser
is relying on the accuracy of each such representation and
warranty in entering into this Agreement and completing the
Purchase.
3.1 Corporate Matters.
(1) Status and Capacity of Corporation. The Corporation has
been duly incorporated and organized, is a subsisting corporation
under the laws of Ontario, and has the corporate power and
capacity and is duly qualified to own or lease its property and
to carry on its business as now conducted in each jurisdiction in
which it owns or leases property or carries on business. The
Corporation is a "private company" within the meaning of the
Securities Act (Ontario).
(2) Capacity of Vendor. Each Vendor has the power and capacity
to execute and deliver this Agreement and to consummate the
Purchase and otherwise perform his or her obligations under this
Agreement.
(3) Enforceability. This Agreement has been duly and validly
executed and delivered by each Vendor and is a valid and legally
binding obligation of each Vendor enforceable against such Vendor
in accordance with its terms, subject to bankruptcy, insolvency
and other laws affecting creditors' rights generally and to the
qualification that equitable remedies may be granted only in the
discretion of a court of competent jurisdiction.
(4) Residence. None of the Vendors is a non-resident of Canada
within the meaning of the Income Tax Act (Canada).
(5) Investments. The Corporation has no subsidiaries and does
not own, directly or indirectly, any shares or other equity
securities of any corporation or any equity or ownership interest
in any Person. The Corporation is not subject to any obligation
or requirement to provide funds to or make any investment in any
Person by way of loan, capital contribution or otherwise.
(6) Corporate Records. The corporate records and minute books
of the Corporation, all of which have been provided to the
Purchaser, contain complete and accurate minutes of all meetings
of and corporate actions or written resolutions of the directors,
committees of directors and shareholders of the Corporation,
including all by-laws and resolutions passed by the directors,
committees of directors and shareholders of the Corporation,
since its formation. All such meetings were duly called and
held, all such corporate actions and written resolutions were
duly taken or validly signed and all such by-laws and resolutions
were duly passed. The share certificate books, register of
shareholders, register of transfers, register of directors and
similar corporate records of the Corporation are complete and
accurate.
(7) Transfer Taxes. All exigible security transfer Taxes or
similar Taxes payable in connection with the transfer of any
securities of the Corporation have been duly paid.
(8) Shareholders' Agreements, etc. There are no shareholders'
agreements, pooling agreements, voting trusts or other similar
agreements with respect to the ownership or voting of any of the
shares of the Corporation.
(9) Licences and Permits. The Corporation holds all licences,
permits and authorizations requisite for, and has complied with
all Applicable Laws applicable to, the conduct of the Business.
(10) Operations and Assets. Attached as Schedule 3.1(10) is a
list of each jurisdiction in which operations of the Corporation
are carried on and a brief description of the nature of such
operations and each jurisdiction in which tangible assets owned
or used by the Corporation are located.
3.2 Share Capital and Dividends and Shares.
(1) Authorized and Issued Share Capital. The authorized capital
of the Corporation consists of 100,000 common shares, of which
100 common shares have been duly issued and are outstanding as
fully paid and non-assessable shares in the capital of the
Corporation. No shares or other securities of the Corporation
have been issued in violation of any Applicable Law, the articles
of incorporation, by-laws or other constating documents of the
Corporation or the terms of any shareholders' agreement or any
agreement to which the Corporation is a party or by which it is
bound. The Corporation has not issued or authorized the issue of
any shares except the Purchased Shares.
(2) Title to Shares. The Vendors legally and beneficially own
and control all of the Purchased Shares with good and marketable
title thereto free of any Encumbrances.
(3) No Other Purchase Agreements. No Person has any agreement,
option, understanding or commitment, or any right or privilege
(whether by law, pre-emptive or contractual) capable of becoming
an agreement, option or commitment, including a right of
conversion or exchange attached to convertible securities,
warrants or convertible obligations of any nature, for:
(a) the purchase, subscription, allotment or issuance of,
or conversion into, any of the unissued shares in the
capital of the Corporation or any securities of the
Corporation;
(b) the purchase or other acquisition from the Vendors of
any of the Purchased Shares; or
(c) the purchase or other acquisition from the Corporation
of any of its undertaking, property or assets, other
than in the ordinary course of the Business.
(4) Dividends. Since the Statement Date, the Corporation has
not, directly or indirectly, authorized, declared or paid any
dividends or declared or made any other distribution or return of
capital in respect of any of its shares of any class and has not,
directly or indirectly, redeemed, purchased or otherwise acquired
any of its shares of any class or agreed to do so.
(5) Contractual and Regulatory Approvals. Except as specified
in Schedule 3.2(5), none of the Corporation and the Vendors is
under any obligation, contractual or otherwise, to request or
obtain the consent or approval of any Person, and no permits,
licenses, certifications, authorizations or approvals of, or
notifications to, any Governmental Authority are required to be
obtained by the Corporation or the Vendors:
(a) by virtue of or in connection with the execution,
delivery or performance by the Vendors of this
Agreement or the completion of any of the transactions
contemplated herein;
(b) to avoid the loss of any licence, permit or other
authorization or the violation, breach or termination
of, or any default under, or the creation of any
Encumbrance under the terms of, any Applicable Law; or
(c) in order that the authority and ability of the
Corporation to carry on the Business in the ordinary
course and in the same manner as presently conducted
remains in good standing and in full force and effect
as of and following the Purchase.
Complete and correct copies of any agreements under which the
Corporation or any Vendor is obligated to request or obtain any
such consent or approval have been provided to the Purchaser.
3.3 Financial Matters.
(1) Books and Records. All material financial transactions of
the Corporation have been properly recorded in its books and
records, which have been maintained in accordance with GAAP and
all other applicable legal and accounting requirements and good
business practice. Such books and records:
(a) accurately reflect the basis for the financial
condition and the revenues, expenses and results of
operations of the Corporation shown in the Annual
Financial Statements; and
(b) together with all disclosures made in this Agreement or
in the Schedules hereto, present fairly the financial
condition and the revenues, expenses and results of the
operations of the Corporation as of and to the date
hereof.
No information, records, systems, controls or data pertaining to
or required for the operation or administration of the
Corporation or the Business are recorded, stored, maintained by,
or are otherwise dependent upon, any computerized or other
system, program or device that is not exclusively owned and
controlled by the Corporation; and on the Closing Date the
Corporation will have originals or copies of all such records,
systems, controls or data in its possession or control, including
where applicable, copies of all computer software and
documentation relating thereto.
(2) Financial Statements. The Annual Financial Statements have
been prepared in accordance with GAAP applied on a basis
consistent with financial statements of previous years and
present fairly the assets, liabilities (whether accrued,
absolute, contingent or otherwise) and financial condition of the
Corporation as at the Statement Date. The financial position of
the Corporation is now at least as good as that shown by or
reflected in the Annual Financial Statements.
