-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1GK23tA/ONH1IjVO6mYcH8fQnOuw8/ZXgfSvGcqJyo2nMv8VvsPh5FLqx76Rgw8 UIrEKqosmB5/8670+Kj7Kw== 0000831967-97-000012.txt : 19970509 0000831967-97-000012.hdr.sgml : 19970509 ACCESSION NUMBER: 0000831967-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970508 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINETIC CONCEPTS INC /TX/ CENTRAL INDEX KEY: 0000831967 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 741891727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09913 FILM NUMBER: 97598329 BUSINESS ADDRESS: STREET 1: 8023 VANTAGE DR CITY: SAN ANTONIO STATE: TX ZIP: 78230 BUSINESS PHONE: 2103083993 MAIL ADDRESS: STREET 1: P. 0. B0X 659508 CITY: SAN ANTONIO STATE: TX ZIP: 78230 10-Q 1 19 of 19 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________ Commission file number 1-9913 KINETIC CONCEPTS, INC. - ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 74-1891727 - --------------------------------- --------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 8023 Vantage Drive San Antonio, Texas 78230 (210) 524-9000 - --------------------------------- --------------------------------- (Address of principal executive (Registrant's phone number) offices and zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock: 42,442,535 shares as of April 30, 1997 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) March 31, December 31, 1997 1996 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents.............. $ 41,394 $ 59,045 Accounts receivable, net............... 71,556 58,241 Inventories............................ 21,367 20,042 Prepaid expenses and other............. 8,991 6,860 ------- ------- Total current assets............ 143,308 144,188 ------- ------- Net property, plant and equipment........ 67,933 65,224 Notes receivable......................... 3,100 -- Goodwill, less accumulated amortization of $12,120 in 1997 and $12,021 in 1996.... 21,339 13,541 Other assets, less accumulated amortization of $2,871 in 1997 and $5,614 in 1996... 31,871 30,440 ------- ------- $267,551 $253,393 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....................... $ 5,480 $ 3,974 Current installments of capital lease obligations.......................... 118 118 Accrued expenses....................... 32,281 29,792 Income tax payable..................... 7,812 2,970 ------- ------- Total current liabilities...... 45,691 36,854 ------- ------- Capital lease obligations, net of current installments........................... 363 396 Deferred income taxes, net............... 6,007 5,065 ------- ------- 52,061 42,315 ------- ------- Shareholders' equity: Common stock; issued and outstanding 42,305 in 1997 and 42,355 in 1996............. 42 42 Retained earnings........................ 218,212 210,816 Cumulative foreign currency translation adjustment............................. (2,518) 555 Notes receivable from officers........... (246) (335) ------- ------- 215,490 211,078 ------- ------- $267,551 $253,393 ======= ======= See accompanying notes to condensed consolidated financial statements. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (in thousands, except per share data) (unaudited) Three months ended March 31, --------------------- 1997 1996 -------- ---------- Revenue: Rental and service................. $61,825 $56,790 Sales and other.................... 11,356 10,797 ------ ------ Total revenue 73,181 67,587 ------ ------ Rental expenses...................... 37,712 37,246 Cost of goods sold................... 4,242 4,043 ------ ------ 41,954 41,289 ------ ------ Gross profit................. 31,227 26,298 Selling, general and administrative expenses........................... 15,010 12,557 ------ ------ Operating earnings........... 16,217 13,741 Net interest income.................. 454 970 ------ ------ Earnings before income taxes 16,671 14,711 Income taxes........................ 6,668 5,897 ------ ------ Net earnings................ $10,003 $ 8,814 ====== ====== Earnings per common and common equivalent share.................. $ 0.23 $ 0.19 ====== ====== Shares used in earnings per share computations...................... 43,763 45,967 ====== ====== See accompanying notes to condensed consolidated financial statements. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three months ended March 31, ----------------------- 1997 1996 ----------- ---------- Cash flows from operating activities: Net earnings.............................. $ 10,003 $ 8,814 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........... 5,280 5,476 Provision for uncollectible accounts receivable............................ 969 408 Change in assets and liabilities: Increase in accounts receivable, net.... (13,488) (2,920) Increase in inventory................... (1,823) (831) Increase in prepaid and other assets.... (2,133) (2,304) Increase in accounts payable............ 1,356 1,633 Increase (decrease) in accrued expenses. 2,227 (670) Increase in income taxes payable........ 