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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-42783
PROSPECTUS
KINETIC CONCEPTS, INC.
OFFER TO EXCHANGE 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED
NOTES DUE 2007, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 3, 1998, UNLESS EXTENDED.
Kinetic Concepts, Inc., a Texas corporation ("KCI" or the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in
this Prospectus ("Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 9 5/8%
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding 9 5/8% Senior Subordinated
Notes due 2007, Series A (the "Series A Notes"), of which $200,000,000 principal
amount is outstanding. The form and terms of the Exchange Notes will be the same
as the form and terms of the Series A Notes (which they replace) except that (i)
the Exchange Notes will bear a Series B designation, (ii) the Exchange Notes
will have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and will not be subject to certain provisions
relating to an increase in the interest rate which were applicable to the Series
A Notes in certain circumstances relating to the timing of the Exchange Offer,
(iii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Series A Notes under the Registration Rights Agreement (as
defined), which rights will terminate upon consummation of the Exchange Offer
and (iv) the Tender Offer (as defined) having been timely consummated, the
Exchange Notes will not be subject to certain provisions relating to a special
redemption that would have been applicable if the Tender Offer had not been
consummated on or prior to November 6, 1997. The Exchange Notes will evidence
the same debt as the Series A Notes (which they replace) and will be issued
under and be entitled to the benefits of the Indenture dated as of November 5,
1997 (the "Indenture") among the Company, the Guarantors (as defined) and Marine
Midland Bank, as Trustee, governing the Series A Notes and the Exchange Notes.
As used herein, the term "Notes" refers to both the Series A Notes and the
Exchange Notes. See "The Exchange Offer" and "Description of Notes."
Interest on the Exchange Notes will accrue from the date of original
issuance of the Series A Notes for which they were exchanged (November 5, 1997)
and will be payable semi-annually on May 1 and November 1 of each year,
commencing on May 1, 1998, at the rate of 9 5/8% per annum. The Exchange Notes
will be redeemable, in whole or in part, at the option of the Company on or
after November 1, 2002, at the redemption prices set forth herein plus accrued
and unpaid interest, if any, to the date of redemption. In addition, prior to
November 1, 2000, the Company, at its option, may redeem up to 35% of the
aggregate principal amount of the Notes originally issued under the Indenture
with the net cash proceeds of one or more Equity Offerings (as defined) at a
redemption price equal to 109.625% of the aggregate principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption, provided that at least 65% of the aggregate principal amount of the
Notes originally issued remain outstanding immediately after such redemption.
See "Description of Notes -- Redemption."
(continued on next page)
SEE "RISK FACTORS" ON P. 18 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR SERIES A NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED SERIES A
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON MARCH 3, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF SERIES A NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS
NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF SERIES A NOTES BEING
TENDERED FOR EXCHANGE. SERIES A NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES
OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE OFFER AND DOES NOT
ACCEPT FOR EXCHANGE ANY SERIES A NOTES, THE COMPANY WILL PROMPTLY RETURN ALL
PREVIOUSLY TENDERED SERIES A NOTES TO THE HOLDERS THEREOF.
The date of this Prospectus is February 11, 1998.
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The Exchange Notes will be unsecured senior subordinated obligations of the
Company and will be subordinated in right of payment to all existing and future
Senior Debt (as defined) of the Company, including indebtedness under the New
Credit Facilities (as defined). The Exchange Notes will also be effectively
subordinated to all secured indebtedness of either the Company or any of its
subsidiaries to the extent of the assets secured by such indebtedness. The
Exchange Notes will rank pari passu with any future senior subordinated
indebtedness of the Company and will rank senior in right of payment to all
other subordinated obligations of the Company. The Exchange Notes will be
unconditionally guaranteed by each of the domestic subsidiaries of the Company
(the "Guarantors") on an unsecured senior subordinated basis. As of September
30, 1997, on a pro forma basis after giving effect to the Transactions (as
defined) and the Acquisitions (as defined), the Company and the Guarantors would
have had approximately $342.7 million of Senior Debt outstanding and
approximately $57.3 million of availability under the New Credit Facilities. In
addition, on September 30, 1997, the Company's subsidiaries that are not
Guarantors would have had, on the same pro forma basis, approximately $5.7
million of indebtedness and liabilities, including trade payables, which would
be structurally senior to the Exchange Notes. See "Description of Notes."
Upon the occurrence of a Change of Control (as defined), each holder of
Notes will have the right to require the Company to repurchase such holder's
Notes at a price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of repurchase. In addition, the
Company is obligated to offer to repurchase the Notes at 100% of the principal
amount thereof plus accrued interest to the date of repurchase in the event of
certain asset sales. An event constituting a Change of Control will also result
in a default under the New Credit Facilities and may also result in a default
under other Senior Debt, if any. See "Description of Notes -- Change of
Control."
The Company will accept for exchange any and all Series A Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on March 3,
1998, unless extended by the Company in its sole discretion (the "Expiration
Date"). Tenders of the Series A Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Series A Notes were sold by the Company on November 5, 1997 to
the Initial Purchasers (as defined) and were thereupon sold by the Initial
Purchasers in reliance upon Rule 144A under the Securities Act, to a limited
number of qualified institutional buyers that agreed to comply with certain
transfer restrictions and other conditions. Accordingly, the Series A Notes may
not be offered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company
and the Guarantors under the Registration Rights Agreement entered into by the
Company, the Guarantors and the Initial Purchasers in connection with the
offering of the Series A Notes. See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder that is an "affiliate" of the
Company or any of the Guarantors within the meaning of Rule 405 under the
Securities Act or a broker-dealer who purchased the Series A Notes directly from
the Company for resale pursuant to Rule 144A or another exemption from the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder is not engaged
in, and does not intend to engage in, a distribution of the Exchange Notes and
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. See "Purpose of the Exchange Offer" and
"Resale of the Exchange Notes." By tendering the Series A Notes in exchange for
Exchange Notes, each holder, other than a broker-dealer, will represent to the
Company that: (i) it is not an affiliate of the Company or any of the Guarantors
(as defined in Rule 405 under the Securities Act) or a broker-dealer tendering
Series A Notes acquired directly from the Company for its own account; (ii) any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business; and (iii) it is not
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engaged in, and does not intend to engage in, a distribution of the Exchange
Notes and has no arrangement or understanding to participate in a distribution
of the Exchange Notes. If a Holder of Series A Notes is engaged in or intends to
engage in a distribution of the Exchange Notes or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives the Exchange Notes for its own account pursuant to the Exchange Offer
(a "Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of the Exchange Notes received in
exchange for the Series A Notes where such Series A Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
agreed that it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale during the period
required by the Securities Act. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer. No underwriter is
being utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL MAY 12, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION THEREWITH.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
The Series A Notes have been designated as eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkages market. Prior
to this Exchange Offer, there has been no public market for the Exchange Notes.
If such a market were to develop, the Exchange Notes could trade at prices that
may be higher or lower than their principal amount. The Company does not intend
to apply for listing of the Exchange Notes on any securities exchange or for
quotation of the Exchange Notes through the Nasdaq Stock Market's National
Market or otherwise. The Initial Purchasers have previously made a market in the
Series A Notes and the Company has been advised that the Initial Purchasers
currently intend to make a market in the Exchange Notes, as permitted by
applicable laws and regulations, after consummation of the Exchange Offer. The
Initial Purchasers are not obligated, however, to make a market in the Series A
Notes or the Exchange
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Notes and any such market making activity may be discontinued at any time
without notice at the sole discretion of the Initial Purchasers. There can be no
assurance as to the liquidity of the public market for the Exchange Notes or
that any active public market for the Exchange Notes will develop or continue.
If an active public market does not develop or continue, the market price and
liquidity of the Exchange Notes may be adversely affected. See "Risk
Factors -- Lack of Public Market." Moreover, to the extent that the Series A
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series A Notes could be adversely
affected.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of a Global Certificate (as defined herein), which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary" or "DTC") and registered in its name or in the name of Cede & Co.,
its nominee. Beneficial interests in the Global Certificate representing the
Exchange Notes will be shown on, and transfers thereof will be affected through,
records maintained by the Depositary and its participants. After the initial
issuance of the Global Certificate, the Exchange Notes in certified form will be
issued in exchange for the Global Certificate only on the terms set forth in the
Indenture. See "Book-Entry; Delivery and Form."
Holders of the Series A Notes not tendered and accepted in the Exchange
Offer will continue to hold such Series A Notes and will be entitled to all of
the rights and benefits and will be subject to the limitations applicable
thereto under the Indenture and with respect to transfer under the Securities
Act. The Company will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company and the Guarantors will pay
all the expenses incurred by them incident to the Exchange Offer. See "The
Exchange Offer."
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER THIS CHAPTER WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, the statements in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
the Company's press releases and in oral statements made by authorized officers
of the Company. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe" and similar expressions are intended
to identify forward-looking statements. All of these forward-looking statements
are based on estimates and assumptions made by management of the Company, which,
although believed to be reasonable, are inherently uncertain. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any of such statements or estimates will be realized and
actual results will differ from those contemplated by such forward-looking
statements.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
including the notes thereto appearing elsewhere in this Prospectus. Prospective
purchasers should carefully consider the information set forth or referred to
under the heading "Risk Factors." As used in this Prospectus, unless the context
indicates otherwise, (i) the "Company" and "KCI" mean Kinetic Concepts, Inc. and
its consolidated subsidiaries, (ii) all dollar amounts are expressed in United
States dollars, (iii) all references to financial statement balances are
determined in accordance with United States generally accepted accounting
principles ("GAAP") and (iv) "pro forma" means as adjusted on a pro forma basis
for the Transactions (as defined) and the Acquisitions (as defined).
OVERVIEW
Kinetic Concepts, Inc. is a worldwide leader in innovative therapeutic
systems which prevent and treat the complications of immobility that can result
from disease, trauma, surgery or obesity. The Company's clinically effective
therapeutic systems include specialty hospital beds, specialty mattress overlays
and non-invasive medical devices combined with on-site patient care consultation
by the Company's clinically-trained staff. The complications of immobility
include pressure sores, pneumonia and circulatory problems which can increase
patient treatment costs by as much as $75,000 and, if left untreated, can result
in death. The Company's therapeutic systems can significantly improve clinical
outcomes while reducing the cost of patient care by preventing these
complications or accelerating the healing process, as well as by providing labor
savings. The Company has also been successful in applying its therapeutic
expertise to bring to market innovative medical devices that treat chronic
wounds and help prevent blood clots. For the latest twelve-month period ended
September 30, 1997, the Company generated unaudited pro forma revenue and EBITDA
(as defined) of $308.1 million and $95.2 million, respectively. From 1994 to
1996, KCI increased revenue and EBITDA (excluding divested businesses and other
non-recurring gains) at compound annual growth rates of 10.2% and 10.1%,
respectively.
The Company designs, manufactures, markets and services its products, many
of which are proprietary. KCI's therapeutic systems are used to treat patients
across all health care settings including acute care hospitals, extended care
facilities and patients' homes. Health care providers generally prefer to rent
rather than purchase the Company's products in order to avoid the ongoing
service, storage and maintenance requirements and the high initial capital
outlay associated with purchasing such products, as well as to receive the
Company's high-quality clinical support. KCI's therapeutic systems typically
rent for $20 to $175 per day. The Company can deliver its therapeutic systems to
any major domestic trauma center within two hours of notice through its network
of service centers.
Management believes that approximately two-thirds of the patients who use
the Company's therapeutic systems are over the age of 65. Management believes
that the market for its therapeutic systems will continue to grow due to the
aging of the population and further market penetration of the Company's
therapeutic systems as a result of increased pressure on health care providers
to control costs and improve patient outcomes.
The Company's principal executive offices are located at 8023 Vantage
Drive, San Antonio, Texas 78230 and its telephone number is (210) 524-9000.
THERAPIES
The Company's therapeutic systems deliver one or a combination of the
following therapies:
Pressure Relief/Pressure Reduction. The Company's pressure relief and
pressure reduction surfaces provide effective skin care therapy in the treatment
of pressure sores, burns, skin grafts and other skin conditions and help prevent
the formation of pressure sores which develop in certain immobile individuals.
The Company's beds and mattress overlays reduce the amount of pressure at any
point on a patient's skin by using surfaces supported by air, silicon beads, or
a viscous fluid. Some of the products further promote healing through pulsation.
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Pulmonary Care. The Company's pulmonary care systems provide Kinetic
Therapy to help prevent and treat acute respiratory problems, such as pneumonia,
by reducing the build-up of fluid in the lungs. The United States Centers for
Disease Control (the "CDC") defines Kinetic Therapy as the lateral rotation of a
patient by at least 40 degrees to each side (a continuous 80 degree arc). KCI is
the only manufacturer of beds which deliver Kinetic Therapy, which the Company
believes is essential to the prevention or effective treatment of pneumonia in
immobile patients. Some of the Company's products combine Kinetic Therapy with
additional therapies such as percussion and pulsation which help loosen mucous
buildup and promote circulation.
Bariatric Care. The Company offers a line of bariatric care products which
are designed to accommodate obese individuals. These products are used generally
for patients weighing from 250 to 500 pounds, but can accommodate patients
weighing up to 1,000 pounds. These individuals are often unable to fit into
standard-sized beds and wheelchairs. The Company's most advanced bariatric care
product serves as a bed, chair, scale and x-ray table, helps patients enter and
exit the bed, and contains other features which permit patients to be treated
safely and with dignity. Moreover, treating obese patients is a significant
staffing issue for many health care facilities because moving and handling these
patients increases the risk of injury to hospital personnel. Management believes
that its bariatric care products enable health care personnel to treat obese
patients in a manner which is safer to such personnel than traditional methods,
which can help reduce worker's compensation claims. Some of the bariatric
products also address complications of immobility and obesity such as pressure
sores.
Closure of Chronic Wounds. The Company is the sole provider of a patented,
non-invasive device which uses negative pressure to promote the healing of
chronic wounds. The negative pressure is applied through a proprietary foam
dressing which draws the tissue together, stimulates blood flow, reduces
swelling and decreases bacterial growth. The device heals wounds more quickly
than traditional methods and has been effective at closing chronic wounds which
have, in some cases, been open for years.
Circulatory Improvement. The Company offers a non-invasive device which
improves blood circulation, decreases swelling in the lower extremities and
reduces the incidence of blood clots. The therapy is accomplished by wrapping
inflatable cuffs around a foot or leg and then automatically inflating and
deflating them at prescribed intervals. The products are often used by
individuals who have had hip or knee surgeries, diabetes or other conditions
which reduce circulation.
COMPETITIVE STRENGTHS
Management believes the following competitive strengths contribute to the
Company's leading market position and its growth in revenue and EBITDA.
Effective therapeutic systems. The Company has focused on therapeutic
systems that are designed to improve patient outcomes and reduce the cost of
patient care. For example, the Company believes that its Kinetic Therapy systems
can reduce the probability of an immobile patient contracting pneumonia in the
acute care setting by as much as 50%, and that its pressure relief systems can
heal pressure sores up to three times faster than traditional methods.
Proprietary products. The Company is the only manufacturer of Kinetic
Therapy systems and has the exclusive license to market its vacuum wound closure
technology. The Company has several other therapeutic products under development
which management believes are unique and further believes that the use of such
products will reduce the cost of patient care and yield superior outcomes when
compared to traditional methods.
Established service distribution network and broad product line. With 143
domestic service centers, a fleet of approximately 26,500 surfaces, a clinically
trained sales force that conducts more than 200,000 patient visits annually and
the ability to deliver therapies to every major domestic trauma center within
two hours, the Company has a national presence that management believes is a
significant competitive advantage. The Company believes its network addresses
the needs of customers by providing nationwide coverage, consistent availability
of a broad range of products and high-quality service.
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Industry leadership in clinical research. KCI's therapeutic systems are
supported by the most extensive collection of published clinical studies in the
industry. These studies demonstrate the clinical efficacy demanded by health
care providers and the cost effectiveness of the Company's products.
Strong management team. The Company installed a new, experienced
professional management team beginning in 1994. This team, led by Raymond R.
Hannigan, President and Chief Executive Officer, has refocused the Company's
strategy toward providing cost-effective, clinically-proven outcomes.
Management's initiatives have resulted in increased revenue, improved
profitability, improved efficiencies and enhanced distribution and information
systems. As a result, from 1994 to 1996, KCI increased revenue and EBITDA
(excluding divested businesses and other non-recurring gains) at compound annual
growth rates of 10.2% and 10.1%, respectively.
BUSINESS STRATEGY
The Company intends to continue to grow operating earnings and improve its
market position by pursuing the following strategies:
Increase presence in extended care and home care markets. Because of the
cost pressures within the health care industry, acute care hospitals are
discharging patients earlier, thereby increasing the demand for the Company's
products in the extended and home care settings. KCI provides therapies to
patients across multiple care settings through its national distribution network
and broad product line which are designed to provide a continuum of care. The
Company's new marketing programs specifically target national and regional
extended care providers.
Further penetrate the acute care market. KCI serves over 1,300 medium to
large hospitals and is presently focusing its marketing efforts on an additional
1,900 similarly-sized hospitals in which the Company has had a relatively small
presence. The Company believes its strong position as the sole manufacturer of
Kinetic Therapy beds and exclusive provider of its wound closure device will
help KCI penetrate these new accounts.
Increase usage of recently introduced products. The Company intends to
increase revenues by improving market awareness for its most recently introduced
products. The Company's newest products include medical devices for treatment of
chronic wounds, specialty surfaces for obese patients and sophisticated Kinetic
Therapy beds. The Company believes these unique products have excellent growth
potential and provide the Company with an opportunity to penetrate competitive
accounts.
Introduce new products. Approximately 30% of the Company's 1996 domestic
revenues were generated by products which have been introduced since 1994. One
of KCI's objectives is to continue to expand revenues by acquiring or developing
new products which improve patient outcomes and reduce the cost of patient care.
In addition, existing products are continuously improved in consultation with
health care professionals to enhance their features and improve their clinical
effectiveness.
Expand internationally. The Company has direct operations in 13 foreign
countries and has 75 independent dealers in other foreign markets. The Company
intends to continue to expand in growing international markets by establishing
additional direct operations and expanding its dealership network.
Pursue strategic acquisitions. The Company intends to pursue strategic
fold-in acquisitions, both domestically and internationally, to enhance its
geographic coverage and broaden its product line. Between January and October
1997, the Company completed five such acquisitions. For example, the Company's
acquisition of substantially all of the assets of RIK Medical L.L.C. in October
1997 broadened its product line to include a new non-powered proprietary support
surface.
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RECENT ACQUISITIONS
On October 1, 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. Other
recent acquisitions include Ethos Medical, Ltd., and substantially all the
assets of H.F. Systems, Inc. ("H.F. Systems"), Trac Medical, Inc. and Equi-Tron
Mfg., Inc. The acquisitions of RIK and H.F. Systems are collectively referred to
as the "Acquisitions."
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SUMMARY OF THE TRANSACTIONS
THE INVESTORS
Fremont Purchaser II, Inc. (the "Fremont Investor"), is a subsidiary of
Fremont Acquisition Company II, L.L.C. and Fremont Acquisition Company IIA,
L.L.C., which were both formed by Fremont Partners L.P.
Fremont Partners L.P., and certain affiliated parties (collectively,
"Fremont"), is a private equity fund headquartered in San Francisco with
committed capital of $605 million. Fremont is part of The Fremont Group, a
private investment company with more than $7.4 billion in assets under
management. Fremont's strategy is to make substantial privately negotiated
equity investments in sizable businesses and apply a hands-on operating approach
to enhance and create value in partnership with management. Among the companies
where Fremont and its affiliates have had significant roles are Crown Pacific
Partners, L.P. (timber and forest products; NYSE: CRO), Coldwell Banker
Corporation (residential real estate), and, most recently, Kerr Group, Inc.
(specialty plastic closures; NYSE: KGM). The principal offices of Fremont are
located at 50 Fremont Street, Suite 3700, San Francisco, CA 94105.
RCBA Purchaser I, L.P. (the "RCBA Investor" and, together with Fremont
Investor, the "Investors"), was formed by Richard C. Blum & Associates, L.P.
Richard C. Blum & Associates, L.P. and its predecessors and certain
affiliated parties (collectively, "RCBA") is a San Francisco based private
investment concern specializing in strategic block, relationship-oriented
investing. RCBA and its affiliates have approximately $1.2 billion in assets
under management and a 20-year investment performance record. RCBA's investment
strategy is to source negotiated private equity transactions through minority
strategic block investments in the public market. RCBA sources its investments
by identifying companies (or industries) undergoing change, which represent good
businesses and where the opportunity exists to build relationships with
management and subsequently implement strategies to provide a superior return on
investments. Among the investments in which RCBA has played a significant role
are Northwest Airlines Corporation (airline; NASDAQ: NWAC); National Education
Corporation (educational training and publishing; previously NYSE: NEC); and URS
Corporation (infrastructure engineering; NYSE: URS). The offices of RCBA are
located at 909 Montgomery Street, Suite 400, San Francisco, CA 94133.
THE TRANSACTIONS
The Company and the Investors entered into a Transaction Agreement dated as
of October 2, 1997, as amended by a letter agreement dated November 5, 1997 (as
so amended, the "Transaction Agreement"), pursuant to which the Investors
participated in the recapitalization (the "Recapitalization") of the Company.
Pursuant to the Transaction Agreement, the Investors purchased in the aggregate
7,802,180 newly-issued shares of the Company's common stock, $.001 par value per
share ("Shares"), at a per Share price equal to $19.25 (the "Stock Purchase").
The proceeds of the Stock Purchase, together with approximately $343.0 million
of aggregate proceeds from certain financings described below, and the proceeds
from the offering of the Series A Notes (the "Offering"), have been and will be
used by the Company to (i) purchase 31,006,942 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 each seller in cash
(the "Per Share Amount"), (ii) pay all related fees and expenses, (iii) pay the
Merger Consideration (as defined) for Shares in connection with the Merger (as
defined) and (iv) for general corporate purposes.
Pursuant to the Transaction Agreement, the Investors were merged with and
into the Company (the "Merger" and, together with the Recapitalization, the
Tender Offer and the Stock Purchase, the "Transactions") with the Company as the
surviving corporation of the Merger (the "Surviving Corporation"). Following the
consummation of the Merger, Fremont, RCBA, Dr. James Leininger and Dr. Peter
Leininger own 7,029,922, 4,644,010, 5,939,220 and 100,000 Shares, respectively,
representing 39.7%, 26.2%, 33.5% and 0.6% of the Shares outstanding. There are
currently no other shareholders but certain members of management have retained,
and have been granted, additional options to purchase Shares.
9
<PAGE> 10
Funding for the Recapitalization consisted of: (i) gross proceeds from the
Offering of $200.0 million; (ii) borrowings under the New Credit Facilities of
approximately $343.0 million; and (iii) an investment of approximately $348.8
million in equity in the Company (the "Equity Financing"), comprised of the
contribution of approximately $198.6 million of the Continuing Shares (as
defined) at a price of $19.25 per Share by the Continuing Shareholders (as
defined) and the purchase by the Investors of approximately $150.2 million of
Shares from the Company. The New Credit Facilities provide for up to $400.0
million in the form of (i) three tranches of term loans (the "Term Loan
Facility"), (ii) a six-year revolving credit facility (the "Revolving Credit
Facility") and (iii) a six-year acquisition facility (the "Acquisition
Facility", and together with the Term Loan Facility and the Revolving Credit
Facility, the "New Credit Facilities"). See "The Transactions", "Use of
Proceeds", and "Description of New Credit Facilities".
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer provides holders of the Series A Notes with the Exchange
Notes which will generally be freely transferable by the holders thereof without
registration or any prospectus delivery requirement under the Securities Act.
The Company's purpose in engaging in the Exchange Offer is to provide holders of
the Series A Notes with freely transferable securities and to comply with the
provisions of the Registration Rights Agreement which require, subject to
certain conditions, that the Exchange Offer be made. See "Purpose of the
Exchange Offer".
THE EXCHANGE OFFER
Exchange Ratio............. Each Series A Note is exchangeable for a like
principal amount of Exchange Notes.
Expiration Date............ 5:00 p.m., New York City time, on March 3, 1998
unless extended, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer shall have been extended.
Principal Amount of
Notes...................... Subject to the terms and conditions of the Exchange
Offer, any and all Series A Notes will be accepted
if duly tendered and not withdrawn prior to
acceptance thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of
the Series A Notes being tendered. The Indenture
limits the aggregate principal amount which may be
outstanding thereunder, including the Series A
Notes and the Exchange Notes, to $300.0 million
principal amount, of which $200.0 million is
currently outstanding in the form of the Series A
Notes.
Trading and Market Price... The Series A Notes are currently eligible for
quotation through the National Association of
Securities Dealers, Inc.'s PORTAL system. Prior to
the date hereof, there has been only a private
institutional trading market for the Series A
Notes. It is anticipated that a similar trading
market will exist for the Exchange Notes following
the Exchange Offer. BT Alex. Brown Incorporated and
BancAmerica Robertson Stephens (the "Initial
Purchasers") have advised the Company that they
intend to act as market makers for the Exchange
Notes; however, they are not obligated to do so and
may discontinue market making activities with
respect to the Exchange Notes at any time. See
"Risk Factors -- Lack of Public Market."
Resale of Exchange Notes... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, the Company believes that
the Exchange Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other
than broker-dealers who acquire such Exchange Notes
directly from the
10
<PAGE> 11
Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or any holder that is an
"affiliate" of the Company or any of the Guarantors
as defined in Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business
and such holders are not engaged in, and do not
intend to engage in, a distribution of such
Exchange Notes and have no arrangement or
understanding with any person to participate in a
distribution of such Exchange Notes. By tendering
Series A Notes in exchange for Exchange Notes, each
holder, other than a broker-dealer, will represent
to the Company that: (i) it is not an affiliate of
the Company or any of the Guarantors (as defined
under Rule 405 of the Securities Act) or a
broker-dealer tendering Series A Notes acquired
directly from the Company for its own account; (ii)
any Exchange Notes to be received by it will be
acquired in the ordinary course of its business;
and (iii) it is not engaged in, and does not intend
to engage in, a distribution of such Exchange Notes
and has no arrangement or understanding to
participate in a distribution of the Exchange
Notes. If a holder of Series A Notes is engaged in
or intends to engage in a distribution of the
Exchange Notes or has any arrangement or
understanding with respect to the distribution of
the Exchange Notes to be acquired pursuant to the
Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the
Commission and must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any secondary
resale transaction. Each Participating
Broker-Dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of Exchange Notes
received in exchange for Series A Notes where such
Series A Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The Company
has agreed that it will make this Prospectus
available to any Participating Broker-Dealer for
use in connection with any such resale. See "Plan
of Distribution." To comply with the securities
laws of certain jurisdictions, it may be necessary
to qualify for sale or register the Exchange Notes
prior to offering or selling such Exchange Notes.
The Company has agreed, pursuant to the
Registration Rights Agreement and subject to
certain specified limitations therein, to register
or qualify the Exchange Notes for offer or sale
under the securities or "blue sky" laws of such
jurisdictions as may be necessary to permit the
holders of Exchange Notes to trade the Exchange
Notes without any restrictions or limitations under
the securities laws of the several states of the
United States.
Consequences of Failure to
Exchange Series A
Notes.................... Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of Series A Notes who
do not exchange their Series A
11
<PAGE> 12
Notes for Exchange Notes in the Exchange Offer will
no longer be entitled to registration rights and
will not be able to offer or sell their Series A
Notes, unless such Series A Notes are subsequently
registered under the Securities Act (which, subject
to certain limited exceptions, the Company will
have no obligation to do), except pursuant to an
exemption from or in a transaction not subject to,
the Securities Act and applicable state securities
laws. See "Risk Factors -- Consequences of Failure
to Exchange" and "The Exchange Offer -- Terms of
the Exchange Offer."
Conditions of the Exchange
Offer.................... The Company's obligation to consummate the Exchange
Offer is subject to certain conditions. See "The
Exchange Offer -- Conditions." Tenders of the
Series A Notes may be withdrawn at any time prior
to the Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
How to Tender.............. Tendering holders of the Series A Notes must either
(i) complete and sign a Letter of Transmittal, have
their signatures guaranteed if required, forward
the Letter of Transmittal and any other required
documents to the Exchange Agent at the address set
forth under the caption "Exchange Agent," and
either deliver the Series A Notes to the Exchange
Agent or tender such Series A Notes pursuant to the
procedures for book-entry transfer or (ii) request
a broker, dealer, bank, trust company or other
nominee to effect the transaction for them.
Beneficial owners of the Series A Notes registered
in the name of a broker, dealer, bank, trust
company or other nominee must contact such
institution to tender their Series A Notes. The
Series A Notes may be physically delivered, but
physical delivery is not required if a confirmation
of a book-entry transfer of such Series A Notes to
the Exchange Agent's account at DTC is delivered in
a timely fashion. Certain provisions have also been
made for holders whose Series A Notes are not
readily available or who cannot comply with the
procedure for book-entry transfer on a timely
basis. Questions regarding how to tender and
requests for information should be directed to the
Exchange Agent. See "The Exchange Offer -- How to
Tender."
Guaranteed Delivery
Procedures............... Holders of Series A Notes who wish to tender their
Series A Notes and whose Series A Notes are not
immediately available or who cannot deliver their
Series A Notes and a properly completed Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date may tender their Series A
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -- How
to Tender."
Withdrawal Rights.......... Tenders of Series A Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Series A
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer -- Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Tenders...... Subject to the terms and conditions of the Exchange
Offer, including the reservation of certain rights
by the Company, the Series A Notes validly tendered
prior to the Expiration Date will be accepted for
exchange.
12
<PAGE> 13
Subject to such terms and conditions, the Exchange
Notes to be issued in exchange for validly tendered
Series A Notes will be mailed by the Exchange Agent
promptly after acceptance of the tendered Series A
Notes or credited to the holder's account in
accordance with appropriate book-entry procedures.
Although the Company does not currently intend to
do so, if it modifies the terms of the Exchange
Offer prior to the Expiration Date, such modified
terms will be available to all holders of the
Series A Notes, whether or not their Series A Notes
have been tendered prior to such modification. Any
material modification will be disclosed in
accordance with the applicable rules of the
Commission and, if required, the Exchange Offer
will be extended to permit holders of the Series A
Notes adequate time to consider such modification.
See "The Exchange Offer -- Acceptance of Tenders."
Exchange Agent............. Marine Midland Bank
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. See "The Exchange Offer -- Fees and
Expenses."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. The proceeds from
the sale of the Series A Notes were used and are
being used in connection with the Recapitalization
and for general corporate purposes.
Issuer..................... Kinetic Concepts, Inc., a Texas corporation.
Notes Offered.............. $200,000,000 aggregate principal amount of 9 5/8%
Senior Subordinated Notes due 2007.
Maturity Date.............. November 1, 2007
Interest Payment Dates..... Interest on the Exchange Notes will accrue from the
date of original issuance of the Series A Notes
(November 5, 1997) and be payable semi-annually on
each May 1 and November 1, commencing May 1, 1998.
Optional Redemption........ The Series A Notes are, and the Exchange Notes will
be, redeemable at the option of the Company, in
whole or in part, at any time or from time to time,
on or after November 1, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, prior to November 1, 2000, the Company,
at its option, may redeem up to 35% of the
aggregate principal amount of the Notes originally
issued with the net proceeds of one or more Equity
Offerings (as defined) at a price equal to 109.625%
of the aggregate principal amount to be redeemed,
together with accrued and unpaid interest, if any,
to the date of redemption, provided that at least
65% of the aggregate principal amount of the Notes
originally issued remain outstanding immediately
after such redemption. See "Description of
Notes -- Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Exchange Notes and each holder of Series
A Notes will have the right to require the Company
to repurchase such holder's Notes at a purchase
price equal to 101% of the principal amount
thereof, plus accrued and unpaid
13
<PAGE> 14
interest, if any, to the date of repurchase. See
"Description of Notes -- Change of Control."
Offers to Purchase......... In the event of certain asset sales, the Company
will be required to offer to repurchase the
Exchange Notes and the Series A Notes to the extent
of the net cash proceeds from such asset sales at a
price equal to 100% of their principal amount, plus
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes -- Certain
Covenants -- Limitation on Asset Sales."
Guarantees................. The Series A Notes are, and the Exchange Notes will
be, unconditionally guaranteed (the "Guarantees")
by each of the domestic subsidiaries of the
Company. The Guarantees are unsecured senior
subordinated obligations of the Guarantors, and
rank pari passu in right of payment to all existing
and future unsecured senior subordinated
indebtedness of the Guarantors. See "Description of
Notes -- Guarantees."
Ranking.................... The Series A Notes are, and the Exchange Notes will
be, unsecured senior subordinated obligations of
the Company and are and will be subordinated in
right of payment to all existing and future Senior
Debt of the Company, including indebtedness under
the New Credit Facilities. The Notes also are and
will be effectively subordinated to all secured
indebtedness of either the Company or any of its
subsidiaries to the extent of the assets secured by
such indebtedness. The Notes will rank pari passu
with any future senior subordinated indebtedness of
the Company and will rank senior in right of
payment to all other subordinated obligations of
the Company. As of September 30, 1997, on a pro
forma basis after giving effect to the Transactions
and the Acquisitions, the Company and the
Guarantors would have had approximately $342.7
million of Senior Debt outstanding and
approximately $57.3 million of availability under
the New Credit Facilities. In addition, on
September 30, 1997, the Company's subsidiaries that
are not Guarantors would have had, on the same pro
forma basis, approximately $5.7 million of
indebtedness and liabilities, including trade
payables, which would be structurally senior to the
Notes. See "Description of Notes."
Certain Covenants.......... The Indenture governing the Notes (the "Indenture")
imposes certain limitations on the ability of the
Company and its subsidiaries to, among other
things, incur additional indebtedness, pay
dividends or make certain other restricted
payments, consummate certain asset sales, enter
into certain transactions with affiliates, incur
liens, create restrictions on the ability of a
subsidiary to pay dividends or make certain
payments, sell or issue preferred stock of
subsidiaries to third parties, merge or consolidate
with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. See
"Description of Notes -- Certain Covenants."
Federal Income Tax
Considerations........... For federal income tax purposes, holders of Series
A Notes will not recognize any gain or loss upon
the receipt of Exchange Notes pursuant to the
Exchange Offer. See "Certain Tax Considerations."
For additional information regarding the Notes, see "Description of Notes."
14
<PAGE> 15
EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST
In the Registration Rights Agreement, the Company and the Guarantors agreed
(i) to file a registration statement with respect to the Exchange Offer within
45 days after the date of issuance of the Series A Notes (the "Issue Date"),
(ii) to use their best efforts to cause such registration statement to be
declared effective under the Securities Act within 150 days after the Issue Date
and (iii) to use their best efforts to consummate the Exchange Offer within 180
days of the Issue Date. If the Company and the Guarantors do not comply with
their registration obligations in a timely manner, they will be required to pay
additional interest (in addition to the scheduled payment of interest) during
the first 90 day period of such default in an amount equal to 0.50% per annum at
the end of such 90 day period. The amount of the additional interest will
increase by an additional 0.50% per annum for each subsequent 90 day period
until such obligations are complied with, up to a maximum amount of additional
interest of 1.50% per annum. In the event that applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any other reason the Exchange Offer is not consummated within 180 days
of the Issue Date, or if certain holders of the Series A Notes are not permitted
to receive the benefit of the Exchange Offer, the Company and the Guarantors
will use their best efforts to cause to become effective a shelf registration
statement with respect to the resale of the Series A Notes and to keep such
shelf registration statement effective until the earlier of two years after its
effective date and such time as all of the Series A Notes have been sold
thereunder.
15
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table presents summary historical consolidated financial data
of the Company for the three years ended December 31, 1996, for the nine months
ended September 30, 1996 and 1997, and for the latest twelve-month period
("LTM") ended September 30, 1997, which have been derived from the Company's
consolidated financial statements and unaudited historical and pro forma
financial data. The pro forma data give effect to the consummation of the
Transactions and the Acquisitions. The unaudited Pro Forma Condensed
Consolidated Balance Sheet data reflects such adjustments as if the Transactions
and the Acquisitions had occurred at September 30, 1997, and the unaudited Pro
Forma Statements of Earnings data for the nine month period ended September 30,
1997, and for the LTM ended September 30, 1997, reflect such adjustments as if
the Transactions and the Acquisitions had occurred at the beginning of the
respective periods. The historical consolidated financial data of the Company
for the nine months ended September 30, 1996 and 1997, and for the LTM ended
September 30, 1997 have been derived from the Company's interim consolidated
financial statements which, in the opinion of management of the Company, have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the financial data for such periods. The
information in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Selected Historical Consolidated Financial Data," the Consolidated Financial
Statements and the notes thereto and the unaudited Pro Forma Condensed
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
1994 1994(1) 1995 1996 1996 1997 1997(2)
-------- ---------- --------- -------- -------- ----------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue............... $269,646 $ 222,084 $243,443 $269,881 $199,829 $224,511 $233,839
Gross profit.......... 91,023 74,289 92,294 107,361 78,881 92,801 96,333
Operating
earnings(3)........ 124,078 113,383 43,792 55,354 40,090 48,605 51,701
Interest income....... 1,318 1,318 5,063 9,332 3,055 1,421 548
Interest expense...... 5,846 109 509 245 118 126 37,139
Net earnings(4)....... 64,383 70,783 28,441 38,987 25,859 29,903 8,420
Other Data:
EBITDA(5)(6).......... 80,105 67,091 71,615 81,300 59,632 67,133 71,274
EBITDA margin......... 30% 30% 29% 30% 30% 30% 30%
Depreciation and
amortization....... 38,795 26,355 22,760 21,794 16,487 17,144 19,060
Capital
expenditures....... 9,564 5,425 37,104 27,083 19,137 24,004 25,654
Ratio of EBITDA to
cash interest
expense............ 2.03x
Therapy days.......... 4,166 4,166 4,761 5,240 3,897 4,655 4,655
</TABLE>
<TABLE>
<CAPTION>
LTM ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Pro Forma Data:
Revenue................................................... $308,094
EBITDA(6)................................................. 95,187
EBITDA margin............................................. 31%
Cash interest expense..................................... 46,941
Ratio of EBITDA to cash interest expense.................. 2.03x
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------------ SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1997 1997(2)
-------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Cash.................................... $ 43,241 $ 52,399 $ 59,045 $ 45,535 $ 22,276
Working capital......................... 90,731 109,413 107,334 111,164 99,508
Total assets............................ 232,731 243,726 253,393 286,023 319,452
Total debt.............................. 7,924 -- 514 477 543,127
Stockholders' equity (deficit).......... 185,423 210,324 211,078 230,826 (278,460)
</TABLE>
- ---------------
(1) The 1994 unaudited pro forma selected consolidated financial data is based
on the historical financial statements of the Company, giving effect to the
sale of certain assets of the Company's Medical Services Division ("Medical
Services") and all of the capital stock of KCI Financial Services, Inc.
("KCIFS") as if such sales had been consummated as of January 1, 1994 and
giving effect to such other assumptions and adjustments as set forth in the
notes accompanying the 1994 unaudited pro forma condensed consolidated
statement of earnings. See 1994 Unaudited Pro Forma Condensed Consolidated
Statements of Earnings and the notes thereto included in this Prospectus.
(2) The unaudited pro forma selected consolidated financial data is based on the
historical financial statements of the Company giving effect to the
Acquisitions and the Transactions and giving effect to such other
assumptions as set forth in the notes accompanying the unaudited pro forma
consolidated condensed financial statements. The unaudited pro forma
selected consolidated balance sheet data give effect to the Transactions and
Acquisitions as if they had occurred on September 30, 1997. The unaudited
pro forma selected consolidated operating and other data give effect to the
Transactions and Acquisitions as if they had occurred at the beginning of
the nine month period ended September 30, 1997. See Unaudited Pro Forma
Condensed Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
(3) Excluding the effect of the proceeds of $84.8 million from the patent
litigation settlement and other unusual items, operating earnings and pro
forma operating earnings for the year ended December 31, 1994 would have
been $39.2 million and $38.6 million, respectively.
(4) Excluding the effect of the proceeds of $84.8 million from the patent
litigation settlement and other unusual items, net earnings and pro forma
net earnings for the year ended December 31, 1994 would have been $22.0
million and $25.1 million respectively.
(5) EBITDA is defined as earnings before interest expense, income taxes,
depreciation, and amortization. EBITDA and pro forma EBITDA for the year
ended December 31, 1994 exclude the proceeds of $84.8 million from the
patent litigation settlement and other unusual items. Had these amounts been
included, EBITDA and pro forma EBITDA for the year ended December 31, 1994
would have been $165.0 million and $141.8 million, respectively. While
EBITDA should not be construed as a substitute for operating earnings, net
earnings, or cash flows from operating activities in analyzing the Company's
operating performances, financial position or cash flows, the Company has
included EBITDA because it is commonly used by certain investors and
analysts to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability to
service debt.
(6) EBITDA for the year ended December 31, 1996 and pro forma EBITDA for the LTM
ended September 30, 1997 exclude a one-time gain of $5.2 million related to
the early repayment of notes receivable from MEDIQ/PRN that had previously
been discounted.
17
<PAGE> 18
RISK FACTORS
Prospective investors should carefully consider the following risk factors
in addition to the other information contained herein before making an
investment in the Exchange Notes offered hereby.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As a result of the Transactions, the Company has significant indebtedness.
At September 30, 1997, the Company's total liabilities would have been $597.9
million and its stockholders' deficiency would have been $278.5 million, in each
case on a pro forma basis after giving effect to the Transactions and the
Acquisitions. The pro forma stockholders' deficiency is a result of the
Recapitalization. In addition, subject to the restrictions in the New Credit
Facilities and the Indenture, the Company may incur additional indebtedness from
time to time to finance acquisitions or capital expenditures or for other
purposes. After giving effect to the Transactions and the Acquisitions as if
they had occurred at the beginning of the nine month period ended September 30,
1997 and the twelve month period ended December 31, 1996, the Company's pro
forma ratio of earnings to fixed charges would have been 1.39x and 1.35x
respectively.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for other purposes;
(ii) the Company's future ability to obtain additional debt financing for
working capital, capital expenditures or acquisitions may be limited; and (iii)
the Company's level of indebtedness could limit its flexibility in reacting to
changes in the industry and general economic conditions. Certain of the
Company's competitors currently operate on a less leveraged basis and have
significantly greater operating and financing flexibility than the Company.
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations (including those incurred in connection with the
Recapitalization) will depend upon its future operating performance including
its ability to implement its business strategy, which will be affected by the
factors described herein and by prevailing economic conditions and financial,
business, regulatory and other factors, many of which are beyond its control.
The Company currently anticipates that its operating cash flow, together with
borrowings under the New Credit Facilities, will be sufficient to meet its
operating expenses and to service its debt requirements as they become due.
However, if the Company is unable to service its indebtedness, it will be forced
to adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture and the Bank Credit Agreement (as defined) entered into
pursuant to the New Credit Facilities restrict, among other things, the
Company's ability to: incur additional indebtedness; incur liens; pay dividends
or make certain other restricted payments; consummate certain asset sales; enter
into certain transactions with affiliates; incur indebtedness that is
subordinate in right of payment to any Senior Debt and senior in right of
payment to the Notes; impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company; merge or consolidate with any
other person; or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company. See "Description of
Notes -- Certain Covenants" and "Description of New Credit Facilities." In
addition, the Bank Credit Agreement contains other and more restrictive
covenants and prohibits the Company from prepaying certain of its indebtedness
(including the Notes). The Bank Credit Agreement also requires the Company to
maintain specified financial ratios and satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and tests can be
affected by events beyond its control, and there can be no assurance that the
Company will meet those tests. A breach of any of these covenants could result
in a default under the Bank Credit Agreement and/or the Indenture. Upon the
occurrence of an event of default under the Bank Credit Agreement, the lenders
could elect to declare all amounts outstanding under the Bank Credit Agreement,
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together with accrued interest, to be immediately due and payable. If the
Company were unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure that indebtedness. If the indebtedness
under the New Credit Facilities were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
the indebtedness thereunder and the other indebtedness of the Company, including
the Notes. Substantially all of the assets of the Company and each of its
domestic subsidiaries are pledged as security under the Bank Credit Agreement.
See "Description of New Credit Facilities."