(3) Liabilities of the Corporation. There are no liabilities
(contingent or otherwise) of the Corporation of any kind
whatsoever, and to the best of the Vendors' knowledge there is no
basis for any assertion against the Corporation of any
liabilities of any kind, other than:
(a) the liabilities disclosed, reflected in or provided for
in the Annual Financial Statements;
(b) liabilities in an amount less than US$5,000 each
incurred since the Statement Date which were incurred
in the ordinary course of the Business and, in the
aggregate, are not materially adverse to the Business;
and
(c) other liabilities disclosed in this Agreement or in the
Schedules attached hereto.
(4) Outstanding Agreements. The Corporation is not a party to
or bound by any outstanding or executory agreement, contract or
commitment, whether written or oral, except for:
(a) any contract, lease or agreement made in the ordinary
course of the Business under which the Corporation has
a financial obligation of less than US$10,000 per annum
and which can be terminated by the Corporation without
payment of any damages, penalty or other amount by
giving not more than 90 days notice, and
(b) the contracts, leases and agreements described in
Schedule 3.3(4).
Complete and correct copies of each of the contracts, leases and
agreements described in Schedule 3.3(4) have been provided to the
Purchaser.
(5) Product Guarantees, Warranties and Discounts. Except as
described in Schedule 3.3(5):
(a) the Corporation has not given any guarantee or warranty
in respect of any of the products sold or the services
provided by it, except warranties made in the ordinary
course of the Business and in the form of the
Corporation's standard written warranties, copies of
which have been provided to the Purchaser, and except
for warranties implied by Applicable Law;
(b) during the three year period ended on the Closing Date,
no claim has been made against the Corporation for
breach of warranty or contract requirement or
negligence or for a price adjustment or other
concession in respect of any defect in or failure to
perform or deliver any product, service or work which
in any such year exceeded US$2,500;
(c) there are no repair contracts or maintenance
obligations of the Corporation in favour of the
customers or users of products of the Business, except
obligations incurred in the ordinary course of the
Business and in accordance with the Corporation's
standard terms, a copy of which has been provided to
the Purchaser;
(d) the Corporation is not now subject to any agreement or
commitment, and the Corporation has not, within three
years prior to the date hereof, entered into any
agreement with or made any commitment to any customer
of the Business which would require the Corporation to
repurchase any products sold to such customers or to
adjust any price or grant any refund, discount or other
concession to such customer;
(e) the Corporation is not required to provide any letters
of credit, bonds or other financial security
arrangements in connection with any transactions with
its suppliers or customers; and
(f) none of the Corporation's products have any design
defects that would affect such product's ability to
operate and perform as represented by the Corporation=s
sales and marketing materials. Any past mechanical or
electrical design defects have been fully corrected.
(6) Accounts Receivable. All accounts receivable, book debts
and other debts owing to the Corporation reflected in the Annual
Financial Statements and all accounts receivable of the
Corporation arising since the Statement Date arose from bona fide
transactions in the ordinary course of the Business and are good,
valid, enforceable and fully collectible at the aggregate
recorded amounts thereof (subject to a reasonable allowance,
consistent with past practice, for doubtful accounts as reflected
in the Annual Financial Statements or as previously disclosed in
writing to the Purchaser). Except as disclosed in Schedule 3.3(6)
such accounts receivable are not subject to any defence, set-off
or counterclaim.
(7) Inventories. The inventories reflected in the Annual
Financial Statements conform to applicable designs and
specifications, are free from defects in workmanship and
material, have been accurately valued (based on quantities
determined by a physical inventory count) in accordance with GAAP
on a basis consistent with prior practice, and the valuation
thereof accurately reflects inventory that is damaged, obsolete,
defective, unsuitable for its intended use or otherwise
unsaleable in the course of the Business at normal prices. The
level of inventories is consistent with that maintained by the
Corporation prior to the date of this Agreement in accordance
with the ordinary course of the Business in light of seasonal
adjustments, market fluctuations in the industry and the
requirements of its customers. The inventories of the Business
are in good and merchantable condition and are usable or saleable
in the ordinary course of the Business for the purposes for which
they are intended except to the extent, if any, that they have
been written down to net realizable value on the Annual Financial
Statements, and are carried on the books of the Corporation at
the lower of cost and net realizable value.
(8) Absence of Certain Changes or Events. Since the Statement
Date, the Corporation has not:
(a) incurred any obligation or liability (fixed or
contingent) or indebtedness, except normal trade or
business obligations incurred in the ordinary course of
the Business, none of which is materially adverse to
the Corporation;
(b) paid or satisfied any obligations or liability (fixed
or contingent), except:
(A) current liabilities included in the Annual
Financial Statements;
(B) current liabilities incurred since the Statement
Date in the ordinary course of the Business; and
(C) scheduled payments pursuant to obligations under
loan agreements or other contracts or commitments
described in this Agreement or in the schedules
hereto;
(c) created any Encumbrance upon any of its properties or
assets, except as described in this Agreement or in the
schedules hereto;
(d) sold, assigned, transferred, leased or otherwise
disposed of any of its properties or assets, except in
the ordinary course of the Business;
(e) except for the purchase of the Invacare Rights
contemplated by Schedule 6.1(9), purchased, leased or
otherwise acquired any properties or assets, except in
the ordinary course of the Business;
(f) waived, cancelled or written off any rights, claims,
accounts receivable or any amounts payable to the
Corporation, except in the ordinary course of the
Business;
(g) except for the purchase of the Invacare Rights
contemplated by Schedule 6.1(9), entered into any
transaction, contract, agreement or commitment, except
in the ordinary course of the Business;
(h) terminated, discontinued, closed or disposed of any
plant, facility or business operation;
(i) had a supplier terminate, or communicate to the
Corporation the intention or threat to terminate, its
relationship with the Corporation, or the intention to
reduce substantially the quantity of products or
services it sells to the Corporation, except in the
case of suppliers whose sales to the Corporation are
not, in the aggregate, material to the Business or the
financial condition of the Corporation;
(j) had any customer terminate, or communicate to the
Corporation the intention or threat to terminate, its
relationship with the Corporation, or the intention to
reduce substantially the quantity of products or
services it purchases from the Corporation, or its
dissatisfaction with the products or services sold by
the Corporation, except in the case of customers whose
purchases from the Corporation are not, in the
aggregate, material to the Business or the financial
condition of the Corporation;
(k) made any material change in the method of billing
customers or the credit terms made available by the
Corporation to its customers;
(l) made any material change with respect to any method of
management, operation or accounting in respect of the
Business;
(m) suffered any damage, destruction or loss (whether or
not covered by insurance) which has materially
adversely affected or could materially adversely affect
the Business or the financial condition of the
Corporation;
(n) increased any form of compensation or other benefits
payable or to become payable to any of the employees of
the Corporation, except increases made in the ordinary
course of the Business which do not exceed 4%, in the
aggregate, of the amount of the aggregate salary
compensation payable to all of the Corporation=s
employees prior to such increase except those listed on
Schedule 3.3(8)(n);
(o) suffered any extraordinary loss relating to the
Business;
(p) other than in connection with the sale of the Purchased
Shares pursuant to this Agreement and the purchase of
the Invacare Rights contemplated by Section 6.1(9),
made or incurred any material change in, or become
aware of any event or condition which is likely to
result in a material change in, the Business or the
Corporation or its relationships with its customers,
suppliers or employees; or
(q) authorized, agreed or otherwise become committed to do
any of the foregoing.