4,842 4,333 Increase (decrease) in deferred income taxes 942 (116) ------ ------ Net cash provided by operating activities 8,175 13,823 ------ ------ Cash flows from investing activities: Additions to property, plant and equipment (3,615) (6,798) Increase in inventory to be converted into equipment for short-term rental........ (2,820) (750) Dispositions of property, plant and equipment 42 250 Businesses acquired in purchase transactions, net of cash acquired................... (10,099) -- Decrease in note receivable from principal shareholder............................ -- 10,000 Increase in other assets................. (5,484) (801) ------- ------ Net cash provided (used) by investing activities........................... (21,976) 1,901 ------- ------ Cash flows from financing activities: Repayments of capital lease obligations.. (33) -- Proceeds from the exercise of stock options 392 1,141 Purchase and retirement of treasury stock (1,309) (2,331) Cash dividends paid to shareholders...... (1,608) (1,666) Other.................................... 8 -- ------- ------ Net cash used by financing activities.. (2,550) (2,856) ------- ------ Effect of exchange rate changes on cash and cash equivalents......................... (1,300) (160) ------- ------ Net increase (decrease)in cash and cash equivalents.............................. (17,651) 12,708 Cash and cash equivalents, beginning of period 59,045 52,399 ------ ------ Cash and cash equivalents, end of period... $41,394 $65,107 ====== ====== Supplemental disclosure of cash flow information: Cash paid during the first three months for: Interest............................... $ 59 $ 64 Income taxes........................... $ 676 $ 310 See accompanying notes to condensed consolidated financial statements. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ---------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (1) BASIS OF PRESENTATION --------------------- The financial statements presented herein include the accounts of Kinetic Concepts, Inc. and all subsidiaries (the "Company"). The 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. The financial information presented for the interim periods is unaudited and subject to year- end audit and adjustments. (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): March 31, December 31, 1997 1996 ---------- ------------ Finished goods...................... $ 6,010 $ 5,586 Work in process..................... 3,058 1,893 Raw materials, supplies and parts... 19,669 17,113 ------ ------ 28,737 24,592 Less amounts expected to be converted into equipment for short-term rental 7,370 4,550 ------ ------ Total inventories.......... $21,367 $20,042 ====== ====== (3) NOTES RECEIVABLE ---------------- Notes receivable included a $3.0 million note received from James R. Leininger, M.D., the principal shareholder and chairman of the Company's Board of Directors, the proceeds of which were used to finance a construction project for Home Dome, L.L.C., a third party affiliated with Dr. Leininger. The note carries a variable interest rate which will fluctuate between 6.25% and 10.25% per annum, and requires quarterly interest payments beginning May 3, 1997. Monthly principal payments commence March 3, 1998 based on a 20-year note amortization. The note has a final maturity date of February 3, 2002, at which time the entire amount of unpaid principal and interest shall be due. The note is secured by 300,000 shares of the Company's Common Stock and a mortgage on the property under construction. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (4) ACQUISITIONS/DISPOSITIONS ------------------------- 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 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 beds. The Company purchase price of the Access device was approximately $2.0 million in cash plus other consideration. Subsequent to March 31, 1997, the Company acquired 80% of the outstanding capital stock of Ethos Medial Group, Ltd. located in Athlone, Ireland, for approximately $3.5 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 care givers throughout Ireland. (5) SHARES USED IN EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE COMPUTATIONS --------------------------------------- The weighted average number of common and common equivalent shares used in the computation of earnings per share is as follows (in thousands): Three months ended March 31, ------------------- 1997 1996 -------- -------- Average outstanding common shares... 42,401 44,320 Average common equivalent shares- dilutive effect of option shares.. 1,362 1,647 ------ ------ Shares used in earnings per share computations...................... 43,763 45,967 ====== ====== 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. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (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 earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the first quarter ended March 31, 1997 and March 31, 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 quarters is not expected to be material. Independent Accountants' Review Report -------------------------------------- The Board of Directors Kinetic Concepts, Inc.: We have reviewed the condensed consolidated balance sheet of Kinetic Concepts, Inc. and subsidiaries as of March 31, 1997, and the related condensed consolidated statements of earnings for the three-month period ended March 31, 1997 and the condensed consolidated statements of cash flows for the three-month period ended March 31, 1997. These financial statements are the responsibility of the Company's management. The condensed consolidated balance sheet and the related condensed consolidated statement of earnings and condensed consolidated statement of cash flows of Kinetic Concepts, Inc. and subsidiaries as of March 31, 1996 and for the three-month period then ended were reviewed by other accountants whose report (dated April 17, 1996) stated that they were not aware of any material modifications that should be made to those statements for them to be in conformity with generally accepted accounting principles. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements at and for the period ended March 31, 1997 referred to above for them to be in conformity with generally accepted accounting principles. The financial statements for the year ended December 31, 1996, from which the accompanying condensed balance sheet was derived, were audited by other accountants and they expressed an unqualified opinion on those financial statements in their report dated February 5, 1997. /S/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP San Antonio, Texas April 22, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Results of Operations First Quarter of 1997 Compared to First Quarter of 1996 - -------------------------------------------------------- The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the first quarter of the prior year ($ in thousands): Three Months Ended March 31, ------------------------------ Revenue Increase Relationship (Decrease) --------------- ------------- 1997 1996 $ Pct ------ ------- ------ ---- Revenue: Rental and service................. 84% 84% $ 5,035 9% Sales and other.................... 16 16 559 5 --- --- ------ -- Total Revenue.................... 100% 100% 5,594 8 Rental expenses...................... 51 55 466 1 Cost of goods sold................... 6 6 199 5 --- --- ----- -- Gross profit..................... 43 39 4,929 19 Selling, general and administrative expenses........................... 21 19 2,453 20 --- --- ----- -- Operating earnings............... 22 20 2,476 18 Interest income, net................. 1 1 (516) (53) --- --- ----- -- Earnings before income taxes..... 23 22 1,960 13 Income taxes......................... 9 9 771 13 --- --- ----- -- Net earnings..................... 14% 13% $ 1,189 13% === === ===== == The Company's revenue is derived from three primary markets. The following table sets forth the amount of revenue derived from each of these markets for the periods indicated ($ in millions): Three months ended March 31, ------------------ 1997 1996 -------- ------- Domestic Specialty Surfaces $49.6 $45.5 International 16.6 17.3 Medical Devices 6.9 4.8 Other 0.1 -- ---- ---- $73.2 $67.6 ==== ==== Total revenue in the first quarter of 1997 increased by $5.6 million, or 8.3%, to $73.2 million, from $67.6 million in the first quarter of 1996. Revenue from the Company's specialty patient surface business was $49.6 million, up $4.1 million, or 8.9% from the first quarter of 1996. This increase resulted from continued market share gains in the acute care segment combined with market and market share expansion in the extended care segment. Revenue from the Company's international operations was $16.6 million, down 4.0% from the first quarter of 1996, due substantially to unfavorable currency fluctuations during the period. Excluding currency fluctuations, international revenue was comparable to the prior year as lower rental revenue in the German market was offset by revenue gains in other countries. Revenue from medical device operations increased 45.0% to $6.9 million in the first quarter of 1997 due of primarily to the nationwide launch of the V.A.C. in the United States during the last three months 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ----------------------------------------------------------- During 1996, the Company was advised that its bid to become the primary vendor to Premier Purchasing Partners, L.P. ("Premier") was awarded to another vendor effective January 1, 1997. 