SUBORDINATION
The Notes and the Guarantees are and will be unsecured senior subordinated
obligations of the Company and the Guarantors, respectively, and, as such, are
subordinated to all existing and future Senior Debt of the Company and the
Guarantors, including borrowings under the New Credit Facilities. The Notes are
also effectively subordinated to all secured indebtedness of either the Company
or any of its subsidiaries to the extent of the assets secured by such
indebtedness. As of September 30, 1997, on a pro forma basis, the Company and
the Guarantors would have had approximately $342.7 million of Senior Debt. In
addition, on a pro forma basis, the Company would have had approximately $57.3
million available under the New Credit Facilities. Subsidiaries of the Company
that are not Guarantors would have had, on a pro forma basis, approximately $5.7
million of indebtedness and liabilities, including trade payables, which would
be structurally senior to the Notes.
The Company may not pay principal of, premium, if any, or interest on or
other amounts owing in respect of the Notes, make any deposit pursuant to any
defeasance provisions or repurchase, redeem or otherwise retire the Notes if
certain Senior Debt is not paid when due or any other default on such
Indebtedness (as defined) occurs and the maturity of such Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived, any such acceleration has been rescinded or such
Indebtedness has been paid in full. Moreover, under certain circumstances, if
any non-payment default exists with respect to such Indebtedness, the Company
may not make any payments on the Notes for a specified time, unless such default
is cured or waived, any acceleration of such indebtedness has been rescinded or
such indebtedness has been paid in full. See "Description of
Notes -- Subordination."
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
The Company is a holding company, the principal assets of which consist of
equity interests in its subsidiaries. The Company's cash flow and, consequently,
its ability to service debt, including the Notes, is dependent upon the earnings
of its subsidiaries and the payment of funds by those subsidiaries to the
Company in the form of loans, dividends or otherwise. The Notes are and will be
guaranteed on an unsecured senior subordinated basis by the Guarantors, and as a
result, should the Company fail to satisfy any payment obligation under the
Notes, the holders would have a direct claim therefor against the Guarantors.
However, the Guarantors are obligors with respect to substantial indebtedness,
including in their capacity as guarantors under the New Credit Facilities on a
senior basis, and the capital stock of the Guarantors is pledged to secure
amounts borrowed thereunder. Accordingly, there may be insufficient assets
remaining after payment of senior and/or secured claims to pay amounts due on
the Notes. The Company's non-Guarantor subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make funds available therefor, whether
in the form of loans, dividends or otherwise. The Indenture permits the Company
and its subsidiaries (including non-Guarantor subsidiaries) to incur additional
indebtedness, subject to certain limited exceptions. See "Description of
Notes -- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." Any right of the Company to participate in any distribution of
the assets of any of the non-Guarantor subsidiaries upon the liquidation,
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the Notes to participate in the distribution of those assets) will be
subject to the claims of creditors (including trade creditors) and preferred
stockholders, if any, of such non-Guarantor subsidiary, except to the extent
that the Company has a claim against such non-Guarantor subsidiary as a creditor
of such non-Guarantor subsidiary. Moreover, the payment of dividends and the
making of loan advances to the Company by its subsidiaries will be subject to
restrictive
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covenants in agreements entered into by certain of such subsidiaries and may be
restricted upon an event of default thereunder.
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes will have certain rights to
require the Company to repurchase all or a portion of such holder's Notes. See
"Description of Notes." If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient funds to pay the repurchase
price for all Notes tendered by the holders thereof and such failure would
result in an event of default under the Indenture. In addition, a Change of
Control would constitute a default under the New Credit Facilities and is
otherwise restricted by the New Credit Facilities and may be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which the Company may enter into from time to time,
including other agreements relating to secured indebtedness or Senior Debt. No
payment or distribution may be made on the Notes, nor may any of the Notes be
acquired, by or on behalf of the Company while a payment default is continuing
under any Senior Debt or, under certain circumstances and for a specified time,
if a non-payment default exists with respect to certain Senior Debt. See
"Description of Notes -- Subordination." Also, if the Company's obligations
under the New Credit Facilities or any other secured Indebtedness of the Company
or its subsidiaries were accelerated due to a default thereunder, the lenders
thereunder would have a priority claim on the proceeds from the sale of the
collateral securing such Indebtedness.
COMPETITION
The Company faces substantial competition from other companies which
manufacture or market specialty beds, mattress overlays, mattress replacement
systems or medical devices. The Company's principal competitor has financial and
other resources substantially in excess of those available to the Company.
Competitive pressures include increased price competition and the introduction
of new products by the Company's competitors, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
UNCERTAINTY OF HEALTH CARE REFORM
There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 (the "BBA")
significantly reduces federal spending on Medicare and Medicaid over the next
five years by reducing annual payment updates to acute care hospitals, changing
payment systems for both skilled nursing facilities and home health care
services from cost-based to prospective payment systems, eliminating annual
payment updates for durable medical equipment ("DME"), and allowing states
greater flexibility in controlling Medicaid costs at the state level. Until the
Health Care Financing Administration ("HCFA") issues regulations implementing
this legislation in late 1997 and early 1998, the Company cannot reliably
predict the timing of or the exact effect which these initiatives could have on
the pricing and profitability of, or demand for, the Company's products.
However, certain of the provisions of the BBA, such as the changes in the manner
Medicare Part A reimburses skilled nursing facilities, may change the manner in
which the Company's customers make renting and purchasing decisions and could
have a material adverse effect on the Company. The Company also believes it is
likely that efforts by governmental and private payors to contain costs through
managed care and other efforts and to reform health systems will continue in the
future. There can be no assurance that current or future initiatives will not
have a material adverse effect on the Company's business, financial conditions
or results of operations. See "Management Discussion and Analysis of Financial
Condition and Results of Operations -- General" and "Business -- Reimbursement".
CONSOLIDATION OF PURCHASING ENTITIES
One of the most tangible results of the health care reform debate in the
United States has been that it has caused health care providers to examine their
cost structures and reassess the manner in which they provide health care
services. This review, in turn, has led many health care providers to merge or
consolidate with
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other members of their industry in an effort to reduce costs or achieve
operating synergies. A substantial number of the Company's customers, including
group purchasing organizations, hospitals, national nursing home companies and
national home health care agencies, have been affected by this consolidation.
Because larger purchasers or groups of purchasers tend to have more leverage in
negotiating prices, this trend could have a material adverse effect on the
Company's business, financial condition or results of operations. In addition,
the consolidation of health care providers often results in the renegotiation of
contracts and in the granting of price concessions. Finally, as group purchasing
organizations and integrated health care systems increase in size, each contract
represents a greater concentration of market share and the adverse consequences
of losing a particular contract increases considerably. As of September 30,
1997, the Company's ten largest group purchasing contracts accounted for
approximately 41% of the Company's total revenue.
REIMBURSEMENT OF HEALTH CARE COSTS
The Company's products are rented and sold principally to hospitals,
skilled nursing facilities and DME suppliers who receive reimbursement for the
products and services they provide from various public and private third party
payors, including Medicare, Medicaid and private insurance programs. The Company
also acts as a Durable Medical Equipment Supplier under 42 U.S.C. 1395 et seq.
and as such furnishes its products directly to customers and bills payors. As a
result, the demand for the Company's products in any specific care setting is
dependent in part on the reimbursement policies of the various payors in that
setting. In order to be reimbursed, the products generally must be found to be
reasonable and necessary for the treatment of medical conditions and must
otherwise fall within the payor's list of covered services. For example, the
Company is seeking to establish coverage and payment by Medicare Part A and
Medicare Part B for the V.A.C., its chronic wound treatment product, and the
PlexiPulse, its circulatory treatment product, in skilled nursing facilities and
home care. Although clinical acceptance of these products has continued to
increase, neither product has been officially classified as a covered item by
either Part A or Part B. In light of increased controls on Medicare spending,
there can be no assurance on the outcome of future coverage or payment decisions
for any of the Company's products by governmental or private payors. If
providers, suppliers and other users of the Company's products and services are
unable to obtain sufficient reimbursement for the provision of KCI products, a
material adverse impact on the Company's business, financial condition or
operations will likely result. See "Business -- Reimbursement."
FRAUD AND ABUSE LAWS
The Company is subject to various federal and state laws pertaining to
health care fraud and abuse including prohibitions on the submission of false
claims and the payment or acceptance of kickbacks or other remuneration in
return for the purchase or lease of Company products. The United States
Department of Justice and the Office of the Inspector General of the United
States Department of Health and Human Services has launched an enforcement
initiative which specifically targets the long term care, home health and DME
industries. Sanctions for violating these laws include criminal penalties and
civil sanctions, including fines and penalties, and possible exclusion from the
Medicare, Medicaid and other federal health care programs. Although the Company
believes its business arrangements comply with federal and state fraud and abuse
laws, there can be no assurance that the Company's practices will not be
challenged under these laws in the future or that such a challenge would not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Government Regulation -- Fraud and Abuse
Laws."
PRODUCT LIABILITY
The manufacturing and marketing of medical products necessarily entails an
inherent risk of product liability claims. Although the Company has not
experienced any significant losses due to product liability claims and currently
maintains umbrella liability insurance coverage, there can be no assurance that
the amount or scope of the coverage maintained by the Company will be adequate
to protect it in the event a significant product liability claim is successfully
asserted against the Company. See "Business -- Legal Proceedings."
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GOVERNMENT REGULATION
The Company's products are subject to regulation by numerous governmental
authorities, principally the United States Food and Drug Administration (the
"FDA") and corresponding state and foreign regulatory agencies. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for medical devices, withdrawal of marketing clearances or
approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any product manufactured or
distributed by the Company.
On October 6, 1997, at the conclusion of an inspection of the Company's
principal manufacturing facility, the FDA issued the Company a Form 483 which
identified eight observations of conditions that the FDA believed to be in
violation of the FDA's Quality System Regulations ("QSR") (formerly Good
Manufacturing Practices) and Medical Device Reporting ("MDR") requirements.
Several of these observations concerned the Company's TransportAir device and
were similar to previous FDA inspectional observations that became the basis of
a warning letter issued to the Company in August 1995. Specifically, the FDA's
Form 483 stated, among other things, that the Company had not provided solutions
for or verified the implementation of solutions to quality assurance problems
concerning malfunctions of the TransportAir, and that the Company had failed to
submit Medical Device Reports for a number of incidents involving the
TransportAir. The TransportAir device, which provides an auxiliary air supply
for the Company's KinAir, BioDyne, and Therapulse product lines, permits those
bed products to be moved while in full inflation mode. The TransportAir is the
subject of a pending 510(k) notice and has been marketed since 1986 without
specific premarket clearance on the product on a stand-alone basis.
The Company submitted a written response to the FDA's Form 483 observations
on November 20, 1997. However, there can be no assurance that the FDA will agree
with the Company's response or that, regardless of the Company's response, the
FDA will not invoke any of its regulatory or enforcement authority against the
Company. In addition to other regulatory and enforcement actions, the FDA may
issue the Company a Warning Letter which could have an adverse effect on the
Company's ability to obtain Certificates for Products for Export until the FDA's
inspectional observations are corrected to the agency's satisfaction. Federal
agencies could also be advised of the issuance of the Warning Letter which may
be taken into account when considering the award of federal contracts to the
Company. The FDA may also determine that reinspection of the Company's
manufacturing facility is necessary before the agency determines that the
Company's response to the Form 483 is adequate.
The Company has begun modifying the TransportAir to address the problems
that the Company has encountered. If the FDA determines that there is a
reasonable probability that the TransportAir would cause serious, adverse health
consequences or death, the FDA could order the Company to recall the
TransportAir and not allow its redistribution until the Company has verified
that it has implemented appropriate corrective actions. Alternatively, the FDA
could consider the present modification to be a voluntary recall and require the
Company to assure that the modification has been fully implemented and that its
customers are adequately notified of the need for the modification. In addition,
because the TransportAir is not specifically the subject of a cleared 510(k)
notice, the FDA could require the Company to discontinue marketing the device
until it is cleared by the FDA. The failure of the Company to be able to market
the TransportAir would prevent the Company from supplying an alternative power
supply for three of its principal products which could have a material adverse
effect on the Company's ability to market those devices. Any regulatory or
enforcement action invoked by the FDA could have a material adverse effect upon
the Company's business, financial condition or results of operations.
The Company is also subject to numerous federal, state and local laws and
regulations relating to such matters as safe working conditions, manufacturing
practices, fire hazard control and the handling and disposal of hazardous or
potentially hazardous substances. The Company owns and leases properties which
are subject to environmental laws and regulations. There can be no assurance
that the Company will not be required to incur significant costs to comply with
such laws and regulations in the future or that such laws or regulations
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will not have a material adverse effect upon the Company's business, financial
condition or results of operations. See "Business -- Government Regulation."
CONTROLLING SHAREHOLDERS
Upon consummation of the Merger, Fremont and RCBA, in the aggregate, will
own a majority of the issued and outstanding Shares. There can be no assurance
that the interests of Fremont and RCBA (or their respective affiliates), either
individually or collectively, will not conflict with the interests of the
holders of the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small number of key executive
officers. The Company's Chief Executive Officer, Raymond R. Hannigan, and other
members of senior management do not have employment contracts with the Company.
However, Mr. Hannigan and other members of senior management will be Continuing
Shareholders and as such will have an economic incentive (in the form of stock
options and other management incentive plans) to remain with the Company. See
"Management -- Executive Compensation." Nonetheless, there can be no assurance
that Mr. Hannigan or other key executive officers or members of senior
management will continue their employment with the Company. The Company does not
maintain a "key man" insurance policy in respect of its Chief Executive Officer
or any of its senior management. The loss of the services of key senior
management, or the Company's inability to attract and retain additional
management personnel, could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Management."
PATENT LITIGATION
The Company is presently the defendant in five separate lawsuits in which
the plaintiff in the lawsuit has alleged that a product marketed by the Company
infringes a patent held by such plaintiff. Although the Company believes that
its products do not infringe a valid claim of any patent and that it has
meritorious defenses to each of these lawsuits, it is not possible to reliably
predict the outcomes of any of these lawsuits. In the event a court found that
one of the Company's products infringed a valid patent of a third party, the
court may award damages (which in certain of the cases, could be significant)
and enjoin the use of the product in question, either of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Legal Proceedings."
FRAUDULENT TRANSFER CONSIDERATIONS/AVOIDANCE OF GUARANTEES
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or void the Notes or any
Guarantee in favor of other existing or future creditors of the Company or a
Guarantor.
The incurrence by the Company of indebtedness, such as the Notes, would be
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy case or a lawsuit by or on behalf of unpaid creditors of the
Company or a representative of such creditors, such as a trustee or the Company
as debtor-in-possession. Under such laws, if a court were to find that, at the
time such indebtedness was incurred or the Notes were issued, either (i) the
Company incurred such indebtedness or issued the Notes with intent of hindering,
delaying or defrauding creditors, or (ii) the Company received less than a
reasonably equivalent value or fair consideration for incurring such
indebtedness or issuing the Notes and the Company (a) was insolvent by reason of
the incurrence of such indebtedness, including the Notes, (b) was engaged in a
business or a transaction, or was about to engage in a business or a
transaction, for which any property remaining with Company constituted an
unreasonably small amount of capital or (c) intended to incur, or believed that
it would incur, debts beyond its ability to pay as they matured, such court
could void the Company's obligations under the Notes and direct the repayment of
any amount paid thereunder to the Company to a fund for the benefit of the
Company's creditors, or take other action detrimental to the holder of the
Notes.
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Similarly, indebtedness under the Guarantees of the Notes also may be
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy of a Guarantor or in a lawsuit brought by or on behalf of creditors
of a Guarantor under the same standard described above with respect to the
incurrence by a Guarantor of the Guarantee of the Notes. A legal challenge of a
Guarantee on fraudulent conveyance grounds could, among other things, focus on
the benefits, if any, realized by a Guarantor as the result of the issuance by
the Company of the Notes. Pursuant to the terms of the Guarantees, the liability
of each Guarantor is limited to the maximum amount of indebtedness permitted, at
the time of the grant of such Guarantee, to be incurred in compliance with
fraudulent conveyance or similar laws.
To the extent any Guarantee was avoided as a fraudulent conveyance, limited
as described above, or held unenforceable for any other reason, holders of the
Notes would, to such extent, cease to have a claim in respect of such Guarantee
and, to such extent, would be creditors solely of the Company and any Guarantor
whose Guarantee was not avoided, limited, or held unenforceable. In such event,
the claims of the holders of the Notes against the issuer of an avoided, limited
or unenforceable Guarantee would be subject to the prior payment of all
liabilities of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holder of the Notes.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both domestic and foreign;
industry and market capacity; demographic changes; existing government
regulations and changes in, or the failure to comply with, government
regulations; legislative proposals for health care reform; liability and other
claims asserted against the Company; competition; the loss of any significant
customers; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company after the Merger; the availability and terms of capital to fund the
expansion of the Company's business; and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including, without limitation, under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER
There is no existing market for the Notes, and although the Notes are
expected to be eligible for trading in the PORTAL Market, the National
Association of Securities Dealers' screen-based automated market for trading of
securities eligible for resale under Rule 144A, there can be no assurance as to
the liquidity of any market that may develop for the Notes, the ability of
holders of the Notes to sell their Notes, or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the Notes on any securities exchange or the
Nasdaq National Market. The Company has been advised by the Initial Purchasers
that they currently intend to make a market in the Notes. However, the Initial
Purchasers are not obligated to do so and any market-making activities with
respect to the Notes may be discontinued at any time without notice. In
addition, such market-making activity is subject to the limits imposed by the
Securities Act and the Exchange Act, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer and the pendency of any shelf registration
statement.
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CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF EXCHANGE
NOTES
Holders of Series A Notes who do not exchange their Series A Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Series A Notes as set forth in the legend
thereon as a consequence of the issuance of the Series A Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Series A Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register Series A Notes under
the Securities Act. To the extent that Series A Notes are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Series A Notes could be adversely affected.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the Exchange Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of the Company or any
of the Guarantors within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, PROVIDED that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder has no arrangement or
understanding with any person to, and does not intend to, participate in the
distribution of such Exchange Notes.
Any Participating Broker-Dealer that acquired Series A Notes for its own
account as a result of market-making activities or other trading activities may
be a statutory underwriter. Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Series A Notes where such Series A Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities.
The Company and the Guarantors have agreed that they will make this
Prospectus, as it may be amended or supplemented from time to time, available to
any Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
If (i) any holder of Series A Notes (A) is prohibited by law or Commission
policy from participating in the Exchange Offer; (B) may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus, as it may be amended or supplemented from time
to time, is not appropriate or available for such resales; or (C) is a
Participating Broker-Dealer and owns Series A Notes acquired directly from the
Company or an affiliate of the Company or either of the Guarantors and (ii) such
holder has satisfied certain conditions relating to the provision of information
to the Company for use therein, the Company and the Guarantors have agreed to
register such Series A Notes pursuant to the Shelf Registration Statement and to
use their respective best efforts to cause it to be declared effective by the
Commission on or prior to 120 days after the date on which the Company and the
Guarantors became obligated to file the Shelf Registration Statement. The
Company and the Guarantors have agreed to maintain the effectiveness of the
Shelf Registration Statement for, under certain circumstances, a maximum of two
years, to cover resales of Series A Notes held by such holders. See "Purpose of
the Exchange Offer."
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THE TRANSACTIONS
The Company and the Investors entered into the Transaction Agreement
pursuant to which the Investors participated in the Recapitalization. Pursuant
to the Transaction Agreement, the Investors purchased in the aggregate 7,802,180
newly-issued Shares at a per Share price equal to $19.25 in the Stock Purchase.
The proceeds of the Stock Purchase, together with approximately $343.0 million
of aggregate proceeds from certain other financings described below, and the
proceeds from the Offering, have been and will be used by the Company to (i)
purchase 31,006,942 Shares tendered pursuant to the terms of the Tender Offer at
a price of $19.25 per Share, net to each seller in cash; (ii) pay all related
fees and expenses; (iii) pay the Merger Consideration for Shares in connection
with the Merger; and (iv) for general corporate purposes.
Pursuant to the Transaction Agreement on January 5, 1998, the Investors
were merged with and into the Company with the Company as the Surviving
Corporation of the Merger.
At the effective time of the Merger (the "Effective Time"), each Share
issued and outstanding immediately prior to the Effective Time, other than
Shares that were to be cancelled or to remain outstanding as described in this
paragraph ("Continuing Shares"), were cancelled and converted automatically into
the right to receive the Per Share Amount (the "Merger Consideration"), subject
to dissenters' rights as provided under the Texas Business Corporation Act
("Texas Law"). Shares held in the treasury of the Company, each Share owned by
any direct or indirect wholly-owned subsidiary of the Company, and Shares owned
by Investors immediately prior to the Effective Time, were cancelled without any
conversion thereof and no payment or distribution was made with respect thereto.
Each share of common stock of Fremont Investor outstanding immediately prior to
the Effective Time was converted and exchanged for a number of validly issued,
fully paid and nonassessable shares of common stock, par value $.001 per share,
of the Surviving Corporation equal to the quotient obtained by dividing the
number of Shares acquired by Fremont Investor in the Stock Purchase by the
number of outstanding shares of common stock of the Fremont Investor, and each
limited or general partnership interest of RCBA Investor was converted and
exchanged for a number of validly issued, fully paid and nonassessable shares of
common stock, par value $.001 per share, of the Surviving Corporation equal to
the quotient obtained by dividing the number of Shares acquired by the RCBA
Investor in the Stock Purchase by the number of outstanding partnership
interests in RCBA Investor. The 5,939,220 Shares held by and registered in the
name of Dr. James Leininger at the Effective Time, 3,871,752 Shares held by The
Common Fund for Non-Profit Organizations, Stinson Capital Partners II, L.P. and
RCBA-KCI Capital Partners, L.P., 100,000 Shares held by Dr. Peter Leininger and
Options to acquire Shares, held by certain members of Company management who
have entered into stock retention agreements, were not cancelled and remained
outstanding (all of the foregoing persons or entities being herein referred to
as the "Continuing Shareholders").
The Investors entered into a Shareholder Support Agreement with Dr. James
Leininger, dated as of October 2, 1997 (the "Shareholder Support Agreement"),
providing, subject to certain conditions, for (i) the grant by Dr. James
Leininger to the Fremont Investor of an irrevocable option to purchase up to
2,529,197 Shares at $19.25 per Share, subject to the conditions set forth
therein, which option terminated upon consummation of the Tender Offer, (ii) the
grant by Dr. James Leininger to the RCBA Investor of an irrevocable option to
purchase up to 1,670,803 Shares at $19.25 per Share, subject to the conditions
set forth therein, which option terminated upon consummation of the Tender
Offer, (iii) the tender of 13,917,146 Shares owned or controlled by Dr. James
Leininger pursuant to the Tender Offer and (iv) the voting by Dr. James
Leininger of all Shares owned or controlled by him at the time of the
shareholders' meeting called to consider the Merger in favor of the Merger.
Following the consummation of the Merger, Fremont, RCBA, Dr. James
Leininger and Dr. Peter Leininger own 7,029,922, 4,644,010, 5,939,220 and
100,000 Shares, respectively, representing 39.7%, 26.2%, 33.5% and 0.6% of the
Shares outstanding. There are currently no other shareholders, but certain
members of management have retained, and may be granted, additional options to
purchase Shares.
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Funding for the Recapitalization consisted of: (i) gross proceeds from the
Offering of $200.0 million; (ii) borrowings under the New Credit Facilities of
approximately $343.0 million; and (iii) an investment of approximately $348.8
million in equity in the Company (the "Equity Financing"), including the
rollover of approximately $198.6 million of the Continuing Shares by the
Continuing Shareholders and the purchase by the Investors of approximately
$150.2 million of Shares from the Company. The New Credit Facilities provide for
up to $400.0 million in the form of (i) the Term Loan Facility, (ii) the
Revolving Credit Facility and (iii) the Acquisition Facility. See "Use of
Proceeds," and "Description of New Credit Facilities."
PURPOSE OF THE EXCHANGE OFFER
In connection with the initial sale of the Series A Notes, the Company and
the Guarantors agreed, subject to certain conditions, to use their best efforts
to conduct the Exchange Offer pursuant to the terms of the Registration Rights
Agreement by and among the Company, the Guarantors and the Initial Purchasers
(the "Registration Rights Agreement"). Pursuant to the Registration Rights
Agreement, the Company and the Guarantors agreed to (i) cause to be filed with
the Commission, no later than 45 days after the Issue Date, a registration
statement under the Securities Act relating to the Exchange Notes and the
Exchange Offer, and (ii) use their best efforts (a) to cause such registration
statement to be declared effective by the Commission in no event later than 150
days after the Issue Date, (b) to cause the Exchange Offer to remain open for a
period of not less than 20 days (or longer if required by applicable law) and
(c) to consummate the Exchange Offer on or prior to the 180th day after the
Issue Date. The Company's purpose in making the Exchange Offer is to comply with
such agreement and to avoid the increase in interest rate on the Series A Notes
which would occur if the Exchange Offer were not duly and timely consummated.
The Exchange Offer should provide holders of the Series A Notes with the ability
to effect, for federal income tax purposes, a tax-free exchange of such Series A
Notes, which are subject to trading limitations, for Exchange Notes that will
not be subject to such restrictions.
The Exchange Offer provides holders of the Series A Notes with the Exchange
Notes that will generally be freely transferable by holders thereof (other than
any holder who is an "affiliate" or "promoter" of the Company or any of the
Guarantors within the meaning of Rule 405 under the Securities Act), who may
offer for resale, resell or otherwise transfer such Exchange Notes without
complying with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of each such holder's business and such holders have no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes. Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes to be received by it will be acquired in the
ordinary course of its business, that at the time of consummation of the
Exchange Offer such holder will have no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes in violation of
the provisions of the Securities Act, and that such holder is not an affiliate
of the Company or any of the Guarantors within the meaning of the Securities
Act.
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<PAGE> 28
RESALE OF THE EXCHANGE NOTES
With respect to resales of the Exchange Notes, based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company or any of the Guarantors within the
meaning of Rule 405 under the Securities Act), in exchange for Series A Notes in
the ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires Exchange Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act (with such prospectus containing the selling securityholder
information required by Item 507 of Regulation S-K under the Securities Act) in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Series A Notes, where such
Series A Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act (which may be this Prospectus, as it may be
amended or supplemented from time to time) in connection with any resale of such
Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company or any of the Guarantors within the
meaning of Rule 405 under the Securities Act, and (v) the holder or any such
other person acknowledges that if such holder or other person participates in
the Exchange Offer for the purpose of distributing the Exchange Notes it must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Notes and cannot
rely on such no-action letters. As indicated above, each Participating
Broker-Dealer that receives an Exchange Note for its own account in exchange for
the Series A Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for the Series A Notes where such Series A Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in connection
with any such resale during the period required by the Securities Act.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter
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<PAGE> 29
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to the
purchaser or through brokers or dealers who may receive compensation in the form
of commissions or concessions from any such Participating Broker-Dealer and/or
the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that
resells the Exchange Notes that were received by it for its own account pursuant
to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The Company has
agreed to pay all expenses incident to the Exchange Offer other than commissions
or concessions of any brokers or dealers and will indemnify certain parties
against certain liabilities, including liabilities under the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal.
THE EXCHANGE OFFER
TERMS OF THE OFFER
The Company hereby offers, upon the terms and conditions set forth herein
and in the related Letter of Transmittal, to exchange the Exchange Notes for a
like principal amount of the outstanding Series A Notes. An aggregate of $200.0
million principal amount of Series A Notes are outstanding. The Exchange Offer
is not conditioned upon any minimum amount of the Series A Notes being tendered.
The Exchange Offer will expire at 5:00 p.m., New York City time, on March
3, 1998, unless extended. The term "Expiration Date" means 5:00 p.m., New York
City time, on March 3, 1998, unless the Company, in its sole discretion,
notifies the Exchange Agent that the period of the Exchange Offer has been
extended, in which case the term "Expiration Date" means the latest time and
date on which the Exchange Offer as so extended will expire. See "-- Expiration
and Extension."
Holders of the Series A Notes who wish to exchange the Series A Notes for
the Exchange Notes and who validly tender the Series A Notes to the Exchange
Agent or validly tender the Series A Notes by complying with the book-entry
transfer procedures described below and, in each case, who furnish the Letter of
Transmittal and any other required documents to the Exchange Agent, will either
have the Exchange Notes mailed to them by the Exchange Agent or have the
Exchange Notes credited to their account in accordance with the book-entry
transfer procedures described below, promptly after such tender is accepted by
the Company. Subject to the terms and conditions of the Exchange Offer, the
Series A Notes which have been validly tendered prior to the Expiration Date
will be accepted on or promptly after the Expiration Date. Subject to the
applicable rules of the Commission, the Company, however, reserves the right,
prior to the first acceptance of tendered Series A Notes, to delay acceptance of
tendered Series A Notes, or to terminate the Exchange Offer, subject to the
provisions of Rule 14e-1(c) under the Exchange Act, which requires that a tender
offeror pay the consideration offered or return the tendered securities promptly
after the termination or withdrawal of a tender offer.
In addition, the Company reserves the right to waive any condition or
otherwise amend the Exchange Offer in any respect consistent with the Indenture
and the Registration Rights Agreement prior to the acceptance of tendered Series
A Notes. If any amendment by the Company of the Exchange Offer or waiver by the
Company of any condition thereto constitutes a material change in the
information previously disclosed to the holders of Series A Notes, the Company
will, in accordance with the applicable rules of the Commission, disseminate
promptly disclosure of such change in a manner reasonably calculated to inform
such holders of such change. If it is necessary to permit an adequate
dissemination of information regarding
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<PAGE> 30
such material change, the Company will extend the Exchange Offer to permit an
adequate time for holders of the Series A Notes to consider the additional
information.
CERTAIN EFFECTS OF THE EXCHANGE OFFER
Because the Exchange Offer is for any and all Series A Notes, the number of
Series A Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Series A Notes outstanding. As a result, the liquidity of
any remaining Series A Notes may be substantially reduced. The Series A Notes
are currently eligible for sale pursuant to Rule 144A through the PORTAL System
of the National Association of Securities Dealers, Inc. Because the Company
anticipates that most holders of Series A Notes will elect to exchange such
Series A Notes for the Exchange Notes due to the more limited restrictions on
the resale thereof under the Securities Act, the Company anticipates that the
liquidity of the market for any Series A Notes remaining after the consummation
of the Exchange Offer may be substantially limited.
EXPIRATION AND EXTENSION
The Exchange Offer will expire at 5:00 p.m., New York City time, on March
3, 1998, unless extended by the Company. The Exchange Offer may be extended by
oral or written notice from the Company to the Exchange Agent at any time or
from time to time, on or prior to the date then fixed for the expiration of the
Exchange Offer. Public announcement of any extension of the Exchange Offer will
be timely made by the Company, but, unless otherwise required by law or
regulation, the Company will not have any obligation to communicate such public
announcement other than by making a release to the Dow Jones News Service.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Series A Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "-- Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Private Notes, and the Company will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
CONDITIONS
The Exchange Offer is subject to the following conditions: (i) the Exchange
Offer does not violate applicable law or any applicable interpretation of the
staff of the Commission, (ii) no action or proceeding is instituted or
threatened in any court or by any governmental agency which might materially
impair the ability of the Company to proceed with the Exchange Offer and no
material adverse development has occurred in any existing action or proceeding
with respect to the Company and (iii) all governmental approvals have been
obtained, which approvals the Company deems necessary for the consummation of
the Exchange Offer.
REGISTRATION RIGHTS
On November 5, 1997, the Company and the Guarantors entered into the
Registration Rights Agreement with the Initial Purchasers pursuant to which the
Company and the Guarantors have, for the benefit of the holders of the Notes, at
the Company's cost, agreed to (i) file the registration statement of which this
Prospectus forms a part (the "Exchange Offer Registration Statement"), under the
Securities Act with respect to the Exchange Offer which constitutes the
Company's offer to exchange the Series A Notes for the Exchange Notes, which
will have terms identical in all material respects to the Series A Notes (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions and will not contain certain provisions relating to an increase in
the interest rate which were applicable to the Series A Notes in certain
circumstances relating to the timing of the Exchange Offer or contain certain
provisions relating to a special
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<PAGE> 31
redemption pertaining to the timing of the Tender Offer), and (ii) cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the Issue Date. The Company will keep the
Exchange Offer open for not less than 20 calendar days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
holders of the Series A Notes.
In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit the Company to effect the Exchange
Offer, (ii) the Exchange Offer is not consummated within 180 days of the Issue
Date, (iii) in certain circumstances, certain holders of unregistered Exchange
Notes so request within 120 days after the consummation of the Exchange Offer or
(iv) in the case of any holder that participates in the Exchange Offer, such
holder does not receive Exchange Notes on the date of the exchange that may be
sold without restriction under state and federal securities laws (other than due
solely to the status of such holder as an affiliate of the Company or any of the
Guarantors within the meaning of the Securities Act) and so notifies the Company
within 90 days after such holder first becomes aware of such restriction and
provides the Company with a reasonable basis for its conclusion, in the case of
each of clauses (i)-(iv) of this sentence, then the Company will promptly
deliver to the holders and the Trustee written notice thereof and the Company
and the Guarantors shall, at the Company's cost, (a) within 45 days after the
delivery of such notice, file a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use their best efforts to keep the Shelf Registration
Statement effective until two years after its effective date, or such shorter
period ending when (i) all Notes covered by the Shelf Registration Statement
have been sold in the manner set forth and as contemplated therein or (ii) a
subsequent Shelf Registration Statement covering all unregistered Notes has been
declared effective under the Securities Act. The Company will, in the event of
the filing of a Shelf Registration Statement, provide to each holder of the
Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the Notes. A holder of Notes that sells such
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations). In
addition, each holder of the Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have its Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth therein.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available without charge by writing to the Company
at 8023 Vantage Drive, San Antonio, Texas 78230-4726, Attention: Dennis E. Noll,
Secretary.
HOW TO TENDER
A holder of the Series A Notes may tender the Series A Notes by (a)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
Series A Notes being tendered (or a confirmation of an appropriate book-entry
transfer) to the Exchange Agent on or prior to the Expiration Date or (b)
requesting a broker, dealer, bank, trust company or other nominee to effect the
transaction for such holder prior to the Expiration Date.
If Exchange Notes are to be delivered to an address other than that of the
registered holder appearing on the note register (the "Note Register")
maintained by the registrar of the Notes, the signature on the Letter of
Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit
union, savings association or other entity which is a member in good standing of
the Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Guarantee Program, the Stock Exchange Medallion
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Program, or by any other bank, broker, dealer, credit union, savings association
or other entity which is an "eligible guarantor institution," as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
(each of the foregoing constituting an "Eligible Institution"). Exchange Notes
will not be issued in the name of a person other than that of the registered
holder of the Series A Notes appearing on the Note Register.
The Exchange Agent will establish an account with respect to the Series A
Notes at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Series A Notes by causing DTC to transfer such Series A Notes into the
Exchange Agent's account in accordance with DTC's procedure for such transfer.
Although delivery of the Series A Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the Letter of Transmittal,
with any required signature guarantees and any other required documents, must in
any case be transmitted to and received by the Exchange Agent on or prior to the
Expiration Date at one of its addresses set forth below under "Exchange Agent",
or in compliance with the guaranteed delivery procedure described below.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All references in this Prospectus to deposit or delivery of Series A Notes shall
be deemed to include DTC's book-entry delivery method.
Notwithstanding the foregoing, any financial institution that is a
participant in the Depositary's Book-Entry Transfer Facility system (the
"Book-Entry Transfer Facility") may make book-entry delivery of the Existing
Notes by causing the Depositary to transfer such Existing Notes into the
Exchange Agent's account in accordance with the Depositary's Automated Tender
Offer Program ("ATOP") procedures for such book-entry transfers. However, the
exchange for the Existing Notes so tendered will only be made after timely
confirmation (a "Book-Entry Confirmation") of such book-entry transfer of
Existing Notes into the Exchange Agent's account, and timely receipt by the
Exchange Agent of an Agent's Message (as such term is defined in the next
sentence) and any other documents required by the Letter of Transmittal. The
term "Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from a participant tendering the Series A Notes that is
the subject of such Book-Entry Confirmation that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal, and that the
Company may enforce such agreement against such participant.
THE METHOD OF DELIVERY OF THE SERIES A NOTES AND ALL OTHER DOCUMENTS,
INCLUDING DELIVERY THROUGH DTC, IS AT THE ELECTION AND RISK OF THE HOLDER. IF
SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED,
BE USED, AND PROPER INSURANCE BE OBTAINED.
If a holder desires to tender Series A Notes pursuant to the Exchange Offer
and such holder's Series A Notes are not immediately available or time will not
permit all of the above documents to reach the Exchange Agent prior to the
Expiration Date, or such holder cannot complete the procedure of book-entry
transfer on a timely basis, such tender may be effected if the following
conditions are satisfied:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery, in substantially the form provided by the Company, is received by
the Exchange Agent as provided below on or prior to the Expiration Date;
and
(c) the Series A Notes, in proper form for transfer (or confirmation
of book-entry transfer of such Series A Notes into the Exchange Agent's
account at DTC as described above), together with a properly completed and
duly executed Letter of Transmittal and all other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile transmission or mailed to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such Notice of
Guaranteed Delivery.
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A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Series A
Notes (or a timely confirmation received of a book-entry transfer of Series A
Notes into the Exchange Agent's account at DTC) or a Notice of Guaranteed
Delivery from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Notes in exchange for Series A Notes tendered pursuant to
a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Series A Notes (or a timely confirmation received of a
book-entry transfer of Series A Notes into the Exchange Agent's account at DTC)
with the Exchange Agent.
Partial tenders of Series A Notes may be made only if (i) the principal
amount tendered is equal to $1,000 or an integral multiple thereof and (ii) the
remaining untendered portion of such Series A Note is in a principal amount of
$250,000, or any integral multiple of $1,000 in excess of such amount. Holders
tendering less than the entire principal amount of any Series A Note they hold
in accordance with the foregoing restrictions must appropriately indicate such
fact on the Letter of Transmittal accompanying the tendered Series A Note.
With respect to tenders of Series A Notes, the Company reserves full
discretion to determine whether the documentation is complete and generally to
determine all questions as to tenders, including the date of receipt of a
tender, the propriety of execution of any document, and other questions as to
the validity, form, eligibility or acceptability of any tender. The Company
reserves the right to reject any tender not in proper form or otherwise not
valid or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful or to waive any irregularities or conditions, and
the Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions on the Letter of Transmittal) will be final and
binding. The Company and the Exchange Agent shall not be obligated to give
notice of any defects or irregularities in tenders and shall not incur any
liability for failure to give any such notice. The Exchange Agent may, but shall
not be obligated to, give notice of any irregularities or defects in tenders,
and shall not incur any liability for any failure to give any such notice. The
Series A Notes shall not be deemed to have been duly or validly tendered unless
and until all defects and irregularities have been cured or waived. All
improperly tendered Series A Notes, as well as Series A Notes in excess of the
principal amount tendered for exchange, will be returned (unless irregularities
and defects are timely cured or waived), without cost to the tendering holder
(or, in the case of Series A Notes delivered by book-entry transfer within DTC,
will be credited to the account maintained within DTC by the participant in DTC
which delivered such shares), promptly after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, unless it is a Participating Broker-Dealer, it
is not engaging and does not intend to engage in the distribution of the
Exchange Notes, that at the time of consummation of the Exchange Offer such
holder will have no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes in violation of the provision of the
Securities Act, that such holder is not an "affiliate" of the Company or any of
the Guarantors within the meaning of the Securities Act and that if it
participates in the Exchange Offer for the purpose of distributing the Exchange
Notes it must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale of the Exchange Notes.
The Series A Notes tendered in exchange for the Exchange Notes (or a timely
confirmation of a book-entry transfer of such Series A Notes into the Exchange
Agent's account at DTC) must be received by the Exchange Agent, with the Letter
of Transmittal and any other required documents, by 5:00 p.m., New York City
time, on or prior to March 3, 1998, unless extended, or within the time periods
set forth above in "-- How to Tender" pursuant to a Notice of Guaranteed
Delivery from an Eligible Institution. The party tendering the Series A Notes
for exchange (the "Holder") will sell, assign and transfer the Series A Notes to
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<PAGE> 34
the Exchange Agent, as agent of the Company, and irrevocably constitute and
appoint the Exchange Agent as the Holder's agent and attorney-in-fact to cause
the Series A Notes to be transferred and exchanged. The Holder will warrant that
it has full power and authority to tender, exchange, sell, assign and transfer
the Series A Notes and to acquire the Exchange Notes issuable upon the exchange
of such tendered Series A Notes, the Exchange Agent, as agent of the Company,
will acquire good and unencumbered title to the tendered Series A Notes, free
and clear of all liens, restrictions, charges and encumbrances, and that the
Series A Notes tendered for exchange are not subject to any adverse claims or
encumbrance when accepted by the Exchange Agent, as agent of the Company. The
Holder will also covenant and agree that it will, upon request, execute and
deliver any additional documents deemed by the Company or the Exchange Agent to
be necessary or desirable to complete the exchange, sale, assignment and
transfer of the Series A Notes. All authority conferred or agreed to be
conferred in the Letter of Transmittal by the Holder will survive the death or
incapacity of the Holder and any obligation of the Holder shall be binding upon
the heirs, personal representatives, successors and assigns of such Holder.
Signature(s) on the Letter of Transmittal are required to be guaranteed as
set forth above in "-- How to Tender." All questions as to the validity, form,
eligibility (including time of receipt) and acceptability of any tender will be
determined by the Company, in its sole discretion, and such determination will
be final and binding. Unless waived by the Company, irregularities and defects
must be cured by the Expiration Date. The Company will pay all security transfer
taxes, if any, applicable to the transfer and exchange of the Series A Notes
tendered.
WITHDRAWAL RIGHTS
All tenders of the Series A Notes may be withdrawn at any time prior to
acceptance thereof on the Expiration Date. To be effective, a notice of
withdrawal must be timely received by the Exchange Agent at the address set
forth below under "-- Exchange Agent." Any notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered the Series A Notes
to be withdrawn. If the Series A Notes have been physically delivered to the
Exchange Agent, the tendering holder must also submit the serial number shown on
the particular Series A Notes to be withdrawn. If the Series A Notes have been
delivered pursuant to the book-entry procedures set forth above under "-- How to
Tender," any notice of withdrawal must specify the name and number of the
participant's account at DTC to be credited with the withdrawn Series A Notes.
The Exchange Agent will return the properly withdrawn Series A Notes as soon as
practicable following receipt of notice of withdrawal. All questions as to the
validity, including time of receipt, of notices of withdrawals will be
determined by the Company, and such determinations will be final and binding on
all parties.
ACCEPTANCE OF TENDERS
Subject to the terms and conditions of the Exchange Offer, including the
reservation of certain rights by the Company, the Series A Notes tendered
(either physically or through book-entry delivery as described in "-- How to
Tender") with a properly executed Letter of Transmittal and all other required
documentation, and not withdrawn, will be accepted promptly after the Expiration
Date. Subject to such terms and conditions, Exchange Notes to be issued in
exchange for properly tendered Series A Notes will either be mailed by the
Exchange Agent or credited to the holder's account in accordance with the
appropriate book-entry procedures promptly after the acceptance of the properly
tendered Series A Notes. Acceptance of Series A Notes will be effected by the
delivery of a notice to that effect by the Company to the Exchange Agent.
Subject to the applicable rules of the Commission, the Company, however,
reserves the right, prior to the acceptance of tendered Series A Notes, to delay
acceptance of tendered Series A Notes upon the occurrence of any of the
conditions set forth above under the caption "-- Conditions." The Company
confirms that its reservation of the right to delay acceptance of tendered
Series A Notes is subject to the provisions of Rule 14e-1(c) under the 1934 Act
which requires that a tender offeror pay the consideration offered or return the
tendered securities promptly after the termination or withdrawal of a tender
offer.
Although the Company does not currently intend to do so, if it modifies the
terms of the Exchange Offer, such modified terms will be available to all
holders of Series A Notes, whether or not their Series A Notes
34
<PAGE> 35
have been tendered prior to such modification. Any material modification will be
disclosed in accordance with the applicable rules of the Commission and, if
required, the Exchange Offer will be extended to permit holders of Series A
Notes adequate time to consider such modification.
The tender of Series A Notes pursuant to any one of the procedures set
forth in "-- How to Tender" will constitute an agreement between the tendering
holder and the Company upon the terms and subject to the conditions of the
Exchange Offer.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Letters of Transmittal must be addressed to the Exchange Agent at one of
the addresses set forth below:
<TABLE>
<S> <C>
By Mail: By Courier or By Hand:
Marine Midland Bank Marine Midland Bank
Attn: Corporate Trust Department Attn: Corporate Trust Operations
140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180
</TABLE>
By Facsimile: (212) 658-2292
Attn: Paulette Shaw
Telephone: (212) 658-5931
Delivery to other than the above addresses will not constitute valid
delivery.