(9) Tax Matters.
(a) The Corporation has duly and on a timely basis prepared
and filed all tax returns and other documents required
to be filed by it in respect of all Taxes, and such
returns and documents are complete and correct.
Complete and correct copies of all such returns and
other documents filed in respect of the three fiscal
years of the Corporation ended on the Statement Date
hereof have been provided to the Purchaser.
(b) The Corporation has paid all Taxes which are due and
payable by it in or before the date hereof. Adequate
provision was made in the Annual Financial Statements
for all Taxes for the period covered by the Annual
Financial Statements. The Corporation has no liability
for Taxes other than those provided for in the Annual
Financial Statements and those arising in the ordinary
course of the operation of the Business since the
Statement Date.
(c) Canadian federal and provincial income tax assessments
have been issued to the Corporation covering all past
periods up to and including the fiscal year ended
February 28, 1996. There are no actions, suits,
proceedings, investigations, enquiries or claims now
made or, to the best of the Vendors' knowledge, pending
or threatened against the Corporation in respect of
Taxes.
(d) There are no agreements, waivers or other arrangements
providing for any extension of time with respect to the
filing of any Tax return or other document or the
payment of any Taxes by the Corporation or the period
for any assessment or reassessment of Taxes. Subject to
the right of tax authorities or other Governmental
Authorities to allege that a taxation year is open for
reassessment because of fraud or misrepresentation,
only the fiscal years of the Corporation subsequent to
February 28, 1992 remain open for reassessment for
additional Taxes.
(e) The Corporation has withheld from each amount paid or
credited to any Person the amount of Taxes required to
be withheld therefrom and has remitted such Taxes to
the proper Tax or other Governmental Authorities within
the time required under Applicable Law.
(f) The Corporation is a Canadian-controlled private
corporation, as defined in the Income Tax Act,
(Canada), and has been one since the date of its
incorporation.
(g) No debt or other obligation of the Corporation has been
or will be settled or extinguished on or prior to the
Closing Date such that the provisions of Section 80 of
the Income Tax Act (Canada) apply or would apply
thereto.
(10) Bank Accounts and Authorizations. Attached as Schedule
3.3(10) is a list of all safe deposit boxes and bank accounts of
the Corporation and the names of all Persons having access or
signing authority and of all powers of attorney given by the
Corporation.
(11) Insurance. Attached as Schedule 3.3(11) is a list of all
insurance policies (including the name of the insurer, policy
number, amount of coverage, type of insurance, expiry date and
details of pending claims) maintained by the Corporation in
respect of its assets, business operations, directors, officers
and employees. All such insurance policies are valid and
enforceable and in full force and effect, are underwritten by
unaffiliated and reputable insurers, are sufficient for all
applicable requirements of law and provide insurance, including
liability and product liability insurance, in such amounts and
against such risks as is customary for corporations engaged in
businesses similar to that carried on by the Corporation to
protect the employees, properties, assets, Business and
operations of the Corporation. The Corporation is not in default
with respect to the payment of any premium or compliance with any
of the provisions contained in any such insurance policy and has
not failed to give any notice or present any claim within the
appropriate time therefor. To the best of the Vendors'
knowledge, there are no circumstances under which the Corporation
would be required to or, in order to maintain its coverage,
should give any notice to the insurers under any such insurance
policy which has not been given. The Corporation has not
received notice from any of the insurers regarding cancellation
of such insurance policy. The Corporation has not received
notice from any of the insurers denying any claims.
(12) Capital Expenditures. The Corporation is not committed to
make any capital expenditures, nor have any capital expenditures
been authorized by the Corporation at any time since the
Statement Date.
(13) Non-Arm's Length Matters. Except as disclosed in Schedule
3.3(13), the Corporation is not a party to or bound by any
agreement with, is not indebted to, and no amount is owing to the
Corporation by, the Vendors or any of the Vendors' Affiliates or
any officers, former officers, directors, former directors,
shareholders, former shareholders, employees (except for oral
employment agreements with employees) or former employees of the
Corporation or any Person not dealing at arm's length with any of
the foregoing within the meaning of the Income Tax Act (Canada).
Since the Statement Date, the Corporation has not made or
authorized any payments to any of the Vendors or any of the
Vendors' Affiliates, or any officers, former officers, directors,
former directors, shareholders, former shareholders, employees or
former employees of the Corporation or to any Person not dealing
at arm's length with any of the foregoing within the meaning of
the Income Tax Act (Canada) except for salaries and other
employment compensation payable to employees of the Corporation
in the ordinary course of the Business and at the regular rates
payable to them. No amount is owing to the Corporation by any
shareholder, director, officer or employee of the Corporation or
any Person, firm or corporation not dealing at arm's length with
any of the foregoing within the meaning of the Income Tax Act
(Canada).
3.4 Property of Corporation.
(1) Title to Assets. The Corporation is the owner of and has
good and marketable title to all of its properties and assets,
including all properties and assets reflected in the Annual
Financial Statements and all properties and assets acquired by
the Corporation after the Statement Date, free and clear of all
Encumbrances, except for:
(a) the properties and assets disposed of, utilized or
consumed by the Corporation since the Statement Date in
the ordinary course of the Business;
(b) Encumbrances for Taxes not yet due and payable;
(c) the Encumbrances described in Schedule 3.4(1);
(d) undetermined or inchoate Encumbrances incidental to
current construction or current operations and
statutory Encumbrances claimed or held by any
Governmental Authority that have not at the time been
filed or registered against the title to the asset or
served upon the Corporation pursuant to law or that
relate to obligations not due or delinquent; and
(e) Encumbrances given in the ordinary course of the
Business to any public utility or Governmental
Authority in connection with the operations of the
Business, other than security for borrowed money.
No other Person owns any assets which are being used in the
Business, except for the Leased Premises and the personal
property described in Schedule 3.4(6) or Schedule 3.4(1). Except
in respect to Invacare Rights, there are no agreements or
commitments to purchase property or assets by the Corporation,
other than in the ordinary course of the Business.
(2) Real Properties. The Corporation does not have any right,
title or interest in any real property except for the
Corporation's leasehold interests in the Leased Premises.
(3) Leases and Leased Premises.
(a) Other than the lease described in Schedule 3.4(3)the
lease dated November 18, 1993 between the Corporation
as lessee and Aurald Enterprise Limited as lessor, as
renewed on a month-to-month basis (the "Lease"), is the
only agreement under which the Corporation leases any
real or immovable property. A complete and correct copy
of the Lease has been provided to the Purchaser.