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. During the first three months of 1997, revenue from hospitals within the Premier group purchasing organization was higher than in the year-ago period, due primarily to the removal of contractual revenue caps effective January 1997. Management believes these interim results are not indicative of the results to be expected for the full fiscal year, although the Company expects that a portion of the revenue will be retained. Rental expenses were 61.0% of total rental revenue in the first quarter of 1997 compared to 65.6% in the first quarter of 1996. This decrease is primarily attributable to the increase in rental revenue, as the majority of rental expenses are relatively fixed, e.g. facility and delivery costs. Gross profit increased $4.9 million, or 18.7%, to $31.2 million in the first quarter of 1997 from $26.3 million in the first quarter of 1996 due to the increase in revenue as well as the controlled growth in rental expenses. Selling, general and administrative expenses increased $2.4 million, or 19.5%, to $15.0 million in the first quarter of 1997 from $12.6 million in the first quarter of 1996. As a percentage of total revenue, selling, general and administrative expenses were at 20.5% in the first quarter of 1997 as compared with 18.6% in the first quarter of 1996. The increase is due in part to costs associated with certain key investments, e.g. improved marketing and information systems as well as increased legal and professional fees. Operating earnings for the period increased $2.5 million, or 18.0%, to $16.2 million compared to $13.7 million in the prior-year quarter resulting largely from revenue growth. Net interest income for the three months ended March 31, 1997 was $.5 million compared to $1.0 million in the prior year. The decrease in interest income resulted from (i) the early payment in October 1996 of all remaining notes receivable from Mediq/PRN and (ii) lower invested cash balances due to acquisition activities in the first quarter of 1997. The Company's effective income tax rate in the first quarter of 1997 was 40%, consistent with the first quarter of 1996. Net earnings increased $1.2 million, or 13.5%, to $10.0 million in the first quarter of 1997 from $8.8 million in the first quarter of 1996. This increase was due to the relative decrease in rental expenses and the change in revenue as discussed above. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Financial Condition - ------------------- The change in revenue and expenses experienced by the Company during the first quarter of 1997 and other factors resulted in changes to the Company's balance sheet as follows: Cash and cash equivalents were $41.4 million at March 31, 1997, a decrease of $17.6 million from December 1996. The cash decrease resulted substantially from business/asset acquisitions totaling $10.1 million plus a temporary increase in accounts receivable. Accounts receivable at March 31, 1997 were $71.6 million, a $13.3 million or 22.9%, 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 future receivable balances to decrease as this system is stabilized. Inventory at March 31, 1997 increased $1.4 million, or 6.6%, to $21.4 million from $20.0 million at December 31, 1996 primarily due to planned product introductions and further market expansion internationally. Net property, plant and equipment at March 31, 1997 increased $2.7 million, or 4.2%, to $67.9 million from $65.2 million at December 31, 1996 due in part to asset acquisitions such as H.F. Systems. Capital expenditures were $6.4 million during the first quarter of 1997 as the Company invested in new products for its rental fleet and new computer systems. Depreciation and amortization for the first three months of 1997 totaled $5.3 million, down 3.6% 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 $7.8 million during the period, to $21.3 million, due primarily to the Company's two asset acquisitions in the period. Accrued expenses at March 31, 1997 increased $2.5 million, or 8.4%, to $32.3 million from $29.8 million at December 31, 1996. Accruals for sales taxes payable and national sales meetings and other operating costs accounted for the majority of this increase. Market Trends - -------------- The health care industry continues to face various challenges, including increased pressure on health care providers to control costs, the accelerating migration of patients from acute care facilities into extended care (e.g. skilled nursing facilities and rehabilitation centers) and home care settings, the consolidation of health care providers and national and regional group purchasing organizations and the growing demand for clinically proven and cost effective ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Market Trends (continued) - ------------------------- therapies. In addition, Congress continues to debate federal health care expenditures in an attempt to slow the rate of growth and balance the federal budget. As a result, the Company believes that health care providers will continue to experience heightened cost control pressures. The Company is addressing these trends by expanding its product line to address certain niche market demands, e.g. obesity, and further developing applications for its existing product continuum. The Company believes that introductions of unique and therapeutic products such as the TriaDyne and BariKare beds and