SOLICITATION OF TENDERS; EXPENSES
Except as described above under "Exchange Agent," the Company has not
retained any agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or other persons for soliciting or recommending
acceptances of the Exchange Offer. The Company will, however, pay the Exchange
Agent reasonable and customary fees for its services and will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of the Series A Notes and in handling or forwarding tenders for their
customers.
35
<PAGE> 36
USE OF PROCEEDS
The Company will not receive any proceeds as a result of the Exchange
Offer.
The net proceeds to the Company from the Offering were approximately $191.7
million after deducting discounts and estimated offering expenses payable by the
Company. The Company utilized and will utilize the net proceeds, together with
borrowings under the New Credit Facilities, the Investors' equity investment and
the Continuing Shareholders' rollover equity investment to consummate the
Recapitalization, pay related fees and expenses and for general corporate
purposes. See "The Transactions." The following table illustrates the sources
and uses of proceeds:
<TABLE>
<CAPTION>
AMOUNT
----------
(DOLLARS
IN
THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
New Credit Facilities
Term Loans................................................ $300,000
Revolving Credit Facility(1).............................. 33,000
Acquisition Facility(2)................................... 10,000
Notes....................................................... 200,000
Fremont Investor equity investment.......................... 135,326
RCBA Investor equity investment............................. 14,866
Continuing Shareholders' rollover equity investment......... 198,553
Existing cash reserves...................................... 2,699
--------
Total Sources.......................................... $894,444
========
USES OF FUNDS:
Purchases of Shares......................................... $631,638
Net purchase of options..................................... 20,832
Continuing Shareholders' rollover equity investment......... 198,553
Fees and expenses........................................... 43,421
--------
Total Uses............................................. $894,444
========
</TABLE>
- ---------------
(1) The Revolving Credit Facility has total commitments of $50.0 million.
(2) The Acquisition Facility has total commitments of $50.0 million.
36
<PAGE> 37
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of September 30, 1997 (i) on a historical basis and (ii) on a pro
forma basis after giving effect to the Transactions and Acquisitions including
the Offering and the application of the net proceeds therefrom, as if they had
occurred on September 30, 1997. This table should be read in conjunction with
"The Transactions", "Description of Notes", "Description of New Credit
Facilities" and the historical financial data of the Company included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 45,535 $ 22,276
Current portion of long-term debt:
New Credit Facilities..................................... $ -- $ 4,800
Capital lease obligation.................................. 137 137
-------- ---------
$ 137 $ 4,937
======== =========
Long-term debt:
Existing bank credit facilities........................... $ -- $ --
New Credit Facilities(1).................................. -- 337,850
Notes..................................................... -- 200,000
Capital lease obligation.................................. 340 340
-------- ---------
Total long-term debt........................................ 340 538,190
-------- ---------
Minority Interest........................................... 220 220
-------- ---------
Stockholders' equity including paid-in capital:
Common stock, $.001 par value; 100,000,000 shares
authorized............................................. 42 17
Additional paid-in capital................................ -- 133,904
Retained earnings (deficit)............................... 235,579 (407,586)
Other..................................................... (4,795) (4,795)
-------- ---------
Total stockholders' equity............................. 230,826 (278,460)
-------- ---------
Total Capitalization................................. $231,386 $ 259,950
======== =========
</TABLE>
- ---------------
(1) As of September 30, 1997, on a pro forma basis after giving effect to the
Transactions and the Acquisitions, the Company would have had availability
of $22.3 million under the Revolving Credit Facility and $35.0 million under
the Acquisition Facility.
37
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements give effect to the Acquisitions and the Transactions. The unaudited
pro forma condensed consolidated balance sheet as of September 30, 1997 gives
effect to the Transactions and the Acquisitions as if they had occurred on
September 30, 1997. The unaudited condensed consolidated statements of earnings
for the nine months ended September 30, 1997, for the year ended December 31,
1996, and for the nine months ended September 30, 1996 give effect to the
Acquisitions and the Transactions as if they had occurred at the beginning of
each period presented.
The information in the column titled "The Company Historical" is summarized
from the historical consolidated financial statements of the Company included
elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated financial statements have
been prepared by Company management and are presented for informational purposes
only. The pro forma adjustments are based on available information and
assumptions that Company management believes are reasonable. These unaudited pro
forma condensed consolidated financial statements may not be indicative of the
results that actually would have occurred if the Transactions and the
Acquisitions had been in effect on the dates indicated or which may be obtained
in the future. The unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements appearing elsewhere in this Prospectus.
38
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
THE --------------------------- THE
COMPANY ACQUISITION THE COMPANY
HISTORICAL OF RIK(A) TRANSACTIONS PRO FORMA
---------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................... $ 45,535 $(23,259) $(643,741)(b) $ 22,276
133,911(c)
521,854(d)
(12,024)(e)
Accounts receivable, net................. 74,875 3,181 78,056
Inventories.............................. 21,068 627 21,695
Income taxes receivable.................. 7,969(b) 12,568
4,599(e)
Prepaid expenses and other............... 10,653 92 10,745
-------- -------- --------- ---------
Total current assets..................... 152,131 (19,359) 12,568 145,340
Net property, plant and equipment.......... 72,535 2,260 74,795
Notes receivable........................... 3,100 3,100
Goodwill, net.............................. 27,649 17,059 44,708
Other assets, net.......................... 30,608 105 20,796(d) 51,509
-------- -------- --------- ---------
Total Assets..................... $286,023 $ 65 $ 33,364 $ 319,452
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable......................... $ 5,423 $ $ $ 5,423
Current installments of long-term
obligations........................... 4,800(d) 4,800
Current installments of capital lease
obligations........................... 137 137
Accrued expenses......................... 33,631 65 33,696
Income taxes payable..................... 1,776 1,776
-------- -------- --------- ---------
Total current liabilities........ 40,967 65 4,800 45,832
======== ======== ========= =========
New Credit Facility........................ 337,850(d) 337,850
The Notes.................................. 200,000(d) 200,000
Capital leases obligations, excluding
current installments..................... 340 340
Deferred income taxes...................... 13,462 13,462
Other...................................... 208 208
Minority interest.......................... 220 220
-------- -------- --------- ---------
Total Liabilities................ 55,197 65 542,650 597,912
-------- -------- --------- ---------
Shareholders' equity (deficit):
Common stock............................. 42 (32)(b) 17
7(c)
Additional paid-in capital............... 133,904(c) 133,904
Retained earnings (deficit).............. 235,579 (635,740)(b) (407,586)
(7,425)(e)
Other.................................... (4,795) (4,795)
-------- -------- --------- ---------
230,826 (509,286) (278,460)
-------- -------- --------- ---------
Total Liabilities and
Shareholders'
Equity (Deficit)............... $286,023 $ 65 $ 33,364 $ 319,452
======== ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
39
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
THE ACQUISITION
COMPANY OF RIK THE THE COMPANY
HISTORICAL AND HF(F) TRANSACTIONS PRO FORMA
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Service and rental........................ $184,730 $8,425 -- $193,155
Sales and other........................... 39,781 903 -- 40,684
-------- ------ -------- --------
Total revenue.......................... 224,511 9,328 -- 233,839
Rental expenses............................. 115,633 5,349 -- 120,982
Cost of goods sold.......................... 16,077 447 -- 16,524
-------- ------ -------- --------
131,710 5,796 137,506
-------- ------ -------- --------
Gross profit........................... 92,801 3,532 -- 96,333
Selling, general and administrative
expenses.................................. 44,196 1,971 $ (1,535)(g) 44,632
-------- ------ -------- --------
Operating earnings..................... 48,605 1,561 1,535 51,701
Interest income............................. 1,421 (873) 548
Interest expense............................ (126) -- (37,013)(h) (37,139)(j)
-------- ------ -------- --------
Earnings before income taxes and
minority interest.................... 49,900 688 (35,478) 15,110
Income tax.................................. 19,960 263 (13,570)(i) 6,653
Minority interest........................... 37 -- -- 37
-------- ------ -------- --------
Net earnings........................... $ 29,903 $ 425 $(21,908) $ 8,420
======== ====== ======== ========
Other Information(k):
EBITDA.................................... $ 67,133 $2,606 $ 1,535 $ 71,274
EBITDA margin............................. 30% 30%
Depreciation and amortization............. 17,144 1,916 19,060
Capital expenditures...................... 24,004 1,650 25,654
Ratio of EBITDA to cash interest
expense................................ 2.03x
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statement.
40
<PAGE> 41
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
THE -------------------------------
COMPANY ACQUISITION THE THE COMPANY
HISTORICAL OF RIK AND HF(F) TRANSACTIONS PRO FORMA
---------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Service and rental....................... $225,450 $16,025 -- $241,475
Sales and other.......................... 44,431 782 -- 45,213
-------- ------- -------- --------
Total revenue......................... 269,881 16,807 286,688
Rental expenses............................ 146,205 10,585 -- 156,790
Cost of goods sold......................... 16,315 305 -- 16,620
-------- ------- -------- --------
162,520 10,890 173,410
-------- ------- -------- --------
Gross profit.......................... 107,361 5,917 -- 113,278
Selling, general and administrative
expenses................................. 52,007 4,883 $ (2,281)(g) 54,609
-------- ------- -------- --------
Operating earnings.................... 55,354 1,034 2,281 58,669
Interest income............................ 9,332 (1,164) 8,168
Interest expense........................... (245) -- (48,930)(h) (49,175)(j)
-------- ------- -------- --------
Earnings (loss) before income taxes
and minority interest............... 64,441 (130) (46,649) 17,622
Income tax................................. 25,454 (50) (17,843)(i) 7,561
-------- ------- -------- --------
Net earnings (loss)................... $ 38,987 $ (80) $(28,806) $ 10,101
======== ======= ======== ========
Other Information(k):
EBITDA................................ $ 81,300 $ 3,208 $ 2,281 $ 86,789
EBITDA margin......................... 30% 30%
Depreciation and amortization......... 21,794 3,338 25,132
Capital expenditures.................. 27,083 2,790 29,873
Ratio of EBITDA to cash interest
expense............................. 1.86x
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
41
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
ADJUSTMENTS
THE -------------------------------
COMPANY ACQUISITION THE THE COMPANY
HISTORICAL OF RIK AND HF(A) TRANSACTIONS PRO FORMA
---------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Service and rental......................... $167,523 $12,019 $179,542
Sales and other............................ 32,306 587 32,893
-------- ------- -------- --------
Total revenue.............................. 199,829 12,606 212,435
Rental expenses............................ 109,263 7,939 117,202
Cost of goods sold......................... 11,685 229 11,914
-------- ------- -------- --------
120,948 8,168 129,116
-------- ------- -------- --------
Gross profit............................... 78,881 4,438 83,319
Selling, general and administrative
expenses................................. 38,791 3,674 $ (1,711)(g) 40,754
-------- ------- -------- --------
Operating earnings......................... 40,090 764 1,711 42,565
Interest income............................ 3,055 (873) 2,182
Interest expense........................... (118) (36,655)(h) (36,773)(j)
-------- ------- -------- --------
Earnings (loss) before income taxes and
minority interest........................ 43,027 (109) (34,944) 7,974
Income tax................................. 17,168 (42) (13,366)(i) 3,760
-------- ------- -------- --------
Net earnings (loss)........................ $ 25,859 $ (67) $(21,578) $ 4,214
======== ======= ======== ========
Other Information(k):
EBITDA..................................... $ 59,632 $ 1,980 $ 1,711 $ 63,323
EBITDA margin.............................. 30% 30%
Depreciation and amortization.............. 16,487 2,089 18,576
Capital expenditures....................... 19,137 2,063 21,200
Ratio of EBITDA to cash interest expense... 1.82x
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
42
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
ACQUISITIONS
On February 1, 1997, the Company acquired the assets of H.F. Systems, Inc.
("HF") for approximately $7,955 in cash. On October 1, 1997, the Company
acquired the assets of RIK Medical L.L.C. ("RIK") for approximately $23,259 in
cash plus an earn-out of up to $2,000. The acquisitions were accounted for as
purchase transactions and the results of operations are included in the
Company's audited financial statements from the date of acquisition.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The unaudited pro forma condensed consolidated balance sheet gives effect
to the acquisition of RIK, the Offering and the Recapitalization assuming that
the transactions occurred on that date. The Acquisitions include the acquisition
of RIK on October 1, 1997 and HF on February 1, 1997 in transactions accounted
for as purchases. The Offering and the Recapitalization include the offer to
purchase certain outstanding Shares and the related equity investment by the
Investors and certain financings.
(a) Represents net assets acquired, the excess of purchase price over
net assets acquired, and the related cash payment.
(b) Represents cash payment for 32,358,906 Shares tendered at $19.25
per Share, net purchase of 2,247,015 stock options outstanding and income
tax benefit of $7,969.
(c) Represents proceeds from sale of 7,436,042 Shares to the Investors
and related increases in equity, net of expenses of $9,233.
(d) Represents proceeds of financing from the Term Loan Facility of
$300,000, the Offering of $200,000 and the Revolving Credit Facility and
Acquisition Facility of $42,650, including capitalized costs related
thereto of $20,796. As of November 30, 1997, the aggregate amount
outstanding under the Revolving Credit Facility and Acquisition Facility
was $43,000.
(e) Represents the expensing of nonrecurring fees and expenses
directly related to the Offering, the Recapitalization and related cash
payment.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
The pro forma condensed consolidated statements of earnings give effect to
the Transactions and the Acquisitions as if all of them had occurred at the
beginning of the year. The Acquisitions reflect the results of operations of RIK
and HF. The Transactions include additional interest expense, certain expense
savings and the related income tax effects.
(f) Represents historical results of RIK and HF, adjusted for
amortization of additional goodwill, expected reductions in operating
expenses due to anticipated efficiencies and consolidations, and the
related income tax effect. Results of HF after the date of acquisition are
included in the Company's historical amounts.
(g) Reflects reductions in compensation and administrative costs
resulting from changes in organizational structure as a result of the
Recapitalization.
(h) Reflects interest expense on the New Credit Facilities at weighted
average interest rates ranging from approximately 7.9% to 8.1% and interest
on the Notes of 9 5/8%. For every 1/8% change in the assumed interest rate
on the Notes, the effect would be an increase of $250 to pretax interest
expense.
(i) Represents income tax effect at an effective tax rate of 38.25%.
43
<PAGE> 44
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma condensed consolidated statement of earnings
excludes approximately $12,024 of nonrecurring expenses (principally
compensation and other fees) directly related to the Offering that are expected
to be incurred within the next twelve months.
INTEREST EXPENSE
(j) Includes non-cash charges of amortized deferred financing costs
for the periods ended September 30, 1997, December 31, 1996, and September
30, 1996 of $1,950, $2,600, and $1,950, respectively.
OTHER INFORMATION
(k) EBITDA is defined as earnings before interest expense, income
taxes, depreciation and amortization. EBITDA margin represents the ratio of
EBITDA to total revenues. The ratio of EBITDA to cash interest expense is
calculated by dividing consolidated cash interest expense into EBITDA for
the period. EBITDA and pro forma EBITDA for the year ended December 31,
1996 exclude a one-time gain of $5,180 related to the early repayment of
notes receivable from MEDIQ/PRN that had previously been discounted.
44
<PAGE> 45
1994 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
The following unaudited pro forma condensed consolidated statement of
earnings for the year ended December 31, 1994 gives effect to the dispositions
of Medical Services and KCIFS as if such dispositions had occurred on January 1,
1994. The pro forma information is based on the historical financial statements
of the Company, giving effect to the dispositions and the assumptions and
adjustments set forth in the notes accompanying the unaudited pro forma
condensed consolidated statement of earnings. This unaudited pro forma statement
may not be indicative of the results that actually would have occurred if the
dispositions had occurred during the period indicated. The unaudited pro forma
condensed consolidated statement of earnings should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Prospectus.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DIVISIONS SOLD
------------------ PRO FORMA
KINETIC CONCEPTS, INC. MEDICAL --------------------------
AND SUBSIDIARIES SERVICES KCIFS ADJUSTMENTS AS ADJUSTED
---------------------- -------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service........... $228,832 $ 34,495 $ -- $ -- $194,337
Sales and other.............. 40,814 9,351 3,716 -- 27,747
-------- -------- ------ ------- --------
Total revenue............. 269,646 43,846 3,716 -- 222,084
Rental expenses................ 159,235 24,014 -- -- 135,221
Cost of goods sold............. 19,388 6,814 -- -- 12,574
-------- -------- ------ ------- --------
Gross profit.............. 91,023 13,018 3,716 -- 74,289
Selling, general and
administrative expenses...... 51,813 14,143 2,017 -- 35,653
Unusual items.................. (84,868) (10,121) -- -- (74,747)
-------- -------- ------ ------- --------
Operating earnings........ 124,078 8,996 1,699 -- 113,383
Interest expense (income),
net.......................... 4,528 310 732 (4,695)(4a) (1,209)
-------- -------- ------ ------- --------
Earnings before income
taxes, minority interest
and cumulative effect of
change in accounting
principle............... 119,550 8,686 967 4,695 114,592
Income taxes................... 55,949 12,820 369 1,831(4b) 44,591
-------- -------- ------ ------- --------
Earnings (loss) before
minority interest and
cumulative effect
of change in accounting
principle............... 63,601 (4,134) 598 2,864 70,001
Minority interest.............. 40 -- -- -- 40
Cumulative effect of change in
accounting for inventory..... 742 -- -- -- 742
-------- -------- ------ ------- --------
Net earnings (loss)....... $ 64,383 $ (4,134) $ 598 $ 2,864 $ 70,783
======== ======== ====== ======= ========
Earnings per share........ $ 1.46 $ 1.60
======== ========
Shares used in earnings
per share
computations............ 44,143 44,143
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statements
of earnings.
45
<PAGE> 46
NOTES TO 1994 UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS
NOTE 1. DISPOSITION OF MEDICAL SERVICES
On September 30, 1994, the Company sold certain assets (the "Assets") of
Medical Services to Mediq/PRN Life Support Services-I, Inc. ("MEDIQ/PRN") under
an Asset Purchase Agreement. Upon consummation of this transaction, MEDIQ/PRN
acquired the Assets and assumed certain liabilities of Medical Services. The
sales price was approximately $84.1 million. Medical Services was in the
business of renting to providers a portfolio of standard-of-care medical
products such as ventilators, monitors and infusion pumps. In conjunction with
the sale, the Company and its affiliates agreed not to rent similar products
manufactured by third parties for five years.
Gross proceeds included a cash payment of approximately $65.3 million and
promissory notes in the aggregate principal amount of $18.8 million. The net
proceeds of $72.8 million, pre-tax gain of $8.1 million and after-tax net loss
of $2.5 million were calculated as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 65,300
Notes receivable, net of discount and allowance............. 9,852
Fees and commissions........................................ (2,329)
--------
Net proceeds.............................................. 72,823
Equipment and inventory sold................................ (38,959)
Goodwill.................................................... (25,778)
Accounts receivable provision............................... (2,479)
Capital leases assumed...................................... 2,514
--------
Pre-tax gain on disposition at September 30, 1994......... 8,121
Fourth quarter 1994 collection of accounts receivable....... 2,000
--------
Pre-tax gain on disposition at December 31, 1994.......... 10,121
Tax expense................................................. (12,601)
--------
Net loss on disposition........................... $ (2,480)
========
</TABLE>
Tax expense exceeded the pre-tax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill.
During the fourth quarter of 1994, the Company recognized a $2.0 million
pre-tax gain as a result of the collection of Medical Services' accounts
receivable which had not been included in the sale. These receivables had been
reserved at the time of the sale. Partially offsetting this gain, the Company
recorded post closing adjustments of $1.2 million relating to the operations of
Medical Services.
NOTE 2. DISPOSITION OF KCIFS
On June 15, 1995, the Company sold KCIFS to Cura Capital Corporation
("Cura") for cash under a Stock Purchase Agreement. Upon consummation of this
transaction, Cura acquired all of the outstanding capital stock of KCIFS. Total
proceeds from the sale were $7.2 million. In addition, the Company and its
affiliates agreed not to provide lease financing for medical equipment
manufactured by third parties for a period of three years. KCIFS served as the
leasing agent for Medical Services, certain assets of which were sold in
September 1994.
NOTE 3. SALE OF MRD
On March 27, 1995, the Company sold the assets of MRD, a subsidiary that
refurbished standard hospital beds and furniture. The assets, operations and
sales proceeds of MRD were immaterial to the overall operations of the Company
and, therefore, the unaudited pro forma condensed consolidated statements of
46
<PAGE> 47
NOTES TO 1994 UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS -- (CONTINUED)
earnings do not contain any adjustment for MRD. In addition, the Company and its
affiliates agreed not to refurbish certain hospital beds and related furniture
for a period of three years.
NOTE 4. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed consolidated statements of earnings give
effect to the following pro forma adjustments:
(a) To decrease interest expense as a result of the application of
proceeds from the dispositions to the repayment of indebtedness as if such
repayment had occurred on January 1, 1994, and to include interest income
which would have been earned under the notes receivable issued in
connection with the disposition of Medical Services.
(b) To adjust income tax expense used to reflect the consolidated
statutory tax rates.
47
<PAGE> 48
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the fiscal years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived
from the Company's audited consolidated financial statements. The selected
consolidated financial data for the nine months ended September 30, 1996 and
1997 are derived from the Company's unaudited consolidated financial statements
which in the opinion of management include all normal, recurring adjustments
necessary to state fairly the data included therein in accordance with GAAP for
interim financial information. Interim results are not necessarily indicative of
the results to be expected for the entire fiscal year. The unaudited pro forma
selected consolidated financial data set forth below with respect to the fiscal
year ended December 31, 1994 and for the nine months ended September 30, 1996
and 1997 are derived from the Company's unaudited pro forma condensed
consolidated statements of earnings. All of the data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
the notes thereto, and the Unaudited Pro Forma Condensed Consolidated Statements
of Earnings and the notes relating thereto included in this Prospectus.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
--------------------------------------------------------------- ENDED
PRO SEPTEMBER 30,
FORMA -------------------
1992 1993 1994 1994(1) 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Revenue:
Rental and service...................... $244,905 $232,250 $228,832 $194,337 $206,653 $225,450 $167,523 $184,730
Sales and other......................... 33,586 36,622 40,814 27,747 36,790 44,431 32,306 39,781
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue......................... 278,491 268,872 269,646 222,084 243,443 269,881 199,829 224,511
-------- -------- -------- -------- -------- -------- -------- --------
Rental expenses........................... 156,682 169,687 159,235 135,221 137,420 146,205 109,263 115,633
Cost of goods sold........................ 18,987 18,666 19,388 12,574 13,729 16,315 11,685 16,077
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............................ 102,822 80,519 91,023 74,289 92,294 107,361 78,881 92,801
Selling, general and administrative
expenses................................ 47,710 53,279 51,813 35,653 48,502 52,007 38,791 44,196
Unusual items(2).......................... -- 6,705 (84,868) (74,747) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating earnings...................... 55,112 20,535 124,078 113,383 43,792 55,354 40,090 48,605
Interest income (expense), net............ (7,195) (5,908) (4,528) (1,209) 4,554 9,087 2,937 1,295
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income taxes, minority
interest, extraordinary item and
cumulative effect of changes in
accounting principles................... 47,917 14,627 119,550 114,592 48,346 64,441 43,027 49,900
Income taxes.............................. 19,405 7,175 55,949 44,591 19,905 25,454 17,168 19,960
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before minority interest,
extraordinary item and cumulative
effects of changes in accounting
principles.............................. 28,512 7,452 63,601 70,001 28,441 38,987 25,859 29,940
Minority interest......................... -- 560 40 40 -- -- -- (37)
Extraordinary item -- debt extinguishment,
net..................................... -- (400) -- -- -- -- -- --
Cumulative effect of change in accounting
for inventory(3)........................ -- -- 742 742 -- -- -- --
Cumulative effect of change in accounting
for income taxes(4)..................... -- 450 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings............................ $ 28,512 $ 8,062 $ 64,383 $ 70,783 $ 28,441 $ 38,987 $ 25,859 $ 29,903
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share...................... $ 0.63 $ 0.18 $ 1.46 $ 1.60 $ 0.63 $ 0.86 $ 0.56 $ 0.68
======== ======== ======== ======== ======== ======== ======== ========
Shares used in earnings per share
computations............................ 45,060 44,627 44,143 44,143 45,457 45,489 45,923 43,772
======== ======== ======== ======== ======== ======== ======== ========
Cash flow provided by operations.......... $ 58,007 $ 56,538 $ 96,451 $ 56,782 $ 62,167 $ 40,289 $ 37,115
-------- -------- -------- -------- -------- -------- --------
Cash dividends paid to common
shareholders............................ $ 6,277 $ 6,638 $ 6,588 $ 6,631 $ 6,607 $ 4,988 $ 4,789
-------- -------- -------- -------- -------- -------- --------
Cash dividends per share paid to common
shareholders............................ $ .14 $ .15 $ .15 $ .15 $ .15 $ .11 $ .11
-------- -------- -------- -------- -------- -------- --------
Ratio of earnings to fixed charges........ 5.7x 2.4x 17.0x 21.9x 29.4x 27.3x 26.7x
-------- -------- -------- -------- -------- -------- --------
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................ $ 55,473 $ 60,907 $ 90,731 $109,413 $107,334 $111,164
Total assets............................................... $286,915 $284,573 $232,731 $243,726 $253,393 $286,023
Long-term obligations -- noncurrent(5)..................... $102,237 $101,889 $ 2,636 $ -- $ 396 $ 340
Minority interest.......................................... $ 990 $ 40 $ -- $ -- $ -- $ 220
Redeemable convertible preferred stock..................... $ 3,307 $ -- $ -- $ -- $ -- $ --
Other shareholders' equity................................. $123,813 $125,707 $185,423 $210,324 $211,078 $230,826
Book value per share(6).................................... $ 2.73 $ 2.76 $ 4.22 $ 4.74 $ 4.98 $ 5.43
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
DETERMINATION OF RATIO OF EARNINGS TO FIXED CHARGES:
Earnings before income taxes, minority interest,
extraordinary item and cumulative effects of changes in
accounting principles................................... $47,917 $14,627 $119,550 $48,346 $64,441 $43,027 $49,900
Minority interest......................................... -- 560 40 -- -- -- (37)
Fixed charges
Interest expense........................................ 8,482 8,819 5,846 509 245 118 126
Interest portion of lease expense(7).................... 1,660 1,665 1,635 1,800 2,025 1,515 1,814
------- ------- -------- ------- ------- ------- -------
Earnings before fixed charges............................. $58,059 $25,671 $127,071 $50,655 $66,711 $44,660 $51,803
======= ======= ======== ======= ======= ======= =======
Fixed charges
Interest................................................ $ 8,482 $ 8,819 $ 5,846 $ 509 $ 245 $ 118 $ 126
Interest portion of rental expenses..................... 1,660 1,665 1,635 1,800 2,025 1,515 1,814
Preferred stock dividend requirements..................... 49 26 -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Fixed charges and preferred stock dividends............... $10,191 $10,510 $ 7,481 $ 2,309 $ 2,270 $ 1,633 $ 1,940
======= ======= ======== ======= ======= ======= =======
Ratio of earnings to fixed charges...................... 5.7x 2.4x 17.0x 21.9x 29.4x 27.3x 26.7x
======= ======= ======== ======= ======= ======= =======
</TABLE>
- ---------------
(1) The unaudited pro forma selected consolidated financial data is based on the
historical financial statements of the Company, giving effect to the sale of
certain assets of the Medical Services and all of the capital stock of KCIFS
as if such sales had been consummated as of January 1, 1994, and giving
effect to such other assumptions and adjustments as set forth in the notes
accompanying the pro forma condensed consolidated statements of earnings.
See the 1994 Unaudited Pro Forma Condensed Consolidated Statement of
Earnings and the notes thereto included elsewhere in this Prospectus.
(2) See Note 12 of Notes to Consolidated Financial Statements for information on
unusual items.
(3) See Note 1 of Notes to Consolidated Financial Statements for information on
cumulative effect of change in method of accounting for inventory.
(4) See Note 7 of Notes to Consolidated Financial Statements for information on
cumulative effect of change in method of accounting for income taxes.
(5) See Notes 5 and 6 of Notes to Consolidated Financial Statements for
information concerning the Company's borrowing arrangements and lease
obligations.
(6) Based on shares outstanding at end of year or period.
(7) Estimated to approximate 15% of lease expense.
49
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The ongoing health care debate continues to create pressure on health care
providers to control costs, provide cost effective therapies and improve patient
outcomes. Industry trends resulting from these pressures include the
accelerating migration of patients from acute care facilities into extended care
(e.g., skilled nursing facilities and rehabilitation centers) and home care
settings, and the consolidation of health care providers and national and
regional group purchasing organizations. In August 1997, in an effort to reduce
the federal deficit and lower overall federal healthcare expenditures, Congress
passed the BBA. The BBA contains a number of provisions which will impact the
federal reimbursement of health care costs 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, beginning July 1, 1998 in the manner in
which skilled nursing facilities ("SNFs") are reimbursed from a cost-based
system to a prospective payment system whereby SNFs will receive an all
inclusive, case-mix 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.
Less than 10% of the Company's revenues are 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 substantial
impact on its hospital customers or the dealers who distribute the Company's
products in the home health care market. However, changes introduced by the BBA
may have an impact on the manner in which the Company's extended care customers
make purchasing and rental decisions. Under a fixed payment system, decisions on
selecting the products and services used in patient care are generally based on
clinical and cost-effectiveness.
Industry trends including pricing pressures, the consolidation of health
care providers and national and regional group purchasing organizations and a
shift in market demand toward lower-priced products such as mattress overlays
have had the impact of reducing the Company's overall average daily rental rates
on its products. These industry trends, together with the increasing migration
of patients from acute care to extended and home care settings, have had the
effect of reducing overall acute care market growth. While the Company expects
these industry trends to continue, it has successfully addressed these trends
over the last three years by (i) increasing its marketing efforts beyond its
existing base of more than 1,300 acute care hospitals to market to an additional
1,900 medium to large hospitals in which the Company has previously had a
relatively small presence and (ii) introducing new high-end therapies and
products including the TriaDyne and BariKare beds, the V.A.C. and the PlexiPulse
All-in-1 system. The Company's overall market continues to increase based upon
demographic trends as most of the Company's patients are over 65 years old.
Additionally, through its nationwide distribution network, the Company has
expanded its presence in both the extended and home care settings.
Expansion of the Company's national distribution network has allowed KCI to
leverage a relatively fixed field cost structure across a broad range of
patients and care settings which has resulted in improved operating margins. In
addition, increasing demand for the Company's products in the extended and home
care settings has increased utilization of certain of the Company's products
which were originally developed for acute care settings. Because of cost
pressures within the health care industry, patients are leaving the acute care
setting sooner, thereby increasing the demand for the Company's products in the
extended and home care settings.
Generally, the Company's customers prefer to rent rather than purchase the
Company's products in order to avoid the ongoing service, storage and
maintenance requirements and the high initial capital outlays associated with
purchasing such products, as well as to receive the Company's high-quality
clinical support. As
50
<PAGE> 51
a result, rental revenues are a high percentage of the Company's overall
revenues. More recently, sales have increased as a portion of the Company's
revenues. The Company believes this trend will continue because certain U.S.
health care providers are purchasing products that are less expensive and easier
to maintain such as medical devices, mattress overlays and mattress replacement
systems. In addition, international health care providers tend to purchase
therapeutic surfaces more often than U.S. health care providers.
RESULTS OF OPERATIONS
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 (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
REVENUE VARIANCE
RELATIONSHIP INCREASE (DECREASE)
------------ --------------------
1997 1996 $ PCT
---- ---- --------- -----
<S> <C> <C> <C> <C>
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%
=== === ======= ===
</TABLE>
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 (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Domestic Specialty Surfaces................................ $146.9 $134.4
International.............................................. 51.3 51.6
Medical Devices............................................ 25.6 13.6
Other...................................................... 0.7 0.2
------ ------
$224.5 $199.8
====== ======
</TABLE>
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
51
<PAGE> 52
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.
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 prior-year resulting largely from
the above-mentioned revenue growth.
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%, 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.
52
<PAGE> 53
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
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 prior year (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
REVENUE VARIANCE
RELATIONSHIP INCREASE (DECREASE)
------------ --------------------
1996 1995 $ PCT
---- ---- --------- -----
<S> <C> <C> <C> <C>
Revenue:
Rental and service................................ 84% 85% $18,797 9%
Sales and other................................... 16 15 7,641 21
--- --- ------- ---
Total Revenue.................................. 100 100 26,438 11
--- --- ------- ---
Rental expenses..................................... 54 56 8,785 6
Cost of goods sold.................................. 6 6 2,586 19
--- --- ------- ---
Gross profit................................... 40 38 15,067 16
Selling, general and administrative expenses........ 19 20 3,505 7
--- --- ------- ---
Operating earnings............................. 21 18 11,562 26
Interest income, net................................ 3 2 4,533 100
--- --- ------- ---
Earnings before income taxes................... 24 20 16,095 33
Income taxes........................................ 10 8 5,549 28
--- --- ------- ---
Net earnings................................... 14% 12% $10,546 37%
=== === ======= ===
</TABLE>
The following table sets forth, for the periods indicated, the amount of
revenue derived from each of the Company's markets (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Domestic Specialty Surfaces............................ $181,266 $163,014
International.......................................... 68,764 60,689
Medical Devices........................................ 19,234 17,151
Other.................................................. 617 2,589
-------- --------
$269,881 $243,443
======== ========
</TABLE>
Total Revenue: Total revenue in 1996 was $269.9 million, an increase of
$26.4 million or 10.9% from 1995. This increase was primarily attributable to
growth in the Company's domestic specialty support surface business combined
with international expansion and penetration. Domestic specialty support surface
revenue includes revenue from acute and extended care facilities as well as
revenue from the home care segment. Revenue from acute care facilities was up
$8.1 million, or 7.3%, from the prior year, due in large part to the continued
success of the TriaDyne, the Company's leading Kinetic Therapy product. Rental
revenue from Kinetic Therapy products grew 31% in 1996. Revenue from extended
care settings in 1996 increased 32%, or $12.0 million, primarily due to
increased patient days and the addition of various new national accounts.
Revenue in the home care segment, which accounts for 5% of total Company
revenue, decreased $1.9 million, or 12.8%, from 1995 primarily due to a change
in Medicare reimbursement policy which had the effect of reducing the number of
reimbursable patient days in the period. Revenue from the Company's
international operations increased $8.1 million, or 13.3%, to $68.8 million in
1996, despite adverse foreign currency exchange fluctuations of approximately $2
million. Strong sales in mattress overlay products accounted for more than half
of this increase. Revenue growth in the German home care market and further
penetration in various emerging markets, e.g., Switzerland and Australia, also
contributed to international revenue growth. Revenue from the Company's two
primary medical devices, PlexiPulse and the V.A.C., was $19.2 million, an
53
<PAGE> 54
increase of $2.1 million, or 12.3%, from 1995. This increase was substantially
due to the introduction of the V.A.C. in the United States.
In November 1996, the Company announced that it had been advised by Premier
Purchasing Partners, L.P. ("Premier"), that its bid to be the primary supplier
for the newly combined group had been awarded to another vendor. Premier is a
new voluntary group purchasing organization which was formed as a result of the
merger of three separate group purchasing organizations. Revenue from hospitals
within Premier for 1996 accounted for approximately 10% of the Company's total
revenue. Because facilities within Premier are not committed to do business with
the group's primary vendor, it is difficult to predict the ultimate effect of
the new agreement on revenue and operating profits.
Rental Expenses: Rental expenses for 1996 totaled $146.2 million, an
increase of $8.8 million, or 6.4%, from the prior year. The addition of extended
care sales representatives, new information systems and international market
expansion accounted for a majority of the increase. As a percentage of total
revenue, 1996 rental expenses were 54.2%, down from 56.4% in the prior period.
This decrease is due primarily to the 1996 revenue increase because most of the
Company's rental or field expenses are relatively fixed in nature.
Gross Profit: Gross profit in 1996 was $107.4 million, an increase of
$15.1 million, or 16.3%, from the year-ago period due substantially to higher
revenue, as discussed previously, combined with relatively fixed field expenses.
Gross profit margin for 1996, as a percentage of total revenue, was 39.8%, up
from 37.9% for the prior year. Rental margins improved to 35.1%, up 1.6% from
1995, while sales margins improved slightly to 63.3%, from 62.7%, as the product
mix continued to shift toward higher margin overlays and disposable products.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses for 1996 were $52.0 million, an increase of
$3.5 million, or 7.2%, from 1995. Total SG&A expenses for the prior year also
included a $2.9 million nonrecurring loss from the sale of KCIFS in June 1995.
Costs associated with international market expansion, improved information
systems and marketing, legal and professional activities accounted for a
substantial part of this increase. As a percentage of total revenue, SG&A
expenses in 1996 were 19.3%, down slightly from 19.9% in the year-ago period.
Operating Earnings: Operating earnings for 1996 were $55.4 million, an
increase of $11.6 million, or 26.4%, from 1995. The increase was due primarily
to the growth in revenue combined with the implementation of various initiatives
undertaken to improve efficiencies, e.g., new information systems. As a
percentage of total revenue, the Company's operating margin improved to 20.5%,
up more than 2% from 1995.
Net Interest Income: Net interest income for the year was $9.1 million,
which included $5.2 million from the early repayment of all remaining notes
receivable from MEDIQ/PRN. The notes had an aggregate face value of $10 million
and had been discounted to a carrying value of $3.2 million, excluding accrued
interest. The notes were retired for approximately $9 million.
Income Taxes: The Company's effective income tax rate for 1996 was 39.5%
compared to 41.2% in 1995. This decrease was primarily the result of
implementing various tax planning initiatives both domestically and overseas.
Net Earnings: Net earnings for 1996 were $39.0 million, or $0.86 per
share, compared to 1995 net earnings of $28.4 million, or $0.63 per share.
Higher revenue and controlled spending, combined with the one-time increase in
interest income and a lower overall tax rate accounted for the 37% earnings
improvement. Average common and common equivalent shares outstanding were
substantially unchanged year-to-year.
54
<PAGE> 55
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
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 prior year (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
REVENUE VARIANCE
RELATIONSHIP INCREASE (DECREASE)
------------ -------------------
1995 1994 $ PCT
---- ---- ---------- -----
<S> <C> <C> <C> <C>
Revenue:
Rental and service................................ 85% 85% $(22,179) (10)%
Sales and other................................... 15 15 (4,024) (10)
--- --- -------- --
Total revenue.................................. 100 100 (26,203) (10)
--- --- -------- --
Rental expenses..................................... 56 59 (21,815) (14)
Cost of goods sold.................................. 6 7 (5,659) (29)
--- --- -------- --
Gross profit................................... 38 34 1,271 1
Selling, general and administrative expenses........ 20 19 (3,311) (6)
Unusual items....................................... -- (31) 84,868 NM
--- --- -------- --
Operating earnings............................. 18 46 (80,286) (65)
Interest income, net................................ 2 (1) 9,082 201
--- --- -------- --
Earnings before income taxes, minority interest
and cumulative effect of change in accounting
principle.................................... 20 45 71,204 (60)
Income taxes........................................ 8 21 (36,044) (64)
Earnings before minority interest and
cumulative effect of change in accounting
principle.................................... 12 24 (35,160) (55)
Minority interest in subsidiary loss................ -- -- (40) --
Cumulative effect of change in accounting
principle......................................... -- -- (742) --
--- --- -------- --
Net earnings................................... 12% 24% $(35,942) (56)%
=== === ======== ==
</TABLE>
The following table sets forth, for the periods indicated, the amount of
revenue derived from each of the Company's markets (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Domestic Specialty Surfaces............................ $163,014 $157,756
International.......................................... 60,689 46,444
Medical Devices........................................ 17,151 13,854
Other(1)............................................... 2,589 51,592
-------- --------
$243,443 $269,646
======== ========
</TABLE>
- ---------------
(1) Consists of revenue of Medical Services, KCIFS and MRD.
Unusual Items: In September 1994, the Company settled a patent
infringement suit against its principal competitor, Support Systems
International, Inc. ("SSI"), a predecessor in interest to Hill-Rom, Inc., for
$84.8 million. In connection with the settlement, SSI agreed to withdraw its
high-end specialty bed from the market. The comparability of the Company's
financial results for the years ended December 31, 1995 and 1994 was
significantly impacted by (1) this settlement and (2) the pre-tax gain of $10.1
million from the sale of certain assets of Medical Services. Partially
offsetting these items were certain miscellaneous unusual items, primarily
dispositions of overstocked inventory and underutilized rental assets and a
write-down of the carrying
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value of the assets of MRD which had a negative impact of $6.8 million. The
following is a summary of the unusual items recorded in 1994 (dollars in
thousands):
<TABLE>
<S> <C>
SSI patent litigation settlement............................ $84,750
Legal fees related to SSI patent litigation settlement...... (3,154)
Pre-tax gain on sale of Medical Services.................... 10,121
Miscellaneous............................................... (6,849)
-------
Unusual items in operating earnings......................... $84,868
=======
</TABLE>
Each following reference to "on an as adjusted basis" shall mean that the
results for the period have been adjusted to reflect the sales of Medical
Services and KCIFS as if such sales had occurred on January 1, 1994.
Total Revenue: Total revenue in 1995 was $243.4 million, a decrease of
$26.2 million, or 9.7%, from 1994. This decrease was directly attributable to
the sale of Medical Services in September 1994. Medical Services generated $43.8
million in revenue during 1994. On an as adjusted basis, total revenue for 1995
would have increased by $19.9 million, or 9.0%, to $242.0 million from $222.1
million in 1994 primarily as a result of growth in the Company's international
operations combined with smaller increases in each of the Company's other
primary markets. Revenue from acute care facilities increased $1.7 million, or
1.6%, from 1994, primarily as a result of increased therapy days in the acute
care setting, due partly to the successful introduction of new products,
including the BariKare and the TriaDyne, offset by a continuing shift in product
mix toward lower-cost overlays. Revenue from extended care settings in 1995 was
$37.5 million, an increase of $3.0 million, or 8.7%, from 1994, primarily due to
increased patient days as patients migrated from high-cost, acute care settings
to lower-cost, extended care settings. Revenue from home care settings increased
$0.6 million or 4.3% from 1994, which reflects the Company's decision to shift
to an independent dealer network at the beginning of the year. This network
provides easier access to a larger patient population; however, revenue received
from dealers is less than that which the Company would receive from direct sales
because revenue from dealers is net of dealer service expense. Revenue from the
Company's international operations was $60.7 million in 1995, up $14.3 million
or 30.8% from 1994. Increased market penetration and increased product sales
contributed to this higher international revenue. In addition, international
operations benefited from favorable currency exchange rate fluctuations which
accounted for $6.6 million of the revenue increase. Revenue from medical device
operations was $17.1 million in 1995, an increase of $3.2 million, or 23.0%,
from 1994, primarily as a result of greater market penetration of the
PlexiPulse.
Rental Expenses: Rental expenses for 1995 were $137.4 million, a decrease
of $21.8 million, or 13.7%, from 1994. This decrease was a result of the sale of
Medical Services in September 1994. On an as adjusted basis, rental expenses for
1995 would have been $137.4 million, an increase of $2.2 million, or 1.6%, over
1994. On an as adjusted basis, as a percentage of total revenue, rental expenses
would have been 56.8% in 1995 compared to 60.9% in 1994. This decrease is
primarily attributable to the as adjusted increase in revenue, as the majority
of these costs are relatively fixed, combined with a reduction in field
headcount and depreciation expense.
Gross Profit: Gross profit in 1995 was $92.3 million, an increase of $1.3
million, or 1.4%, over 1994. On an as adjusted basis, gross profit in 1995 would
have been $90.8 million, an increase of $16.5 million, or 22.2%, from 1994. On
an as adjusted basis, as a percentage of revenue, gross profit margin would have
increased to 37.5% in 1995 from 33.5% in 1994 as a result of the increase in as
adjusted revenue, the relatively fixed nature of the rental expenses, and the
reduction in headcount and depreciation expense as discussed above.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for 1995 were $48.5 million, a decrease of $3.3 million,
or 6.4%, from 1994 as a result of the sale of Medical Services in September
1994. On an as adjusted basis, selling, general and administrative expenses
would have been $44.7 million, an increase of $9.0 million, or 25.3%, in 1995
from 1994. On an as adjusted basis, as a percentage of revenue, selling, general
and administrative expenses would have been 18.5% in 1995 compared to 16.1% in
1994. These increases related primarily to common overhead costs, previously
allocated to Medical Services, which have been absorbed by the Company, and
costs associated with certain key investments, e.g., improved information
systems.