(b) The Corporation is exclusively entitled to all rights
and benefits as lessee under the Lease, and the
Corporation has not sublet, assigned, licensed or
otherwise conveyed any rights in the premises subject
to the Lease (the "Leased Premises") or in the Lease to
any other Person.
(c) All rental and other payments and other obligations
required to be paid and performed by the Corporation
pursuant to the Lease have been duly paid and
performed. The Corporation is not in default of any of
its obligations under the Lease and, to the best of the
Vendors' knowledge, the other party to the Lease is not
in default of any of its obligations under the Lease.
(d) The terms and conditions of the Lease will not be
affected by, nor will the Lease be in default as a
result of, the completion of the Purchase.
(4) Status of Property. Except for environmental matters which
are the subject of the separate representations and warranties
contained in Section 3.4(5), the use by the Corporation of the
Leased Premises is not in breach of any applicable building,
zoning or other statute, by-law, ordinance, regulation, covenant,
restriction or official plan, and the Corporation has adequate
rights of ingress and egress for the operation of the Business in
the ordinary course and, specifically:
(a) no alteration, repair, improvement or other work that
has not been completed has been ordered, directed or
requested in writing by any competent Governmental
Authority to be done in respect of the Leased Premises
or any of the plumbing, heating, elevating, water,
drainage or electrical systems, fixtures or works;
(b) there is nothing owing by the Corporation in respect of
the Leased Premises to any municipal corporation, or to
any other corporation or commission owning or operating
a public utility for water, gas, electrical power or
energy, steam or hot water, or for the use thereof,
other than current accounts in respect of which the due
date has not yet passed; and
(c) no part of the Leased Premises has been taken or
expropriated by any Governmental Authority nor, to the
Vendor's knowledge, has any notice or proceeding in
respect thereof been given or commenced.
(5) Environmental Matters.
(a) The Corporation, the operation of the Business, the
property and assets owned or leased by the Corporation
and the use, maintenance and operation thereof have
been and are in compliance with all Environmental Laws.
To the best of the Vendors' knowledge, there is no
pending or threatened Environmental Claim against the
Corporation or, against any prior owner or occupant of
any Property. The Corporation is not responsible for
any clean-up or corrective action under any
Environmental Laws. The Corporation has never
conducted or caused to be conducted an environmental
assessment or study of any of the Properties.
(b) The Corporation has obtained all Environmental Permits
necessary to conduct the Business and to own, use and
operate its properties.
(c) Except in compliance with Environmental Laws, there are
no Contaminants located on or in any of the Properties,
and, except in compliance with Environmental Laws, no
Release of any Contaminant has occurred on or from the
Properties or has resulted from the operation of the
Business and the conduct of any other activities of the
Corporation. Except in compliance with Environmental
Laws, the Corporation has not used any of its
properties or assets to produce, generate, store,
handle, transport or dispose of any Contaminant and,
except in compliance with Environmental Laws, none of
the Properties has been or is being used as a landfill
or waste disposal site.
(6) Personal Property. The Corporation is not the lessee of any
personal or movable property and is not a party to any
conditional sale or other title retention agreement except as
disclosed in Schedule 3.4(6).
(7) Work Orders and Deficiencies. Except for environmental
matters which are the subject of separate representations and
warranties contained in Section 3.4(5),there are no outstanding
work orders, non-compliance orders, deficiency notices or other
such notices relative to the Leased Premises.
(8) Plants, Facilities and Equipment. To the best of the
Vendors' knowledge, the Leased Premises are free of any
structural defect. All machinery, equipment, tools, furniture,
furnishings and materials used in the Business are in good
working order, fully operational and free of any defect, except
for normal wear and tear.
(9) Intellectual Property.
(a) Schedule 3.4(9) lists and contains a description of all
Intellectual Property owned by the Corporation. The
Corporation has good and valid title to all of the
Intellectual Property, free and clear of any and all
Encumbrances, except in the case of any Intellectual
Property licensed to the Corporation as disclosed in
Schedule 3.4(9). Except as indicated in Schedule
3.4(9), the Corporation has the exclusive right to use
all of the Intellectual Property and has not granted
any license or other rights to any other Person in
respect of the Intellectual Property. None of the
rights of the Corporation in the Intellectual Property
will be impaired or affected in any way by the
transactions contemplated by this Agreement.
(b) The conduct of the Business and the use of the
Intellectual Property does not infringe, and the
Corporation has not received any notice, complaint,
threat or claim alleging infringement of, any patent,
trade mark, trade name, copyright, industrial design,
trade secret or other Intellectual Property or
proprietary right of any other Person, and the conduct
of the Business does not include any activity which may
constitute passing off.
3.5 Conduct of Business.
(1) Suppliers. Schedule 3.5(1) contains a list of the 20
largest suppliers (by dollar volume) of materials to the
Corporation during the twelve-month period ended on the Closing
Date, indicating the existing contractual arrangements with each
such supplier. There is no sole-source supplier of significant
materials or services to the Corporation with respect to which
practical alternative sources of supply are not available on
comparable terms and conditions.
(2) Customers. Schedule 3.5(2) contains a list of all customers
of the Corporation during the twelve-month period ended on the
Closing Date, indicating the existing contractual arrangements
with each such customer.
(3) Necessary Assets. The assets owned or leased by the
Corporation are adequate for the conduct of the Business as
usually conducted and include all proprietary rights, trade
secrets and other property and assets, tangible and intangible,
applicable to or used in connection with the Business. None of
the Vendors nor any other Person owns any assets which are being
used in or are reasonably necessary to carry on the Business or
operations of the Corporation in the normal course except the
Leased Premises and the assets leased to the Corporation and
described in Schedule 3.4(6).
(4) Restrictions on Doing Business. The Corporation is not a
party to or bound by any agreement or commitment which would
restrict or limit its rights to carry on or compete in any
business or activity or to solicit business from any Person or in
any geographical area or otherwise to conduct the Business as
currently conducted and as proposed to be conducted. The
Corporation is not subject to any legislation or any judgment,
order or requirement of any court or Governmental Authority which
is not of general application to Persons carrying on a business
similar to the Business. There is no fact known to the Vendors
that has application to the Corporation (other than general
economic or industry conditions) that materially adversely
affects or, as far as the Vendors can reasonably foresee, will
materially adversely affect the Business that has not been set
forth in this Agreement or any Schedule hereto.
(5) Contracts. The Corporation is not a party to or bound by any
contract or commitment, written or oral, which has more than
three months to run, involves a price or consideration of more
than US$50,000 in the aggregate, or which could materially and
adversely affect the business, affairs or prospects, financial or
other, of the Corporation. The Corporation is in good standing
and is entitled to all benefits under all contracts to which it
is a party and, except as disclosed in Schedule 3.5(5), none of
them is dependent upon the guarantee of or any security provided
by a third party. There exists no state of facts which after
notice or lapse of time or both would constitute a default or
breach thereunder and to the best of the Vendors' knowledge, none
of the other parties to such contracts is in material default
thereunder.