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<PAGE> 57
Operating Earnings: Operating earnings for 1995 were $43.8 million, a
decrease of $80.3 million, or 64.7%, from 1994, primarily as a result of the
one-time benefit of the patent litigation settlement and the sale of Medical
Services in 1994. On an as adjusted basis, and excluding the patent litigation
settlement and the other unusual items, operating earnings for 1995 would have
been $46.1 million, an increase of $7.5 million or 19.4% from 1994. On an as
adjusted basis, and excluding the patent litigation settlement and the other
unusual items, as a percentage of revenue, operating earnings would have
increased to 19.1% for 1995 from 17.4% in 1994 substantially due to the improved
gross profit discussed above.
Net Interest Income: Net interest income for 1995 was $4.6 million as
compared to net interest expense of $4.5 million in 1994. This change was a
result of the repayment of the Company's outstanding long-term debt at the end
of the third quarter of 1994. On an as adjusted basis, net interest income for
1995 would have been $4.9 million compared to net interest income of $1.2
million in 1994. This difference was primarily due to the fact that the 1995
results include interest income and a reduction in interest expense resulting
from the additional cash provided by the patent litigation settlement. In
addition, interest income for 1995 included $1.7 million representing the
principal received in excess of the discounted value of the MEDIQ/PRN notes.
Income Taxes: The Company's effective income tax rate for 1995 was 41.2%
compared to 46.8% in 1994. This decrease was primarily a result of the
recognition in 1995 of certain foreign tax credits and the September 1994
write-off of the goodwill associated with Medical Services.
Other: During 1994, the cumulative losses allocated to the minority
interest holder of MRD exceeded the balance of such holder's investment. As a
result, the Company recognized $3.8 million of losses in 1994. These losses and
the diminished opportunities within the refurbishment business contributed
towards the Company's decision to liquidate the assets and discontinue the
operations of MRD. Concurrently, the Company wrote off unamortized goodwill of
$1.5 million and wrote down inventories to net realizable value.
Change in Accounting Principle: During the first quarter of 1994, the
Company recorded the cumulative effect of a change in its inventory accounting
method which resulted in a one-time after-tax earnings increase of $742,000, or
$0.02 per share.
Net Earnings: Net earnings for 1995 were $28.4 million, or $0.63 per
share, a decrease of $36.0 million from $64.4 million, or $1.46 per share, in
1994. This decrease was primarily due to the 1994 benefit from the patent
litigation settlement and the net loss from the sale of KCIFS in 1995, and
offset in part by the net loss from the sale of Medical Services and other
unusual items in 1994. On an as adjusted basis and excluding the effect of the
patent litigation settlement and other unusual items, net earnings would have
increased by 38.6% to $29.4 million, or $0.65 per share, in 1995 from $21.2
million, or $0.48 per share, in 1994. On an as adjusted basis and excluding the
effect of the patent litigation settlement and other unusual items, as a
percentage of revenue, net margin would have increased to 12.1% in 1995 from
9.5% in 1994, primarily as a result of the improvement in gross profit discussed
above.
FINANCIAL CONDITION, SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
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 repurchase 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.
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<PAGE> 58
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.
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 $29.8 million at 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.
LIQUIDITY AND CAPITAL RESOURCES
Historical
Historically, the Company has financed its operations through internally
generated funds and existing cash reserves. Operating activities generated cash
of $37.1 million and $40.3 million, respectively, in each of the nine month
periods ended September 30, 1997 and 1996. For each of the three years ended
December 31, 1996, 1995 and 1994, operating cash flows were $62.2 million, $56.8
million and $96.5 million, respectively. On an as adjusted basis, excluding the
effects of the patent litigation settlement and the sale of certain assets of
the Medical Services Division, operating cash flows for 1994 would have totaled
approximately $48.5 million.
Cash flows used in investing activities were $43.2 million and $8.7 million
for each of the nine month periods ended September 30, 1997 and 1996,
respectively. Investing activities consist primarily of capital expenditures
related to the Company's rental products and acquisitions as well as investments
in computer hardware and software. In addition, for the nine months ended
September 30, 1997, the Company used cash in acquisitions totaling $16.9 million
while the 1996 period included $10.0 million received from the repayment of a
note receivable from the Company's principal shareholder and Chairman of the
Board of Directors. For each of the three years ended December 31, 1996, 1995
and 1994, cash flows used in (provided by) investing activities were $17.6
million, $42.9 million and $(47.8) million, respectively. On an as adjusted
basis, excluding the sale of certain assets of Medical Services, cash used in
investing activities for the year ended December 31, 1994 would have been $17.5
million.
Cash flows used in financing activities were $4.8 million and $16.6 million
for each of the nine month periods ended September 30, 1997 and 1996,
respectively. For each of the three years ended December 31, 1996, 1995 and 1994
cash flows used by financing activities were $37.3 million, $5.6 million and
$112.6
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<PAGE> 59
million, respectively. Financing activities for 1994 consisted primarily of the
Company's $102.6 million pay down of substantially all of its outstanding debt.
Post-Recapitalization
After the Recapitalization, the Company's principal sources of liquidity
are expected to be cash flow from operating activities and borrowings under the
Revolving Credit Facility and Acquisition Facility. It is anticipated that the
Company's principal uses of liquidity will be to fund capital expenditures
related to the Company's rental products, provide needed working capital, meet
debt service requirements and finance the Company's strategic plans.
The New Credit Facilities total $400.0 million and consist of (i) a $50.0
million six-year Revolving Credit Facility, (ii) a $50.0 million six-year
Acquisition Facility, (iii) a $120.0 million six-year amortizing Term Loan A,
(iv) a $90.0 million seven-year amortizing Term Loan B and (v) a $90.0 million
eight-year amortizing Term Loan C, (collectively, "the Term Loans"). The Term
Loans were fully drawn to finance a portion of the Tender Offer. The Acquisition
Facility was partially drawn to, in effect, finance the RIK acquisition. The
Acquisition Facility provides the Company with financing to pursue strategic
acquisition opportunities. The Acquisition Facility will remain available to the
Company for a period of three years at which time it will begin to amortize over
the remaining three years of the facility. The Company has utilized and will
utilize borrowings under the Revolving Facility to help effect the Tender Offer,
pay related fees and expenses, fund capital expenditures and meet working
capital needs. See "Description of New Credit Facilities."
The Term Loans are payable in equal quarterly installments(1) subject to an
amortization schedule as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998........................................................ $ 4,800,000
1999........................................................ $ 8,800,000
2000........................................................ $16,800,000
2001........................................................ $31,800,000
2002........................................................ $31,800,000
2003........................................................ $36,800,000
2004........................................................ $85,500,000
2005........................................................ $83,700,000
</TABLE>
- ---------------
(1) The first three quarterly principal installments for 2004 shall be $450,000
with the final installment for that year equal to $84,150,000. For 2005, the
first three installments shall be equal to $225,000 and the final
installment shall be equal to $83,025,000.
The Term Loans and the Notes are subject to customary terms, covenants and
conditions which may partially restrict the uses of future cash flows by the
Company. The Company does not expect that these covenants and conditions will
have a material adverse impact on its operations.
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<PAGE> 60
BUSINESS
GENERAL
Kinetic Concepts, Inc. is a worldwide leader in innovative therapeutic
systems which prevent and treat the complications of immobility that can result
from disease, trauma, surgery or obesity. The Company's clinically effective
therapeutic systems include specialty hospital beds, specialty mattress overlays
and non-invasive medical devices combined with on-site patient care consultation
by the Company's clinically-trained staff. The complications of immobility
include pressure sores, pneumonia and circulatory problems which can increase
patient treatment costs by as much as $75,000 and, if left untreated, can result
in death. The Company's therapeutic systems can significantly improve clinical
outcomes while reducing the cost of patient care by preventing these
complications or accelerating the healing process, as well as by providing labor
savings. The Company has also been successful in applying its therapeutic
expertise to bring to market innovative medical devices that treat chronic
wounds and help prevent blood clots. For the LTM ended September 30, 1997, the
Company generated unaudited pro forma revenue and EBITDA (as defined) of $308.1
million and $95.2 million, respectively. From 1994 to 1996, KCI increased
revenue and EBITDA (excluding divested businesses and other non-recurring gains)
at compound annual growth rates of 10.2% and 10.1%, respectively.
The Company designs, manufactures, markets and services its products, many
of which are proprietary. KCI's therapeutic systems are used to treat patients
across all health care settings including acute care hospitals, extended care
facilities and patients' homes. Health care providers generally prefer to rent
rather than purchase the Company's products in order to avoid the ongoing
service, storage and maintenance requirements and the high initial capital
outlay associated with purchasing such products, as well as to receive the
Company's high-quality clinical support. KCI's therapeutic systems typically
rent for $20 to $175 per day. The Company can deliver its therapeutic systems to
any major domestic trauma center within two hours of notice through its network
of service centers.
Management believes that approximately two-thirds of the patients who use
the Company's therapeutic systems are over the age of 65. Management believes
that the market for its therapeutic systems will continue to grow due to the
aging of the population and further market penetration of the Company's
therapeutic systems resulting from increased pressure on health care providers
to control costs and improve patient outcomes.
Founded by James R. Leininger, M.D., an emergency room physician, to
provide better care for his patients, the Company was incorporated in Texas in
1976. The Company's principal offices are located at 8023 Vantage Drive, San
Antonio, Texas 78230 and its telephone number is (210) 524-9000.
THERAPIES
The Company's therapeutic systems deliver one or a combination of the
following therapies:
Pressure Relief/Pressure Reduction. The Company's pressure relief and
pressure reduction surfaces provide effective skin care therapy in the treatment
of pressure sores, burns, skin grafts and other skin conditions and help prevent
the formation of pressure sores which develop in certain immobile individuals.
The Company's beds and mattress overlays reduce the amount of pressure at any
point on a patient's skin by using surfaces supported by air, silicon beads, or
a viscous fluid. Some of the products further promote healing through pulsation.
Pulmonary Care. The Company's pulmonary care systems provide Kinetic
Therapy to help prevent and treat acute respiratory problems, such as pneumonia,
by reducing the build-up of fluid in the lungs. The United States Centers for
Disease Control (the "CDC") defines Kinetic Therapy as the lateral rotation of a
patient by at least 40 degrees to each side (a continuous 80 degree arc). KCI is
the only manufacturer of beds which deliver Kinetic Therapy, which the Company
believes is essential to the prevention or effective treatment of pneumonia in
immobile patients. Some of the Company's products combine Kinetic Therapy
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with additional therapies such as percussion and pulsation which help loosen
mucous buildup and promote circulation.
Bariatric Care. The Company offers a line of bariatric care products which
are designed to accommodate obese individuals. These products are used generally
for patients weighing from 250 to 500 pounds, but can accommodate patients
weighing up to 1,000 pounds. These individuals are often unable to fit into
standard-sized beds and wheelchairs. The Company's most sophisticated bariatric
care product can serve as a bed, chair, scale and x-ray table, helps patients
enter and exit the bed, and contains other features which permit patients to be
treated safely and with dignity. Moreover, treating obese patients is a
significant staffing issue for many health care facilities because moving and
handling these patients increases the risk of worker's compensation claims by
such personnel. Management believes that these products enable health care
personnel to treat these patients in a manner which is safer to hospital
personnel than traditional methods, which can help reduce worker's compensation
claims. Some of the bariatric products also address complications of immobility
and obesity such as pressure sores.
Closure of Chronic Wounds. The Company is the sole provider of a patented,
non-invasive device which uses negative pressure to promote the healing of
chronic wounds. The negative pressure is applied through a proprietary foam
dressing which draws the tissue together, stimulates blood flow, reduces
swelling and decreases bacterial growth. The device heals wounds more quickly
than traditional methods and has been effective at closing chronic wounds which
have, in some cases, been open for years.
Circulatory Improvement. The Company offers a non-invasive device which
improves blood circulation, decreases swelling in the lower extremities and
reduces the incidence of blood clots. The therapy is accomplished by wrapping
inflatable cuffs around a foot or leg and then automatically inflating and
deflating them at prescribed intervals. The products are often used by
individuals who have had hip or knee surgeries, diabetes, or other conditions
which reduce circulation.
COMPETITIVE STRENGTHS
Management believes the following competitive strengths contribute to the
Company's leading market position and its growth in revenue and EBITDA.
Effective therapeutic systems. The Company has focused on therapeutic
systems that are designed to improve patient outcomes and reduce the cost of
patient care. For example, the Company believes that its Kinetic Therapy systems
can reduce the probability of an immobile patient contracting pneumonia in the
acute care setting by as much as 50%, and that its pressure relief systems can
heal pressure sores up to three times faster than traditional methods.
Proprietary products. The Company is the only manufacturer of Kinetic
Therapy systems and has the exclusive license to market its vacuum wound closure
technology. The Company has several other therapeutic products under development
which management believes are unique and further believes the use of such
products will reduce the cost of patient care and yield superior outcomes when
compared to traditional methods.
Established service distribution network and broad product line. With 143
domestic service centers, a fleet of approximately 26,500 surfaces, a clinically
trained sales force that conducts more than 200,000 patient visits annually, and
the ability to deliver therapies to every major domestic trauma center within
two hours, the Company has a national presence that management believes is a
significant competitive advantage. The Company believes its network addresses
the needs of customers by providing nationwide coverage, consistent availability
of a broad range of products and high-quality service.
Industry leadership in clinical research. KCI's therapeutic systems are
supported by the most extensive collection of published clinical studies in the
industry. These studies demonstrate the clinical efficacy demanded by health
care providers and the cost effectiveness of the Company's products.
Strong management team. The Company installed a new, experienced
professional management team beginning in 1994. This team, led by Raymond R.
Hannigan, President and Chief Executive Officer, has
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refocused the Company's strategy toward providing cost-effective,
clinically-proven outcomes. Management's initiatives have resulted in increased
revenue, improved profitability, improved efficiencies and enhanced distribution
and information systems. As a result, from 1994 to 1996, KCI increased revenue
and EBITDA (excluding divested businesses and other non-recurring gains) at
compound annual growth rates of 10.2% and 10.1%, respectively.
BUSINESS STRATEGY
The Company intends to continue to grow operating earnings and improve its
market position by pursuing the following strategies:
Increase presence in extended care and home care markets. Because of the
cost pressures within the health care industry, acute care hospitals are
discharging patients earlier, thereby increasing the demand for the Company's
products in the extended and home care settings. KCI provides therapies to
patients across multiple care settings through its national distribution network
and broad product line which are designed to provide a continuum of care. The
Company's new marketing programs specifically target national and regional
extended care providers.
Further penetrate the acute care market. KCI serves over 1,300 medium to
large hospitals and is presently focusing its marketing efforts on an additional
1,900 similarly-sized hospitals in which the Company has had a relatively small
presence. The Company believes its strong position as the sole manufacturer of
Kinetic Therapy beds and exclusive provider of its wound closure device will
help KCI penetrate these new accounts.
Increase usage of recently introduced products. The Company intends to
increase revenues by improving market awareness for its most recently introduced
products. The Company's newest products include medical devices for treatment of
chronic wounds, specialty surfaces for obese patients and sophisticated Kinetic
Therapy beds. The Company believes these unique products have excellent growth
potential and provide the Company with an opportunity to penetrate competitive
accounts.
Introduce new products. Approximately 30% of the Company's 1996 domestic
revenues were generated by products which have been introduced since 1994. One
of KCI's objectives is to continue to expand revenues by acquiring or developing
new products which improve patient outcomes and reduce the cost of patient care.
In addition, existing products are continuously improved in consultation with
health care professionals to enhance their features and improve their clinical
effectiveness.
Expand internationally. The Company has direct operations in 13 foreign
countries and has 75 independent dealers in other foreign markets. The Company
intends to continue to expand in growing international markets by establishing
additional direct operations and expanding its dealership network.
Pursue strategic acquisitions. The Company intends to pursue strategic
fold-in acquisitions, both domestically and internationally, to enhance its
geographic coverage and broaden its product line. Between January and October
1997, the Company completed five such acquisitions. For example, the Company's
acquisition of substantially all of the assets of RIK in October 1997 broadened
its product line with a new non-powered proprietary support surface.
CORPORATE ORGANIZATION
The Company is organized into four operating divisions: KCI Therapeutic
Services, Inc. ("KCI Therapeutic Services" or "KCTS"), KCI Home Care, KCI
International, Inc. ("KCI International") and KCI New Technologies, Inc.
("NuTech").
KCI Therapeutic Services
KCI Therapeutic Services provides a broad line of therapeutic specialty
support surfaces to patients in acute and sub-acute facilities as well as
extended care settings. This division consists of approximately 1,000 personnel,
many of whom have a medical or clinical background. Sales are generated by a
sales force of
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approximately 300 individuals who are responsible for new accounts in addition
to the management and expansion of existing accounts. A portion of this sales
force is focused exclusively on either the extended care market or the acute
care market although the majority of the sales force is responsible for sales
across both settings.
KCI Therapeutic Services has a national 24-hour, seven days-a-week customer
service communications system which allows it to quickly and efficiently respond
to its customers' needs. The Company distributes its specialty patient support
surfaces to acute and extended care facilities through a network of 143 domestic
service centers. The KCTS service centers are organized as profit centers and
the general managers who supervise the service centers are responsible for both
sales and service operations. Each center has an inventory of specialty beds and
overlays which are delivered to the individual hospitals or extended care
facilities on an as-needed basis.
The KCTS sales and support staff is comprised of approximately 250
employees with medical or clinical backgrounds. The principal responsibility of
approximately 125 of these clinicians is making product rounds and participating
in treatment protocols. These clinicians educate the hospital staff on issues
related to patient treatment, assist in the establishment of protocols and
accumulate outcome data related to the treatment of the patient. The clinical
staff makes approximately 200,000 patient rounds annually. KCTS accounted for
approximately 64%, 61% and 53%, respectively, of the Company's total revenue in
the years ended December 31, 1996, 1995 and 1994.
KCI Home Care
KCI Home Care rents and sells products that address the unique demands of
the home health care market. In January 1995, KCI Home Care started a transition
from a combined direct/dealer distribution system to distributing its products
through home medical equipment ("HME") dealers. The Company believes that
selling through the home care provider network gives it access to a larger
patient population and improves the overall contribution from this business
segment despite a reduction in per patient revenue. KCI Home Care accounted for
approximately 5% of the Company's total revenue in 1996.
KCI International
KCI International offers the Company's therapies and services in 13 foreign
countries including Germany, Austria, the United Kingdom, Canada, France, the
Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Spain and Ireland.
The Denmark office has recently been expanded to serve all of Scandinavia. In
addition, relationships with 75 independent distributors in Latin America, the
Middle East, Asia and Eastern Europe allow KCI International to serve the
demands of a growing global market. KCI International accounted for
approximately 25%, 25% and 17%, respectively, of the Company's total revenue in
1996, 1995 and 1994. See Note 13 of Notes to Consolidated Financial Statements
for information on foreign and domestic operations.
NuTech
NuTech manufactures and markets the PlexiPulse and PlexiPulse All-in-1
System. The products are sold through a direct sales force and a limited number
of independent distributors and rented through an alliance with MEDIQ/PRN, a
national medical device rental company with a strong portfolio of national
accounts. NuTech accounted for approximately 6% of the Company's total revenue
in 1996.
THERAPIES/PRODUCTS
The Company's "Continuum of Care" is focused on treating wound care
patients, pulmonary patients, large or obese patients and patients with
circulatory problems by providing innovative, outcome driven therapies across
multiple care settings. The Company's therapies include Pressure Relief/Pressure
Reduction, Pulmonary Care, Bariatric Care, Closure of Chronic Wounds and
Circulatory Improvement.
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Pressure Relief/Pressure Reduction
The Company's pressure relief products include a variety of framed beds and
overlays such as the KinAir III, TheraPulse, FluidAir Elite, HomeKair, First
Step TriCell, DynaPulse, First Step Plus, First Step Select, AirWorks Plus,
Impression, RIK mattress, and RIK overlay. The KinAir III has been shown to
provide effective skin care therapy in the treatment of pressure sores, burns
and post operative skin grafts and flaps, and to help prevent the formation of
pressure sores and certain other complications of immobility. The TheraPulse
provides a more aggressive form of treatment through continuous pulsating action
which gently massages the skin to help promote capillary and lymphatic
circulation in patients suffering from severe pressure sores, burns, skin grafts
or flaps, swelling or circulation problems. The FluidAir Elite supports the
patient on a low-pressure surface of air-fluidized silicon beads providing
pressure relief for skin grafts or flaps, burns and pressure sores and also has
built in scales. The HomeKair bed and TriCell overlay are low-cost pressure
relief products designed to be easily transportable directly to a patient's
home. The DynaPulse is a pulsating mattress replacement system that helps
prevent pressure ulcers in patients at high risk for skin breakdown and can also
be used to treat existing pressure ulcers. The First Step family of overlays is
designed to provide pressure relief and help prevent pressure sores. AirWorks
Plus is a low-cost overlay which has air chambers which assist in redistributing
pressure for better skin care. Impression is a self-contained for-sale product
for the prevention of pressure sores which is intended to replace standard
hospital mattresses. The RIK mattress and the RIK overlay are non-powered
products that provide pressure relief utilizing a patented viscous fluid and an
anti-shear layer.
Pulmonary Care
The CDC defines Kinetic Therapy as lateral rotation of a patient by at
least 40 degrees on each side (a continuous 80 degree arc). The Company believes
Kinetic Therapy is essential to the prevention or effective treatment of
pneumonia and other pulmonary complications in immobile patients. The Company's
Kinetic Therapy products include the TriaDyne, RotoRest, RotoRest Delta, BioDyne
II and Q2 Plus. The TriaDyne, introduced in mid-1995, provides patients in acute
care settings with three distinct therapies on an air suspension surface. The
TriaDyne applies Kinetic Therapy by rotating the patient up to 40 degrees to
each side and provides an industry-first feature of simultaneously turning the
patient's torso and lower body in opposite directions while keeping the patient
positioned in the middle of the bed. The TriaDyne can also provide percussion
therapy to the patient's chest to loosen mucous buildup in the lungs and
pulsating therapy to promote capillary circulation. The TriaDyne is built on
Stryker Corporation's critical care frame, which is narrow and well suited to an
ICU environment. The TriaDyne offers several other novel features not available
on other products. The RotoRest Delta is a specialty bed which can rotate a
patient up to a 62 degree angle on each side for the treatment of pulmonary
complications and prevention of pneumonia. The RotoRest has been shown to
improve the care of patients suffering from multiple trauma, spinal cord injury,
severe pulmonary complications, respiratory failure and deep vein thrombosis.
The BioDyne II combines many of the therapeutic benefits of the KinAir III and
the RotoRest and is used by patients suffering from pneumonia, coma, stroke and
chronic neurological disorders.
Bariatric Care
The Company markets a line of therapeutic support surfaces and aids for
patients suffering from obesity, a market that had previously been underserved.
These products not only provide the proper support needed by obese patients, but
also enable nurses to care for these patients in a dignified manner. Moreover,
treating obese patients is a significant staffing issue for many health care
facilities because moving and handling these patients increases the risk of
worker's compensation claims by nurses. The use of the Company's Bariatric
products enables hospital staff to treat and move obese patients in a manner
which is safer to hospital personnel while utilizing fewer hospital personnel.
The most advanced product in this line is the BariKare, which can serve as a
bed, chair, scale and x-ray table. This product is used generally for patients
weighing from 250 to 500 pounds but can be used for patients who weigh up to 850
pounds. The Company believes that the BariKare is the most advanced product of
its type available today. In 1996, the Company also introduced the FirstStep
Select Heavy Duty overlay which incorporates pressure-relieving therapy in a
design that supports
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patients weighing up to 650 pounds. The Company recently introduced the
BariAire, which builds into the BariKare the benefits of the First Step Select
Heavy Duty overlay and adds new features.
Closure of Chronic Wounds
The Company manufactures and markets the Vacuum Assisted Closure device
(the "V.A.C."), a non-invasive, active wound closure therapy that utilizes
negative pressure. The V.A.C. promotes healing in wounds, pressure ulcers and
grafts that frequently do not respond to traditional methods of treatment.
Treatment protocols with the V.A.C. call for a proprietary foam material to be
fitted and placed in or on top of a wound and covered with an airtight,
occlusive dressing. The foam is attached to a separate vacuum pump. When
activated, the vacuum pump creates a negative pressure in the wound that draws
the tissue together. This vacuum action also stimulates blood flow on the
surface of the wound, reduces edema and decreases bacterial colonization, all of
which stimulate healing. The dressing material is replaced every 48 hours and
fitted to accommodate the decreasing size of the wound over time. This is a
significant improvement over the traditional method for treating wounds which
requires the nursing staff to clean and dress a serious wound every 8 to 12
hours.
Circulatory Improvement
The PlexiPulse and PlexiPulse All-in-1 System are non-invasive vascular
assistance devices that aid venous return by pumping blood from the lower
extremities to help prevent deep vein thrombosis ("DVT") and re-establish
microcirculation. The pumping action is created by compressing specific parts of
the foot or calf with specially designed inflatable cuffs that are connected to
a separate pump unit. The cuffs are wrapped around the foot and/or calf and are
inflated in timed increments by the pump. The intermittent inflation compresses
a group of veins in the lower limbs and boosts the velocity of blood flowing
back toward the heart. This increased velocity has been proven to significantly
decrease formation of DVT in non-ambulatory post-surgical and post-trauma
patients. The PlexiPulse is effective in preventing DVT, reducing edema and
improving lower limb blood circulation.
PRODUCT SUPPORT
As both private and government reimbursement programs continue to move
towards systems where facilities receive a fixed payment to cover all medical
expenses based only upon the patient's initial diagnosis, actuarial information
becomes more critical to predict patient outcomes and to develop appropriate
pricing structures. The collection of this valuable data is central to KCI's
effort of proving cost effective patient outcomes.
At the foundation of KCI's clinical advantage ("The Clinical Advantage") is
an active program of sponsoring independent clinical research. KCI's portfolio
of over 60 active and completed studies supports the medical efficacy and cost
effectiveness of utilizing the Company's products and protocols as part of the
healing and prevention process. In addition, KCI's research is focused on
providing the outcome data demanded by today's health care provider.
Health care providers around the world who utilize KCI's therapeutic
systems experience aspects of The Clinical Advantage every day. Whether it is an
emergency placement of a KCI TriaDyne or the V.A.C., participation in developing
a wound care management program, or daily patient rounds to assist facility
staff and collect clinical outcome data, trained KCI team members make more than
200,000 regular patient rounds annually. This staff is comprised of over 1,000
employees with approximately 25% having a medical or clinical background. In
order for the hospital and KCI to collect and process data on patient outcomes,
the Company has developed Genesis, Odyssey and PAO2, three proprietary software
programs.
Genesis is utilized by KCI staff clinicians to assist customers in tracking
asset utilization and patient outcomes. Using hand held computers, KCI
clinicians make regular rounds to document the effect of KCI products on a
patient's overall outcome. At the facility's direction, this information is
entered into a central database and analyzed to determine the effectiveness of
specific treatment protocols.
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Odyssey and PAO2 are sold to KCI customers to enable them to standardize
the information collected on their Wound Management and Pulmonary Management
Protocols, respectively. Health care providers utilize both Odyssey and PAO2 as
tools to document and track wound and pulmonary management programs, including
the resultant patient outcome and the cost of achieving that outcome. Facilities
collect data on their wound and pulmonary patients, and periodically share this
information with KCI for inclusion in a national database. KCI compiles the
information and can generate reports comparing a facility's program or patient
results with those of similar programs or patients on an internal, regional or
national basis. This information enables each facility to continuously improve
its wound and pulmonary management programs, achieving the best outcome at the
lowest total cost of care.
KCI's integrated clinical database consisting of the Genesis, Odyssey and
PAO2 information platforms combined with an extensive clinical field presence
and clinically proven therapies and protocols define KCI's unique product
support advantage in the marketplace -- The Clinical Advantage.
COMPETITION
The Company believes that the principal competitive factors within its
markets are product efficacy, clinical outcomes, service and cost of care.
Furthermore, the Company believes that a national presence with full
distribution capabilities is important to serve large, sophisticated national
and regional health care group purchasing organizations ("GPOs") and providers.
The Company contracts with both proprietary and voluntary GPOs. Proprietary
GPOs own all of the hospitals which they represent and, as a result, can ensure
complete compliance with a national agreement. Voluntary GPOs negotiate
contracts on behalf of member hospital organizations but cannot ensure that
their members will comply with the terms of a national agreement. Approximately
47% of the Company's total revenue during 1996 was generated under national
agreements with GPOs in the acute and extended care settings.
In November 1996, the Company announced that it had been advised by Premier
Purchasing Partners, L.P., that its bid to be the primary supplier for the newly
combined group had been awarded to another vendor. Premier is a new voluntary
group purchasing organization which was formed as a result of the merger of
three separate group purchasing organizations. Revenue from hospitals within
Premier for 1996 accounted for approximately 10% of the Company's total revenue.
Because facilities within Premier are not committed to do business with the
group's primary vendor, it is difficult to predict the ultimate effect of the
new agreement on revenue and operating profits.
The Company competes on a national level with Hill-Rom, Kendall and
Invacare and on a regional and local level with numerous other companies. The
Company competes principally with Invacare in the home care segment. NuTech
competes primarily with Kendall International in the foot and leg compression
market. In the U.S. specialty surface market and certain international markets,
the Company competes principally with Hill-Rom.
RESEARCH AND DEVELOPMENT
The focus of the Company's research and development program has been to
develop new products and make technological improvements to existing products.
Since January 1994, the Company has introduced a number of new products
including: the TriaDyne, the BariKare, the TriCell, the First Step Select Heavy
Duty, the FluidAir Elite, the PlexiPulse All-in-1 System, the BariAire, the
Pedidyne and The V.A.C., a product developed from technology licensed to the
Company. Expenditures for research and development represented approximately 2%
of the Company's total expenditures in 1996. The Company intends to continue its
research and development efforts.
MANUFACTURING
The Company's manufacturing processes for its specialty beds, mattress
overlays, and medical devices include the manufacture of certain components, the
purchase of certain other components from suppliers and
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the assembly of these components into a completed product. Mechanical components
such as blower units, electrical displays and air flow controls consist of a
variety of customized subassemblies which are purchased from suppliers and
assembled by the Company. The Company believes it has an adequate source of
supply for each of the components used to manufacture its products.
PROPERTIES
The Company's corporate headquarters are currently located in a 170,000
square foot building in San Antonio, Texas which was purchased by the Company in
January 1992. The Company utilizes 89,000 square feet of the building with the
remaining space being leased to unrelated entities.
The Company conducts its manufacturing, shipping, receiving and storage
activities in a 153,000 square foot facility in San Antonio, Texas, which was
purchased by the Company in January 1988. In 1989, the Company completed the
construction of a 17,000 square foot addition to the facility which is utilized
as office space. The Company also owns a 37,000 square foot building in San
Antonio, Texas which houses the Company's engineering center and currently
serves as the NuTech division headquarters. In 1992, the Company purchased a
35,000 square foot facility in San Antonio, Texas which is used for storage. The
Company maintains additional storage at two leased facilities in San Antonio,
Texas. In 1994, the Company purchased a facility in San Antonio, Texas which has
been provided to a charitable organization to provide housing for families of
cancer patients. The facility is built on 6.7 acres and consists of a 15,000
square foot building and 2,500 square foot house. In June 1997, the Company
acquired a 28 acre tract of land adjacent to its corporate headquarters. There
are three buildings on the land which contain an aggregate of 40,000 square
feet.
The Company leases approximately 143 domestic distribution centers,
including each of its seven regional headquarters, which range in size from
1,500 to 18,000 square feet.
PATENTS AND TRADEMARKS
The Company seeks patent protection in the United States and abroad. As of
October 1, 1997, the Company had 59 issued U.S. patents relating to its
specialized beds, mattresses and related products. The Company also has 32
pending U.S. Patent applications. Many of the Company's specialized beds,
products and services are offered under trademarks and service marks. The
Company has 28 registered trademarks and service marks in the United States
Patent and Trademark Office.
EMPLOYEES
As of October 1, 1997, the Company had approximately 2,100 employees. The
Company's employees are not represented by labor unions and the Company
considers its employee relations to be good.
GOVERNMENT REGULATION
United States. The Company's products are subject to regulation by
numerous governmental authorities, principally the United States Food and Drug
Administration ("FDA") and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the clinical testing, manufacture,
labeling, distribution and promotion of medical devices. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company that violates statutory or regulatory requirements.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification, and
adherence to QSRs)
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although many Class I devices are exempt from certain FDA requirements. Class II
devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are high risk devices that receive greater FDA
scrutiny to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices). Before a new
medical device can be introduced in the market, the manufacturer must generally
obtain FDA clearance ("510(k) Clearance") or Premarket Approval ("PMA"). All of
the Company's current products have been classified as Class I or Class II
devices, which typically are legally marketed based upon 510(k) Clearance. The
FDA has announced plans to evaluate its classification system and reclassify or
exempt many devices that are currently classified as Class I devices. 510(k)
Clearance will generally be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
medical device. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence than in the past.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive
testing and manufacturing information, including preclinical and clinical trial
data, to demonstrate the safety and effectiveness of the device. The FDA's
review of a PMA application generally takes one to two years from the date the
PMA is accepted for filing, but it may take significantly longer.
If human clinical trials of a device are required, and the device presents
a "significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an Investigational Device Exemption
("IDE") application prior to commencing human clinical trials. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
Institutional Review Boards ("IRBs") without the need for FDA approval. Sponsors
of clinical trials are permitted to sell investigational devices distributed in
the course of the study provided such compensation does not exceed recovery of
the costs of manufacture, research, development and handling.
The Company has submitted four 510(k) notices for new devices which are
currently pending FDA review. The Company also has several 510(k) notifications
pending for modifications to certain of its currently marketed products. Because
the determination of whether a new 510(k) notification must be submitted for a
device modification is subjective, companies sometimes provide information to
the FDA to update their 510(k) files without formally submitting a premarket
notification. In certain circumstances, the FDA allows continued marketing of a
modified device while a 510(k) is pending. There can be no assurance, however,
that the FDA will allow the Company to continue to market any of these devices
pending marketing clearance from the FDA or that the Company will obtain 510(k)
clearance for these devices on a timely basis, if at all. The FDA's failure to
grant any necessary regulatory clearances or approvals or to allow continued
marketing of devices pending clearance could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has also made other modifications to its devices which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations and would not require the Company to submit a new 510(k) notice
for any of the changes made to the Company's devices. If the FDA requires the
Company to submit a new 510(k) notice for any device modification, the Company
may be prohibited from marketing the modified device until the 510(k) notice is
cleared by the FDA. There can be no assurance that the Company will obtain
premarket clearance or approval on a timely basis, if at all, for any device for
which it has filed or may in the future file a submission.
The Company is sponsoring several clinical trials which have been
determined by IRBs at the participating institutions to be "nonsignificant risk"
studies. There can be no assurance, however, that the FDA would agree with these
determinations and not require the Company to obtain the FDA approval of the
IDEs before continuing the studies.
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All devices manufactured or distributed by the Company are subject to
pervasive and continuing regulation by the FDA and certain state agencies,
including record keeping requirements and mandatory reporting of certain adverse
experiences resulting from use of the devices. Labeling and promotional
activities are subject to regulation by the FDA and, in certain circumstances,
by the Federal Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses and the FDA
scrutinizes the advertising of medical devices to ensure that unapproved uses of
medical devices are not promoted.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Quality
System Regulation ("QSR") (formerly Good Manufacturing Practices) requirements,
which include design, testing, control and documentation requirements.
Manufacturers must also comply with MDR requirements that a company report
certain device-related incidents to the FDA. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with QSR
requirements, MDR requirements and other applicable regulations. The Company is
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition, and results of operations. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
On October 6, 1997, at the conclusion of an inspection of the Company's
principal manufacturing facility, FDA issued the Company a Form 483 which
identified eight observations of conditions that the FDA believed to be in
violation of the FDA's QSR and MDR requirements. Several of these observations
concerned the Company's TransportAir device and were similar to previous FDA
inspectional observations that became the basis of a Warning Letter issued to
the Company in August of 1995. Specifically, the FDA's Form 483 stated, among
other things, that the Company had not provided solutions for or verified the
implementation of solutions to quality assurance problems concerning
malfunctions of the TransportAir, and that the Company had failed to submit
Medical Device Reports for a number of incidents involving the TransportAir. The
TransportAir device, which provides an auxiliary air supply for the Company's
KinAir, BioDyne and TheraPulse product lines, permits those bed products to be
moved while in full inflation mode. The TransportAir is the subject of a pending
510(k) notice and has been marketed without specific premarket clearance on the
product on a stand-alone basis since 1986.
The Company submitted a written response to the FDA's Form 483 observations
on November 20, 1997. However, there can be no assurance that the FDA will agree
with the Company's response or that, regardless of the Company's response, the
FDA will not invoke any of its regulatory or enforcement authorities against the
Company. In addition to other regulatory and enforcement actions, the FDA may
issue the Company a Warning Letter which could have an adverse effect on the
Company's ability to obtain Certificates for Products for Export until the FDA's
inspectional observations are corrected to the agency's satisfaction. Federal
agencies could also be advised of the issuance of the Warning Letter which may
be taken into account when considering the award of federal contracts to the
Company. The FDA may also determine that reinspection of the Company's facility
is necessary before the agency determines that the Company's response to the
Form 483 is adequate.
The Company has begun modifying its TransportAir devices to address the
problems that the Company has encountered. If the FDA determines that there is a
reasonable probability that the TransportAir would cause serious, adverse health
consequences or death, the FDA could order the Company to recall the
TransportAir and not allow redistribution of the device until the Company has
verified that it has implemented appropriate corrective actions. Alternatively,
the FDA could consider the distribution of the modified version of the
TransportAir to be a voluntary recall and require the Company to assure that the
modification has been fully implemented and that its customers are adequately
notified of the need for the modification. In addition, because the TransportAir
is not specifically the subject of a cleared 510(k) notice, FDA could require
the Company to discontinue marketing the device until it is cleared by FDA. The
failure of the Company to be
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able to market the TransportAir would prevent the Company from supplying an
alternative power supply for three of its principal products which could have a
material adverse effect on the Company's ability to market those devices. Any
regulatory or enforcement action invoked by FDA could have a material adverse
effect upon the Company.
Fraud and Abuse Laws. The Company is subject to federal and state laws
pertaining to health care fraud and abuse. In particular, certain federal and
state laws prohibit manufacturers, suppliers, and providers from offering or
giving or receiving kickbacks or other remuneration in connection with the
ordering or recommending purchase or rental of health care items and services.
The federal anti-kickback statute provides both civil and criminal penalties
for, among other things, offering or paying any remuneration to induce someone
to refer patients to, or to purchase, lease, or order (or arrange for or
recommend the purchase, lease, or order of), any item or service for which
payment may be made by Medicare or certain federally-funded state health care
programs (e.g., Medicaid). This statute also prohibits soliciting or receiving
any remuneration in exchange for engaging in any of these activities. The
prohibition applies whether the remuneration is provided directly or indirectly,
overtly or covertly, in cash or in kind. Violations of the law can result in
numerous sanctions, including criminal fines, imprisonment, and exclusion from
participation in the Medicare and Medicaid programs.
These provisions have been broadly interpreted to apply to certain
relationships between manufacturers and suppliers, such as the Company, and
hospitals, skilled nursing facilities ("SNFs"), and other potential purchasers
or sources of referral. Under current law, courts and the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services
("HHS") have stated, among other things, that the law is violated where even one
purpose (as opposed to a primary or sole purpose) of a particular arrangement is
to induce purchases or patient referrals.
The OIG has taken certain actions which suggest that arrangements between
manufacturers/suppliers of durable medical equipment or medical supplies and
SNFs (or other providers) may be under continued scrutiny. An OIG enforcement
initiative, Operation Restore Trust ("ORT"), has targeted an investigation of
fraud and abuse in a number of states (i.e., California, Florida, Illinois, New
York, and Texas), focusing specifically on the long-term care, home health, and
DME industries. ORT's funding has officially ended and the Inspector General has
announced plans to implement an "ORT-Plus" program in other states in
conjunction with other federal law enforcement bodies. Furthermore, in August
1995, the OIG issued a Special Fraud Alert describing certain relationships
between SNFs and suppliers that the OIG viewed as abusive under the statute.
These initiatives create an environment in the industry in which the Company
operates in which there will continue to be significant scrutiny for compliance
with federal and state fraud and abuse laws.
Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the
purchase or rental of medical equipment and supplies. State laws vary in scope
and have been infrequently interpreted by courts and regulatory agencies, but
may apply to all health care items or services, regardless of whether Medicaid
or Medicaid funds are involved.
The Company is also subject to federal and state laws prohibiting the
presentation (or the causing to be presented) of claims for payment (by
Medicare, Medicaid, or other third party payors) that are determined to be
false, fraudulent, or for an item or service that was not provided as claimed.
In one case, a major DME manufacturer paid more than $4 million to settle
allegations that it had "caused to be presented" false Medicare claims through
advice that its sales force allegedly gave to customers concerning the
appropriate reimbursement coding for its products.
ISO Certification. Due to the harmonization efforts of a variety of
regulatory bodies worldwide, certification of compliance with the ISO 9000
series of International Standards ("ISO Certification") has become particularly
advantageous and, in certain circumstances necessary for many companies in
recent years. Beginning in June of 1998, ISO Certification is expected to be
required for all manufacturers selling and distributing products within the
European Economic Community. Anticipating such requirements, the Company began
preparing for ISO Certification in 1995 and, in early 1997, began working with
an accredited body that has been authorized to grant ISO Certification. Based
upon preliminary assessments, the Company
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expects to attain such certification in the first quarter of 1998. Failure to
obtain ISO Certification by June of 1998 may have an adverse effect on the
Company, particularly on the Company's sale and distribution of products within
the European Economic Community.
Other Laws. The Company owns and leases property that is subject to
environmental laws and regulations. The Company also is subject to numerous
federal, state and local laws and regulations relating to such matters as safe
working conditions, manufacturing practices, fire hazard control and the
handling and disposal of hazardous or potentially hazardous substances.
International. Sales of medical devices outside of the United States are
subject to regulatory requirements that vary widely from country to country.
Premarket clearance or approval of medical devices is required by certain
countries. The time required to obtain clearance or approval for sale in a
foreign country may be longer or shorter than that required for clearance or
approval by the FDA and the requirements may vary. Failure to comply with
applicable regulatory requirements can result in loss of previously received
approvals and other sanctions and could have a material adverse effect on the
Company's business, financial condition or results of operations.
REIMBURSEMENT
The Company's products are rented and sold principally to hospitals,
extended care facilities and HME providers who receive reimbursement for the
products and services they provide from various public and private third-party
payors, including the Medicare and Medicaid programs and private insurance
plans. The Company also directly bills third party payors, including Medicare
and Medicaid, and receives reimbursement from these payors. In such cases,
Medicare beneficiaries are billed twenty percent (20%) for coinsurance. As a
result, demand and payment for the Company's products is dependent in part on
the reimbursement policies of these payors. The manner in which reimbursement is
sought and obtained for any of the Company's products varies based upon the type
of payor involved and the setting in which the product is furnished and utilized
by patients.
Medicare. Medicare is a federally-funded program that reimburses the costs
of health care furnished primarily to the elderly and disabled. Medicare is
composed of two parts: Part A and Part B. The Medicare program has established
guidelines for the coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by Medicare, a health
care item or service furnished to a Medicare beneficiary must be reasonable and
necessary for the diagnosis or treatment of an illness or injury or to improve
the functioning of a malformed body part. This has been interpreted to mean that
the item or service must be safe and effective, not experimental or
investigational (except under certain limited circumstances involving devices
furnished pursuant to an FDA-approved clinical trial), and appropriate. Specific
Medicare guidelines have not currently been established addressing under what
circumstances, if any, Medicare coverage would be provided for the use of the
PlexiPulse or the V.A.C.
The methodology for determining the amount of Medicare reimbursement of the
Company's products varies based upon, among other things, the setting in which a
Medicare beneficiary receives health care items and services. The recently
enacted BBA will significantly impact the manner in which Medicare reimbursement
is funded over the next five years. Most of the Company's products are furnished
in a hospital, skilled nursing facility or the beneficiary's home.