3.6 Employment Matters.
(1) Employees. Schedule 3.6(1) states the name, job title,
duration of employment and rate of remuneration of, and the
nature of services performed by, each employee of the Corporation
and indicates the names of those who have stated that they will
resign or retire as a result of the transaction contemplated by
this Agreement. Schedule 3.6(1) also describes the benefit plans
applicable to each employee including all pension, insurance,
disability, vacation, severance and other benefit plans offered
by the Corporation (the "Benefit Plans").
(2) Benefit Plans. Complete and correct copies of all
documentation establishing or relating to the Benefit Plans or,
where such Benefit Plans are oral commitments, written summaries
of the terms thereof, and the most recent financial statements
and actuarial reports related thereto and all reports and returns
in respect thereof filed with any regulatory agency within three
years prior to the date hereof have been provided to the
Purchaser. There are no pending claims by any employee covered
under the Benefit Plans or by any other Person which allege a
breach of fiduciary duties or violation of Applicable Law or
which may result in liability to the Corporation and, to the best
of the Vendors' knowledge, there is no basis for such a claim.
There are no employees or former employees of the Corporation who
are receiving from the Corporation any pension or retirement
payments, or who are entitled to receive any such payments, not
covered by a pension plan to which the Corporation is a party.
(3) Remuneration. Except as disclosed in Schedule 3.3(8)(n),
since the Statement Date, no payments have been made or
authorized to directors, officers or employees, except at regular
rates of remuneration.
(4) Labour Matters and Employee Contracts. The Corporation is
not a party to or bound by any collective agreement, is not
currently conducting negotiations with any labour union or
employee association and to the best of the Vendors= knowledge,
during the period of five years preceding the date of this
Agreement there has been no attempt to organize, certify or
establish any labour union or employee association in relation to
any of the employees of the Corporation. The Corporation is not a
party to any written employment agreement and there is no
agreement for the employment of any employee which cannot be
terminated on reasonable notice and without penalty. There is no
agreement or practice relating to the payment of any management,
consulting, service or other fee or any bonus, pension, share of
profits or retirement allowance, or any insurance, health or
other employee benefit, except as disclosed in Schedule 3.6(1).
There are no existing or, to the best of the Vendors' knowledge,
threatened, labour strikes or labour disputes, grievances,
controversies or other labour troubles affecting the Corporation
or the Business.
(5) Employee Legislation. The Corporation has complied with
all Applicable Laws applicable to it relating to employment,
including those relating to wages, hours, collective bargaining,
occupational health and safety, workers' hazardous materials,
employment standards, pay equity and workers' compensation.
There are no outstanding charges or complaints against the
Corporation relating to unfair labour practices or discrimination
or under any legislation relating to employees. The Corporation
has paid in full all amounts owing under the Workers'
Compensation Act (Ontario) or comparable provincial legislation,
and there are no circumstances that would permit a penalty
reassessment under such legislation. Except as disclosed in
Schedule 3.6(5), there are no charges or orders requiring the
Corporation to comply outstanding under the Occupational Health
and Safety Act (Ontario) or comparable legislation.
3.7 General Matters.
(1) Compliance with Constating Documents, Agreements and Laws.
The execution, delivery and performance of this Agreement and
each of the other agreements contemplated or referred to herein
by the Vendors and the Corporation, and the completion of the
Purchase, will not constitute or result in a violation or breach
by the Corporation or the Vendors of or default by the
Corporation or the Vendors under, or cause the acceleration of
any obligations of the Corporation under:
(a) any term or provision of any of the articles, by-laws
or other constating documents of the Corporation;
(b) the terms of any agreement (written or oral),
indenture, instrument or understanding or other
obligation or restriction to which the Corporation or
the Vendors is a party or by which any of them is
bound; or
(c) any judgment, decree, order or award of any
Governmental Authority of competent jurisdiction; or
(d) any Applicable Law.
(2) Litigation. Except for environmental matters which are the
subject of separate representations and warranties contained in
Section 3.4(5), there are no actions, suits or proceedings,
judicial or administrative (whether or not purportedly on behalf
of the Corporation or the Vendors) pending or, to the best of the
Vendors' knowledge, threatened, by or against or affecting the
Corporation, at law or in equity, or before or by any court or
any Governmental Authority.
3.8 Equitron, Inc.
(1) Jurisdiction and Ownership. Equitron, Inc. ("Equi-US") is
a corporation incorporated under the laws of the State of New
York. All of the issued and outstanding shares of Equi-US are
legally and beneficially owned by James Alexander and Elleanor
Alexander.
(2) Business. Other than holding title to the Invacare Rights
and the sale of such rights to the Corporation as contemplated by
Section 6.1(9) and acting as shipping agent for the Corporation,
Equi-US does not carry on any business of any nature, does not
own or lease any property or assets whatsoever and is not
entitled to receive any income.
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to each of the Vendors
as stated below and acknowledges that each of the Vendors is
relying on the accuracy of each such representation and warranty
in entering into this Agreement and completing the Purchase.
4.1 Status. The Purchaser is a subsisting corporation under the
laws of Ontario and has full corporate power and authority to
execute and deliver this Agreement and to consummate the
Purchase.
4.2 Due Authorization. The execution and delivery of this
Agreement and the consummation of the Purchase have been duly and
validly authorized by the Purchaser and no other corporate
proceedings on the part of the Purchaser are necessary to
authorize this Agreement or the Purchase.
4.3 Enforceability. This Agreement has been duly and validly
executed and delivered by the Purchaser and is a valid and
legally binding agreement of the Purchaser enforceable against
the Purchaser in accordance with its terms, subject to
bankruptcy, insolvency and other laws affecting creditors' rights
generally and to the qualification that equitable remedies may be
granted only in the discretion of a court of competent
jurisdiction.
4.4 Contractual and Regulatory Approvals. The Purchaser and its
Affiliates are under no obligation, contractual or otherwise, to
request or obtain the consent or approval of any Person, and,
except as set out in Schedule 4.4, no permits, licenses,
certifications, authorizations or approvals of, or notifications
to, any Governmental Authority are required to be obtained by the
Purchaser or its Affiliates by virtue of or in connection with
the execution, delivery or performance by the Purchaser of this
Agreement or the completion of any of the transactions
contemplated herein.
4.5 Compliance with Constating Documents, Agreements and Laws.
The execution, delivery and performance of this Agreement and
each of the other agreements contemplated or referred to herein
by the Purchaser, and the completion of the Purchase, will not
constitute or result in a violation or breach of or default
under, or cause the acceleration of any obligations of the
Purchase under:
(1) any term or provision of any of the articles, by-laws
or other constating documents of the Purchaser;
(2) the terms of any agreement (written or oral),
indenture, instrument or understanding or other
obligation or restriction to which the Purchaser is a
party or by which it is bound;
(3) any judgment, decree, order or award of any
Governmental Authority or regulatory body; or
(4) any Applicable Law.
SECTION 5 - FIRST RIGHT OF REFUSAL
5.1 First Right of Refusal. If, at any time prior to the fifth
anniversary of the Closing Date James Alexander wishes to sell,
licence or otherwise dispose, in whole or in part, of any right,
title or interest in, to or under any of the Excluded Property or
any other projects developed by James Alexander prior to the
fifth anniversary of the Closing Date (collectively with the
Excluded Property, the "First Refusal Property"), he shall first
make an offer in writing to the Purchaser to sell the First
Refusal Property that is offered for sale (the "Offered
Property") and shall specify in such offer the price for such
Offered Property, the manner of payment and the place of time of
closing. James Alexander shall provide any information
reasonably necessary to evaluate the First Refusal Property and
to conduct due diligence investigations in respect thereof. The
Purchaser may accept such offer within 30 Business Days after
receipt thereof and in the event that no acceptance is received
from the Purchaser within such 30 Business Day period, the offer
shall be deemed to have been refused. If the offer is not
accepted within such 30 Business Day period, James Alexander
shall be at liberty for a further period of 60 Business Days
commencing with the expiration of the first 30 Business Day
period to sell the Offered Property to any Person at a price
which is not less than the price and on the terms which are not
more favourable than the terms at which such Offered Property was
offered to the Purchaser. If no such sale is completed within
such further period of 60 Business Days, James Alexander shall be
required, before selling, transferring, assigning or otherwise
disposing of any such Offered Property to offer such Offered
Property to the Purchaser in the manner hereinbefore provided and
such process shall be repeated so often as James Alexander
desires to sell, transfer, assign or otherwise dispose of such
Offered Property.
SECTION 6 - CONDITIONS
6.1 Closing Conditions in Favour of the Purchaser. The
obligations of the Purchaser under this Agreement are subject to
the conditions stated below which are for the exclusive benefit
of the Purchaser and all or any of which may be waived by the
Purchaser.
(1) Vendors' Obligations. The Vendors shall have performed each
of their obligations under this Agreement to the extent required
to be performed on or before the Closing Date.
(2) Adverse Proceedings. No action or proceeding shall be
pending or threatened which could reasonably be expected to
impair or prohibit the completion of the Purchase.
(3) Status of Lease. The Vendors shall have delivered to the
Purchaser (a) an acknowledgment from the lessor under the Lease
that such lease is in full force and the Corporation is not in
breach of any of the terms thereof, (b) any consent to the change
in ownership effected by the Purchase of the Purchased Shares as
may be required by the terms of such Lease, and (c) the
Corporation shall have entered into a new lease with the lessor
in the form attached hereto as Schedule 6.1(3).
(4) Employment Agreements. The Corporation shall have entered
into an employment agreement and a non-competition agreement with
each of James H. Alexander and Scott Alexander.
(5) Indebtedness of Shareholders, Directors etc. All
indebtedness to the Corporation of shareholders, directors,
officers and employees and any Person, firm or corporation not
dealing at arm's length with any of the foregoing within the
meaning of the Income Tax Act (Canada) for advances or other
amounts shall have been paid in full.
(6) Releases and Resignations. The Vendors shall have delivered
to the Purchaser releases and resignations of each of James
Alexander and Elleanor Alexander as directors of the Corporation
as of the Closing Date.
(7) Corporate Action. All appropriate action of the directors,
shareholders and officers of the Corporation shall have been
taken and all requisite consents, approvals and resignations
shall have been obtained to transfer the Purchased Shares to the
Purchaser.
(8) Approvals, Consents, Etc. Any approval, consent, ruling,
exemption or authorization that may be necessary or appropriate
in respect of the transactions contemplated hereby required to be
obtained by the Vendors or the Corporation shall have been
received and shall be absolute or on terms reasonably acceptable
to the Purchaser.
(9) Invacare Rights. The Corporation shall have acquired the
Invacare Rights on terms and conditions specified in Schedule
6.1(9).
(10) Purchaser's Approval. The board of directors of the
Purchaser shall have approved the Purchase.
(11) Approval of Counsel and Opinion. Counsel for the Vendors
shall have delivered to the Purchaser a legal opinion in the form
and content satisfactory to the Purchaser.
6.2 Closing Conditions in Favour of the Vendor. The obligations
of the Vendors under this Agreement are subject to the conditions
stated below which are for the exclusive benefit of the Vendors
and all or any of which may be waived by the Vendors.
(1) Purchaser's Obligations. The Purchaser shall have performed
each of its obligations under this Agreement to the extent
required to be performed on or before the Closing Date.
(2) Adverse Proceedings. No action or proceeding shall be
pending or threatened which could reasonably be expected to
impair or prohibit the completion of the Purchase.
(3) Personal Guarantees. Arrangements satisfactory to the
Vendors for the release of their personal guarantees of the bank
indebtedness of the Corporation shall have been made by the
Corporation, the Vendors and the Purchaser.
(4) Corporate Action. All appropriate action of the directors,
shareholders and officers of the Purchaser shall have been taken.
(5) Approvals, Consents, Etc. Any approval, consent, ruling,
exemption or authorization that may be necessary or appropriate
in respect of the transactions contemplated hereby required to be
obtained by the Purchaser shall have been received and shall be
absolute or on terms reasonably acceptable to the Vendors.
(6) Approval of Counsel and Opinions. Counsel for the Purchaser
shall have delivered to the Vendors a legal opinion in the form
and content satisfactory to the Vendors.
(7) KCI Indemnity. KCI shall have executed and delivered to the
Vendors an indemnity in the form and content of Schedule 6.2(7).
(8) Employee Bonus. The Corporation shall have made
arrangements for the payment of employee bonus as detailed in
Schedule 6.2(8).
SECTION 7 - SURVIVAL AND INDEMNITY
7.1 Survival. The representations, warranties and obligations
contained in this Agreement or in any document delivered
hereunder shall survive the closing of the transaction
contemplated by this Agreement, subject to the limitations that:
(1) the representations, warranties and obligations of the
Vendors relating to any Tax liability of the
Corporation which is based on misrepresentation or
fraud shall continue in force indefinitely;
(2) the representations, warranties and obligations of the
Vendors relating to any Tax liability of the
Corporation which is not based on misrepresentation or
fraud shall terminate upon the expiration of the last
to expire of any time within which an assessment,
reassessment or similar document may be issued under
any applicable legislation;
(3) the representations and warranties contained in section
3.4(5) shall terminate on the expiry of the applicable
statute of limitations in respect thereof;
(4) all other representations and warranties of the
Vendors, except for the representation and warranty of
the Vendors contained in Section 3.2(2), shall
terminate upon the expiration of one year after the
completion of the Purchase on the Closing Date; and
(5) no claim may be asserted for breach of any
representation or warranty after the expiration of any
applicable time period referred to above.