Hospital Setting. With the establishment of the prospective payment system
in 1983, acute care hospitals are now generally reimbursed by Medicare for
inpatient operating costs based upon prospectively determined rates. Under the
prospective payment system ("PPS"), acute care hospitals receive a predetermined
payment rate based upon the Diagnosis-Related Group ("DRG") into which each
Medicare beneficiary is assigned, regardless of the actual cost of the services
provided. Certain additional or "outlier" payments may be made to a hospital for
cases involving unusually long lengths of stay or high costs. However, outlier
payments based upon length of stay are gradually being phased out and will be
eliminated effective with fiscal year 1998. Furthermore, pursuant to regulations
issued in 1991, and subject to a ten-year transition period, the capital costs
of acute care hospitals (such as the cost of purchasing or renting the Company's
specialty beds) are also reimbursed by Medicare pursuant to an add-on to the
DRG-based payment amount.
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Accordingly, acute care hospitals generally do not receive direct Medicare
reimbursement under PPS for the distinct costs incurred in purchasing or renting
the Company's products. Rather, reimbursement for these costs is deemed to be
included within the DRG-based payments made to hospitals for the treatment of
Medicare-eligible inpatients who utilize the products. Since PPS rates are
predetermined, and generally paid irrespective of a hospital's actual costs in
furnishing care, acute care hospitals have incentives to lower their inpatient
operating costs by utilizing equipment and supplies that will reduce the length
of inpatient stays, decrease labor, or otherwise lower their costs.
The principal manner in which the BBA impacts Medicare Part A in the acute
care setting is that it has reduced the annual DRG payment updates to be paid
over the next five years by more than $40.0 billion. In addition, the BBA
authorizes HCFA to enact regulations which are designed to restrain certain
hospital reimbursement activities which are perceived to be abusive or
fraudulent.
Certain specialty hospitals (e.g., long-term care, rehabilitation and
children hospitals) also use the Company's products. Such specialty hospitals
currently are exempt from the PPS and, subject to certain cost ceilings, are
reimbursed by Medicare on a reasonable cost basis for inpatient operating and
capital costs incurred in treating Medicare beneficiaries. Consequently,
long-term care hospitals may receive separate Medicare reimbursement for
reasonable costs incurred in purchasing or renting the Company's products;
however, Medicare reimbursement for such hospitals are expected to be reduced by
$3.5 billion over the next five years. There can be no assurance that a
prospective payment system will not be instituted for such hospitals in future
legislation.
Skilled Nursing Facility Setting. Skilled Nursing Facility Settings
("SNFs") which purchase or rent the Company's products may be reimbursed
directly under Medicare Part A for some portion of their incurred costs.
Generally speaking, only the costs of treatment during the first 100 days of a
qualifying spell of illness are subject to Medicare reimbursement. The costs
incurred by SNFs in furnishing care to Medicare beneficiaries are categorized as
either routine costs or ancillary costs. Routine costs are those costs which are
incurred for items and services routinely furnished to all patients (e.g.,
general nursing services, items stocked in gross supply). Ancillary costs are
considered those costs which are incurred for items or services ordered to treat
a condition of a specific patient and which are not generally furnished to most
patients. Ancillary costs are not subject to the routine cost limits. Given the
current routine cost limits, SNFs may be more inclined to purchase or rent
products which are reimbursed by Medicare as ancillary items or services than if
these products were reimbursed as routine items or services. At present, the
Company's specialty beds are classified under Medicare Part A as ancillary
items. HCFA currently interprets the definition of ancillary items to include
certain support surfaces such as low air loss mattress replacements, bed overlay
systems and air fluidized therapy. Neither The V.A.C. nor the PlexiPulse have
yet been classified as ancillary items when furnished in a SNF setting.
On July 1, 1998, the manner in which SNFs are reimbursed under Medicare
Part A will change dramatically. On that date, reimbursement for SNFs under
Medicare Part A will change from a cost-based system to a prospective payment
system. The new payment system will be based on resource utilization groups
("RUGs"). Under the RUGs system, a SNF Medicare patient will be assigned to a
RUGs category upon admission to the SNF. The RUGs category to which the patient
will be assigned will depend upon the level of care and resources the patient
requires. The SNF will receive a fixed per diem payment based upon the RUGs
category assigned to each Medicare patient. The per diem payments made to the
SNFs will be based upon a blend of their actual costs and a national average
cost (which is subject to local wage-based adjustments). Initially, 75% of a
SNF's per diem will be based on its costs and 25% of the per diem will be based
on national average cost. At the end of a four-year phase-in period, all per
diem payments will be based on the national average cost. Because the RUG's
system provides SNFs with fixed cost reimbursement, SNFs may be less inclined
than they have in the past to use products which had previously been reimbursed
as ancillary costs. Because the Company believes its products are both cost
effective and efficacious, the Company believes that it will be able to rent and
sell its products effectively under the RUGs system.
Home Setting. The Company's products are also provided to Medicare
beneficiaries in home care settings. Medicare reimburses beneficiaries, or
suppliers accepting assignment, for the purchase or rental of
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DME for use in the beneficiary's home or a home for the aged (as opposed to use
in a hospital or skilled nursing facility setting). So long as the Medicare Part
B coverage criteria are met, certain of the Company's products, including air
fluidized beds, air-powered flotation beds and alternating air mattresses, are
reimbursed in the home setting under the DME category known as "Capped Rental
Items." Pursuant to the fee schedule payment methodology for this category,
Medicare pays a monthly rental fee (for a period not to exceed fifteen months)
equal to 80% of the established allowable charge for the item. Guidelines
concerning under what circumstances, if any, the V.A.C. or the PlexiPulse will
be covered and reimbursed by DME have not been established. Under the BBA, there
will be a five-year freeze on consumer price index updates for Medicare Part B
Services in the home care setting.
Medicaid. The Medicaid program is a cooperative federal/state program that
provides medical assistance benefits to qualifying low income and
medically-needy persons. State participation in Medicaid is optional and each
state is given discretion in developing and administering its own Medicaid
program, subject to certain federal requirements pertaining to payment levels,
eligibility criteria and minimum categories of services. The Medicaid program
finances approximately 50% of all care provided in skilled nursing facilities
nationwide. The Company sells or rents its products to SNFs for use in
furnishing care to Medicaid recipients. SNFs, or the Company, may seek and
receive Medicaid reimbursement directly from states for the incurred costs.
However, the method and level of reimbursement, which generally reflects
regionalized average cost structures and other factors, varies from state to
state.
Private Payors. Many private payors, including indemnity insurers,
employer group health insurance programs and managed care plans, presently
provide coverage for the purchase and rental of the Company's products. The
scope of coverage and payment policies varies among private payors. Furthermore,
many such payors are investigating or implementing methods for reducing health
care costs, such as the establishment of capitated or prospective payment
systems.
The Company believes that government and private efforts to contain or
reduce health care costs are likely to continue. These trends may lead
third-party payors to deny or limit reimbursement for the Company's products,
which could negatively impact the pricing and profitability of, or demand for,
the Company's products.
LEGAL PROCEEDINGS
On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit
against the Company in the United States District Court for the Western District
of Texas. Novamedix 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 reliably 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 required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products over which
they have monopoly power -- hospital beds and head wall units. The suit further
alleges that Hill-Rom engaged in activities which constitute predatory pricing
and refusals to deal. Hill-Rom has filed an answer denying the allegations in
the suit. Although discovery is just beginning and it is not possible to
reliably 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
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Company's antitrust lawsuit and other actions were designed to enable KCI to
monopolize the specialty therapeutic surface market. Although it is not possible
to reliably predict the outcome of this litigation, the Company believes that
the counterclaim is without merit.
On December 24, 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 Hill-Rom. 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
does not believe that the TriaDyne bed infringes any valid claims of the
Hill-Rom patent or that this lawsuit will have a material adverse impact on the
Company's business.
The Company is a party to several lawsuits arising in the ordinary course
of its business, including three other lawsuits alleging patent infringement by
the Company, and the Company is contesting adjustments proposed by the Internal
Revenue Service to prior years' tax returns. Provisions have been made in the
Company's financial statements for estimated exposures related to these lawsuits
and adjustments. 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. See "Risk Factors -- Patent Litigation."
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 management believes
that the Company currently maintains adequate liability insurance coverage.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company, together with certain other key personnel.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Jaunich II...................... 57 Chairman of the Board
Raymond R. Hannigan.................... 58 Director, President and Chief Executive Officer
James R. Leininger, M.D................ 53 Director
James T. Farrell....................... 33 Director
N. Colin Lind.......................... 41 Director
Jeffrey W. Ubben....................... 36 Director
Dennis E. Noll......................... 43 Senior Vice President, General Counsel and Secretary
Christopher M. Fashek.................. 48 President, KCI Therapeutic Services
Frank DiLazzaro........................ 39 President, KCI International
Richard C. Vogel....................... 43 Vice President and General Manager, NuTech
Michael C. Wells....................... 45 Vice President and General Manager, KCI
Home Care
Michael J. Burke....................... 50 Vice President, Manufacturing
Martin J. Landon....................... 38 Vice President, Accounting and Corporate Controller
</TABLE>
Robert Jaunich II became a director and Chairman of the Board after the
consummation of the Tender Offer. Mr. Jaunich is a Managing Director of Fremont
Partners where he shares management responsibility for the $605 million
investment fund. He is also a Managing Director and a member of the Board of
Directors and Executive Committee of The Fremont Group. Prior to joining the
Fremont Group in 1991, he was Executive Vice President and a member of the Chief
Executive Office of Jacobs Suchard AG a Swiss-based chocolate, sugar
confectionery and coffee company. He currently serves as a director of CNF
Transportation, Inc. and as Chairman of the Managing General Partner of Crown
Pacific Partners, L.P.
Raymond R. Hannigan joined the Company as its President and Chief Executive
Officer in November 1994 and has served as a director of the Company since 1994.
From January 1991 to November 1994, Mr. Hannigan was the President of the
International Division of Sterling Winthrop Consumer Health Group (a
pharmaceutical company with operations in over 40 countries), a wholly-owned
subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr. Hannigan was the
President of Sterling Drug International.
James R. Leininger, M.D. is the founder of the Company and served as
Chairman of the Board of Directors from 1976 until 1997. From January 1990 to
November 1994, Dr. James Leininger served as President and Chief Executive
Officer of the Company. From 1975 until October 1986, Dr. James Leininger was
also the Chairman of the Emergency Department of the Baptist Hospital System in
San Antonio, Texas.
James T. Farrell became a director after the consummation of the Tender
Offer. Mr. Farrell is a Managing Director of Fremont Partners. Before joining
The Fremont Group in 1991, he was an associate at ESL Partners, a private
investment partnership. In 1985, he began his career at Copley Real Estate
Advisors. Mr. Farrell is a former director of Coldwell Banker Corporation. He
also serves as a director of the nonprofit Pacific Research Institute.
N. Colin Lind became a director after the consummation of the Tender Offer.
Mr. Lind is a Managing Director of Richard C. Blum & Associates, L.P. Before
joining RCBA in 1986 he was a Vice President at R. H. Chappell Co., an
investment concern focused on development stage companies, and was previously a
Vice President of Research for two regional brokerage firms, Davis Skaggs, Inc.
and Wheat First Securities. He has previously been a director of two public
companies and seven venture capital backed companies.
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Jeffrey W. Ubben became a director after the consummation of the Tender
Offer. Mr. Ubben is a Managing Director of Richard C. Blum & Associates, L.P.
Before joining RCBA in 1995 he was manager of the $5 billion Fidelity Value Fund
and had been employed by Fidelity for a period of nine years.
Dennis E. Noll joined the Company in February 1992 as its Senior Corporate
Counsel and was appointed Vice President, General Counsel and Secretary in
January 1993. Mr. Noll was promoted to Senior Vice President in September 1995.
Prior to joining the Company in February 1992, Mr. Noll was a shareholder of the
law firm of Cox & Smith Incorporated.
Christopher M. Fashek joined the Company in February 1995 as President,
KCTS. Prior to joining the Company, he served as General Manager, Sterling
Winthrop, New Zealand since February 1993, and served as Vice President Sales of
Sterling Health USA from 1989 until February 1993.
Frank DiLazzaro joined the Company in 1988 as General Manager, KCI Medical
Canada. Mr. DiLazzaro served as Vice President, KCI International, Inc. from
June 1989 to December 1992. Mr. DiLazzaro has served as President, KCI
International, Inc. since January 1993 and was Vice President, Marketing from
April 1993 to September 1995.
Richard C. Vogel joined the Company as its Vice President and General
Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr. Vogel served as
Executive Vice President of Vestar, Inc., a California-based biotechnology
company.
Michael C. Wells joined the Company as Regional Vice President, KCTS, in
August 1994 and served in that role until June 1996 when he was promoted to the
position of Vice President and General Manager, KCI Home Care. Prior to joining
the Company, he served in Sales Management and Infusion Management roles from
1988 to August 1994 with Homedco, which currently operates today as the Apria
Healthcare Group. From 1978 to 1988, Mr. Wells held Marketing and Sales
Management positions with Baxter Healthcare, formerly American Hospital Supply
Corporation.
Michael J. Burke joined the Company in September 1995 as Vice President,
Manufacturing. Prior to joining the Company, Mr. Burke worked for Sterling
Winthrop, Inc., a Division of Eastman Kodak Company, for 25 years, where he
served as Vice President, Manufacturing and as General Manager, Sterling Health
HK/China since 1992.
Martin J. Landon joined the Company in May 1994 as Senior Director of
Corporate Development and was promoted to Vice President, Accounting and
Corporate Controller in October 1994. From 1987 to May 1994, Mr. Landon worked
for Intelogic Trace, Inc., most recently serving as Vice President and Chief
Financial Officer.
EXECUTIVE COMPENSATION
The information set forth in this section relates to the Chief Executive
Officer and the four highest paid executive officers of the Company other than
the CEO (collectively with the CEO, the "named executive officers") as of
December 31, 1996. It is expected that, following the consummation of the
Transactions, the Company will provide its executives with compensation
(including cash compensation and benefits) comparable to the compensation
previously provided to them as executives of KCI, with such additions and
modifications as may be negotiated by the Company and management.
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COMPENSATION SUMMARY
The following table shows all the cash compensation paid or to be paid by
the Company or its subsidiaries, as well as certain other compensation paid or
accrued, during the fiscal years indicated, to the named executive officers for
such period in all capacities in which they served:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS COMPENSATION(2)
--------------------------- ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Raymond R. Hannigan........... 1996 $275,000 $175,000 12,000 $4,888
Chief Executive Officer & 1995 250,000 172,500 $39,204 12,000 1,836
President 1994 33,173 23,777 1,000,000(3) 0
Peter A. Leininger, M.D....... 1996 $177,122 $ 86,000 8,000 $2,551
Director and Executive 1995 165,436 85,554 $37,717 8,000 1,585
Vice President 1994 151,352 115,000 11,520(4) 1,621
Bianca A. Rhodes.............. 1996 $200,000 $106,000 123,000(5) $1,193
Chief Financial Officer & 1995 184,000 105,984 83,000(3) 556
Senior Vice President(6) 1994 165,958 133,000 7,440 530
Frank DiLazzaro............... 1996 $168,000 $ 86,000 78,000(5) $ 884
President, KCI 1995 156,000 85,536 8,000 1,012
International, Inc. 1994 144,200 106,050 63,130(4) 1,085
Christopher M. Fashek......... 1996 $193,000 $115,800 123,000(5) $1,647
Chief Executive Officer and 1995 165,000 77,760 83,000 421
President, KCI Therapeutic
Services
</TABLE>
- ---------------
(1) The column entitled "Other Annual Compensation" includes $26,849 paid to Mr.
Hannigan in 1995 for reimbursement of relocation expenses and a personal
benefit received by Dr. Peter A. Leininger for certain transportation
expenses. Except with respect to personal benefits received by Mr. Hannigan
and Dr. Peter Leininger in fiscal 1995, the personal benefits provided to
each of the named executive officers under various Company programs did not
exceed 10% of the individual's combined salary and bonus for the year.
(2) The "All Other Compensation" column for 1996 includes the Company's
contribution to the Company's Employee Stock Ownership Plan of $242 for Dr.
Peter A. Leininger, Ms. Rhodes and Mr. DiLazzaro, which was credited in
1996, a Company contribution of $500 to the Company's 401(k) plan for Dr.
Peter Leininger and Ms. Rhodes, and a premium for term life insurance in an
amount which ranged from $141 to $4,381 depending on the age of the
executive officer and similar amounts for 1995 and 1994.
(3) The referenced stock options for Mr. Hannigan and Ms. Rhodes include stock
options covering 440,000 and 75,000 shares of Common Stock, respectively,
granted to them by Dr. James R. Leininger.
(4) The stock options granted to Dr. Peter Leininger and Mr. DiLazzaro in fiscal
1994 included stock options covering 4,080 and 47,530 Shares, respectively,
which were granted pursuant to a repricing plan. The table does not reflect
the cancellation of stock options covering 6,200 and 21,270 Shares,
respectively, in connection with the repricing plan.
(5) The stock options granted to Ms. Rhodes and Messrs. DiLazzaro and Fashek in
fiscal 1996 include stock options granted pursuant to the Senior Executive
Stock Option Plan covering 115,000, 70,000 and 115,000 Shares, respectively.
A senior executive stock option plan and grants thereunder were
preliminarily approved by the Board of Directors on October 27, 1995 and the
final form of the Senior Executive Stock Option Plan, and the grants
thereunder, were finally approved on December 5, 1996. The plan was approved
by the Company's shareholders on May 13, 1997.
(6) Ms. Rhodes is no longer employed by the Company.
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EMPLOYMENT ARRANGEMENT
Effective November 14, 1994, Raymond R. Hannigan agreed to serve as
President and Chief Executive Officer of the Company with an annual salary of
$250,000 and the right to participate in the Company's Management Incentive
Bonus Plan with an annual target bonus of $125,000. Upon commencement of his
employment, Mr. Hannigan also received a non-qualified option to purchase
560,000 Shares at an exercise price of $4.50 per share, which was the fair
market value on the date he agreed to serve in such capacities. In addition to
other benefits, the Company and Mr. Hannigan agreed that in the event that Mr.
Hannigan's employment is terminated for any reason other than malfeasance or
acts of moral turpitude, he will receive as severance an amount equal to one
year's salary and auto allowance.
EQUITY BASED PLANS
Prior to the Transactions, the Company maintained an employee stock
ownership plan (the "ESOP") and an employee stock purchase plan (the "ESPP").
The Company made contributions of Shares into participants' accounts under the
ESOP. The ESPP allowed participants to purchase Shares at a discount through
payroll deductions. The Company's Board of Directors has voted to terminate both
the ESOP and the ESPP.
Prior to the consummation of the Tender Offer, the Company maintained the
1997 Stock Incentive Plan (the "1997 Plan"), the 1995 Senior Executive Stock
Option Plan (the "1995 Plan"), the 1988 Directors Stock Option Plan (the
"Directors Plan"), and the 1987 Key Contributor Stock Option Plan (the "1987
Plan" and together with the 1997 Plan, the 1995 Plan and the Directors Plan, the
"Old Plans"). The Old Plans granted participants options to purchase Shares (the
"Old Options") at defined exercise prices. As of December 1, 1996, exercise
prices for the Old Options ranged from $3.00 to $17.00.
In conjunction with the consummation of the Tender Offer, the Old Options
that had not yet vested were accelerated and became fully exercisable. The Old
Options, with the exception of options granted under the 1997 Plan, may, until
the termination of the notice period, be exercised for Shares or exchanged for
cash. Old Options granted under the 1997 Plan may be exercised until the end of
the notice period, or exchanged for cash until the termination of the 90 day
Change of Control Period (as defined in the 1997 Plan). Certain executives will
exchange their Old Options for options ("Exchange Options") granted under the
Company Management Equity Plan (the "MEP"). Old Options that are not exercised
or exchanged will be cancelled at the end of their respective notice periods.
THE MANAGEMENT EQUITY PLAN
In conjunction with the Transactions, the Company adopted the MEP, under
which the Company may grant awards of nonqualified stock options (the "New
Options") to certain employees of the Company and its subsidiaries, subject to
the execution of an award agreement (the "Agreement") by each such employee. The
MEP also provides for the exchange of Old Options for Exchange Options and the
retention of Shares held prior to the effective date of the MEP, with such
Shares becoming subject to the terms of the MEP and considered management Shares
(the "Management Shares"). Management Shares and Options are sometimes referred
to as "Awards".
Administration. The MEP is administered by a Committee of the Board of
Directors (the "Committee"). The Committee has authority to adopt rules to carry
out the purposes of the MEP, and to interpret, administer and apply the terms of
the MEP. The Committee's determinations will be final and binding with respect
to all matters relating to the MEP.
Eligible Persons. The Chief Executive Officer of the Company will
recommend for approval by the Board of Directors the individuals to whom Awards
may be granted (the "Participants") and determine the number and form of Awards
to be granted to each Participant. The Board of Directors will determine Awards
granted to the Chief Executive Officer.
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Agreement. The terms and conditions of each grant or sale of Awards are
combined in an Agreement (the "Agreement") in a form approved by the Committee,
which contains terms and conditions not inconsistent with the MEP and which
incorporate the MEP by reference.
Restrictions on Transfer. The MEP provides that no Management Share,
Option or Share received upon the exercise of an Option (an "Option Share")
whose terms are governed by the MEP may be sold, transferred, assigned, pledged
or otherwise encumbered or disposed of to any third party other than the
Company, except as provided in the MEP or Agreement, or to a Permitted
Transferee (as defined in the MEP). Each Permitted Transferee (other than the
Company) will, as a condition to the transfer, execute an agreement pursuant to
which it will become a party to the Agreement applicable to the transferor.
Number of Shares Issuable. The maximum number of Shares that may be issued
in connection with Awards granted under the MEP (together with any Shares issued
in connection with Management Shares and Options) is 6.5% of the initial Shares
outstanding as of the Effective Time, subject to adjustment. Any Management
Shares forfeited or repurchased by the Company or any Option that expires or is
surrendered without being exercised in full, may again be available for issuance
in connection with future grants or offerings of Awards.
Options. Options entitle the Participants to purchase Shares, upon payment
of the relevant Option Price. Each Agreement relating to an Option will specify
the relevant Option Price. Exchange Options will retain the exercise price of
the relevant Old Option. Each New Option will vest and become exercisable in 20%
installments on each of the first five anniversaries of the consummation of the
Tender Offer and will generally be exercisable for a period of seven years,
unless the Committee determines otherwise and so sets forth in the applicable
Agreement. If a Participant's employment is terminated due to death, disability
or retirement, all Options granted to such Participant will vest on the date of
such termination. If a Sale of Stock or a Sale of Assets (as such terms are
defined in the MEP) is completed within three years of the effective date of the
MEP, all outstanding, unvested Options will vest immediately upon such
completion. If an IPO or a Sale by Fremont/RCBA (as such terms are defined in
the MEP) is completed within three years of the effective date of the MEP, half
of all outstanding, unvested Options will vest immediately upon such completion.
Upon termination of a Participant's employment with the Company, all
unvested Options held by such Participant will terminate and be cancelled and
all vested Options will be exercisable until the earlier of (i) 30 days
following the Participant's termination of employment or status (or 180 days, if
the termination is due to the death, disability or retirement of such
Participant), (ii) the Company's exercise of its call rights under the MEP and
(iii) the exercise of the Participant's put rights under the MEP. Upon the
expiration of such period or exercise of such call right or put right, any such
vested Option not theretofore exercised will be cancelled, and the shares of
Common Stock that had been subject thereto will be available for grants of
further Awards under the MEP.
A Participant will have no rights as a stockholder with respect to any
Shares issuable upon exercise of an Option until a certificate evidencing such
shares has been issued to such Participant.
Management Shares. Management Shares may be granted for no consideration,
offered for sale at a purchase price determined by the Committee in its sole
discretion at the time of offering and set forth in the applicable Agreement, or
received in exchange for Shares held by a Participant prior to the effective
date of the MEP. Any offer to sell Management Shares will expire no later than
60 days following the date of such offer. Participants have all rights of a
stockholder as to the Management Shares, including the right to receive
dividends and the right to vote in accordance with the Company's Articles of
Incorporation, subject to restrictions set forth in the MEP and the applicable
Agreement.
Call Rights. If, prior to the completion of an IPO, a Participant's
employment with the Company is terminated for any reason or an Involuntary
Transfer occurs (as such term is defined in the MEP), the Company has the right
to repurchase all Management Shares, vested Options and Option Shares held by
such Participant or his Permitted Transferee under the MEP during the 60-day
period following such termination. The Company's call right will become null and
void subsequent to the completion of an IPO.
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The purchase price to be paid with respect to any call right will be
determined as of the first Valuation Date (as such term is defined in the MEP)
coincident with or following the date of termination or Involuntary Transfer.
The consideration to be paid in respect to Management Shares, vested Options and
Option Shares surrendered for cancellation will be the aggregate Applicable
Management Share Value, Applicable Option Value or Applicable Option Share Value
(as such terms are defined in the MEP), determined as of the first Valuation
Date coincident with or following the date of termination or Involuntary
Transfer, of the Shares issuable upon exercise of such vested Options over the
aggregate Option price of such Option.
The Applicable Management Share Value is defined, as of a date of
determination, as the Public Value of the Shares if the Company is a Public
Company and the Fair Market Value of the Shares if the Company is not a Public
Company (as such terms are defined in the MEP), provided, however, that if the
Company is not a Public Company and the date of determination falls prior to the
fifth anniversary of the effective date of the MEP, the Applicable Management
Share Value will not exceed the lesser of the Fair Market Value of such
Management Share or $19.25 plus 7% compounded annually on each anniversary of
the last day of the Tender Offer (the "Tender Date"). The Applicable Option
Share Value is defined, as of a date of determination, as the Public Value of
the Shares if the Company is a Public Company and the Fair Market Value of the
Shares if the Company is not a Public Company, provided, however, that if the
Company is not a Public Company, and such date falls prior to the fifth
anniversary of the Effective Time and the Option Share was obtained through the
exercise of an Exchange Option, the Applicable Option Share Value will not
exceed the lesser of (A) the Fair Market Value or (B) the sum of (1) $19.25 less
the exercise price of such underlying Exchange Option (the "Spread") plus 7% of
the Spread compounded annually on each anniversary of the Tender Date and (2)
the exercise price of such Option plus 7% of the exercise price compounded
annually on each anniversary of the date of exercise. The Applicable Option
Value is defined, as of a date of determination, as the Public Value of the
Shares if the Company is a Public Company and the Fair Market Value of the
Shares if the Company is not a Public Company, provided, however, that if the
Company is not a Public Company, such date of determination falls prior to the
fifth anniversary of the effective date and the Option to be valued is an
Exchange Option, the Applicable Option Value will not exceed the lesser of (A)
the Fair Market Value of the Shares underlying such Exchange Option less the
exercise price of such Exchange Option or (B) the Spread plus 7% of the Spread
compounded annually on each anniversary of the Tender Date. The Company will
give notice of the purchase price to be paid within a reasonable time from the
date of determination of such price. The Company's call right will become null
and void subsequent to the completion of an IPO.
Put Rights. If, prior to the completion of an IPO, a Participant's
employment with the Company is terminated for any reason, the Participant has
the right to have the Company repurchase any Management Shares, vested Options
and Option Shares beneficially owned by such Participant or his Permitted
Transferees during the 60-day period immediately following the termination. The
purchase price to be paid with respect to any put right will be determined as of
the first Valuation Date coincident with or following the date of termination.
The consideration to be paid in respect to Management Shares, vested Options and
Option Shares surrendered for cancellation will be the aggregate Applicable
Management Share Value, Applicable Option Value or Applicable Option Share
Value, determined as of the first Valuation Date coincident with or following
the date of termination or Involuntary Transfer, of the Shares issuable upon
exercise of such vested Options over the aggregate Option price of such Option.
The Participant's put rights will become null and void subsequent to the
completion of an IPO. The Company retains the right to delay the Participant's
exercise of his put rights in case of limited financial capability of the
Company.
Certain Corporate Changes. In the event of a stock dividend or split, the
Committee may either adjust the number of Options granted pursuant to the MEP
and to each Participant or adjust the exercise price of any Options so as to
provide each Participant with a benefit equivalent to that such Participant
would have been entitled to had the dividend or split not occurred. Upon the
occurrence of certain Reorganization Events (as defined in the MEP) including
the merger of the Company with another entity, the sale of substantially all the
assets of the Company or any other change of control of the Company, the
Committee is authorized to make any adjustments it deems necessary in connection
with the Reorganization Event.
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<PAGE> 81
Amendment of the Plan. The Board of Directors of the Company may, at any
time, alter, amend, suspend or terminate the MEP. No termination or amendment
may adversely affect a Participant's rights under the MEP without such
Participant's consent.
Termination of the Plan. The MEP will continue until terminated by the
Board of Directors, and no further Awards will be made thereunder after the date
of such termination.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during fiscal 1996 to the named executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED(1) YEAR ($/SH)(2) DATE 5%(4) 10%(4)
---- ----------- ---------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond R. Hannigan......... 12,000 .93% $ 16.50 05/15/06 $124,520 $ 315,560
Peter A. Leininger.......... 8,000 .62% $ 16.50 05/15/06 $ 83,013 $ 210,373
Bianca A. Rhodes............ 8,000 9.56% $ 16.50 05/15/06 $ 83,013 $ 210,373
115,000(3) $11.125 10/27/05 $808,377 $2,299,990
Frank DiLazzaro............. 8,000 6.07% $ 16.50 05/15/96 $ 83,013 $ 210,373
70,000(3) $11.125 10/27/05 $492,056 $1,391,244
Christopher M. Fashek....... 8,000 9.56% $ 16.50 05/15/06 $ 83,013 $ 210,373
115,000(3) $11.125 10/27/05 $808,377 $2,299,990
</TABLE>
- ---------------
(1) Except as otherwise noted, the options vest and become exercisable in twenty
percent (20%) increments on May 15 of each year after the date of grant. The
options are not transferable other than by will or laws of descent and
distribution or pursuant to a qualified domestic relations order.
(2) Except with respect to the options discussed in footnote (3) below, the
exercise price of all options granted by the Company in 1996 was equal to
the fair market value of Shares at the close of business on the date of the
grant.
(3) The stock options granted to Ms. Rhodes and Messrs. DiLazzaro and Fashek in
fiscal 1996 include stock options granted under the Senior Executive Stock
Option Plan covering 115,000, 70,000 and 115,000 shares of Shares,
respectively. A senior executive stock option plan and grants thereunder
were preliminarily approved by the Board of Directors on October 27, 1995
and the final form of the Senior Executive Stock Option Plan, and the grants
thereunder, were finally approved on December 5, 1996. The grants under this
plan were subject to shareholder approval of the Senior Executive Stock
Option Plan which approval was received on May 13, 1997. The exercise price
of the options granted by the Company under this plan is $11.25 per share.
The options vest in 25% increments on December 31 of each of the first four
full calendar years (each such year being a "Vesting Year") following the
date of the option; provided, however, such portion of the option scheduled
to vest in such Vesting Year will not vest if (i) the Company has failed to
achieve 100% of the Company's annual plan approved by the Board for such
calendar year or (ii) the average closing price of the Shares during
December of such Vesting Year does not represent a twenty percent (20%)
increase over the average price of the Shares during December of the
preceding calendar year and such event has occurred in two consecutive
years; provided, however, if such option holder is employed by the Company
and the option is not fully vested on the date six months prior to the
expiration date of such option, the option will then become fully vested.
Notwithstanding the foregoing, the option may not be exercised prior to the
third anniversary of the date of grant except in the event of a change in
control or termination of the senior executive's employment without good
cause. The options are not transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations
order.
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<PAGE> 82
(4) The information in these columns illustrates the value that might be
realized upon the exercise of the options granted during fiscal 1996
assuming the specified compound rates of appreciation of Shares over the
term of the options. The potential realizable value set forth in the columns
of the foregoing table do not take into account certain provisions of the
options providing for termination of an option following termination of
employment, nontransferability or vesting requirements. With respect to the
options described in footnote (3) above, the options were treated as granted
on December 5, 1996 for purposes of this calculation, the date on which the
Board of Directors adopted and approved the final form of the Senior
Executive Stock Option Plan. The fair market value of Shares at the close of
business on December 5, 1996 was $12.00 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information concerning the options
exercised by each named executive officer during fiscal 1996 and the number and
value of the options held by the named executive officers at the end of the
fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FY-END AT FY-END
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Raymond R. Hannigan(2)................... 56,500 $ 530,252 627,200 $4,409,800
296,800 2,209,600
Peter A. Leininger, M.D.(3).............. 1,200,000 $15,150,000 34,228 $ 238,648
15,992 64,892
Bianca A. Rhodes(4)(5)................... 25,000 $ 218,750 118,014 $ 609,571
170,426 466,099
Frank DiLazzaro(4)....................... 81,300 $ 915,166 20,284 $ 29,004
80,246 218,154
Christopher M. Fashek(4)................. 16,600 $ 163,250 30,350 $ 32,344
142,450 427,181
</TABLE>
- ---------------
(1) The values are calculated by subtracting the exercise price from the fair
market value of the underlying Common Stock as of December 31, 1996 (based
on a closing price of $12.25 per share on December 31, 1996).
(2) Dr. James R. Leininger granted Mr. Hannigan an option in fiscal 1994 to
purchase 440,000 shares of Common Stock at a purchase price of $5.74 per
share. Mr. Hannigan purchased 56,500 of the shares of Common Stock subject
to such option during fiscal 1996. The remaining portion of the option to
purchase 340,000 shares of Common Stock is currently exercisable and
included herein.
(3) Dr. James R. Leininger granted Dr. Peter A. Leininger an option in 1992 to
purchase 1,200,000 shares of Common Stock at a price of $3.50 per share. Dr.
Peter A. Leininger exercised this option in fiscal 1996.
(4) The options shown for Ms. Rhodes and Messr. DiLazzaro and Fashek include
stock options granted under the Senior Executive Stock Option Plan covering
115,000, 70,000 and 115,000 shares of Common Stock, respectively, of which
28,750, 17,500 and 28,750, respectively, were exercisable as of December 31,
1996. The Senior Executive Stock Option Plan and grants thereunder were
preliminarily approved by the Board of Directors on October 27, 1995 and the
final form of the Senior Executive Stock Option Plan, and the grants
thereunder, were finally approved on December 5, 1996. The grants under this
plan were subject to shareholder approval of the Senior Executive Stock
Option Plan which approval was received on May 13, 1997. The purchase price
of the options is $11.125 per share.
(5) The options shown for Ms. Rhodes include an option to acquire 75,000 shares
of Common Stock at a purchase price of $9.125 per share granted to Ms.
Rhodes by Dr. James R. Leininger, 25,000 of which were exercisable as of
December 31, 1996.
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<PAGE> 83
PRINCIPAL SHAREHOLDERS
Based on information received upon request from the persons concerned, each
person known to be the beneficial owner (as defined in Rule 13d-3 promulgated
under the Exchange Act) of more than five percent of the outstanding Shares,
each director, named executive officer and all directors and executive officers
of the Company as a group, owned beneficially as of January 6, 1998 the number
and percentage of outstanding Shares indicated in the following table:
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
-----------------------------
NUMBER OF PERCENT OF
NAMES OF INDIVIDUALS SHARES CLASS
-------------------- --------- ----------
<S> <C> <C>
James R. Leininger, M.D..................................... 5,939,220 33.5%
8023 Vantage Drive
San Antonio, TX 78230
Fremont Partners L.P........................................ 7,029,922 39.7%
and certain related parties
50 Fremont Street, Suite 3700,
San Francisco, CA 94105
Richard C. Blum & Associates, L.P........................... 4,644,010 26.2%
and certain related parties
909 Montgomery St., Suite 400
San Francisco, CA 94133
Peter A. Leininger, M.D..................................... 158,220(1) 1.0%
Raymond R. Hannigan......................................... 392,000(2) 1.1%
James T. Farrell(3)......................................... --
Robert Jaunich II(3)........................................ --
N. Colin Lind(4)............................................ --
Jeffrey W. Ubben(4)......................................... --
Christopher M. Fashek....................................... 250,200(5) *
Frank DiLazzaro............................................. 178,530(6) *
All directors and executive officers as a group(17
persons).................................................. 7,147,150(3)(4)(7) 45.1%
</TABLE>
- ---------------
* Less than one (1%) percent
(1) Includes options to purchase 58,220 Shares.
(2) Includes options to purchase 392,000 Shares.
(3) Messrs. Farrell and Jaunich are managing directors of Fremont Partners, L.P.
and certain of its related parties ("Fremont"). The Shares shown do not
include the Shares beneficially owned by Fremont. See "Summary -- Summary of
the Transactions."
(4) Messrs. Lind and Ubben are managing directors of Richard C. Blum &
Associates, L.P. and certain of its related parties ("RCBA"). The Shares
shown do not include the Shares beneficially owned by RCBA. See
"Summary -- Summary of the Transactions."
(5) Includes options to purchase 250,200 Shares.
(6) Includes options to purchase 178,530 Shares.
(7) Includes options to purchase 820,030 Shares.
83
<PAGE> 84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION
Dr. James Leininger and certain other parties received approximately
$265,500,000 for the sale of the 13,792,211 Shares that he tendered in the
Tender Offer. Additionally, Dr. James Leininger retained a 33.5% interest in the
Company following the Transactions. The directors and executive officers of the
Company (other than Dr. James Leininger) received an aggregate of approximately
$37,650,000 for their Shares and Employee Options in the Transactions.
INDEMNIFICATION AND INSURANCE
The Transaction Agreement requires the Company to provide indemnification
to each present and former officer, director, employee or agent of the Company,
including, without limitation, each Person controlling any of the foregoing
Persons (the "Indemnified Parties"), against all claims, losses, liabilities,
damages, judgments, fines, fees, cost or expenses, including, without
limitation, attorneys' fees and disbursements (collectively, "Costs"), incurred
in connection with any claim, action, suit proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time of the Merger
(including, without limitation, the Transaction Agreement and the transactions
and actions contemplated thereby and giving effect to the consummation of such
transactions and actions), whether asserted or claimed prior to, at or after the
Effective Time. After the Transactions, the Company is required to maintain, at
no expense to the beneficiaries, directors' and officers' liability insurance
("D&O Insurance") for the Indemnified Parties with respect to matters occurring
at or prior to the Effective Time, issued by a carrier or carriers assigned a
claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher,
providing at least the same coverage as the D&O Insurance currently maintained
by the Company and containing terms and conditions which are not materially less
favorable to the beneficiaries, for a period of at least six years from the
Effective Time; provided, however, that in no event shall the Company be
requested to expend pursuant to the Transaction Agreement more than an amount
per year equal to 200% of current annual premiums paid by the Company for such
insurance.
AGREEMENT AMONG SHAREHOLDERS
The Company, Fremont, RCBA and Dr. James Leininger entered into an
agreement upon the consummation of the Tender Offer (the "Agreement Among
Shareholders") governing the respective obligations and relationship of each
party as shareholders of the Company. The Agreement Among Shareholders provides
that until six months after a public offering of Shares, Fremont, RCBA and Dr.
James Leininger will not sell, transfer, pledge or hypothecate any shares of the
Company then held by them, subject to certain exceptions provided, however, Dr.
James Leininger is permitted to make any transfers of up to 10.5% of the
Company's then outstanding Shares.
The Agreement Among Shareholders provides that (i) if any of Fremont, RCBA
or Dr. James Leininger wishes to sell shares, then such party shall offer to
include in the proposed sale certain Shares designated by any of the other
parties and (ii) if Fremont and RCBA propose to sell all (but not less than all)
of the Shares they own, then Fremont and RCBA may require Dr. James Leininger to
include in such sale all of the Shares held by him, unless he holds less than
10% of the then outstanding shares. Pursuant to the Agreement Among Shareholders
the Company grants to each of Fremont, RCBA and Dr. James Leininger the
preemptive right to purchase shares of the Company in an amount up to the
percentage of all outstanding fully diluted stock of the Company owned by such
party, subject to certain exceptions.
At any time after the fifth anniversary of the Agreement Among
Shareholders, if there has not been a public offering of the Company's Shares,
Fremont, RCBA or Dr. Leininger may request that the Company register at least
33% of the Shares held by such party. In addition, each party will have the
right to request additional registration of at least 33% of the Shares then held
by such party at any time after one year, but before three years, following the
completion of a public offering of the Shares. If the Company shall proceed with
a filing of a registration statement in connection with a proposed offer and
sale of Shares by the Company, the Company will notify Fremont, RCBA and Dr.
James Leininger and shall include in such registration the number of Shares
requested by such parties.
84
<PAGE> 85
The Agreement Among Shareholders further provides that until there is a
public offering of Shares, Fremont, RCBA and Dr. James Leininger will take all
steps to insure that the Board of Directors of the Company shall have eight
members and that the Nominating Committee (as defined therein) of the Board of
Directors will consist of Dr. James Leininger, one director designated by
Fremont and one director designated by RCBA. The eight-member board will consist
of Dr. James Leininger, the Company's then Chief Executive Officer, two persons
designated by Fremont, two persons designated by RCBA and two or more
independent directors designated by the Nominating Committee.
THE SHAREHOLDER SUPPORT AGREEMENT
The Investors entered into a shareholder support agreement (the
"Shareholder Support Agreement") with Dr. James Leininger. Pursuant to the
Shareholder Support Agreement, Dr. James Leininger agreed, subject to the terms
and conditions thereof, (i) to grant to the Investors an option to purchase from
him at the Per Share Amount, 4,200,000 Shares owned or controlled by him, which
option expired upon consummation of the Tender Offer, (ii) to tender 13,792,211
Shares owned (either beneficially or of record) by Dr. James Leininger pursuant
to the Offer and (iii) to vote all Shares owned (either beneficially or of
record) at the time of the shareholder's meeting to approve the Merger.
TRANSACTION FEES
Pursuant to the terms of the Transaction Agreement, upon consummation of
the Merger the Company became obligated to pay transaction fees of $5,119,000 to
Fremont Investor and $3,381,000 to RCBA Investor.
OTHER TRANSACTIONS
In August 1995, the Company loaned $10 million to Dr. James Leininger. This
loan was secured by a stock pledge agreement covering 1,000,000 Shares owned by
Dr. James Leininger. The interest on the loan accrued at 7.94% per annum. In
January 1996, the loan was repaid in full.
On December 18, 1996, a company controlled by Dr. James Leininger acquired
a tract of land (the "Property") from the Company for $395,000. The Property is
comprised of approximately 2.2 acres and is adjacent to the Company's corporate
headquarters. The purchase price was based on the aggregate cost of the Property
to the Company (including acquisition expenses). The Company believes that the
acreage was transferred to Dr. James Leininger at a price equal to its fair
market value. In connection with the purchase of the Property, the Company
loaned Dr. James Leininger $3,000,000 in February 1997 to develop the Property.
The loan bears interest at a rate equal to the prime rate of Texas Commerce Bank
(but such rate shall not be less than 6.15% or greater than 10.25%) and matures
on the fifth anniversary of the loan. The loan is non-recourse to Dr. James
Leininger but is secured by the Property, the improvements on the Property and
300,000 Shares owned by Dr. James Leininger.
Pursuant to the provisions of the Executive Committee Stock Ownership
Policy, the Company loaned funds to Christopher M. Fashek, the President of KCI
Therapeutic Services, Inc. (a wholly-owned subsidiary of the Company), Bianca A.
Rhodes, the Company's Chief Financial Offer at the time and Dennis E. Noll, the
Company's Senior Vice President and General Counsel. These loans were utilized
by such executive officers to acquire Shares in order to meet the standards set
forth in the Company's Executive Committee Stock Ownership Policy. The loans
bear interest at the applicable federal rate established by the Internal Revenue
Service and have a term of five years. At the option of each such executive
officer, the loans are repayable on a biweekly basis through payroll deduction
or in equal installments of principal and interest on an annual basis. The
initial loans made to Mr. Fashek, Ms. Rhodes and Mr. Noll were $109,821,
$170,672 and $86,310, respectively, and the outstanding balance of principal and
accrued interest on such loans as of December 31, 1996 were $87,076, $166,003
and $81,888, respectively. Mr. Noll repaid his loan in February 1997 and Ms.
Rhodes repaid the principal of her loan in July 1997. The Board has amended the
Executive Committee Stock Ownership Policy to make the ownership thresholds in
the policy voluntary and, as a result, the Company will not be making loans to
executive officers under the policy in the future.