7.2 Indemnity of the Vendors. The Vendors shall jointly and
severally fully indemnify the Purchaser and the Corporation for
the maximum relevant period specified in Section 7.1 against all
losses, liabilities, expenses, claims or other matters (a
"Claim"):
(1) arising out of any misrepresentation or breach of
warranty by the Vendors or any of them under this
Agreement;
(2) arising out of any breach or non-performance by the
Vendors or any of them of any covenant or other
obligation to be performed by the Vendors or any of
them under this Agreement;
(3) arising out of any assurance or commitment made to any
employee of the Corporation at or prior to the Closing
Time in respect of the continued operation of the
Corporation's business, other than severance pay
obligations in the ordinary course of business,
provided that such severance pay obligations meet the
minimum requirements of applicable law;
and such indemnity shall include, without limitation, reasonable
expenses of investigation and legal fees and expenses in connec
tion with any action or proceeding against the Corporation or the
Purchaser. If the amount required to satisfy any Claim so
disclosed or provided for shall exceed the amount so disclosed or
provided for, the excess shall be considered to be a separate
Claim in respect of which no disclosure or provision has been
made. The liability of the Vendors under this Section 7.2 with
regard to any misrepresentation or breach of warranty shall not
extend to any Claim asserted after the applicable time period
referred to in Section 7.1.
7.3 Indemnity of the Purchaser. The Purchaser shall fully
indemnify the Vendors for the maximum relevant period specified
in Section 7.1 against all Claims:
(1) arising out of any misrepresentation or breach of
warranty by the Purchaser under this Agreement;
(2) arising out of any breach or non-performance by the
Purchaser of any covenant or other obligation to be
performed by the Purchaser under this Agreement; and
(3) otherwise relating to the Corporation arising from the
operation of the Business after the Closing Time;
and such indemnity shall include, without limitation, reasonable
expenses of investigation and legal fees and expenses in
connection with any action or proceeding against the Vendors. The
liability of the Purchaser under this Section 7.3 with regard to
any misrepresentation or breach of warranty shall not extend to
any Claim asserted after the applicable time period referred to
in Section 7.1.
7.4 Limitations.
(1) The liability of the Vendors under this Section 7 with
regard to any misrepresentation or breach of warranty
shall not exceed C$3,000,000.
(2) There shall be no liability under this Section 7 unless
and solely to the extent that the aggregate amount of
Claims exceeds C$5,000.
7.5 Notice of Claim. In the event that a party (the
"Indemnified Party") shall become aware of any Claim in respect
of which another party (the "Indemnifying Party") has agreed to
indemnify the Indemnified Party pursuant to this Agreement, the
Indemnified Party shall promptly give written notice thereof to
the Indemnifying Party. Such notice shall specify whether the
Claim arises as a result of a Claim by a Person against the
Indemnified Party (a "Third Party Claim") or whether the Claim
does not so arise (a "Direct Claim"), and shall also specify with
reasonable particularity (to the extent that the information is
available) the alleged factual basis for the Claim and the amount
of the Claim, if known. If, through the fault of the Indemnified
Party, the Indemnifying Party does not receive notice of any
Claim in time to contest effectively the determination of any
liability susceptible of being contested, the Indemnifying Party
shall be entitled to set off against the amount claimed by the
Indemnified Party the amount of any Claims incurred by the
Indemnifying Party resulting from the Indemnified Party's failure
to give such notice on a timely basis.
7.6 Direct Claims. With respect to any Direct Claim, following
receipt of notice from the Indemnified Party of the Claim, the
Indemnifying Party shall have 60 days to make such investigation
of the Claim as is considered necessary or desirable. For the
purpose of such investigation, the Indemnified Party shall make
available to the Indemnifying Party the information relied upon
by the Indemnified Party to substantiate the Claim, together with
all such other information as the Indemnifying Party may
reasonably request. If both parties agree at or prior to the
expiration of such 60-day period (or any mutually agreed upon
extension thereof) to the validity and amount of such Claim, the
Indemnifying Party shall immediately pay to the Indemnified Party
the full agreed upon amount of the Claim, failing which the
matter shall be referred to binding arbitration or in such other
manner as the parties may agree.
7.7 Third Party Claims. With respect to any Third Party Claim,
the Indemnifying Party shall have the right, at its expense, to
participate in or assume control of the negotiation, settlement
or defence of the Claim and, in such event, the Indemnifying
Party shall reimburse the Indemnified Party for all the
Indemnified Party's out-of-pocket expenses as a result of such
participation or assumption. If the Indemnifying Party elects to
assume such control, the Indemnified Party shall have the right
to participate in the negotiation, settlement or defence of such
Third Party Claim and to retain counsel to act on its behalf,
provided that the fees and disbursements of such counsel shall be
paid by the Indemnified Party unless the Indemnifying Party
consents to the retention of such counsel or unless the named
parties to any action or proceeding include both the Indemnifying
Party and the Indemnified Party and a representation of both the
Indemnifying Party and the Indemnified Party by the same counsel
would be inappropriate due to the actual or potential differing
interests between them (such as the availability of different
defences). If the Indemnifying Party, having elected to assume
such control, thereafter fails to defend the Third Party Claim
within a reasonable time, the Indemnified Party shall be entitled
to assume such control, and the Indemnifying Party shall be bound
by the results obtained by the Indemnified Party with respect to
such Third Party Claim. If any Third Party Claim is of a nature
such that the Indemnified Party is required by applicable law to
make a payment to any Person (a "Third Party") with respect to
the Third Party Claim before the completion of settlement
negotiations or related legal proceedings, the Indemnified Party
may make such payment and the Indemnifying Party shall, forthwith
after demand by the Indemnified Party, reimburse the Indemnified
Party for such payment. If the amount of any liability of the
Indemnified Party under the Third Party Claim in respect of which
such payment was made, as finally determined, is less than the
amount that was paid by the Indemnifying Party to the Indemnified
Party, the Indemnified Party shall, forthwith after receipt of
the difference from the Third Party, pay the amount of such
difference to the Indemnifying Party.
7.8 Settlement of Third Party Claims. If the Indemnifying Party
fails to assume control of the defence of any Third Party Claim,
the Indemnified Party shall have the exclusive right to contest,
settle or pay the amount claimed. Whether or not the
Indemnifying Party assumes control of the negotiation, settlement
or defence of any Third Party Claim, the Indemnifying Party shall
not settle any Third Party Claim without the written consent of
the Indemnified Party, which consent shall not be unreasonably
withheld or delayed; provided, however, that the liability of the
Indemnifying Party shall be limited to the proposed settlement
amount if any such consent is not obtained for any reason.
7.9 Co-operation. The Indemnified Party and the Indemnifying
Party shall co-operate fully with each other with respect to
Third Party Claims, and shall keep each other fully advised with
respect thereto (including supplying copies of all relevant
documentation promptly as it becomes available).
7.10 Exclusivity. The provision of this Section 7 shall apply to
any Claim for breach of any covenant, representation, warranty or
other provision of this Agreement or any agreement, certificate
or other document delivered pursuant hereto (other than a Claim
for specific performance or injunctive relief) with the intent
that all such Claims shall be subject to the limitations and
other provisions contained in this Section 7.