85
<PAGE> 86
DESCRIPTION OF NEW CREDIT FACILITIES
The Company has entered into New Credit Facilities pursuant to a bank
credit agreement (the "Bank Credit Agreement") with Bank of America National
Trust and Savings Association ("Bank of America"), as Administrative Agent, and
Bankers Trust Company ("Bankers Trust"), as Syndication Agent, and other
institutions party thereto (the "Banks"), which provides loans of up to $400.0
million. Loans under the Bank Credit Agreement consist of (i) $120.0 million in
aggregate principal amount of six-year Tranche A Term Loans, $90.0 million in
aggregate principal amount of seven-year Tranche B Term Loans and $90.0 million
in aggregate principal amount of eight-year Tranche C Term Loans (the "Tranche A
Term Loans," the "Tranche B Term Loans," and the "Tranche C Term Loans" are
referred to collectively as the "Term Loans"), to be used to finance a portion
of the Recapitalization and to pay related fees and expenses, (ii) a $50.0
million six-year revolving credit facility (the "Revolving Credit Facility"), of
which $33.0 million was drawn down in connection with the consummation of the
Tender Offer, and which permits the Company to borrow up to $50.0 million to
finance a portion of the Recapitalization and related fees and expenses as well
as the working capital, letters of credit and other general corporate needs and
(iii) a $50.0 million six-year acquisition facility to finance permitted
acquisitions and related fees and expenses (the "Acquisition Facility"), of
which $10.0 was drawn down in connection with the consummation of the Tender
Offer. This information relating to the Bank Credit Agreement is qualified in
its entirety by reference to the complete text of the documents to be entered
into in connection therewith. The following is a description of the general
terms of the Bank Credit Agreement.
Indebtedness of the Company under the Bank Credit Agreement is guaranteed
by certain of the domestic subsidiaries of the Company and is secured by (i) a
first priority security interest in all, subject to certain customary
exceptions, of the tangible and intangible assets of the Company and its
domestic subsidiaries, including, without limitation, intellectual property and
real estate owned by the Company and its domestic subsidiaries, (ii) a first
priority perfected pledge of all capital stock of the Company's domestic
subsidiaries and (iii) a first priority perfected pledge of up to 65% of the
capital stock of foreign subsidiaries owned directly by the Company or its
domestic subsidiaries.
Indebtedness under the Revolving Credit Facility (other than certain loans
under the Revolving Credit Facility designated in foreign currency), the Term
Loans and the Acquisition Facility initially bears interest at a rate based
upon, at the Company's option, either (i) the Base Rate (defined as the higher
of (x) the rate of interest publicly announced by Bank of America as its
"reference rate" and (y) the federal funds effective rate from time to time plus
0.50%), plus 1.25% in respect of the Tranche A Term Loans, the loans under the
Revolving Credit Facility (the "Revolving Loans") and the loans under the
Acquisition Facility (the "Acquisition Loans"), 1.50% in respect of the Tranche
B Term Loans and 1.75% in respect of the Tranche C Term Loans, or (ii) the
Eurodollar Rate (as defined in the Bank Credit Agreement) for one, two, three or
six months, in each case plus 2.25% in respect of Tranche A Term Loans,
Revolving Loans and Acquisition Loans, 2.50% in respect of Tranche B Term Loans
and 2.75% in respect of the Tranche C Term Loans. Certain Revolving Loans
designated in foreign currency will initially bear interest at a rate based upon
the cost of funds for such loans, plus 2.25% or 2.50%, depending on the type of
foreign currency. Performance-based reductions of the interest rates under the
Term Loans, the Revolving Loans and the Acquisition Loans are available. The
Company is expected to obtain interest rate protection for not less than 50% of
the amount of the Term Loans no later than 90 days after the closing of the Bank
Credit Agreement.
The Term Loans are subject to quarterly amortization payments commencing on
March 31, 1998. Commitments under the Acquisition Facility will expire December
31, 2000 and the Acquisition Facility loans outstanding shall be repayable in
equal quarterly amortization payments commencing March 31, 2001. In addition,
the Bank Credit Agreement provides for mandatory repayments, subject to certain
exceptions, of the Term Loans, the Acquisition Facility and/or the Revolving
Credit Facility based on certain net asset sales outside the ordinary course of
business of the Company and its subsidiaries, the net proceeds of certain debt
and equity issuances and excess cash flows (as defined in the Bank Credit
Agreement).
The Revolving Loans may be repaid and reborrowed. The Company is required
to pay to the Banks under the Bank Credit Agreement a commitment fee initially
equal to 0.50% per annum, payable in arrears on a
86
<PAGE> 87
quarterly basis, on the average daily unused portion of the Revolving Credit
Facility and Acquisition Facility during such quarter. The Company also is
required to pay to the Banks participating in the Revolving Credit Facility
letter of credit fees equal to the applicable margin then in effect with respect
to Eurodollar loans under the Revolving Credit Facility on the face amount of
each letter of credit outstanding and to the Bank issuing a letter of credit a
fronting fee of 0.25% on the average daily stated amount of each outstanding
letter of credit issued by such Bank, in each case payable in arrears on a
quarterly basis. Bank of America and Bankers Trust will receive and continue to
receive such other fees as have been separately agreed upon.
The Bank Credit Agreement requires the Company to meet certain financial
tests, including minimum levels of EBITDA (as defined therein), minimum interest
coverage and maximum leverage ratio. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of additional
indebtedness, investments, dividends, loans and advances, capital expenditures,
transactions with affiliates, asset sales, acquisitions, mergers and
consolidations, prepayments of other indebtedness (including the Notes), liens
and encumbrances and other matters customarily restricted in such agreements.
The Bank Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, failures under ERISA plans, judgment defaults, failure of any
guaranty, security document security interest or subordination provision
supporting the Bank Credit Agreement to be in full force and effect and change
of control of the Company.
87
<PAGE> 88
DESCRIPTION OF NOTES
The Series A Notes were and the Exchange Notes will be issued under an
indenture (the "Indenture"), dated as of November 5, 1997 by and among the
Company, the Guarantors and Marine Midland Bank, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the TIA as in
effect on the date of the Indenture. A copy of the Indenture may be obtained
from the Company or the Initial Purchasers. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions." For purposes of this section, references to the
"Company" include only the Company and not its Subsidiaries.
The Notes are unsecured obligations of the Company, ranking subordinate in
right of payment to all Senior Debt of the Company.
The Notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially is the Trustee's corporate trust office. The Company may change any
Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Series A Notes that remain outstanding
after the completion of the Exchange Offer, together with the Exchange Notes
issued in connection with the Exchange Offer, will be treated as a single class
of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $300.0 million, of
which $200.0 million were issued in the Offering, and will mature on November 1,
2007. Additional amounts may be issued in one or more series from time to time
subject to the limitations set forth under "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness" and the restrictions contained in the
Credit Agreement. Interest on the Notes accrues at the rate of 9 5/8% per annum
and will be payable semiannually in cash on each May 1 and November 1,
commencing on May 1, 1998, to the persons who are registered Holders at the
close of business on April 15 and October 15, respectively, immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including the date of issuance.
The Notes are not entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after November
1, 2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on November 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.813%
2003........................................................ 103.208%
2004........................................................ 101.604%
2005 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to November 1, 2000, the Company may, at its option, on one or
more occasions use all or a portion of the net
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cash proceeds of one or more Equity Offerings (as defined below) to redeem the
Notes issued under the Indenture at a redemption price equal to 109.625% of the
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the date of redemption; provided that at least 65% of the principal amount of
Notes originally issued remains outstanding immediately after any such
redemption. In order to effect the foregoing redemption with the proceeds of any
Equity Offering, the Company shall make such redemption not more than 120 days
after the consummation of any such Equity Offering.
As used in the preceding paragraph, "Equity Offering" means any offering of
Qualified Capital Stock of the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which such Notes are listed or, if such Notes
are not then listed on a national securities exchange, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be redeemed
in part; provided, further, that if a partial redemption is made with the
proceeds of an Equity Offering, selection of the Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis or on as nearly
a pro rata basis as is practicable (subject to DTC procedures), unless such
method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the paying agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or
distribution of any kind or character is made on account of any Obligations on
the Notes, or for the acquisition of any of the Notes for cash or property or
otherwise. If any default occurs and is continuing in the payment when due,
whether at maturity, upon any redemption, by declaration or otherwise, of any
principal of, interest on, unpaid drawings for letters of credit issued in
respect of, or regularly accruing fees or commissions with respect to, any
Senior Debt, no payment or distribution of any kind or character shall be made
by or on behalf of the Company or any other Person on its or their behalf with
respect to any Obligations on the Notes or to acquire any of the Notes for cash
or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any
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other Person on its behalf shall (x) make any payment or distribution of any
kind or character with respect to any Obligations on the Notes or (y) acquire
any of the Notes for cash or property or otherwise. Notwithstanding anything
herein to the contrary, in no event will a Blockage Period extend beyond 180
days from the date the payment on the Notes was due and only one such Blockage
Period may be commenced within any 360 consecutive days. No event of default
which existed or was continuing on the date of the commencement of any Blockage
Period with respect to the Designated Senior Debt shall be, or be made, the
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
As of September 30, 1997, on a pro forma basis after giving effect to the
Transactions and the Acquisitions, the Company and the Guarantors would have had
approximately $342.7 million of Senior Debt outstanding and approximately $57.3
million of availability under the Credit Agreement.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally, to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal of and interest on the Notes. The Guarantees
are subordinated to Guarantor Senior Debt on the same basis as the Notes are
subordinated to Senior Debt. The obligations of each Guarantor are limited to
the maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under the Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in an amount pro rata, based on the net assets of each
Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with or into or to other Persons upon the terms
and conditions set forth in the Indenture. See "Certain Covenants -- Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Guarantor is sold by the Company and/or by one or more of the Company's
Restricted Subsidiaries or in the event all or substantially all assets of a
Guarantor are sold by the Company and/or by one of the Company's Restricted
Subsidiaries and (i) such sale complies with the provisions set forth in
"Certain Covenants -- Limitation on Asset Sales" and (ii) such Guarantor is
released from all of its obligations under the Credit Agreement, the Guarantor's
Guarantee will be automatically and unconditionally released. In addition, any
Guarantor that is designated as an Unrestricted Subsidiary in accordance with
the terms of the Indenture will be relieved of its obligations under its
Guarantee.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
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<PAGE> 91
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) obtain the requisite consents under the Credit
Agreement (so long as the terms of which provide that a Change of Control would
result in a default or event of default or would otherwise require repayment)
and all other Senior Debt (the terms of which provide that a Change of Control
would result in a default or event of default or would otherwise require
repayment) to permit the repurchase of the Notes as provided below or (ii) in
the event a consent is not obtained with respect to such Credit Agreement or any
such other Senior Debt, repay in full and terminate all commitments under
Indebtedness under such Credit Agreement or such other Senior Debt, as the case
may be, or offer to repay in full and terminate all commitments under all
Indebtedness under such Credit Agreement or such other Senior Debt, as the case
may be, and to repay the Indebtedness owed to each lender which has accepted
such offer. The Company shall first comply with the covenant in the immediately
preceding sentence before it shall be required to repurchase Notes pursuant to
the provisions described below. The Company's failure to comply with the
covenant described in the first sentence of this paragraph shall be governed by
clause (iii) and not clause (ii) under "Events of Default" below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
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CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries may incur Indebtedness (including, without limitation, Acquired
Indebtedness) if on the date of the incurrence of such Indebtedness, after
giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company or warrants,
options or other rights to acquire Qualified Capital Stock (but excluding any
debt security or Disqualified Capital Stock convertible into, or exchangeable
for, Qualified Capital Stock)) on or in respect of shares of the Company's
Capital Stock to holders of such Capital Stock, (b) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company or any
warrants, rights or options to purchase or acquire shares of any class of such
Capital Stock, (c) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company that is subordinate or junior in right of
payment to the Notes, or (d) make any Investment (other than Permitted
Investments) (each of the foregoing actions set forth in clauses (a), (b), (c)
and (d) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Default or
an Event of Default shall have occurred and be continuing or (ii) the Company is
not able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted
Payments (including such proposed Restricted Payment) made subsequent to the
Issue Date (the amount expended for such purposes, if other than in cash, being
the fair market value of such property as determined reasonably and in good
faith by the Board of Directors of the Company, whose determination shall be
conclusive) shall exceed the sum, without duplication, of: (u) 50% of the
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned subsequent to
the Issue Date and on or prior to the date the Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting period); plus (v)
100% of the aggregate net cash proceeds received by the Company from any Person
(other than a Subsidiary of the Company) from the issuance and sale subsequent
to the Issue Date and on or prior to the Reference Date of Qualified Capital
Stock of the Company; plus (w) 100% of the aggregate net cash proceeds received
after the Issue Date by the Company from the issuance or sale (other than to a
Subsidiary of the Company) of debt securities or Disqualified Capital Stock that
have been converted into or exchanged for Qualified Capital Stock of the
Company, together with (without duplication) any net cash proceeds received by
the Company at the time of such conversion or exchange; plus (x) to the extent
not otherwise included in the Consolidated Net Income of the Company, an amount
equal to the net reduction in Investments (other than reductions in Permitted
Investments) in Unrestricted Subsidiaries resulting from the payments in cash of
interest on Indebtedness, dividends, repayments of loans or advances or other
transfers of assets, in each case to the Company or a Restricted Subsidiary or
from the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary;
plus (y) to the extent not otherwise included in Consolidated Net Income, net
cash proceeds from sale of Investments which were treated as Restricted
Payments, but not to exceed the amounts so treated; plus (z) without duplication
of any amounts included in clause (iii)(v) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(v) and (z), any
net cash proceeds from an Equity Offering to the extent used to redeem the
Notes); plus (aa) $15.0 million.
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<PAGE> 93
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
or redemption payment if the dividend or redemption payment would have been
permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company (or warrants, options or other rights to acquire
Qualified Capital Stock of the Company (but excluding any debt security or
Disqualified Capital Stock convertible into, or exchangeable for, Qualified
Capital Stock)) or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company (or warrants,
options or other rights to acquire Qualified Capital Stock of the Company (but
excluding any debt security or Disqualified Capital Stock convertible into, or
exchangeable for, Qualified Capital Stock)); (3) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of any
Indebtedness of the Company or of any Guarantor that is subordinate or junior in
right of payment to the Notes or such Guarantor's Guarantee, as the case may be,
either (i) solely in exchange for shares of Qualified Capital Stock of the
Company (or warrants, options or other rights to acquire Qualified Capital Stock
of the Company (but excluding any debt security or Disqualified Capital Stock
convertible into, or exchangeable for, Qualified Capital Stock)); or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Subsidiary of the Company) of (A) shares of Qualified
Capital Stock of the Company (or warrants, options or other rights to acquire
Qualified Capital Stock of the Company (but excluding any debt security or
Disqualified Capital Stock convertible into, or exchangeable for, Qualified
Capital Stock)); or (B) Refinancing Indebtedness; (4) the purchase of any
Subordinated Indebtedness at a purchase price not greater than 101% of the
principal amount thereof in the event of a Change of Control in accordance with
provisions similar to the "-- Change of Control" covenant; provided that prior
to such purchase the Company has made the Change of Control Offer as provided in
such covenant with respect to the Notes and has purchased all Notes validly
tendered for payment in connection with such Change of Control Offer and that no
Default or Event of Default is in existence prior to or as a result of such
purchase; (5) so long as no Default or Event of Default shall have occurred and
be continuing, repurchases by the Company of Common Stock of the Company from
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an amount not to exceed $10.0 million in the aggregate; and (6)
the acquisition of shares of Capital Stock (or warrants, rights or options to
acquire Capital Stock of the Company) of the Company in connection with the
consummation of the Merger. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses
(2)(ii) and (5) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition (provided that for purposes of this provision,
the amount of (x) any liabilities (as shown on the most recent balance sheet of
the Company or such Restricted Subsidiary or in the notes thereto) of the
Company or such Restricted Subsidiary that are assumed by the transferee of any
such assets (other than liabilities that are by their terms pari passu with or
subordinated to the Notes or the guarantee of the Guarantors, as applicable) and
(y) any securities or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are immediately converted by the
Company or such Restricted Subsidiary into cash or Cash Equivalents (or as to
which the Company or such Restricted Subsidiary has received at or prior to the
consummation of the Asset Sale a commitment (which may be
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<PAGE> 94
subject to customary conditions) from a nationally recognized investment,
merchant or commercial bank to convert into cash or Cash Equivalents within 180
days of the consummation of such Asset Sale and which are thereafter actually
converted into cash or Cash Equivalents within such 180-day period) will be
deemed to be cash or Cash Equivalents (and shall be deemed to be Net Cash
Proceeds for purposes of the following provisions as and when reduced to cash or
Cash Equivalents) to the extent of the net cash or Cash Equivalents realized
thereon), and (iii) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 365 days of receipt thereof either (A) to
repay or prepay any Senior Debt and, in the case of any Senior Debt under any
revolving credit facility, effect a permanent reduction in the availability
under such revolving credit facility, (B) to make an investment in properties
and assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of the
Company and its Subsidiaries as existing on the Issue Date or in businesses
which are the same, similar or reasonably related or complementary to the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the Issue Date ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
366th day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary of the Company, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $10.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $10.0 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and (b) such Asset Sale is for
fair market value.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
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If a Net Proceeds Offer is made, there can be no assurance that the Company
will have available funds sufficient to pay the Net Proceeds Offer Amount for
all the Notes that might be delivered by Holders seeking to accept the Net
Proceeds Offer. In the event the Company is required to purchase outstanding
Notes pursuant to a Net Proceeds Offer, the Company expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing. In addition, the terms of the instruments
relating to Senior Debt of the Company or a Restricted Subsidiary of the Company
may require the Net Proceeds be used to repay or prepay Senior Debt.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any
Restricted Subsidiaries, or the properties or assets of any Restricted
Subsidiaries, other than the Person or such Person's Subsidiaries or the
properties or assets of the Person so acquired or such Person's Subsidiaries;
(5) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (6) any agreement to sell assets or
Capital Stock permitted under the Indenture to any Person pending the closing of
such sale; (7) any instrument governing a Permitted Lien, to the extent and only
to the extent such instrument restricts the transfer or other disposition of
assets subject to such Permitted Lien; (8) restrictions on cash or other
deposits imposed by customers under contracts entered into in the ordinary
course of business; (9) customary provisions in joint venture agreements and
other similar agreements; (10) the documentation relating to Indebtedness of
Foreign Subsidiaries incurred pursuant to the terms of the Indenture provided
that such encumbrances or restrictions are not more restrictive than those
contained in the Credit Agreement; (11) the Credit Agreement; (12) the
documentation relating to other Indebtedness permitted to be incurred subsequent
to the Issue Date pursuant to the provisions of the covenant described under
"-- Limitations on Incurrence of Additional Indebtedness"; provided that such
encumbrances or restrictions are not more restrictive than those contained in
the Credit Agreement; (13) the documentation relating to Indebtedness of a
Securitization Entity in connection with a Qualified Securitization Transaction;
provided that such restrictions apply only to such Securitization Entity; (14)
an agreement governing Indebtedness incurred to Refinance the Indebtedness
issued, assumed or incurred pursuant to an agreement referred to in clause (2),
(4), (5) or (11) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (4), (5) or (11). Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Subsidiary of the
Company from creating, incurring, assuming or suffering to exist any Permitted
Liens.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned
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Restricted Subsidiary of the Company) or permit any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company) to own any
Preferred Stock of any Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes or any
Guarantee, the Notes and such Guarantee, as the case may be, are secured by a
Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes and the Guarantees are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing the Credit Agreement; (C) Liens securing Senior Debt and Liens securing
Guarantor Senior Debt; (D) Liens securing the Notes and the Guarantees; (E)
Liens of the Company or a Restricted Subsidiary of the Company on assets of any
Subsidiary of the Company; (F) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens (y) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (z) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (G) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
that is senior in right of payment to the Notes or any Guarantee, as the case
may be, and expressly contractually subordinate in right of payment to any other
Indebtedness of the Company or such Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person (other than the Merger), or sell, assign, transfer, lease,
convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of
the Company to sell, assign, transfer, lease, convey or otherwise dispose of)
all or substantially all of the Company's assets (determined on a consolidated
basis for the Company and the Company's Restricted Subsidiaries) whether as an
entirety or substantially as an entirety to any Person unless: (i) either (1)
with respect to such a consolidation or merger, the Company shall be the
surviving or continuing corporation or (2) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")
(x) shall be a corporation organized and validly existing under the laws of the
United States or any State thereof or the District of Columbia and (y) shall
expressly assume, by supplemental indenture (in form and substance satisfactory
to the Trustee), executed and delivered to the Trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on all of the
Notes and the performance of every covenant of the Notes, the Indenture and the
Registration Rights Agreement on the part of the Company to be performed or
observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, shall be able to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity, as the case may be,
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer,
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lease, conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture comply
with the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of the "-- Limitation on
Asset Sales" covenant) will not, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into any Person other than the
Company or any other Guarantor unless: (i) the entity formed by or surviving any
such consolidation or merger (if other than the Guarantor) or to which such
sale, lease, conveyance or other disposition shall have been made is a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia; (ii) such entity assumes by
supplemental indenture all of the obligations of the Guarantor on the Guarantee;
and (iii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing. Any merger or
consolidation of a Guarantor with and into the Company (with the Company being
the surviving entity) or another Guarantor that is a Wholly Owned Restricted
Subsidiary of the Company need only comply with clause (iv) of the first
paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.5 million shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary of the
Company enters into an Affiliate Transaction (or a series of related Affiliate
Transactions related to a common plan) that involves an aggregate fair market
value of more than $10.0 million, the Company or such Restricted Subsidiary, as
the case may be, shall, prior to the consummation thereof, obtain a favorable
opinion as to the fairness of such transaction or series of related transactions
to the Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i) fees
and compensation paid to and indemnity provided on behalf of, officers,
directors, employees or consultants of the Company or any Restricted Subsidiary
of the Company in the ordinary course of business of the Company or such
Restricted Subsidiary; (ii) transactions exclusively between or among the
Company and any of its Restricted Subsidiaries or exclusively between or among
such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; (iii) any agreement as in effect as of the Issue
Date or any amendment thereto or
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any transaction contemplated thereby (including pursuant to any amendment
thereto) in any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders in any material
respect than the original agreement as in effect on the Issue Date; (iv) so long
as no Default or Event of Default has occurred and is continuing, the payment of
amounts owing pursuant to the Management Agreement; (v) so long as no Default or
Event of Default has occurred and is continuing, the payment of amounts owing
pursuant to the Transaction Agreement; (vi) loans or advances to employees not
to exceed $5.0 million at any time outstanding; (vii) issuance of employee stock
options approved by the Board of Directors of the Company and the shareholders
of the Company; (viii) transactions effected as part of a Qualified
Securitization Transaction; and (ix) Restricted Payments permitted by the
Indenture.
Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary (other
than a Foreign Subsidiary or Securitization Entity) that is not a Guarantor, or
if the Company or any of its Restricted Subsidiaries shall organize, acquire or
otherwise invest in another Restricted Subsidiary (other than a Foreign
Subsidiary or Securitization Entity) having total assets with a book value in
excess of $500,000, then such transferee or acquired or other Restricted
Subsidiary shall within 15 days of the end of the next succeeding fiscal quarter
(unless the book value of such Restricted Subsidiary is in excess of $5.0
million in which case, contemporaneously with the organization, acquisition or
other investment in such Restricted Subsidiary, as the case may be) (i) execute
and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture.
In the event that (i) a Restricted Subsidiary shall be required pursuant to
the preceding paragraph to deliver the documents described above in clauses (i)
and (ii) of the preceding paragraph (the "Additional Guarantee Documents"), (ii)
the Company would be required to publicly disclose separate financial statements
of such Restricted Subsidiary for the periods required by Rules 3-01 and 3-02 of
Regulation S-X under the Securities Act, (iii) such Restricted Subsidiary is not
a Significant Subsidiary of the Company, and (iv) the Company shall be able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "-- Limitation on
Incurrence of Additional Indebtedness," then such Restricted Subsidiary shall
not be required to deliver the Additional Guarantee Documents to the Trustee
until the earlier of (x) one year and three months from the date such Restricted
Subsidiary would otherwise have had to deliver the Additional Guarantee
Documents and (y) the date such financial statements would not be required to be
publicly disclosed; provided that in no event shall more than one such
Restricted Subsidiary not be required to deliver the Additional Guarantee
Documents at any one time pursuant to this paragraph.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
or complementary to the businesses in which the Company and its Restricted
Subsidiaries are engaged on the Issue Date.
Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA sec. 314(a).
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company (other than a Securitization Entity) and such failure continues for
a period of 30 days or more, or the acceleration of the final stated
maturity of any such Indebtedness (which acceleration is not rescinded,
annulled or otherwise cured within 30 days of receipt by the Company or
such Restricted Subsidiary of notice of any such acceleration) if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, in each case
with respect to which the 30-day period described above has passed,
aggregates $20.0 million or more at any time;
(v) one or more judgments which exceeds in the aggregate $20.0 million
(excluding judgments to the extent covered by insurance by a reputable
insurer as to which the insurer has acknowledged coverage) shall have been
rendered against the Company or any of its Significant Subsidiaries that is
a Restricted Subsidiary of the Company and such judgments remain
undischarged, unvacated, unpaid or unstayed for a period of 60 days after
such judgment or judgments become final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or
any of the Guarantees is declared to be null and void and unenforceable or
any of the Guarantees is found to be invalid or any of the Guarantors
denies its liability under its Guarantee (other than by reason of release
of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or 5 business days after receipt by the
Company and the representative under the Credit Agreement of such Acceleration
Notice. If an Event of Default specified in clause (vi) above with respect to
the Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind
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and cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, and satisfied all of their obligations
with respect to the Notes, except for (i) the rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest on the
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payments, (iii) the rights, powers, trust, duties and immunities of the Trustee
and the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect
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that, and based thereon such opinion of counsel shall confirm that, the Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the Indenture
or any other material agreement or instrument to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (vi) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Company or others; (vii) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with; (viii) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that (A) the trust funds will not be subject to any rights of holders of Senior
Debt, including, without limitation, those arising under the Indenture and (B)
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, to comply with any
requirements of the Commission in order to effect or maintain qualification
under TIA or to make any change that will provide any additional benefit to the
Holders or does not adversely affect rights of any Holder, so long as such
change does not, in the opinion of the Trustee, adversely affect the rights of
any of the Holders in any material respect. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel.
Other modifications and amendments of the Indenture may be made with the consent
of the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that,
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without the consent of each Holder affected thereby, no amendment may: (i)
reduce the amount of Notes whose Holders must consent to an amendment; (ii)
reduce the rate of or change or have the effect of changing the time for payment
of interest, including defaulted interest, on any Notes; (iii) reduce the
principal of or change or have the effect of changing the fixed maturity of any
Notes, or change the date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Notes payable in money other than that stated in the Notes; (v) make any change
in provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default;
(vi) amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event a Change
of Control has occurred or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated, or, following the occurrence or
consummation of a Change of Control or Asset Sale, modify any of the provisions
or definitions with respect thereto; (vii) modify or change any provision of the
Indenture or the related definitions affecting the subordination or ranking of
the Notes or any Guarantee in a manner which adversely affects the Holders; or
(viii) release any Guarantor from any of its obligations under its Guarantee or
the Indenture otherwise than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees are governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Guarantor, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee is permitted to engage in other transactions;
provided that if the Trustee acquires any conflicting interest as described in
the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (i) existing at the time such Person becomes a Restricted
Subsidiary of the Company or at the time it merges or consolidates with the
Company or any of its Restricted Subsidiaries or (ii) which becomes Indebtedness
of the Company or a Restricted Subsidiary in connection with the acquisition of
assets from such Person, and in each case not incurred by such Person or its
Subsidiary in connection with, or in anticipation or contemplation of, such
Person becoming a Restricted Subsidiary of the Company or such acquisition,
merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting
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securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of the Company of
(a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any
other property or assets of the Company or any Restricted Subsidiary of the
Company other than in the ordinary course of business; provided, however, that
Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $1.0 million, (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "Merger, Consolidation and Sale of
Assets" or any such disposition that constitutes a Change of Control, (iii)
sales of accounts receivable, equipment and related assets (including contract
rights) of the type specified in the definition of "Qualified Securitization
Transaction" to a Securitization Entity for the fair market value thereof,
including cash in an amount at least equal to 75% of the fair market value
thereof, and (iv) transfers of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
"Qualified Securitization Transaction" (or a fractional undivided interest
therein) by a Securitization Entity in a Qualified Securitization Transaction.
For the purposes of clause (iii), Purchase Money Notes shall be deemed to be
cash.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the four highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United
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States of America or any state thereof or the District of Columbia or any U.S.
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $100.0 million; (v) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; (vi) investments in money market
funds which invest substantially all their assets in securities of the types
described in clauses (i) through (v) above; and (vii) investments made by
Foreign Subsidiaries in local currencies in instruments issued by or with
entities of such jurisdiction having correlative attributes to the foregoing.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than any of the Permitted Holders(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (B) Consolidated Interest
Expense, (C) the aggregate depreciation and amortization (including amortization
of goodwill and other intangibles) of such Person and its Restricted
Subsidiaries for such period, and (D) other non-cash charges of such Person and
its Restricted Subsidiaries for such period, less any non-cash charges
increasing Consolidated Net Income during such period and less the amount of all
cash payments made by such Person or any of its Restricted Subsidiaries during
such period to the extent such payments relate to non-cash charges that were
added back in determining Consolidated EBITDA for such period or any prior
period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or
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one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income") attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale,
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation, but excluding amortization or
write-off of deferred financing costs; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person
in which the referant Person has an interest, other than a Restricted Subsidiary
of the referent Person, except to the extent of cash dividends or distributions
paid to the referent Person or to a Restricted Subsidiary of the referent Person
by such Person, (f) any restoration to income of any contingency reserve in
accordance with GAAP, except to the extent that provision for such reserve was
made out of Consolidated Net Income accrued at any time following the Issue
Date, (g) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during
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such period whether or not such operations were classified as discontinued), and
(h) in the case of a successor to the referent Person by consolidation or merger
or as a transferee of the referent Person's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of assets.
"Continuing Directors" means, as of the date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agreement" means the Credit Agreement to be dated on or about
November 3, 1997, among the Company, certain subsidiary borrowers from time to
time parties thereto, the lenders party thereto in their capacities as lenders
thereunder and Bank of America National Trust and Savings Association, as
Administrative Agent, and Bankers Trust Company, as Syndication Agent, together
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented,
restated or otherwise modified from time to time, including any agreement (and
related documents) extending the maturity of, refinancing, replacing or
otherwise restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the
"Limitation on Incurrence of Additional Indebtedness" covenant above) or adding
Restricted Subsidiaries of the Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement (and
related documents) or any successor or replacement agreement (and related
documents) and whether by the same or any other agent, lender or group of
lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25.0 million and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"Fremont" means Fremont Partners, L.P. and its Affiliates.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company which
(i) is not organized under the laws of the United States, any state thereof or
the District of Columbia and (ii) conducts substantially all of its business
operations in a country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other
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entity as may be approved by a significant segment of the accounting profession
of the United States, as in effect from time to time.
"Guarantor" means (i) the domestic Subsidiaries of the Company on the Issue
Date and (ii) each of the Company's Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees to
be bound by the terms of the Indenture as a Guarantor; provided that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture.
"Guarantor Senior Debt" means with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy or the commencement of any
bankruptcy, insolvency, reorganization, receivership or other similar proceeding
at the rate provided for in the documentation with respect thereto, whether or
not such interest is an allowed claim under applicable law) and fees and
expenses (including costs of collection), indemnity obligations on, and all
other amounts and obligations owing in respect of, any Indebtedness of a
Guarantor, whether outstanding on the Issue Date or thereafter created, incurred
or assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting the generality of
the foregoing, "Guarantor Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy or the commencement of any bankruptcy,
insolvency, reorganization, receivership or other similar proceeding at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of, (x) all monetary obligations of every nature of the Company
or such Guarantor under the Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, commissions, expenses and indemnities, (y) all Interest
Swap Obligations of such Guarantor and (z) all obligations of such Guarantor
under Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt"
shall not include (i) any Indebtedness of such Guarantor to a Subsidiary of such
Guarantor or any Affiliate of such Guarantor or any of such Affiliate's
Subsidiaries, (ii) Indebtedness of such Guarantor to, or guaranteed by such
Guarantor on behalf of, any shareholder, director, officer or employee of such
Guarantor or any Restricted Subsidiary of such Guarantor (including, without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or owing
by such Guarantor, (vi) Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional
Indebtedness," (but, as to any such obligation, no such violation shall be
deemed to exist for purposes of this clause (vi) if the holder(s) of such
Indebtedness or their representative and the Trustee shall have received an
officers' certificate of the Company to the effect that the incurrence of such
Indebtedness does not (or, in the case of revolving credit Indebtedness or other
Indebtedness available to be borrowed under the Credit Agreement after the date
of the initial borrowing thereunder, that the incurrence of the entire committed
amount thereof at the date on which the initial borrowing thereunder is made
would not) violate such provisions of the Indenture), (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of such Guarantor.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings), (v) all
Obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) guarantees and other
contingent obligations in respect
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of Indebtedness of other Persons of the type referred to in clauses (i) through
(v) above and clause (viii) below, (vii) all Obligations of any other Person of
the type referred to in clauses (i) through (vi) which are secured by any Lien
on any property or asset of such Person, the amount of such Obligation being
deemed to be the lesser of the fair market value of such property or asset or
the amount of the Obligation so secured, (viii) all Obligations under Currency
Agreements and Interest Swap Obligations of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (ii) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged, and may include a
commercial or investment banking, appraisal or accounting firm.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary
(proportionate to the Company's equity interest in such Subsidiary) and shall
exclude, and the aggregate amount of all Restricted Payments made as Investments
since the Issue Date shall exclude and be reduced by, the fair market value of
the net assets of any Unrestricted Subsidiary (proportionate to the Company's
equity interest in such Subsidiary) at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary, such exclusion and reduction
not to exceed the amount of Investments previously made by the referant person
and its Restricted Subsidiaries and treated as Restricted Payments and (ii) the
amount of any Investment shall be the original cost of such Investment, without
any adjustments for increases or decreases in value, or write-ups, write-downs
or write-offs with respect to such Investment, reduced by the payment of
dividends or distributions in connection with such Investment or any other
amounts received in respect of such Investment; provided that no such payment of
dividends or distributions or receipt of any such other amounts shall reduce the
amount of any Investment if such payment of dividends or distributions or
receipt of any such amounts would be included in Consolidated Net Income. If the
Company or any Restricted Subsidiary of the Company sells or otherwise disposes
of any Common Stock of any direct or indirect Restricted Subsidiary of the
Company such that, after giving effect to any such sale or disposition, it
ceases to be a Subsidiary of the Company, the Company shall be deemed to have
made an Investment on the date of any such sale or disposition equal to the fair
market value of the Capital Stock of such Restricted Subsidiary not sold or
disposed of.
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"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Management Agreement" means a management agreement to be entered into
among the Company, Fremont and RCBA and which provides for the payment or
accrual of not more than $2,000,000 of compensation annually beginning on
November 1 and ending on October 31 of the following year.
"Merger" means the merger of Freemont and RCBA with and into the Company
pursuant to the Transaction Agreement.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts (determined by the Company in good faith) to be provided by the Company
or any Restricted Subsidiary, as the case may be, as a reserve, against any post
closing adjustments or liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"Non-Recourse Indebtedness" means Indebtedness secured only by an asset and
which is expressly stated to be without recourse to the Company or its
Restricted Subsidiaries from the date of incurrence of such Indebtedness.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, commissions, indemnifications, reimbursements, damages and
other liabilities payable under the documentation governing any Indebtedness.
"Permitted Holder(s)" means RCBA and Fremont.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes offered hereby and the Guarantees
thereof;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $400.0
million, less (x) the aggregate amount of any Indebtedness of
Securitization Entities in Qualified Securitization Transactions incurred
at a time that the Company is not able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness", provided that the Company may elect in writing to the
Trustee to have the amount of said reduction resulting from such
Indebtedness incurred in connection with a Qualified Securitization
Transaction to be reduced by an amount (the "Transferred Reduction Amount")
up to the then remaining amount of Permitted Indebtedness that could be
incurred pursuant to clause (xiii) below, and in the event of such
election, the amount of Permitted Indebtedness that can be incurred
pursuant to clause (xiii) will be reduced by the Transferred Reduction
Amount, (y) the amount of all scheduled principal payments actually made by
the Company and (z) the amount of all required permanent prepayments of
Indebtedness under the Credit Agreement actually made with the proceeds of
an Asset Sale;
(iii) Indebtedness incurred by Foreign Subsidiaries not to exceed
$20.0 million (or the equivalent amount thereof, at the time of incurrence,
in other foreign currencies);
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(iv) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or permanent mandatory prepayments when actually paid
or permanent reductions thereon;
(v) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(vi) Indebtedness under Currency Agreements; provided that such
Currency Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vii) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company, in each case subject to no Lien (other than a Lien in connection
with the Credit Agreement and Permitted Liens which are not consensual)
held by a Person other than the Company or a Restricted Subsidiary of the
Company; provided that if as of any date any Person other than the Company
or a Restricted Subsidiary of the Company owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness (other than a
Lien in connection with the Credit Agreement and Permitted Liens which are
not consensual), such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the issuer of such Indebtedness;
(viii) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien (other than a Lien in
connection with the Credit Agreement and Permitted Liens which are not
consensual); provided that (a) any Indebtedness of the Company to any
Restricted Subsidiary of the Company (other than a Restricted Subsidiary
which is a Guarantor) is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes
and (b) if as of any date any Person other than a Restricted Subsidiary of
the Company owns or holds any such Indebtedness or any Person holds a Lien
in respect of such Indebtedness (other than a Lien in connection with the
Credit Agreement and Permitted Liens which are not consensual), such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(x) Indebtedness of the Company or any Restricted Subsidiary
represented by performance bonds, warranty or contractual service
obligations, standby letters of credit or appeal bonds, in each case to the
extent incurred in the ordinary course of business of the Company or such
Restricted Subsidiary in accordance with customary industry practices, in
amounts and for the purposes customary in the Company's industry;
(xi) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is not recourse to the Company or
any Subsidiary of the Company (except for Standard Securitization
Undertakings);
(xii) Refinancing Indebtedness; and
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(xiii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $75.0 million
at any one time outstanding (which may be Indebtedness under the Credit
Agreement in addition to that permitted by clause (ii)).
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
Company, (ii) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment is unsecured
and subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) investments in cash and Cash
Equivalents; (iv) loans and advances to employees and officers of the Company
and its Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $5.0 million at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (vi) Investments in Unrestricted Subsidiaries
not to exceed $10.0 million at any one time outstanding; (vii) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers; (viii) Investments made by the Company or its
Restricted Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the "Limitation on Asset Sales" covenant;
(ix) Investments existing on the date of the Indenture; (x) accounts receivable,
advances, loans, guarantees or extensions of credit created or acquired in the
ordinary course of business, consistent with past or industry practice; (xi) any
Investment by the Company or a Wholly Owned Restricted Subsidiary of the Company
in a Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction; provided
that any Investment in a Securitization Entity is in the form of a Purchase
Money Note or an equity interest; and (xii) Investments committed to by the
Company or its Restricted Subsidiaries on the Issue Date not to exceed $1.5
million in the aggregate.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory, contractual and common law Liens of landlords to
secure rent payments and Liens of carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen and other Liens imposed by law incurred
in the ordinary course of business for sums not yet delinquent or being
contested in good faith, if such reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens securing judgments not giving rise to an Event of
Default;
(v) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Company or any of
its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
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(vii) purchase money Liens to finance property or assets (including
the cost of construction) of the Company or any Restricted Subsidiary of
the Company acquired in the ordinary course of business; provided, however,
that (A) the related purchase money Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any property or
assets of the Company or any Restricted Subsidiary of the Company other
than the property and assets so acquired or constructed and (B) the Lien
securing such Indebtedness shall be created within 180 days of such
acquisition or construction;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
(xiv) Liens arising under the Indenture;
(xv) leases or subleases granted to others that do not materially
interfere with the business of the Company and its Restricted Subsidiaries;
(xvi) Liens in connection with any filing of Uniform Commercial Code
financing statements regarding leases;
(xvii) Liens securing Non-Recourse Indebtedness incurred pursuant to
the Indenture;
(xviii) Liens arising from a bank or financial institution honoring a
check or draft inadvertently drawn against insufficient funds in the
ordinary course of business; and
(xix) Liens on assets transferred to a Securitization Entity or on
assets of a Securitization Entity, in either case incurred in connection
with a Qualified Securitization Transaction.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a
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Qualified Securitization Transaction to a Securitization Entity, which note
shall be repaid from cash available to the Securitization Entity, other than
amounts required to be established as reserves pursuant to agreements, amounts
paid to investors in respect of interest, principal and other amounts owing to
such investors, amounts paid in connection with the purchase of newly generated
receivables or newly acquired equipment and amounts paid for administrative
costs in the ordinary course of business.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any or its Subsidiaries may sell, convey or
otherwise transfer to (a) a Securitization Entity (in the case of a transfer by
the Company or any of its Subsidiaries) and (b) any other Person (in the case of
a transfer by a Securitization Entity), or may grant a security interest in, any
accounts receivable or equipment (whether now existing or arising or acquired in
the future) of the Company or any of its Subsidiaries, and any assets related
thereto including, without limitation, all collateral securing such accounts
receivable and equipment, all contracts and contract rights and all guarantees
or other obligations in respect of such accounts receivable and equipment,
proceeds of such accounts receivable and equipment and other assets (including
contract rights) which are customarily transferred or in respect of which
security interests are customarily granted in connection with asset
securitization transactions involving accounts receivable and equipment.
"RCBA" means Richard C. Blum & Associates, Inc. and its Affiliates.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iii), (v), (vi), (vii), (viii), (ix), (x), (xi) or
(xiii) of the definition of Permitted Indebtedness), in each case that does not
(1) result in an increase in the aggregate principal amount of Indebtedness of
such Person as of the date of such proposed Refinancing (plus the amount of any
premium required to be paid under the terms of the instrument governing such
Indebtedness or the amount of any premium reasonably determined to be necessary
to accomplish such refinancing and plus the amount of reasonable expenses
incurred by the Company and any Restricted Subsidiary in connection with such
Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness solely of the Company or any
Restricted Subsidiary or is Indebtedness solely of the Company and any
Restricted Subsidiary or Restricted Subsidiaries, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company or such Restricted
Subsidiary or the Company and such Restricted Subsidiary or Restricted
Subsidiaries, as the case may be, and (y) if such Indebtedness being Refinanced
is subordinate or junior to the Notes, then such Refinancing Indebtedness shall
be subordinate to the Notes at least to the same extent and in the same manner
as the Indebtedness being Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that (a) if,
and for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times constitute
the holders of a majority in outstanding principal amount of such Designated
Senior Debt in respect of any Designated Senior Debt and (b) the administrative
agent (or any successor thereto) shall be a Representative of the lenders under
the Credit Agreement.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any
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property, whether owned by the Company or any Restricted Subsidiary at the Issue
Date or later acquired, which has been or is to be sold or transferred by the
Company or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of
such Property.