SECTION 8 - CLOSING
8.1 Closing. The closing of the Purchase shall take place at
the offices of McMillan Binch, Barristers & Solicitors, 38th
Floor, Royal Bank Plaza, South Tower, 200 Bay Street, Toronto,
Ontario, at 11:00 a.m. (the "Closing Time") on the Closing Date,
at which time the Vendor shall deliver to the Purchaser certi
ficates for the Purchased Shares duly endorsed in blank for
transfer together with reasonable evidence of the due compliance
by the Vendors with all of the conditions contained in Section
6.1 and such other documents as counsel for the Purchaser may
consider necessary or appropriate against payment of the Purchase
Price by the Purchaser to the Vendors and reasonable evidence of
the due compliance by the Purchaser with all of the conditions
set forth in Section 6.2 and such other documents as counsel for
the Vendors may consider necessary or appropriate.
SECTION 9 - ARBITRATION
9.1 Rules. Except as set forth in Section 2, any controversy or
claim arising out of or relating to the Purchase shall be settled
by arbitration in accordance with the Rules of Procedure for
Commercial Arbitration of the Arbitration and Mediation Institute
of Canada Inc., in effect at the date of commencement of such
arbitration (the "Rules"), by one arbitrator (the "Arbitrator")
appointed in accordance with the Rules. The arbitration will
take place in the City of Toronto unless otherwise agreed and
will be final and binding. The procedures and substance of the
arbitration will be governed by the Arbitrations Act, 1991 of
Ontario or any successor legislation, as in effect at the time of
the arbitration. Disputes involving more than two parties shall
be settled by one arbitration, as determined by the arbitration
procedures adopted in this clause. Where by this clause any
dispute or difference is to be referred to arbitration, the
making of an award shall be a condition precedent to any right of
action by either party against the other. Judgment upon the
award rendered by the Arbitrator may be entered in any court
having jurisdiction thereof. The Arbitrator may determine all
questions or law and jurisdiction including questions as to
whether the dispute is arbitrable and shall have the right to
grant legal and equitable relief including injunctive relief and
the right to grant permanent and interim injunctive relief and
shall have the discretion to award costs including reasonable
legal fees, interest and costs of the arbitration. The
Arbitrator may not amend or otherwise alter the terms and
conditions of the Purchase. Any Claim arising out of or relating
to the Purchase shall be made in writing and shall be served upon
the party against whom the Claim is made not more than twelve
months from the date of the alleged breach, and in default, any
such Claim shall be deemed to have been abandoned and shall be
absolutely barred.
SECTION 10 - MISCELLANEOUS
10.1 Shareholder Loans. The Purchaser shall cause the Corporation
to repay to the Vendors their shareholder loans to the
Corporation in an amount equal to C$88,695.00 in the aggregate.
The Corporation shall repay the shareholder loans pursuant to
this Section 10.1 on the same day that the purchase price
adjustment pursuant to Section 2.6 would be payable.
10.2 Dissolution of Equi-US. James Alexander and Elleanor
Alexander shall cause Equi-US to be dissolved within 60 days
after the Closing Date. During the period after the Closing Date
and prior to its dissolution, Equi-US shall not carry on any
business of any nature. All monies received by Equi-US after the
Closing Time (other than from the Vendors) and prior to its
dissolution shall be for the account of, and held in trust for,
the Corporation and shall immediately be remitted by Equi-US to
the Corporation.
10.3 Further Assurances. Each party shall from time to time
promptly execute and deliver all further documents and take all
further action reasonably necessary or appropriate to give effect
to the provisions of this Agreement and to complete the Purchase.
10.4 Preservation of Books and Records. The Purchaser agrees that
it will preserve the books and records of and relating to the
Corporation and the Business for a period of six years from the
Closing Date, or for such longer a period as is required by any
Applicable Law, and will permit the Vendors or their authorized
representatives reasonable access thereto in connection with the
affairs of the Vendors relating to the Corporation's matters
prior to the Closing Date.
10.5 Brokers. Each of the parties represents to the other that
it has not employed any broker, finder, investment banker or
other intermediary in connection with the transactions
contemplated by this Agreement who might be entitled to a fee
from the other or from the Corporation or any commission upon
consummation of the transaction.
10.6 Notice. Unless otherwise specified, each Notice to a party
must be given in writing and delivered personally or by courier,
sent by prepaid registered mail or transmitted by fax to the
party as follows:
If to the Vendors:
James, Scott and Elleanor Alexander
c/o Equi-Tron Mfg. Inc.
820 Nipissing Road, Units 3 and 4
Milton, Ontario
L9T 4Z9
Fax No.: (905) 875-1468
If to the Purchaser:
KCI Equi-Tron Inc.
c/o Kinetic Concepts, Inc.
8023 Vantage Drive
San Antonio, Texas
78230-4726
Attention: General Counsel
Fax No: (210) 255-6993
with a copy to:
McMillan Binch
P.O. Box 38, South Tower
Royal Bank Plaza
Toronto, Ontario
M5J 2J7
Attention: Stephen C.E. Rigby
Fax No: (416) 865-7048
or to any other address, fax number or Person that the party
designates. Any Notice, if delivered personally or by courier,
will be deemed to have been given when actually received, if
transmitted by fax before 3:00 p.m. on a Business Day, will be
deemed to have been given on that Business Day, and if
transmitted by fax after 3:00 p.m. on a Business Day, will be
deemed to have been given on the Business Day after the date of
the transmission.
10.7 Time. Time shall be of the essence of this Agreement.
10.8 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the Province of
Ontario and the federal laws of Canada applicable therein, and
each of the parties irrevocably attorns to the non-exclusive
jurisdiction of the courts of Ontario.
10.9 Entire Agreement. This Agreement and the attached Schedules
constitute the entire agreement between the parties with respect
to the subject matter and supersede all prior negotiations and
understandings. No provision may be amended or waived except in
writing.
10.10 Severability. Any provision of this Agreement which
is invalid or unenforceable shall not affect any other provision
and shall be deemed to be severable.
10.11 Assignment and Enurement. No party may assign this
Agreement without the prior written consent of the other parties,
which consent may not be unreasonably withheld or delayed. This
Agreement enures to the benefit of and binds the parties and
their respective heirs, executors, administrators, personal and
legal representatives, successors and permitted assigns.
10.12 Counterparts. This Agreement and any amendment,
supplement, restatement or termination of any provision of this
Agreement may be executed and delivered in any number of
counterparts, each of which when executed and delivered is an
original but all of which taken together constitute one and the
same instrument.
The parties have executed this Agreement.
KCI EQUI-TRON INC.
By: /s/ KEITH JONES
------------------------
Name: Keith Jones
Title:Vice-President
/S/ JAMES H. ALEXANDER
- ------------------------ ------------------------
Witness James H. Alexander
/S/ ELLEANOR ALEXANDER
- ------------------------ ------------------------
Witness Elleanor Alexander
/S/ SCOTT ALEXANDER
- ------------------------ ------------------------
Witness Scott Alexander
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