"Securitization Entity" means a Wholly Owned Restricted Subsidiary of the
Company (or another Person in which the Company or any Subsidiary of the Company
makes an Investment and to which the Company or any Subsidiary of the Company
transfers accounts receivable or equipment and related assets) which engages in
no activities other than in connection with the financing of accounts receivable
or equipment and which is designated by the Board of Directors of the Company
(as provided below) as a Securitization Entity (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any Subsidiary of the Company (excluding guarantees
of Obligations (other than the principal of, and interest on, Indebtedness)
pursuant to Standard Securitization Undertakings), (ii) is recourse to or
obligates the Company or any Subsidiary of the Company in any way other than
pursuant to Standard Securitization Undertakings or (iii) subjects any property
or asset of the Company or any Subsidiary of the Company, directly or
indirectly, contingently or otherwise, to the satisfaction thereof, other than
pursuant to Standard Securitization Undertakings, (b) with which neither the
Company nor any Subsidiary of the Company has any material contract, agreement,
arrangement or understanding other than on terms no less favorable to the
Company or such Subsidiary than those that might be obtained at the time from
Persons that are not Affiliates of the Company, other than fees payable in the
ordinary course of business in connection with servicing receivables of such
entity, and (c) to which neither the Company nor any Subsidiary of the Company
has any obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors of the Company giving effect to such designation and an
officer's certificate certifying that such designation complied with the
foregoing conditions.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy or the commencement of any bankruptcy, insolvency, reorganization,
receivership or other similar proceeding at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) and fees and expenses (including costs of
collection), indemnity obligations on, and all other amounts and obligations
owing in respect of, any Indebtedness of the Company, whether outstanding on the
Issue Date or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy or the commencement of any
bankruptcy, insolvency, reorganization, receivership or other similar proceeding
at the rate provided for in the documentation with respect thereto, whether or
not such interest is an allowed claim under applicable law) on, and all other
amounts owing in respect of, (x) all monetary obligations of every nature of the
Company under the Credit Agreement, including, without limitation, obligations
to pay principal and interest, reimbursement obligations under letters of
credit, guaranteed obligations, fees, commissions, expenses and indemnities, (y)
all Interest Swap Obligations and (z) all obligations under Currency Agreements,
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company or any Affiliate of
the Company or any of such Affiliate's Subsidiaries, (ii) Indebtedness of the
Company to, or guaranteed by the Company on behalf of, any shareholder,
director, officer or employee of the Company or any Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owed or owing by the Company, (vi) Indebtedness incurred in violation of
the Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness" (but, as to any such obligation, no such violation shall be deemed
to exist for purposes of this clause (vi) if the holder(s) of such Indebtedness
or their representative and the
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Trustee shall have received an officers' certificate of the Company to the
effect that the incurrence of such Indebtedness does not (or, in the case of
revolving credit Indebtedness or other Indebtedness available to be borrowed
under the Credit Agreement after the date of the initial borrowing thereunder,
that the incurrence of the entire committed amount thereof at the date on which
the initial borrowing thereunder is made would not) violate such provisions of
the Indenture), (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of the
Company.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are reasonably customary in an accounts receivable or equipment
securitization transaction.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Transaction Agreement" means the transaction agreement dated as of October
2, 1997 among Fremont Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company
as in effect on the Issue Date.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided that (x) the Company certifies to
the Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries (other than the assets of such Restricted Subsidiary to be
designated an Unrestricted Subsidiary and its Subsidiaries). In the event that
any Restricted Subsidiary is designated an Unrestricted Subsidiary in accordance
with the above provisions, the Guarantee of such Subsidiary will be released.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if (x) immediately after giving effect to such
designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant, unless such
designated Subsidiary shall, at the time of designation, have no Indebtedness
outstanding other than Permitted Indebtedness, and (y) immediately before and
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
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"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than, in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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CERTAIN TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences related to the Exchange Offer and associated with the acquisition,
ownership, and disposition of the Notes. The following summary does not discuss
all of the aspects of federal income taxation that may be relevant to a
prospective holder of the Notes in light of his or her particular circumstances,
or to certain types of holders which are subject to special treatment under the
federal income tax laws (including persons who hold the Notes as part of a
conversion, straddle or hedge, dealers in securities, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers and S
corporations). Further, this summary pertains only to holders that are citizens
or residents of the United States, corporations, partnerships or other entities
created in or under the laws of the United States or any state thereof, or
estates or trusts the income of which is subject to United States federal income
taxation regardless of its source. In addition, this summary does not describe
any tax consequences under state, local, or foreign tax laws.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations (the "Regulations"), rulings and
pronouncements issued by the Internal Revenue Service ("IRS") and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect the holders of the Notes.
The Company has not sought and will not seek any rulings from the IRS or
opinions from counsel with respect to the matters discussed below. There can be
no assurance that the IRS will not take positions concerning the tax
consequences of the Exchange Offer or the valuation, purchase, ownership or
disposition of the Notes which are different from those discussed herein.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
An exchange of the Series A Notes for the Exchange Notes pursuant to the
Exchange Offer should not be treated as a significant modification of the Series
A Notes; accordingly, an Exchange Note should be treated as a continuation of
the corresponding Series A Note and an exchanging holder should not recognize
any gain or loss as a result of participating in the Exchange Offer. In
addition, an exchanging holder's basis in an Exchange Note should be equal to
the basis of the corresponding Series A Note and the holding period for an
Exchange Note would include such holder's holding period for the corresponding
Series A Note.
The Exchange Offer will not have any federal income tax consequences to a
non-exchanging holder.
Each exchanging holder should consult with his or her individual tax
advisor concerning any foreign, state or local tax consequences of the Exchange
Offer as well as to the effect of his or her particular facts and circumstances
on the matters discussed herein.
TAXATION OF ACCRUED STATED INTEREST ON NOTES
Accrued stated interest paid on a Note will generally be taxable to a
holder as ordinary interest income at the time it accrues or is received, in
accordance with the holder's regular method of accounting for federal income tax
purposes.
The Company will annually furnish to certain record holders of the Notes
and the IRS information with respect to any stated interest accruing during the
calendar year as may be required under applicable Regulations.
MARKET DISCOUNT
If a holder purchases a Note, other than in connection with the Offering or
the Exchange Offer, for less than the stated redemption price of the Note at
maturity, the difference is considered "market discount," unless such difference
is "de minimis," i.e., less than one-fourth of one percent of the stated
redemption price of the Note at maturity multiplied by the number of complete
years to maturity (after the holder acquires the Note). Under market discount
rules, any gain realized by the holder on a taxable disposition of a Note having
"market discount," as well as any partial principal payment made with respect to
such a Note, will be treated as ordinary income to the extent of the then
"accrued market discount" of the Note. The rules concerning the
117
<PAGE> 118
calculation of "accrued market discount" are set forth in the paragraph
immediately below. In addition, a holder of such a Note may be required to defer
the deduction of all or a portion of the interest expense on any indebtedness
incurred to purchase or carry a Note having "market discount."
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Note, unless the holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the date of the holder's acquisition of the Note through
the maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by
the holder.
Accrual of market discount will not cause the accrued amounts to be
included currently in a holder's taxable income, in the absence of a disposition
of, or principal payment on, the Note. Nevertheless, a holder may elect to
currently include market discount in income as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the
acquisition of a Note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies and all subsequent years unless
revoked with the consent of the IRS. Accrued market discount which is included
in a holder's gross income will increase the adjusted tax basis of the Note in
the hands of the holder.
ACQUISITION PREMIUM
If a subsequent holder acquires a Note for an amount which is greater than
the stated redemption price of the Note at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal to
the amount of such excess. The holder may elect to amortize the premium using a
constant yield method employing six month compounding over the period from the
acquisition date to the maturity date of the Note. Amortized amounts may be
offset only against interest paid with respect to the Note and will reduce the
holder's adjusted tax basis in the Note to the extent so used. Once made, an
election to amortize and offset interest on the Note may be revoked only with
the consent of the IRS and will apply to all Notes held by the holder on the
first day of the taxable year to which the election relates and to subsequent
taxable years and to all Notes subsequently acquired by the holder.
SALE, EXCHANGE OR OTHER TAXABLE DISPOSITION OF THE NOTES
The sale, redemption or other taxable disposition of a Note will result in
the recognition of gain or loss to the holder in an amount equal to the
difference between (i) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued stated
interest) in exchange therefore and (ii) the holder's adjusted tax basis in such
Note. A holder's initial tax basis in a Note purchased by such holder will be
equal to the issue price of the Note.
Any gain or loss on the sale, redemption or other taxable disposition of a
Note will be capital gain or loss, except to the extent of any "accrued market
discount," assuming a purchaser of the Note holds such security as a "capital
asset" (generally property held for investment) within the meaning of Section
1221 of the Code. In the case of an individual holder, such capital gain
generally will be subject to a maximum federal tax rate of 20% if the individual
has held the Note for more than 18 months, or 28% if the individual has held the
Note for more than one year and up to 18 months. The deductibility of capital
losses is subject to certain limitations. Payments on such disposition for
accrued stated interest not previously included in income will be treated as
ordinary interest income. Prospective holders should consult their own tax
advisors in this regard.
PURCHASE OR REDEMPTION OF NOTES
Effect of Change of Control and Asset Sale. Upon a Change of Control, the
Company is required to offer to redeem all outstanding Notes for a price equal
to 101% of the principal amount thereof plus accrued and unpaid stated interest.
See "Description of Notes -- Change of Control." Under the Regulations, such a
Change of Control redemption requirement will not affect the yield or maturity
date of the Notes unless, based
118
<PAGE> 119
on all the facts and circumstances as of the issue date, it is more likely than
not that a Change of Control giving rise to the redemption will occur. Upon
certain asset sales, the Company will be obligated to offer to repurchase the
Notes at one hundred percent (100%) of the principal amount thereof plus accrued
and unpaid interest to the date of redemption. The Company will not treat the
Change of Control or the asset sale redemption provisions of the Notes as
affecting the calculation of the yield to maturity of any Note.
Optional Redemption. The Company, at its option, may redeem part or all of
the Notes at any time on or after November 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of redemption. In
addition, if the Company consummates an Equity Offering on or before November 1,
2000, the Company may, at its option, use all or a portion of the proceeds from
such Equity Offering to redeem up to thirty-five percent (35%) of the aggregate
principal amount of the Notes originally issued in the Offering at a redemption
price equal to 109.625%, together with accrued and unpaid interest to the date
of redemption; provided, however, that, after giving effect to any such
redemption, at least 65% of the aggregate principal amount of the Notes
originally issued remains outstanding. See "Description of Notes -- Redemption."
For purposes of determining whether the Notes are issued with any "original
issue discount," the Regulations generally provide that an issuer will be
treated as exercising any such option if its exercise would lower the yield of
the debt instrument. A redemption of Notes at the optional redemption prices,
however, would increase rather than decrease the effective yield of the debt
instrument as calculated from the issue date.
The Company does not currently intend to exercise any of the options
described above with respect to the Notes. Should the Company exercise an option
and redeem a Note, the holder of the Note would be required to treat any amount
paid by the Company which exceeds the Note's then principal balance and all
accrued and unpaid interest thereon as an amount received in exchange for the
Note.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax
if (i) the payee fails to properly furnish a taxpayer identification number
("TIN") to the payor, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of "reportable payments" and the IRS has notified the payor that
withholding is required, or (iv) there has been a failure of the payee to
certify under a penalty of perjury that a payee is not subject to withholding
under Section 3406 of the Code. As a result, if any one of the events discussed
above occurs with respect to a holder of Notes, the Company, its paying agent or
other withholding agent will be required to withhold a tax equal to 31% of any
"reportable payment" made in connection with the Notes to such holder. A
"reportable payment" includes, among other things, amounts paid in respect of
interest or original issue discount and amounts paid through brokers in
retirement of securities. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against such
holder's federal income tax, provided, that the required information is
furnished to the IRS. Certain holders (including, among others, corporations and
certain tax-exempt organizations) are not subject to the backup withholding
rules.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW, WHICH IS SUBJECT TO
CHANGE, POSSIBLY WITH RETROACTIVE EFFECT. PROSPECTIVE HOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
EXCHANGE OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS.
119
<PAGE> 120
BOOK-ENTRY; DELIVERY AND FORM
The Certificates representing the Exchange Notes will be issued in fully
registered form, without coupons and will be deposited with, or on behalf of,
the Depositary, and registered in the name of Cede & Co., as the Depository's
nominee in the form of a global Exchange Note certificate (the "Global
Certificate") or will remain in the custody of the Trustee.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only by the Depositary to its nominee to such Depositary
or another nominee of the Depositary or by the Depositary or its nominee to a
successor of the Depositary or a nominee of such successor.
The Company understands that the Depositary is a limited-purpose trust
company which was created to hold securities for its participating organizations
(the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not Participants may beneficially own securities
held by the Depositary through Participants or indirect participants.
Pursuant to procedures established by the Depositary (i) upon deposit of
the Global Certificate, the Depositary will credit the accounts of Participants
with portions of the principal amount of the Global Certificate and (ii)
ownership of the Exchange Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interest of the Depository's participants), the
Depository's Participants and the Depository's indirect participants.
The laws of some jurisdictions require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer interests in the Global Certificate will be limited to such
extent.
So long as the nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or holder of
the Exchange Notes for all purposes under the Indenture. Except as provided
below, the owners of interests in the Global Certificate will not be entitled to
have Exchange Notes registered in their names, will not receive or be entitled
to receive physical delivery of Exchange Notes in definitive form and will not
be considered the owners or holders thereof under the Indenture. As a result,
the ability of a person having a beneficial interest in Exchange Notes
represented by the Global Certificate to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise take
actions in respect to such interest may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Company, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of interests in the Global Certificate or for
maintaining, supervising or reviewing any records relating to such interests.
Principal and interest payments on the Global Certificate registered in the
name of the Depository's nominee will be made by the Company or through a paying
agent to the Depository's nominee as the registered owner of the Global
Certificate. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Exchange Notes are registered as the owners
of such Exchange Notes for the purpose of receiving payments of principal and
interest on such Exchange Notes and for all other purposes whatsoever.
Therefore, neither the Company, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest on the
Exchange Notes to owners of interests in the Global Certificate. The Depositary
has advised the Company and the Trustee that its present practice is, upon
receipt of any payment of principal or interest, to credit immediately the
account of the Participants with payments in amounts proportionate to their
respective holdings in principal amount of interests in the Global Certificate
as shown on the records of the Depositary. Payments by Participants and indirect
participants to owners of interests in the Global Certificate will be governed
by standing instructions and customary practices,
120
<PAGE> 121
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
Participants or indirect participants.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Company within 90
calendar days, the Company will issue Exchange Notes in certificated form in
exchange for the Global Certificate. In addition, the Company may at any time
determine not to have the Exchange Notes represented by a Global Certificate,
and, in such event, will issue Exchange Notes in certificated form in exchange
for the Global Certificate. In either instance, an owner of an interest in the
Global Certificate would be entitled to physical delivery of such Exchange Notes
in certificated form. Exchange Notes so issued in certificated form will be
issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or its nominee in identifying the beneficial owners or the related
Exchange Notes, and each such person may conclusively rely on, and shall be
protected in relying on, instructions from the Depositary or its nominee for all
purposes (including with respect to the registration and delivery, and the
respective principal amounts, of the Exchange Notes to be issued).
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Exchange Offer Registration Statement",
which term shall encompass all amendments, exhibits, annexes and schedules
thereto) pursuant to the Securities Act and the rules and regulations
promulgated thereunder, covering the Exchange Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Company and
the Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Exchange Offer Registration Statement, reference is made to the
exhibit for a more complete description of the document or matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Exchange Offer Registration Statement, including the exhibits thereto, can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the Commission at 7 World Trade Center, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The Company was until recently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith filed reports, proxy and information
statements and other information with the Commission. Such material filed by the
Company with the Commission may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may also be obtained at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
As a result of filing the Exchange Offer Registration Statement with the
Commission, the Company and the Guarantors will become subject to the
informational requirements of the Exchange Act, and in accordance therewith will
be required to file periodic reports and other information with the Commission.
The obligation of the Company and the Guarantors to file periodic reports and
other information with the Commission will be suspended if the Notes are held of
record by fewer than 300 holders as of the beginning of any fiscal year of the
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<PAGE> 122
Company and the Guarantors other than the fiscal year in which the Exchange
Offer Registration Statement is declared effective.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so long
as the Series A Notes or the Exchange Notes remain outstanding, it will file
with the Commission and distribute to holders of the Series A Notes or the
Exchange Notes, as applicable, copies of the financial information that would
have been contained in annual reports and quarterly reports, including
management's discussion and analysis of financial condition and results of
operations, that the Company would have been required to file with the
Commission pursuant to the Exchange Act. Such financial information shall
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year. The Company will also make such reports available to prospective
purchasers of the Series A Notes or the Exchange Notes, as applicable,
securities analysts and broker-dealers upon their request. In addition, the
Company has agreed that for so long as any of the Series A Notes remain
outstanding it will make available to any prospective purchaser of the Series A
Notes or beneficial owner of the Series A Notes in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act,
until such time as the Company has either exchanged the Series A Notes for
securities identical in all material respects which have been registered under
the Securities Act or until such time as the holders thereof have disposed of
such Series A Notes pursuant to an effective registration statement filed by the
Company.
INDEPENDENT ACCOUNTANTS
The consolidated balance sheets of the Company as of December 31, 1995 and
1996, and the related consolidated statements of earnings, cash flows, and
shareholders' equity for each of the years in the three year period ended
December 31, 1996 included in this Prospectus have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, as stated in their report
appearing herein. The report of KPMG Peat Marwick LLP covering the December 31,
1994 financial statements refers to a change in the method of applying overhead
to inventory in 1994.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Cox & Smith Incorporated, San Antonio, Texas.
122
<PAGE> 123
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-3
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995
and 1994............................................... F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994........... F-6
Notes to Consolidated Financial Statements................ F-7
Interim Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of September 30,
1997 (Unaudited)....................................... F-32
Condensed Consolidated Statements of Earnings for the
Three Months and Nine Months Ended September 30, 1997
and 1996 (Unaudited)................................... F-33
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996
(Unaudited)............................................ F-34
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-35
</TABLE>
F-1
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheets of Kinetic
Concepts, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, cash flows and shareholders' equity
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kinetic
Concepts, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company changed its method of applying overhead to inventory in 1994.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 5, 1997
F-2
<PAGE> 125
CONSOLIDATED BALANCE SHEETS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 59,045 $ 52,399
Accounts receivable, net.................................. 58,241 56,032
Inventories............................................... 20,042 18,854
Note receivable from principal shareholder................ -- 10,291
Prepaid expenses and other................................ 6,860 4,865
-------- --------
Total current assets.............................. 144,188 142,441
-------- --------
Net property, plant and equipment........................... 65,224 62,276
Other notes receivable, net................................. -- 3,187
Goodwill, less accumulated amortization of $12,021 in 1996
and
$10,625 in 1995........................................... 13,541 13,968
Other assets, less accumulated amortization of $5,614 in
1996 and
$5,638 in 1995............................................ 30,440 21,854
-------- --------
$253,393 $243,726
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,974 $ 2,512
Current installments of capital lease obligations......... 118 --
Accrued expenses.......................................... 29,792 26,490
Income tax payable........................................ 2,970 4,026
-------- --------
Total current liabilities......................... 36,854 33,028
-------- --------
Capital lease obligations, excluding current installments... 396 --
Deferred income taxes, net.................................. 5,065 374
-------- --------
42,315 33,402
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock; issued and outstanding 42,355 in 1996 and
44,331 in 1995............................................ 42 44
Additional paid-in capital.................................. -- 12,123
Retained earnings........................................... 210,816 197,290
Cumulative foreign currency translation adjustment.......... 555 1,052
Notes receivable from officers.............................. (335) (185)
-------- --------
211,078 210,324
-------- --------
$253,393 $243,726
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 126
CONSOLIDATED STATEMENT OF EARNINGS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Rental and service....................................... $225,450 $206,653 $228,832
Sales and other.......................................... 44,431 36,790 40,814
-------- -------- --------
Total revenue......................................... 269,881 243,443 269,646
-------- -------- --------
Rental expenses............................................ 146,205 137,420 159,235
Cost of goods sold......................................... 16,315 13,729 19,388
-------- -------- --------
162,520 151,149 178,623
-------- -------- --------
Gross profit.......................................... 107,361 92,294 91,023
Selling, general and administrative expenses............... 52,007 48,502 51,813
Unusual items.............................................. -- -- (84,868)
-------- -------- --------
Operating earnings.................................... 55,354 43,792 124,078
Interest income (expense), net............................. 9,087 4,554 (4,528)
-------- -------- --------
Earnings before income taxes, minority interest and
cumulative effect of change in accounting
principle........................................... 64,441 48,346 119,550
Income taxes............................................... 25,454 19,905 55,949
-------- -------- --------
Earnings before minority interest and cumulative
effect of change in accounting principle............ 38,987 28,441 63,601
Minority interest in subsidiary loss....................... -- -- 40
Cumulative effect of change in accounting for inventory.... -- -- 742
-------- -------- --------
Net earnings.......................................... $ 38,987 $ 28,441 $ 64,383
======== ======== ========
Earnings per common and common equivalent share:
Earnings before cumulative effect of change in accounting
principle............................................. $ 0.86 $ 0.63 $ 1.44
Cumulative effect of change in accounting for
inventory............................................. -- -- 0.02
-------- -------- --------
Earnings per share.................................... $ 0.86 $ 0.63 $ 1.46
======== ======== ========
Shares used in earnings per share computations............. 45,489 45,457 44,143
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 127
CONSOLIDATED STATEMENTS OF CASH FLOWS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 38,987 $ 28,441 $ 64,383
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 21,794 22,760 38,795
Provision for uncollectible accounts receivable...... 2,457 1,883 1,100
Noncash portion of unusual items..................... -- -- 4,797
Loss (gain) on KCIFS and Medical Services
dispositions....................................... -- 2,933 (10,121)
Gain on early repayment of notes receivable.......... (5,180) -- --
Change in assets and liabilities net of effects from
purchase of subsidiaries and unusual items:
Decrease (increase) in accounts receivable, net.... (4,626) (2,695) 7,316
Decrease (increase) in notes receivable............ 3,187 6,014 (9,201)
Decrease (increase) in inventory................... (1,034) (998) 2,735
Decrease (increase) in prepaid and other assets.... (1,927) (593) 3,947
Increase (decrease) in accounts payable............ 1,525 (895) (3,672)
Increase (decrease) in accrued expenses............ 3,349 (520) 2,781
Increase (decrease) in income taxes payable........ (1,056) (3,999) 5,378
Increase (decrease) in deferred income taxes....... 4,691 4,451 (11,787)
-------- -------- ---------
Net cash provided by operating activities....... 62,167 56,782 96,451
-------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.............. (27,783) (36,104) (13,814)
Decrease (increase) in inventory to be converted into
equipment for short-term rental...................... 700 (1,000) 4,250
Dispositions of property, plant and equipment........... 5,400 3,231 2,869
Proceeds from sale of KCIFS and Medical Services
divisions............................................ -- 7,182 65,300
Excess principal repayment on discounted notes
receivable........................................... 5,180 -- --
Business acquired in purchase transactions, net of cash
acquired............................................. (1,146) -- --
Decrease (increase) in finance lease receivables, net... -- 339 (1,561)
Note (received) repaid from principal shareholder....... 10,000 (10,000) --
Increase in other assets................................ (9,960) (6,531) (9,230)
-------- -------- ---------
Net cash provided (used) by investing
activities.................................... (17,609) (42,883) 47,814
-------- -------- ---------
Cash flows from financing activities:
Repayments of notes payable and long-term obligations... -- (800) (102,625)
Borrowing (repayments)of capital lease obligations...... 457 (64) (2,382)
Proceeds from the exercise of stock options............. 4,264 4,919 915
Purchase and retirement of treasury stock............... (35,241) (2,849) (1,157)
Cash dividends paid to shareholders..................... (6,607) (6,631) (6,588)
Other................................................... (150) (185) (791)
-------- -------- ---------
Net cash used by financing activities........... (37,277) (5,610) (112,628)
-------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................. (635) 869 1,324
-------- -------- ---------
Net increase in cash and cash equivalents................. 6,646 9,158 32,961
Cash and cash equivalents, beginning of year.............. 52,399 43,241 10,280
-------- -------- ---------
Cash and cash equivalents, end of year.................... $ 59,045 $ 52,399 $ 43,241
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 128
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION TREASURY LOAN TO
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK ESOP
------ ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993................. $46 $ 18,803 $117,685 $(1,602) $(8,510) $(655)
Net earnings................................ -- -- 64,383 -- -- --
Exercise of stock options................... -- 803 -- -- -- --
Forgiveness of officer receivable........... -- -- -- -- -- --
Tax benefit realized from stock option
plan...................................... -- 112 -- -- -- --
Treasury stock purchased.................... -- -- -- -- (1,157) --
Treasury stock retired...................... (2) (9,665) -- -- 9,667 --
Cash dividends on common and preferred
preferred stock -- $0.15 per share........ -- -- (6,588) -- -- --
Payments on loan to ESOP.................... -- -- -- -- -- 655
Foreign currency translation adjustment..... -- -- -- 1,448 -- --
--- -------- -------- ------- ------- -----
Balances at December 31, 1994................. 44 10,053 175,480 (154) -- --
--- -------- -------- ------- ------- -----
Net earnings................................ -- -- 28,441 -- -- --
Exercise of stock options................... -- 4,024 -- -- -- --
Tax benefit realized from stock
option plan............................... -- 895 -- -- -- --
Treasury stock purchased.................... -- -- -- -- (2,849) --
Treasury stock retired...................... -- (2,849) -- -- 2,849 --
Cash dividends on common stock -- $0.15 per
share..................................... -- -- (6,631) -- -- --
Foreign currency translation adjustment..... -- -- -- 1,206 -- --
--- -------- -------- ------- ------- -----
Balances at December 31, 1995................. 44 12,123 197,290 1,052 -- --
--- -------- -------- ------- ------- -----
Net earnings................................ -- -- 38,987 -- -- --
Exercise of stock options................... -- 2,098 -- -- -- --
Tax benefit realized from stock
option plan............................... -- 2,166 -- -- -- --
Treasury stock purchased.................... -- -- -- -- (35,241) --
Treasury stock retired...................... (2) (16,387) (18,854) -- 35,241 --
Cash dividends on common stock -- $0.15 per
share..................................... -- -- (6,607) -- -- --
Foreign currency translation adjustment..... -- -- -- (497) -- --
--- -------- -------- ------- ------- -----
Balances at December 31, 1996................. $42 $ -- $210,816 $ 555 $ -- $ --
=== ======== ======== ======= ======= =====
<CAPTION>
NOTES RECEIVABLE FROM TOTAL
OFFICERS FOR EXERCISE SHAREHOLDERS'
OF STOCK OPTIONS EQUITY
--------------------- -------------
<S> <C> <C>
Balances at December 31, 1993................. $ (60) $125,707
Net earnings................................ -- 64,383
Exercise of stock options................... -- 803
Forgiveness of officer receivable........... 60 60
Tax benefit realized from stock option
plan...................................... -- 112
Treasury stock purchased.................... -- (1,157)
Treasury stock retired...................... -- --
Cash dividends on common and preferred
preferred stock -- $0.15 per share........ -- (6,588)
Payments on loan to ESOP.................... -- 655
Foreign currency translation adjustment..... -- 1,448
------ --------
Balances at December 31, 1994................. -- 185,423
------ --------
Net earnings................................ -- 28,441
Exercise of stock options................... (185) 3,839
Tax benefit realized from stock
option plan............................... -- 895
Treasury stock purchased.................... -- (2,849)
Treasury stock retired...................... -- --
Cash dividends on common stock -- $0.15 per
share..................................... -- (6,631)
Foreign currency translation adjustment..... -- 1,206
------ --------
Balances at December 31, 1995................. (185) 210,324
------ --------
Net earnings................................ -- 38,987
Exercise of stock options................... (150) 1,948
Tax benefit realized from stock
option plan............................... -- 2,166
Treasury stock purchased.................... -- (35,241)
Treasury stock retired...................... -- (2)
Cash dividends on common stock -- $0.15 per
share..................................... -- (6,607)
Foreign currency translation adjustment..... -- (497)
------ --------
Balances at December 31, 1996................. $(335) $211,078
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 129
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Kinetic
Concepts, Inc. ("KCI") and all subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications of amounts related to prior years have
been made to conform with the 1996 presentation.
(b) Nature of Operations and Customer Concentration
The Company designs, manufactures, markets and distributes therapeutic
products, primarily specialty hospital beds, mattress overlays and medical
devices that treat and prevent the complications of immobility. The principal
markets for the Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities throughout the
U.S. and Western Europe. Receivables from these customers are unsecured.
The Company contracts with both proprietary and voluntary purchasing
organizations ("GPOs"). Proprietary GPOs own all of the hospitals which they
represent and, as a result, can ensure complete compliance with an executed
national agreement. Voluntary GPOs negotiate contracts on behalf of member
hospital organizations but cannot ensure that their members will comply with the
terms of an executed national agreement. Approximately 47% of the Company's
revenue during 1996 was generated under national agreements with GPOs.
The Company operates directly in ten foreign countries including Germany,
Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland,
Australia, Sweden and Italy (see Note 13).
(c) Revenue Recognition
Service and rental revenue are recognized as services are rendered. Sales
and other revenue are recognized when products are shipped. Through June 15,
1995, the Company leased certain medical equipment under long-term lease
agreements which were accounted for as direct financing leases. Unearned
interest was amortized to income over the term of the lease using the interest
method (see Note 2).
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value). Costs include material, labor and manufacturing overhead
costs. Inventory expected to be converted into equipment for short-term rental
has been reclassified to property, plant and equipment.
On January 1, 1994, the Company changed its method of applying overhead to
inventory. Historically, a single labor overhead rate and a single materials
overhead rate were used in valuing ending inventory. Labor overhead was applied
as labor was incurred while materials overhead was applied at the time of
shipping.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments which extend
the useful life of the equipment are capitalized.
F-7
<PAGE> 130
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Depreciation and Amortization
Depreciation on property, plant and equipment is calculated on the
straight-line method over the estimated useful lives (thirty to forty years for
the buildings and between three and ten years for most of the Company's other
property and equipment) of the assets.
(h) Goodwill
Goodwill represents the excess purchase price over the fair value of net
assets acquired and is amortized over five to thirty-five years from the date of
acquisition using the straight-line method.
The carrying value of goodwill is based on management's current assessment
of recoverability. Management evaluates recoverability using both objective and
subjective factors. Objective factors include management's best estimates of
projected future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis, technological
advantage or disadvantage, and the Company's strategic focus.
(i) Other Assets
Other assets consist principally of patents, trademarks, system development
costs, long-term investments, cash and investments restricted for use by the
Company's captive insurance company, and the estimated residual value of assets
subject to leveraged leases. Patents and trademarks are amortized over the
estimated useful life of the respective asset using the straight-line method.
(j) Income Taxes
The Company recognizes certain transactions in different time periods for
financial reporting and income tax purposes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The provision for deferred income
taxes represents the change in deferred income tax accounts during the year.
(k) Common Stock and Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed by dividing
net earnings by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options (using the treasury stock method). Earnings per
share computed on a fully diluted basis is not presented as it is not
significantly different from earnings per share computed on a primary basis.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) Insurance Programs
The Company established the KCI Employee Benefits Trust (the "Trust") as a
self-insurer for certain risks related to the Company's U.S. employee health
plan and certain other benefits. The Company funds the
F-8
<PAGE> 131
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trust based on the value of expected future payments, including claims incurred
but not reported. The Company has purchased insurance which limits the Trust's
liability under the benefit plans.
The Company's wholly-owned captive insurance company, KCI Insurance
Company, Ltd. (the "Captive"), reinsures the primary layer of commercial general
liability, workers' compensation and auto liability insurance for certain
operating subsidiaries. Provisions for losses expected under these programs are
recorded based upon estimates of the aggregate liability for claims incurred
based on actuarial reviews. The Company has obtained insurance coverage for
catastrophic exposures as well as those risks required to be insured by law or
contract.
(n) Foreign Currency Translation
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The translation of the applicable
foreign currencies into U.S. dollars is performed for balance sheet accounts
using the exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
(o) Stock Options
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". The new Statement allows companies to continue accounting for
stock-based compensation under the provisions of APB Opinion 25, "Accounting for
Stock Issued to Employees"; however, companies are encouraged to adopt a new
accounting method based on the estimated fair value of employee stock options.
Companies that do not follow the new fair value based method will be required to
provide expanded disclosures in footnotes to the financial statements. The
Company has elected to continue accounting for stock-based compensation under
the provisions of APB Opinion 25 and has provided the required by disclosures
(See Note 9).
NOTE 2. ACQUISITIONS AND DISPOSITIONS
On June 15, 1995, the Company sold KCI Financial Services ("KCIFS") to Cura
Capital Corporation ("Cura") for cash under a Stock Purchase Agreement. Upon
consummation of this transaction, Cura acquired all of the outstanding capital
stock of KCIFS. Total proceeds from the sale were $7.2 million. This transaction
resulted in a pre-tax loss of $2.9 million which is reflected in selling,
general and administrative expenses in 1995. In addition, the Company and its
affiliates agreed not to provide lease financing for medical equipment
manufactured by third parties for a period of three years. KCIFS served as the
leasing agent for Medical Services, certain assets of which were sold in
September 1994. The operating results of KCIFS for 1995 and 1994 were not
material as compared to the overall results of the Company.
In December of 1994, the Company adopted a plan to liquidate the assets of
Medical Retro Design, Inc. ("MRD"). Pursuant to that plan, the Company sold
certain operating assets of MRD to HBR Healthcare Co. under an Asset Purchase
Agreement effective March 27, 1995. The sales price was approximately $250,000.
In conjunction with the sale, KCI and its affiliates agreed not to refurbish
certain hospital beds and related furniture for a period of three years.
Goodwill of $1.5 million associated with MRD was written off in 1994. The
write-off was treated as an unusual item. The operating results of MRD for 1995
and 1994 were immaterial to the overall results of the Company.
On September 30, 1994, the Company sold certain assets (the "Assets") used
exclusively by Medical Services to Mediq/PRN under an Asset Purchase Agreement.
Upon consummation of this transaction, Mediq/PRN acquired the Assets and assumed
certain liabilities of Medical Services. The sales price was approximately $84.1
million. In conjunction with the sale, the Company and its affiliates agreed not
to rent or distribute a portfolio of critical care and life support equipment
for five years.
F-9
<PAGE> 132
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross proceeds included a cash payment of approximately $65.3 million and
promissory notes in the aggregate principal amount of $18.8 million. The net
proceeds of $72.8 million, pre-tax gain of $10.1 million, and after-tax net loss
of $2.5 million were calculated, as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 65,300
Notes receivable (See Note 3)............................... 9,852
Fees and commissions........................................ (2,329)
--------
Net proceeds........................................... 72,823
Equipment and inventory sold................................ (38,959)
Goodwill.................................................... (25,778)
Accounts receivable provision............................... (479)
Capital leases assumed...................................... 2,514
--------
Pre-tax gain on disposition............................ 10,121
--------
Tax expense................................................. (12,601)
--------
Net loss on disposition................................ $ (2,480)
========
</TABLE>
Tax expense exceeded the pre-tax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill.
During the second quarter of 1996, the Company acquired Astec Medical, a
small overlay company in the United Kingdom. This firm produces a well-received
product which will enable the Company to further penetrate the community
hospital market throughout Europe.
Subsequent to December 31, 1996, the Company acquired H.F. Systems, Inc. of
Los Angeles. H.F. Systems offers a complete line of therapeutic specialty
support surfaces primarily to the West Coast extended care marketplace. The
purchase price was approximately $8 million in cash and other considerations.
NOTE 3. NOTES RECEIVABLE
In August 1995, the Company loaned $10.0 million to James R. Leininger,
M.D., the principal shareholder and chairman of the Company's Board of
Directors. The note was secured by a Stock Pledge Agreement covering one million
shares of common stock in Kinetic Concepts, Inc. Interest was payable in annual
installments at the rate of 7.94%. In January 1996, the note receivable was
collected in full.
Other notes receivable included notes received from Mediq/PRN as part of
the proceeds on the sale of Medical Services effective September 30, 1994. At
the time of the sale, the Company received an opinion from an independent
investment banker on the notes receivable which was used to arrive at the
carrying values. In October of 1996, the Company negotiated the early repayment
of all remaining notes for $8.5 million, plus interest accrued through closing.
As a result of this transaction, the Company recognized a one-time gain of $5.2
million before income taxes which has been included as interest income as of
F-10
<PAGE> 133
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996. The values of the various notes receivable at December 31,
1995 for accounting purposes are described below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PRINCIPAL BALANCE
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Note from PRN Holding, Inc. with 10% interest due
quarterly in arrears beginning March 1996 and principal
due
September 1999......................................... $ -- $10,000
Less discount and valuation allowance.................... -- (6,813)
------- -------
Notes receivable, noncurrent............................. $ -- $ 3,187
======= =======
</TABLE>
NOTE 4. SUPPLEMENTAL BALANCE SHEET DATA
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Trade accounts receivable................................ $63,613 $60,149
Employee and other receivables........................... 2,160 2,060
------- -------
65,773 62,209
Less allowance for doubtful receivables.................. 7,532 6,177
------- -------
$58,241 $56,032
======= =======
</TABLE>
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods........................................... $ 5,586 $ 2,890
Work in process.......................................... 1,893 1,040
Raw materials, supplies and parts........................ 17,113 20,174
------- -------
24,592 24,104
Less amounts expected to be converted into equipment for
short-term rental...................................... 4,550 5,250
------- -------
$20,042 $18,854
======= =======
</TABLE>
Net property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Land................................................... $ 1,007 $ 742
Buildings.............................................. 14,254 13,418
Equipment for short-term rental........................ 133,896 110,858
Machinery, equipment and furniture..................... 36,821 27,610
Leasehold improvements................................. 1,388 1,042
Inventory to be converted into equipment............... 4,550 5,250
-------- --------
191,916 158,920
Less accumulated depreciation and amortization......... 126,692 96,644
-------- --------
$ 65,224 $ 62,276
======== ========
</TABLE>
F-11
<PAGE> 134
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
------------------
1996 1995
------- -------
<S> <C> <C>
Payroll, commissions and related taxes................... $13,162 $12,589
Insurance accruals....................................... 2,887 3,470
Other accrued expenses................................... 13,743 10,431
------- -------
$29,792 $26,490
======= =======
</TABLE>
The carrying amount of financial instruments in current assets and current
liabilities approximate fair value because of the short maturity of these
instruments.
NOTE 5. NOTE PAYABLE AND LONG-TERM OBLIGATIONS
The Company entered into a revolving credit and term loan agreement (the
"Credit Agreement") with a bank as agent for itself and certain other financial
institutions. The Credit Agreement provides for a $50 million one-year revolving
credit facility with a two-year renewal option. Any advances under the Credit
Agreement are due at the end of the period covered by the Credit Agreement. At
December 31, 1996, the entire $50 million balance was available.
The interest rate payable on borrowings under the Credit Agreement is at
the election of the Company: (i) the Bank's reference rate, or (ii) the London
inter-bank offered rate quoted to the Bank for one, two, three, or six month
Eurodollar deposits adjusted for appropriate reserves ("LIBOR") plus 40 basis
points.
The Credit Agreement requires that the Company maintain specified ratios
and meet certain financial targets. The Credit Agreement also contains certain
events of default, includes certain provisions governing a change in control of
the Company, and establishes various fees to be paid by the Company. At December
31, 1996, the Company was in compliance with all covenants.
Interest paid on debt during 1996, 1995 and 1994 amounted to $0.2 million,
$0.4 million and $5.4 million, respectively.
NOTE 6. LEASING OBLIGATIONS
The Company is obligated for equipment under various capital leases which
expire at various dates during the next four years. At December 31, 1996 the
gross amount of equipment under capital leases totaled $619,000 and related
accumulated depreciation totaled $175,000.
The Company leases service vehicles, office space, various storage spaces
and manufacturing facilities under noncancelable operating leases which expire
at various dates over the next six years. Total rental expense for operating
leases, net of sublease payments received, was $13.5 million, $12.0 million and
$10.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-12
<PAGE> 135
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997...................................................... $208 $10,498
1998...................................................... 160 7,947
1999...................................................... 160 5,221
2000...................................................... 93 3,771
2001...................................................... -- 1,073
Later years............................................... -- --
---- -------
Total minimum lease payments.............................. 621 $28,510
=======
Less amount representing interest......................... 107
----
Present value of net minimum capital lease payments....... 514
Less current portion...................................... 118
----
Obligations under capital leases excluding current
installments............................................ $396
====
</TABLE>
NOTE 7. INCOME TAXES
Earnings before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Domestic............................................. $51,771 $37,542 $110,287
Foreign.............................................. 12,670 10,804 9,263
------- ------- --------
$64,441 $48,346 $119,550
======= ======= ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal.............................................. $14,363 $4,464 $18,827
State................................................ 2,569 552 3,121
International........................................ 3,831 (325) 3,506
------- ------ -------
$20,763 $4,691 $25,454
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal.............................................. $ 8,148 $4,174 $12,322
State................................................ 2,140 277 2,417
International........................................ 5,166 -- 5,166
------- ------ -------
$15,454 $4,451 $19,905
======= ====== =======
</TABLE>
F-13
<PAGE> 136
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal.............................................. $56,697 $(11,031) $45,666
State................................................ 8,212 (756) 7,456
International........................................ 3,282 -- 3,282
------- -------- -------
$68,191 $(11,787) $56,404
======= ======== =======
</TABLE>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the statutory tax rate of 35
percent to pre-tax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Computed "expected" tax expense....................... $22,554 $16,921 $41,843
Goodwill.............................................. 442 533 9,307
State income taxes, net of Federal benefit............ 2,028 1,571 4,846
Tax-exempt interest from municipal bonds.............. (445) -- --
Foreign income taxed at other than U.S. rates......... 1,145 1,836 350
Utilization of foreign net operating loss
carryforwards....................................... (123) (231) (814)
Nonconsolidated foreign net operating loss............ 67 492 566
Foreign, other........................................ (441) (1,450) 271
Effect of change in inventory accounting method....... -- -- 455
Other, net............................................ 227 233 (420)
------- ------- -------
$25,454 $19,905 $56,404
======= ======= =======
</TABLE>
F-14
<PAGE> 137
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... $ 4,458 $ 3,591
Intangible assets, deducted for book purposes but
capitalized and amortized for tax purposes............. 1 323
Net operating loss carryforwards.......................... 67 492
Inventories, principally due to additional costs
capitalized for tax purposes pursuant to the Tax Reform
Act of 1986............................................ 664 702
Notes receivable, basis difference........................ -- 397
Legal fees, capitalized and amortized for tax purposes.... 670 402
Accrued liabilities....................................... 1,015 519
Deferred foreign tax asset................................ 325 --
Other..................................................... 1,089 41
-------- --------
Total gross deferred tax assets........................ 8,289 6,467
Less valuation allowance............................... (67) (492)
-------- --------
Net deferred tax assets................................ 8,222 5,975
Deferred Tax Liabilities:
Plant and equipment, principally due to differences in
depreciation and basis................................. (11,722) (5,686)
Deferred state tax liability.............................. (973) (421)
Investments, principally due to differences in tax
treatment of certain components........................ (506) --
Other..................................................... (86) (242)
-------- --------
Total gross deferred tax liabilities................. (13,287) (6,349)
-------- --------
Net deferred tax liability........................ $ (5,065) $ (374)
======== ========
</TABLE>
At December 31, 1996, the Company had $1.1 million of operating loss
carryforwards available to reduce future taxable income of certain international
subsidiaries. These loss carryforwards must be utilized within the applicable
carryforward periods. A valuation allowance has been provided for the deferred
tax assets related to loss carryforwards. Carryforwards of $712,000 can be used
indefinitely and the remainder expire from 1997 through 2001.
The Company anticipates that the reversal of existing taxable temporary
differences and future taxable income will provide sufficient taxable income to
realize the tax benefit of the remaining deferred tax assets. In accordance with
the Company's accounting policy, U.S. deferred taxes have not been provided on
undistributed earnings of foreign subsidiaries at the end of 1996, as the
Company intends to reinvest these earnings permanently in the foreign operations
or to repatriate such earnings only when it is advantageous for the Company to
do so. The amount of the unrecognized tax liability for these undistributed
earnings was not material at the end of 1996 due to the availability of foreign
tax credits.
Income taxes paid during 1996, 1995 and 1994 were $15.4 million, $15.1
million and $57.3 million, respectively.
F-15
<PAGE> 138
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock:
The Company is authorized to issue 100 million shares of Common Stock,
$.001 par value (the "Common Stock"). The number of shares of Common Stock
issued and outstanding at the end of 1996 and 1995 was 42,355,000 and
44,331,000, respectively.
Treasury Stock:
In July, 1995, the Company's Board of Directors approved a program to
repurchase up to 3,000,000 shares of its Common Stock. The Company repurchased
2,563,000 shares during 1996 and 77,000 shares during 1995. As of December 31,
1996, there were 360,000 remaining shares to be repurchased in the program. In
1994, the Company's Board of Directors adopted a resolution to return all
repurchased shares to the status of authorized but unissued shares. In
accordance with this resolution, the Company retired 2,563,000 and 77,000
treasury shares in 1996 and 1995, respectively. Subsequent to 1996, the
Company's Board of Directors approved a program which authorizes the Company to
purchase up to an additional 3 million shares.
Preferred Stock:
The Company is authorized to issue up to 20 million shares of Redeemable
Preferred Stock, par value $0.001 per share, in one or more series. As of
December 31, 1996 and December 31, 1995, none were issued.
Employee Stock Ownership Plan:
The Company has established an Employee Stock Ownership Plan (the "ESOP")
covering employees of the Company who meet minimum age and length of service
requirements. The ESOP enables eligible employees to acquire a proprietary
interest in the Company.
As of December 31, 1996, all shares of stock owned by the ESOP have been
allocated to employees. Based on the number of shares planned to be allocated
for the year, ESOP expense recorded during 1996, 1995 and 1994 amounted to $0,
$263,000 and $476,000, respectively.
Investment Plan:
The Company has an Investment Plan intended to qualify as a deferred
compensation plan under Section 401(k) of the Internal Revenue Code of 1986. The
Investment Plan is available to all domestic employees and the Company matches
employee contributions up to a specified limit. In 1996, 1995 and 1994,
$498,000, $265,000 and $314,000, respectively, was charged to expense for
matching contributions.
NOTE 9. STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation". While the new
accounting standard encourages the adoption of a new fair-value method for
expense recognition, Statement 123 allows companies to continue accounting for
stock options and other stock-based awards as provided in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
Company has elected to follow the provisions of APB 25 and related
interpretations in accounting for its stock options plans because, as discussed
below, the alternative fair-value method prescribed by FASB Statement No. 123
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-16
<PAGE> 139
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the "Key
Contributor Stock Option Plan") covers up to an aggregate of 5,750,000 shares of
the Company's Common Stock. Options may be granted under the Key Contributor
Stock Option Plan to employees (including officers), non-employee directors and
consultants of the Company. The exercise price of the options is determined by a
committee of the Board of Directors of the Company. The Key Contributor Stock
Option Plan permits the Board of Directors to declare the terms for payment when
such options are exercised. Options may be granted with a term not exceeding ten
years.
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the "Directors
Stock Option Plan") covers an aggregate of 300,000 shares of the Company's
Common Stock and may be granted to non-employee directors of the Company. The
exercise price of options granted under the Directors Stock Option Plan shall be
the fair market value of the shares of the Company's Common Stock on the date
that such option is granted.
The 1995 Kinetic Concepts, Inc. Senior Executive Management Stock Option
Plan (the "Senior Executive Stock Option Plan") covers a total of 1,400,000
shares of the Company's Common Stock and may be granted to certain senior
executives of the Company at the recommendation of the Chief Executive Officer
and discretion of the Company's Board of Directors. The exercise price for each
share of common stock covered by an option shall be established by the Board of
Directors but may not in any case be less than the fair market value of the
shares of common stock of the Company on the date of grant. Vesting of options
granted is subject to certain terms and conditions. The Senior Executive Stock
Option Plan is subject to final approval by the Company's shareholders.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair-value method of that
statement. The fair value for options granted during the two fiscal years ended
December 31, 1996 and 1995, respectively, was estimated using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates of 6.1% and 6.0%, dividend yields of 0.9% and 2.1%, volatility
factors of the expected market price of the Company's common stock of .32 and
.33, and a weighted-average expected option life of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
underlying assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net Earnings as Reported................................. $38,987 $28,441
Pro Forma Net Earnings................................... $37,996 $28,238
Earnings Per Share as Reported........................... $ 0.86 $ 0.63
Pro Forma Earnings Per Share............................. $ 0.84 $ 0.62
</TABLE>
The Company is not required to apply the method of accounting prescribed by
Statement 123 to stock options granted prior to January 1, 1995. As such, the
pro forma compensation cost reflected above may not be representative of future
results.
F-17
<PAGE> 140
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summaries information about stock options outstanding
at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING CONTRACT EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE (YRS) PRICE AT 12/31/96 PRICE
--------------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00 to $ 4.63................... 1,166 6.9 $ 4.22 594 $ 4.23
$ 5.00 to $ 9.50................... 1,272 7.5 $ 6.26 435 $ 6.14
$11.13 to $17.00................... 901 9.2 $15.61 292 $14.23
----- --- ------ ----- ------
3,339 8.0 $ 8.68 1,321 $ 7.07
===== === ====== ===== ======
</TABLE>
A summary of the Company's stock option activity, and related information,
for years ended December 31, 1996, 1995 and 1994 follows (options in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding -- Beginning of
Year................................ 2,833 $ 5.21 3,029 $4.50 2,668 $5.35
Granted............................. 1,317 $14.47 873 $6.89 2,124 $4.15
Exercised........................... (628) $ 5.05 (792) $4.56 (199) $4.07
Forfeited........................... (183) $ 9.34 (277) $4.57 (1,564) $5.53
----- ------ ----- ----- ------ -----
Options Outstanding -- End of Year.... 3,339 $ 8.68 2,833 $5.21 3,029 $4.50
===== ====== ===== ===== ====== =====
Exercisable at End of Year............ 1,321 $ 7.07
===== ======
Weighted-Average Fair Value of Options
Granted During the Year............. $ 5.80 $2.19
====== =====
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $17.00. The weighted average remaining contractual life of those
options is 8.0 years.
The following table summarizes the activity in the Company's 1987 Key
Contributor Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ ----------------------
<S> <C> <C>
Outstanding, January 1, 1994................................ 2,606 $3.00 to $8.625
Granted................................................... 2,116 $3.375 to $6.00
Canceled.................................................. (1,556) $3.50 to $8.625
Exercised................................................. (199) $3.50 to $5.75
------ -----------------
Outstanding, December 31, 1994.............................. 2,967 $3.00 to $8.625
------ -----------------
Granted................................................... 865 $5.50 to $11.75
Canceled.................................................. (277) $3.375 to $8.1875
Exercised................................................. (760) $3.375 to $6.75
------ -----------------
Outstanding, December 31, 1995.............................. 2,795 $3.00 to $11.75
------ -----------------
Granted................................................... 806 $11.75 to $17.00
Canceled.................................................. (183) $3.625 to $16.50
Exercised................................................. (618) $3.50 to $16.50
------ -----------------
Outstanding, December 31, 1996.............................. 2,800 $3.00 to $17.00
====== =================
</TABLE>
F-18
<PAGE> 141
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in the Company's 1988 Eligible
Directors Stock Option Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
SHARES OPTION PRICE PER SHARE
------ ----------------------
<S> <C> <C>
Outstanding, January 1, 1994................................ 62 $ 4.125 to $ 9.375
Granted................................................... 8 $ 3.75 to $ 4.50
Exercised................................................. -- $ --
Lapsed.................................................... (8) $ 5.00 to $ 5.25
------ ------------------
Outstanding, December 31, 1994.............................. 62 $ 3.75 to $ 9.375
------ ------------------
Granted................................................... 8 $ 8.125 to $ 9.25
Exercised................................................. (32) $ 4.125 to $ 5.875
Lapsed.................................................... -- $ --
------ ------------------
Outstanding, December 31, 1995.............................. 38 $ 3.75 to $ 9.375
------ ------------------
Granted................................................... 31 $14.625 to $16.125
Exercised................................................. (10) $ 4.375 to $ 9.375
Lapsed.................................................... -- $ --
------ ------------------
Outstanding, December 31, 1996.............................. 59 $ 3.75 to $16.125
====== ==================
</TABLE>
In July, 1991, the Company granted options to three non-employee directors
of the Company to acquire a total of 30,000 shares of the Company's Common Stock
at $5.00 per share (the fair market value at date of grant). At December 31,
1996, 20,000 options are exercisable and expire ten years from the grant date.
During 1994, the Chairman of the Board issued options for 440,000 of his
shares at fair market value of $5.74 to the newly appointed Chief Executive
Officer. At December 31, 1996, 340,000 options are exercisable and expire three
years from the grant date.
NOTE 10. OTHER ASSETS
A summary of other long-term assets follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Investment in assets subject to leveraged leases........... $14,766 $ 7,566
Information systems development projects................... 3,124 5,601
Investment in long-term securities......................... 4,989 4,872
Intangible assets.......................................... 3,660 3,475
Deposits and other......................................... 8,529 5,978
------- -------
$35,068 $27,492
(Less) Accumulated amortization............................ 4,628 5,638
------- -------
$30,440 $21,854
======= =======
</TABLE>
Long-term securities consist primarily of government backed securities held
by the Company's wholly owned captive insurance company and are carried at
market value, which is not significantly different than cost. The carrying value
of the long-term securities approximates fair value.
On December 30, 1996, the Company acquired beneficial ownership of a
Grantor Trust. The Trust assets consist of a McDonnell Douglas DC-10 aircraft
and three engines. In connection with the acquisition, KCI paid cash equity of
$7.2 million and assumed non-recourse debt of $47.0 million. The DC-10 aircraft
is on lease to the Federal Express Corporation through June 2012. Federal
Express pays monthly rent to a third
F-19
<PAGE> 142
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
party who, in turn, pays this entire amount to the holders of the non-recourse
certificated indebtedness, which is secured by the aircraft. Recourse to the
certificate holders is limited to the Trust assets only.
NOTE 11. COMMITMENTS AND CONTINGENCIES
On February 21, 1992, Novamedix Limited filed a lawsuit against the Company
in the United States District Court for the Western District of Texas. Novamedix
holds the patent rights to the principal product which directly competes with
the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents
held by Novamedix, that the Company breached a confidential relationship with
Novamedix and a variety of subsidiary claims. Novamedix seeks injunctive relief
and monetary damages. Initial discovery in this case has been substantially
completed. Although it is not possible to predict the outcome of this litigation
or the damages which could be awarded, the Company believes that its defenses to
these claims are meritorious and that the litigation will not have a material
effect on the Company's business, financial condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust lawsuit against
Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom. The suit was
filed in the United States District Court for the Western District of Texas. The
suit alleges that Hill-Rom used its monopoly power in the standard hospital bed
business to gain an unfair advantage in the specialty hospital bed business.
Although discovery is just beginning and it is not possible to predict the
outcome of this litigation or the damages which might be awarded, the Company
believes that its claims are meritorious.
On October 31, 1996 the Company received a counterclaim which had been
filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company
filed in 1995. The counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable Kinetic Concepts to monopolize the bed
market. Although it is not possible to predict the outcome of this litigation,
the Company believes that the counterclaim is without merit.
On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries,
Inc. filed a lawsuit against the Company alleging that the Company's
TriaDyne(TM) bed infringes a patent issued to Hill-Rom in December 1996. This
suit was filed in the United States District Court for the District of South
Carolina. Substantive discovery in the case has not begun. Based upon its
initial investigation, the Company does not believe that the TriaDyne(TM) bed
infringes the Hill-Rom patent or that this lawsuit will materially impact the
marketing of the TriaDyne(TM) bed.
The Company is party to several lawsuits generally incidental to its
business, including product claims and is contesting certain adjustments
proposed by the Internal Revenue Service to prior years' tax returns. Provisions
have been made in the accompanying financial statements for estimated exposures
related to these lawsuits and adjustments. In the opinion of management, the
disposition of these items will not have a material effect on the Company's
business, financial condition or results of operations.
See discussion of self-insurance program at Note 1 and leases at Note 6.
NOTE 12. UNUSUAL ITEMS
During the third quarter of 1994, the Company recorded a gain from the
settlement of a patent infringement lawsuit brought against SSI. The settlement
was $84.75 million. Net of legal expenses, this transaction added $81.6 million
of pre-tax income to the 1994 results. In addition, a $10.1 million pre-tax gain
from the sale of Medical Services was recognized. The Company recorded certain
other unusual items, primarily planned dispositions of under-utilized rental
assets and over-stocked inventories of $6.8 million. These items together total
$84 million and are included in Unusual Items on the 1994 Statement of Earnings.
F-20
<PAGE> 143
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one industry segment: the distribution of
specialty therapeutic beds and medical devices to select health care providers.
A summary of financial information by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers...................... $201,116 $68,765 $ -- $269,881
Intercompany transfers...................... 7,272 -- (7,272) --
-------- ------- -------- --------
Total............................... $208,388 $68,765 $ (7,272) $269,881
======== ======= ======== ========
Operating earnings............................ $ 40,810 $15,197 $ (653) $ 55,354
======== ======= ======== ========
Total assets:
Identifiable assets......................... $156,273 $49,622 $(11,547) $194,348
======== ======= ========
Corporate assets............................ 59,045
--------
Total assets........................ $253,393
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers...................... $182,754 $60,689 $ -- $243,443
Intercompany transfers...................... 6,991 -- (6,991) --
-------- ------- -------- --------
Total............................... $189,745 $60,689 $ (6,991) $243,443
======== ======= ======== ========
Operating earnings............................ $ 33,779 $10,845 $ (832) $ 43,792
======== ======= ======== ========
Total assets:
Identifiable assets......................... $157,615 $43,787 $(10,075) $191,327
======== ======= ========
Corporate assets............................ 52,399
--------
Total assets........................ $243,726
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Unaffiliated customers...................... $223,202 $46,444 $ -- $269,646
Intercompany transfers...................... 5,489 -- (5,489) --
-------- ------- ------- --------
Total............................... $228,691 $46,444 $(5,489) $269,646
======== ======= ======= ========
Operating earnings............................ $117,368 $ 7,737 $(1,027) $124,078
======== ======= ======= ========
Total assets:
Identifiable assets......................... $156,248 $41,756 $(8,514) $189,490
======== ======= =======
Corporate assets............................ 43,241
--------
Total assets........................ $232,731
========
</TABLE>
F-21
<PAGE> 144
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Domestic intercompany transfers primarily represent shipments of equipment
and parts to international subsidiaries. These intercompany shipments are made
at transfer prices which approximate prices charged to unaffiliated customers
and have been eliminated from consolidated net revenues. Corporate assets
consist of cash and cash equivalents.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated results of operations by quarter are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $67,587 $64,272 $67,970 $70,052
Operating earnings.................................. $13,741 $12,721 $13,629 $15,263
Net earnings........................................ $ 8,814 $ 8,187 $ 8,858 $13,128
Earnings per common and common equivalent share..... $ 0.19 $ 0.18 $ 0.19 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $57,027 $59,790 $61,606 $65,020
Operating earnings.................................. $ 9,577 $ 8,717 $12,734 $12,764
Net earnings........................................ $ 6,098 $ 5,716 $ 8,535 $ 8,092
Earnings per common and common equivalent share..... $ 0.14 $ 0.13 $ 0.19 $ 0.18
</TABLE>
Earnings per share for the full year may differ from the total of the
quarterly earnings per share due to rounding differences.
F-22
<PAGE> 145
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(UNAUDITED)
Kinetic Concepts, Inc. has issued $200 million in subordinated debt
securities to finance a tender offer to purchase certain of its common shares
outstanding. In connection with the issuance of these securities, certain of its
subsidiaries (the guarantor subsidiaries) have jointly and severally guaranteed
such debt securities. Certain other subsidiaries (the nonguarantor subsidiaries)
will not guarantee such debt. Separate financial statements and other
disclosures concerning the subsidiary guarantors are not deemed material to
investors.
The following tables present the unaudited condensed consolidating balance
sheets of Kinetic Concepts, Inc. as a parent company, its guarantor subsidiaries
and its nonguarantor subsidiaries as of December 31, 1996 and 1995 and the
related unaudited condensed consolidating statements of earnings and cash flows
for each year in the three-year period ended December 31, 1996.
F-23
<PAGE> 146
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents....... $ $ 50,286 $14,485 $ (5,726) $ 59,045
Accounts receivable, net... 5,174 39,996 13,072 (1) 58,241
Inventories................ 13,944 334 10,605 (4,841) 20,042
Prepaid expenses and
other................... 2,677 3,214 969 -- 6,860
-------- -------- ------- --------- --------
Total current
assets........... 21,795 93,830 39,131 (10,568) 144,188
Net property, plant and
equipment............... 12,965 76,143 9,571 (33,455) 65,224
Goodwill, net.............. 3,375 3,829 6,337 -- 13,541
Other assets, net.......... 10,848 21,470 325 (2,203) 30,440
Intercompany investments
and advances............ 279,773 200,399 -- (480,172) --
-------- -------- ------- --------- --------
Total Assets....... $328,756 $395,671 $55,364 $(526,398) $253,393
======== ======== ======= ========= ========
LIABILITIES AND CAPITAL
ACCOUNTS
Accounts payable........... $ 7,635 $ 509 $ 1,556 $ (5,726) $ 3,974
Intercompany payables...... 102,044 41,683 9,894 (153,621) --
Current installments of
capital lease
obligations............. 118 -- -- -- 118
Accrued expenses........... 5,422 17,947 5,561 862 29,792
Income taxes payable....... 2,111 2,294 (1,435) 2,970
-------- -------- ------- --------- --------
Total current
liabilities...... 117,330 60,139 19,305 (159,920) 36,854
-------- -------- ------- --------- --------
Capital leases obligations,
excluding current
installment............. 348 -- 48 -- 396
Deferred income taxes...... -- 12,120 -- (7,055) 5,065
-------- -------- ------- --------- --------
Total
Liabilities...... 117,678 72,259 19,353 (166,975) 42,315
-------- -------- ------- --------- --------
Stockholders' Equity....... 211,078 323,412 36,011 (359,423) 211,078
-------- -------- ------- --------- --------
Total Liabilities
and Equity....... $328,756 $395,671 $55,364 $(526,398) $253,393
======== ======== ======= ========= ========
</TABLE>
F-24
<PAGE> 147
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents....... $ -- $ 41,142 $13,837 $ (2,580) $ 52,399
Accounts receivable, net... 4,216 40,379 11,437 -- 56,032
Inventories................ 14,884 3,993 5,290 (5,313) 18,854
Note receivable from
principal shareholder... -- 10,291 -- -- 10,291
Prepaid expenses and
other................... 1,591 2,656 647 (29) 4,865
-------- -------- ------- --------- --------
Total current
assets........... 20,691 98,461 31,211 (7,922) 142,441
Net property, plant and
equipment............... 7,314 88,888 7,879 (41,805) 62,276
Notes receivable........... -- 3,187 -- -- 3,187
Goodwill, net.............. 4,050 4,060 5,858 -- 13,968
Other assets, net.......... 10,970 13,303 -- (2,419) 21,854
Intercompany investments
and advances............ 228,758 -- -- (228,758) --
-------- -------- ------- --------- --------
Total Assets....... $271,783 $207,899 $44,948 $(280,904) $243,726
======== ======== ======= ========= ========
LIABILITIES AND CAPITAL
ACCOUNTS
Accounts payable........... $ 3,625 $ 185 $ 1,229 $ (2,527) $ 2,512
Intercompany payables...... 52,172 71,938 4,530 (128,640) --
Accrued expenses........... 5,662 14,636 6,686 (494) 26,490
Income taxes payable....... -- 886 2,736 404 4,026
-------- -------- ------- --------- --------
Total current
liabilities...... 61,459 87,645 15,181 (131,257) 33,028
-------- -------- ------- --------- --------
Capital leases obligations,
excluding current
installment................ -- -- 55 (55) --
Deferred income taxes........ -- 5,258 -- (4,884) 374
-------- -------- ------- --------- --------
Total
liabilities...... 61,459 92,903 15,236 (136,196) 33,402
-------- -------- ------- --------- --------
Stockholders' Equity......... 210,324 114,996 29,712 (144,708) 210,324
-------- -------- ------- --------- --------
Total Liabilities
and Equity....... $271,783 $207,899 $44,948 $(280,904) $243,726
======== ======== ======= ========= ========
</TABLE>
F-25
<PAGE> 148
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS HISTORICAL
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service and rental......... $ -- $176,135 $49,315 $ -- $225,450
Sales and other............ 54,716 10,989 18,768 (40,042) 44,431
------- -------- ------- -------- --------
Total revenue...... 54,716 187,124 68,083 (40,042) 269,881
Rental expenses.............. -- 110,198 45,851 (9,844) 146,205
Cost of goods sold........... 33,774 -- 9,027 (26,486) 16,315
------- -------- ------- -------- --------
33,774 110,198 54,878 (36,330) 162,520
------- -------- ------- -------- --------
Gross profit............ 20,942 76,926 13,205 (3,712) 107,361
Selling, general and
administrative expenses.... 22,615 38,218 3,101 (11,927) 52,007
------- -------- ------- -------- --------
Operating income........ (1,673) 38,708 10,104 8,215 55,354
Interest income (expense),
net........................ (713) 8,703 334 763 9,087
------- -------- ------- -------- --------
Earnings before income
taxes................. (2,386) 47,411 10,438 8,978 64,441
Income tax................... (788) 19,059 3,862 3,321 25,454
------- -------- ------- -------- --------
Earnings before equity
in earnings of
subsidiaries.......... (1,598) 28,352 6,576 5,657 38,987
Equity in earnings of
subsidiaries.......... 40,585 6,576 -- (47,161) --
------- -------- ------- -------- --------
Net earnings............ $38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
======= ======== ======= ======== ========
</TABLE>
F-26
<PAGE> 149
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS HISTORICAL
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service and rental......... $ -- $160,214 $46,439 $ -- $206,653
Sales and other............ 91,737 12,244 13,393 (80,584) 36,790
-------- -------- ------- -------- --------
Total revenue...... 91,737 172,458 59,832 (80,584) 243,443
Rental expenses.............. 134,137 40,453 (37,170) 137,420
Cost of goods sold........... 47,258 2,869 6,517 (42,915) 13,729
-------- -------- ------- -------- --------
47,258 137,006 46,970 (80,085) 151,149
-------- -------- ------- -------- --------
Gross profit............ 44,479 35,452 12,862 (499) 92,294
Selling, general and
administrative expenses.... 11,115 12,219 3,647 21,521 48,502
-------- -------- ------- -------- --------
Operating income........ 33,364 23,233 9,215 (22,020) 43,792
Interest income (expense),
net........................ (4,040) 6,195 287 2,112 4,554
-------- -------- ------- -------- --------
Earnings before income
taxes................. 29,324 29,428 9,502 (19,908) 48,346
Income tax................... 11,436 11,477 4,751 (7,759) 19,905
-------- -------- ------- -------- --------
Earnings before equity
in earnings of
subsidiaries.......... 17,888 17,951 4,751 (12,149) 28,441
Equity in earnings of
subsidiaries.......... 10,554 4,751 -- (15,305) --
-------- -------- ------- -------- --------
Net earnings............ $ 28,442 $ 22,702 $ 4,751 $(27,454) $ 28,441
======== ======== ======= ======== ========
</TABLE>
F-27
<PAGE> 150
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS HISTORICAL
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service and rental......... $ -- $192,612 $36,220 $ -- $228,832
Sales and other............ 43,763 23,438 9,143 (35,530) 40,814
-------- -------- ------- -------- --------
Total revenue...... 43,763 216,050 45,363 (35,530) 269,646
Rental expenses.............. 171,563 34,342 (46,670) 159,235
Cost of goods sold........... 28,784 11,635 3,611 (24,642) 19,388
-------- -------- ------- -------- --------
28,784 183,198 37,953 (71,312) 178,623
-------- -------- ------- -------- --------
Gross profit............ 14,979 32,852 7,410 35,782 91,023
Selling, general and
administrative expenses.... 11,272 21,588 2,365 16,588 51,813
Unusual items................ (81,596) (8,872) 5,600 (84,868)
-------- -------- ------- -------- --------
Operating income........ 85,303 20,136 5,045 13,594 124,078
Interest income (expense),
net........................ (5,225) (8,958) 4,256 5,399 (4,528)
-------- -------- ------- -------- --------
Earnings before income
taxes................. 80,078 11,178 9,301 18,993 119,550
Income tax................... 36,369 5,048 5,116 9,416 55,949
Minority interest............ -- 40 -- -- 40
Cumulative effect of
accounting change.......... 742 -- -- -- 742
-------- -------- ------- -------- --------
Earnings before equity
in earnings of
subsidiaries.......... 44,451 6,170 4,185 9,577 64,383
Equity in earnings of
subsidiaries.......... 19,932 4,186 -- (24,118) --
-------- -------- ------- -------- --------
Net earnings............ $ 64,383 $ 10,356 $ 4,185 $(14,541) $ 64,383
======== ======== ======= ======== ========
</TABLE>
F-28
<PAGE> 151
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. NON- RECLASSIFICATIONS
PARENT COMPANY GUARANTOR GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................. $ 38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:................ (32,912) 30,697 (5,031) 30,426 23,180
-------- -------- -------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES....... 6,075 65,625 1,545 (11,078) 62,167
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property,
plant and equipment..... (8,474) (13,261) (10,017) 3,969 (27,783)
Decrease in inventory to be
converted into equipment
for short-term rental... 700 -- -- -- 700
Dispositions of property,
plant and equipment..... -- 132 5,268 -- 5,400
Businesses acquired in
purchase transactions,
net of cash acquired.... -- (1,146) -- -- (1,146)
Excess principal repayment
on discounted notes
receivable.............. -- 5,180 -- -- 5,180
Note repaid from principal
shareholder............. -- 10,000 -- -- 10,000
Decrease (increase) in
other assets............ 23 (6,796) (1,227) (1,960) (9,960)
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES....... (7,751) (5,891) (5,976) 2,009 (17,609)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments) of
capital lease
obligations............. 466 -- (6) (3) 457
Proceeds from the exercise
of stock options........ 4,264 -- -- -- 4,264
Proceeds (payments) on
intercompany investments
and advances............ 39,442 (51,565) 5,565 6,558 --
Purchase and retirement of
treasury stock.......... (35,241) -- -- -- (35,241)
Cash dividends paid to
shareholders............ (6,607) -- -- -- (6,607)
Other...................... (648) 975 (480) 3 (150)
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES....... 1,676 (50,590) 5,079 6,558 (37,277)
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- (635) (635)
-------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................ -- 9,144 648 (3,146) 6,646
Cash and cash equivalents,
beginning of year.......... -- 41,142 13,837 (2,580) 52,399
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR................ $ -- $ 50,286 $ 14,485 $ (5,726) $ 59,045
======== ======== ======== ======== ========
</TABLE>
F-29
<PAGE> 152
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. RECLASSIFICATIONS
PARENT COMPANY GUARANTOR NON-GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................. $ 28,442 $ 22,702 $ 4,751 $(27,454) $ 28,441
Adjustments to reconcile net
earnings to net cash
provided by operating
activities................. (16,632) 44,747 6,740 (6,514) 28,341
-------- -------- ------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES....... 11,810 67,449 11,491 (33,968) 56,782
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant
and equipment.............. 225 (65,148) (7,632) 36,451 (36,104)
Increase in inventory to be
converted into equipment
for short-term rental...... (1,000) -- -- -- (1,000)
Dispositions of property,
plant and equipment........ 209 669 2,353 -- 3,231
Proceeds from sale of
divisions.................. -- 7,182 -- -- 7,182
Decrease in finance lease
receivable, net............ -- -- -- 339 339
Decrease (increase) in other
assets..................... (5,012) (9,002) 117 (2,634) (16,531)
-------- -------- ------- -------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES....... (5,578) (66,299) (5,162) 34,156 (42,883)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments) of
notes payable and long-term
obligations................ (95) (7,805) (68) 7,168 (800)
Borrowings (repayments) of
capital lease
obligations................ -- -- 55 (119) (64)
Proceeds from the exercise of
stock options.............. 4,919 -- -- -- 4,919
Proceeds (payments) on
intercompany investments
and advances............... (2,596) 16,121 (4,620) (8,905) --
Purchase and retirement of
treasury stock............. (2,849) -- -- -- (2,849)
Cash dividends paid to
shareholders............... (6,631) -- -- -- (6,631)
Other........................ 1,020 (2,855) 1,203 447 (185)
-------- -------- ------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES....... (6,232) 5,461 (3,430) (1,409) (5,610)
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- 869 869
-------- -------- ------- -------- --------
Net increase in cash and cash
equivalents................ -- 6,611 2,899 (352) 9,158
Cash and cash equivalents,
beginning of year.......... -- 34,531 10,938 (2,228) 43,241
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR................ $ -- $ 41,142 $13,837 $ (2,580) $ 52,399
======== ======== ======= ======== ========
</TABLE>
F-30
<PAGE> 153
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC CONCEPTS, INC. NON- RECLASSIFICATIONS
PARENT COMPANY GUARANTOR GUARANTOR AND KINETIC CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------------------- ------------ ------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings................. $ 64,383 $ 10,356 $ 4,185 $(14,541) $ 64,383
Adjustments to reconcile net
earnings to net cash
provided by operating
activities: (6,206) 38,343 276 (345) 32,068
-------- -------- -------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES....... 58,177 48,699 4,461 (14,886) 96,451
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant
and equipment.............. (4,832) (25,413) (4,801) 21,232 (13,814)
Decrease in inventory to be
converted into equipment
for short-term rental...... 4,250 -- -- -- 4,250
Dispositions of property,
plant and equipment........ 497 2,372 -- -- 2,869
Proceeds from sale of
divisions.................. -- 65,300 -- -- 65,300
Increase in finance lease
receivable, net............ -- (1,561) -- -- (1,561)
Decrease (increase) in other
assets..................... (1,505) 9,690 111 (17,526) (9,230)
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES....... (1,590) 50,388 (4,690) 3,706 47,814
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments) of
notes payable and long-term
obligations................ 95 (103,399) 68 611 (102,625)
Borrowings (repayments) of
capital lease
obligations................ (176) (4,778) (61) 2,633 (2,382)
Proceeds from the exercise of
stock options.............. 915 -- -- -- 915
Proceeds (payments) on
intercompany investments
and advances............... (51,838) 38,690 472 12,676 --
Purchase and retirement of
treasury stock............. (1,157) -- -- -- (1,157)
Cash dividends paid to
shareholders............... (6,588) -- -- -- (6,588)
Other........................ 2,162 2,841 1,440 (7,234) (791)
-------- -------- -------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES....... (56,587) (66,646) 1,919 8,686 (112,628)
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- 1,324 1,324
-------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................ -- 32,441 1,690 (1,170) 32,961
Cash and cash equivalents,
beginning of year.......... -- 2,090 9,248 (1,058) 10,280
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR................ $ -- $ 34,531 $ 10,938 $ (2,228) $ 43,241
======== ======== ======== ======== ========
</TABLE>
F-31
<PAGE> 154
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
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 amortization 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 liabilities......................... 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
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE> 155
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
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 equivalent
share...................................... $ 0.23 $ 0.19 $ 0.68 $ 0.56
======= ======= ======== ========
Shares used in earnings per share
computations............................... 44,091 45,553 43,772 45,923
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33
<PAGE> 156
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-34
<PAGE> 157
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):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
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
======= =======
</TABLE>
(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.
(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.
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. 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.
F-35
<PAGE> 158
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(5) SHARES USED IN EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE COMPUTATIONS
The weighted average number of common and common equivalent shares used in
the computation of earnings per share is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
Earnings per common and common equivalent share are computed by dividing
net earnings by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options (using the treasury stock method). Earnings per
share computed on a fully diluted basis is not presented as it is not
significantly different from earnings per share computed on a primary basis.
(6) COMMITMENTS AND CONTINGENCIES
The Company is party to several lawsuits generally incidental to its
business and is contesting certain adjustments proposed by the Internal Revenue
Service to prior years' tax returns. Provisions have been made in the
accompanying financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the disposition of these
items will not have a material effect on the Company's financial statements.
(7) NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary ("basic") earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in basic earnings per share for the 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.
F-36
<PAGE> 159
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-37
<PAGE> 160
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(9) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL
STATEMENTS (UNAUDITED)
Kinetic Concepts, Inc. has issued $200 million in subordinated debt
securities to finance a tender offer to purchase certain of its common shares
outstanding. In connection with the issuance of these securities, certain of its
subsidiaries (the guarantor subsidiaries) have jointly and severally guaranteed
such debt securities. Certain other subsidiaries (the nonguarantor subsidiaries)
will not guarantee such debt. Separate financial statements and other
disclosures concerning the subsidiary guarantors are not deemed material to
Investors.
The following tables present the unaudited condensed consolidating balance
sheets of Kinetic Concepts, Inc. as a parent company, its guarantor subsidiaries
and its nonguarantor subsidiaries as of September 30, 1997 and 1996 and the
related unaudited condensed consolidating statements of earnings and cash flows
for the nine-month periods ended September 30, 1997 and 1996.
F-38
<PAGE> 161
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC KINETIC
CONCEPTS, INC. RECLASSIFICATIONS CONCEPTS, INC.
PARENT COMPANY GUARANTOR NON-GUARANTOR AND AND
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- ------------ ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 1,615 $ 22,876 $21,044 $ $ 45,535
Accounts receivable and note receivable,
net..................................... 268 60,763 13,844 74,875
Inventories................................ 18,157 2,292 9,658 (9,039) 21,068
Prepaid expenses and other................. 6,076 2,807 1,770 10,653
-------- -------- ------- --------- --------
Total current assets............... 262,116 88,738 46,316 (9,039) 152,131
Net property, plant and equipment.......... 13,918 73,882 8,625 (23,890) 72,535
Notes receivable........................... 3,000 100 3,100
Goodwill, net.............................. 2,869 18,831 5,949 27,649
Other assets, net.......................... 9,915 22,080 121 (1,508) 30,608
Intercompany investments and advances...... 242,282 267,443 5,060 (514,785)
-------- -------- ------- --------- --------
Total Assets....................... $298,100 $471,074 $66,071 $(549,222) $286,023
======== ======== ======= ========= ========
LIABILITIES AND CAPITAL ACCOUNTS
Accounts payable............................. $ 2,828 $ 604 $ 1,991 $ $ 5,423
Intercompany payables........................ 59,906 122,107 11,359 (193,372)
Current installments of capital lease
obligations................................ 137 137
Accrued expenses............................. 4,115 24,321 5,694 (499) 33,631
Income taxes payable......................... 889 3,404 (2,517) 1,776
-------- -------- ------- --------- --------
Total current liabilities.......... 66,986 147,921 22,448 (196,388) 40,967
-------- -------- ------- --------- --------
Capital leases obligations, net of current
installments............................... 289 51 340
Deferred income taxes, net................... 18,924 (5,462) 13,462
Other........................................ 208 208
-------- -------- ------- --------- --------
Total Liabilities.................. 67,275 166,845 22,707 (201,850) 54,977
-------- -------- ------- --------- --------
Minority interest............................ 220 220
Stockholders' Equity......................... 230,825 304,229 43,144 (347,372) 230,826
-------- -------- ------- --------- --------
Total Liabilities and Equity....... $298,100 $471,074 $66,071 $(549,222) $286,023
======== ======== ======= ========= ========
</TABLE>
F-39
<PAGE> 162
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC
CONCEPTS, INC. RECLASSIFICATIONS KINETIC
PARENT COMPANY GUARANTOR NON-GUARANTOR AND CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ $ 55,230 $13,215 $ (1,464) $ 66,981
Accounts receivable, net............ 5,246 38,942 12,751 56,939
Inventories......................... 15,488 162 11,940 (6,490) 21,100
Prepaid expenses and other.......... 5,257 2,876 1,429 9,562
-------- -------- ------- --------- --------
Total current assets........ 25,991 97,210 39,335 (7,954) 154,582
Net property, plant and equipment... 12,389 77,445 9,452 (33,898) 65,388
Notes receivable.................... 3,187 3,187
Goodwill, net....................... 3,544 3,836 6,464 13,844
Other assets, net................... 9,574 12,847 (993) 21,428
Intercompany investments and
advances......................... 291,835 (291,835)
-------- -------- ------- --------- --------
Total Assets................ $343,333 $194,525 $55,251 $(334,680) $258,429
======== ======== ======= ========= ========
LIABILITIES AND CAPITAL ACCOUNTS
Accounts payable.................... $ 3,640 $ 386 $ 1,336 $ (1,464) $ 3,898
Intercompany payables............... 114,325 19,307 12,062 (145,694)
Accrued expenses.................... 5,924 17,864 5,844 (574) 29,058
Income taxes payable................ 5,256 2,006 (2,671) 4,591
-------- -------- ------- --------- --------
Total current liabilities... 123,889 42,813 21,248 (150,403) 37,547
-------- -------- ------- --------- --------
Capital leases obligations.......... 494 49 543
Deferred income taxes, net.......... 7,819 (6,430) 1,389
Other...............................
-------- -------- ------- --------- --------
Total Liabilities........... 124,383 50,632 21,297 (156,833) 39,479
-------- -------- ------- --------- --------
Stockholders' Equity................ 216,950 143,893 33,954 (177,847) 218,950
-------- -------- ------- --------- --------
Total Liabilities and
Equity.................... $341,333 $194,525 $55,251 $(334,680) $258,429
======== ======== ======= ========= ========
</TABLE>
F-40
<PAGE> 163
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC HISTORICAL
CONCEPTS, INC. RECLASSIFICATIONS KINETIC
PARENT COMPANY GUARANTOR NON-GUARANTOR AND CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and Service......... $ $150,699 $34,031 $ $184,730
Sales and other............ 32,018 23,991 15,065 (31,293) 39,781
------- -------- ------- -------- --------
Total revenue...... 32,018 174,690 49,096 (31,293) 224,511
Rental expenses.............. 91,263 30,453 (6,083) 115,633
Cost of goods sold........... 20,633 6,014 8,785 (19,355) 16,077
------- -------- ------- -------- --------
20,633 97,277 39,238 (25,438) 131,710
------- -------- ------- -------- --------
Gross profit............ 11,385 77,413 9,858 (5,855) 92,801
Selling, general and
administrative expenses.... 4,593 36,925 2,678 44,196
------- -------- ------- -------- --------
Operating earnings...... 6,792 40,488 7,180 (5,855) 48,605
Net interest income.......... 173 349 216 557 1,295
------- -------- ------- -------- --------
Earnings before income
taxes and minority
interest................ 6,965 40,837 7,396 (5,298) 49,900
Income tax................... 2,747 15,787 3,285 (1,859) 19,960
Minority interest............ (37) (37)
------- -------- ------- -------- --------
Earnings before equity in
earnings of
subsidiaries............ 4,219 25,049 4,074 (3,439) 29,123
Equity in earnings of
subsidiaries............ 25,684 4,074 (29,758)
------- -------- ------- -------- --------
Net earnings................. $29,903 $ 29,123 $ 4,074 $(33,197) $ 29,903
======= ======== ======= ======== ========
</TABLE>
F-41
<PAGE> 164
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC HISTORICAL
CONCEPTS, INC. RECLASSIFICATIONS KINETIC
PARENT COMPANY GUARANTOR NON-GUARANTOR AND CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service.............. $ $130,554 $36,969 $ $167,523
Sales and other................. 31,149 8,273 14,035 (21,151) 32,306
-------- -------- ------- -------- --------
Total revenue........... 31,149 138,827 51,004 (21,151) 199,829
Rental expenses................... 82,091 34,788 (7,616) 109,263
Cost of goods sold................ 24,598 554 6,494 (19,961) 11,685
-------- -------- ------- -------- --------
24,598 82,645 41,282 (27,577) 120,948
-------- -------- ------- -------- --------
Gross profit................. 6,551 56,182 9,722 6,426 78,881
Selling, general and
administrative expenses......... 16,280 20,318 2,193 38,791
Operating earnings.............. (9,729) 35,864 7,529 6,426 40,090
Interest income (expense), net.... (4,407) 6,607 170 567 2,937
-------- -------- ------- -------- --------
Earnings before income taxes.... (14,136) 42,471 7,699 6,993 43,027
Income tax........................ (5,513) 16,351 3,465 2,865 17,168
-------- -------- ------- -------- --------
Earnings before equity in
earnings of subsidiaries..... (8,623) 26,120 4,234 4,128 25,859
Equity in earnings of
subsidiaries................. 34,482 4,234 (38,716)
-------- -------- ------- -------- --------
Net earnings.................... $ 25,859 $ 30,354 $ 4,234 $(34,588) $ 25,859
======== ======== ======= ======== ========
</TABLE>
F-42
<PAGE> 165
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
KINETIC
CONCEPTS, INC. RECLASSIFICATIONS KINETIC
PARENT COMPANY GUARANTOR NON-GUARANTOR AND CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.......................... $ 29,903 $ 29,123 $ 4,074 $(33,197) $ 29,903
Adjustments to reconcile net earnings
to net cash provided by operating
activities.......................... (33,650) 5,337 4,363 31,162 7,212
-------- -------- ------- -------- --------
Net cash provided by operating
activities.......................... (3,747) 34,460 8,437 (2,035) 37,115
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment........................ 923 (14,910) (3,445) (2,362) (19,794)
Increase in inventory to be
converted into equipment for
short-term rental................ (4,210) (4,210)
Dispositions of property, plant and
equipment........................ 264 1,545 1,809
Businesses acquired in purchase
transactions, net of cash
acquired......................... (16,903) (16,903)
Decrease in note receivable from
principal shareholder............ (3,000) (3,000)
Decrease (increase) in other
assets........................... 808 534 125 (2,582) (1,115)
-------- -------- ------- -------- --------
Net cash used in investing
activities.......................... (5,479) (31,015) (1,775) (4,944) (43,213)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of capital
lease obligations................ (248) 3 (62) (307)
Proceeds from the exercise of stock
options.......................... 3,864 3,864
Proceeds (payments) on intercompany
investments and advances......... 21,036 (28,257) 4,748 2,473
Purchase and retirement of treasury
stock............................ (4,133) (4,133)
Cash dividends paid to
shareholders..................... (4,789) (4,789)
Other............................... (4,889) (2,598) (4,854) 12,948 607
-------- -------- ------- -------- --------
Net cash provided (used) by financing
activities.......................... 10,841 (30,855) (103) 15,359 (4,758)
Effect of exchange rate changes on
cash and cash equivalents........... (2,654) (2,654)
-------- -------- ------- -------- --------
Net increase in cash and cash
equivalents......................... 1,615 (27,410) 6,559 5,726 (13,510)
Effect of Unusual Items
Cash and cash equivalents, beginning
of period........................... 50,286 14,485 (5,726) 59,045
-------- -------- ------- -------- --------
Cash and cash equivalents, end of
period.............................. $ 1,615 $ 22,876 $21,044 $ $ 45,535
======== ======== ======= ======== ========
</TABLE>
F-43
<PAGE> 166
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
KINETIC
CONCEPTS, INC. RECLASSIFICATIONS KINETIC
PARENT COMPANY GUARANTOR NON-GUARANTOR AND CONCEPTS, INC.
BORROWER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.......................... $ 25,859 $ 30,354 $ 4,234 $(34,588) $ 25,859
Adjustments to reconcile net earnings
to net cash provided by operating
activities.......................... (37,368) 31,682 (7,856) 27,972 14,430
-------- -------- ------- -------- --------
Net cash (used in) provided by
operating activities................ (11,509) 62,036 (3,622) (6,616) 40,289
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and
equipment........................ (5,750) (8,841) (4,962) 1,266 (18,287)
Increase in inventory to be
converted into equipment for
short-term rental................ (850) (850)
Dispositions of property, plant and
equipment........................ 1,400 1,400
Decrease (increase) in note
receivable from principal
shareholder...................... 10,000 10,000
Decrease (increase) in other
assets........................... 1,289 746 (970) (2,026) (961)
-------- -------- ------- -------- --------
Net cash (used in) provided by
investing activities................ (5,311) 1,905 (4,532) (760) (8,698)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of capital
lease obligations................ 494 (6) 488
Proceeds from the exercise of stock
options.......................... 4,694 4,694
Proceeds (payments) on intercompany
investments and advances......... 33,558 (48,230) 7,730 6,942
Purchase and retirement of treasury
stock............................ (16,599) (16,599)
Cash dividends paid to
shareholders..................... (4,988) (4,988)
Other............................... (339) (1,623) (192) 2,007 (147)
-------- -------- ------- -------- --------
Net cash provided (used) by financing
activities.......................... 16,820 (49,953) 7,532 8,949 (16,552)
Effect of exchange rate changes on
cash and cash equivalents........... (457) (457)
-------- -------- ------- -------- --------
Net increase in cash and cash
equivalents......................... 14,088 (622) 1,116 14,582
Cash and cash equivalents, beginning
of period........................... 41,142 13,837 (2,580) 52,399
-------- -------- ------- -------- --------
Cash and cash equivalents, end of
period.............................. $ $ 55,230 $13,215 $ (1,464) $ 66,981
======== ======== ======= ======== ========
</TABLE>
F-44
<PAGE> 167
======================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER
OF TRANSMITTAL OR BOTH TOGETHER NOR ANY EXCHANGE OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 5
Risk Factors.......................... 18
Purpose of the Exchange Offer......... 27
Resale of the Exchange Notes.......... 28
Plan of Distribution.................. 28
The Exchange Offer.................... 29
Exchange Agent........................ 35
Use of Proceeds....................... 36
Capitalization........................ 37
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 38
Selected Historical Consolidated
Financial Data...................... 48
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 50
Business.............................. 60
Management............................ 75
Executive Compensation................ 76
Principal Shareholders................ 83
Certain Relationships and Related
Transactions........................ 84
Description of New Credit
Facilities.......................... 86
Description of Notes.................. 88
Certain Tax Considerations............ 117
Book-Entry; Delivery and Form......... 120
Available Information................. 121
Independent Accountants............... 122
Legal Matters......................... 122
Index to Financial Statements......... F-1
</TABLE>
UNTIL MAY 12, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
KINETIC CONCEPTS, INC.
OFFER TO EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A
KCILOGO
------------------------
PROSPECTUS
------------------------
February 11, 1998
======================================================