the V.A.C. device will enable it to further penetrate the market. In addition, the Company is increasing its marketing efforts beyond its existing base of more than 1000 acute care hospitals and 2000 extended care facilities to market to an additional 8000 hospitals and nursing homes in which the Company has a relatively small presence. The Company's market continues to increase based upon demographic trends as most of the Company's patients are over 50 years old. Further, its broad product line and national distribution system enable it to compete effectively in the changing healthcare environment. More recently, sales have increased as a portion of the Company's revenue. The Company believes this trend will continue because certain U.S. health care providers are purchasing products that are less expensive and easier to maintain such as medial devices, mattress overlays and mattress replacement systems. In addition, international health care providers tend to purchase products more often than U.S. health care providers. Legal Proceedings - ----------------- On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit against the Company in the United States District Court for the Western District of Texas. Novamedix manufactures the principal product which directly competes with the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents held by Novamedix, that the Company breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. Initial discovery in this case has been substantially completed. Although it is not possible to predict the outcome of this litigation or the damages which could be awarded, the Company believes that its defenses to these claims are meritorious and that the litigation will not have a material adverse effect on the Company's business, financial condition or results of operations. On August 16, 1995, the Company filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill- Rom. The suit was filed in the United States District Court for the Western District of Texas. The suit alleges that Hill-Rom used its monopoly power in the standard hospital bed business to gain an unfair advantage in the specialty hospital bed business. Specifically, the allegations set forth in the suit include a claim that Hill-Rom 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Legal Proceedings (continued) - ----------------------------- activities which constitute predatory pricing and refusals to deal. Hill-Rom has filed an answer denying the allegations in the suit. Although discovery is just beginning and it is not possible to predict the outcome of this litigation or the damages which might be awarded, the Company believes that its claims are meritorious. On October 31, 1996 the Company received a counterclaim which had been filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company filed in 1995. The counterclaim alleges that the Company's antitrust lawsuit and other actions were designed to enable KCI to monopolize the bed market. Although it is not possible to predict the outcome of this litigation, the Company believes that the counterclaim is without merit. On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries, Inc., filed a lawsuit against the Company alleging that the Company's TriaDyne bed infringes a patent issued to Hill-Rom December 24, 1996. This suit was filed in the United States District Court for the District of South Carolina. Substantive discovery in the case has not begun. Based upon its preliminary investigation, the Company believes that its defenses to the lawsuit are meritorious and that this lawsuit will not have a material adverse impact on the marketing of the TriaDyne bed. The Company is a party to several lawsuits arising in the ordinary course of its business and is contesting adjustments proposed by the Internal Revenue Service to prior years' tax returns. 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. The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. The Company currently has certain product liability claims pending for which provision has been made in the Company's financial statements. Management believes that resolution of these claims will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company has not experienced any significant losses due to product liability claims and currently maintains adequate liability insurance coverage. Liquidity and Capital Resources During the first quarter of 1997, the Company generated net cash provided by operating activities of $8.2 million compared to $13.8 million in the prior year period. At March 31, 1997, cash and cash equivalents totaling $41.4 million were available for general corporate purposes. Additionally, the Company maintains a Credit Agreement with a bank as an agent for itself and certain other financial institutions. The Credit Agreement currently permits borrowings of up to $50.0 million. At March 31, 1997, the entire amount of the Credit Agreement was available. The Company believes that current cash reserves combined with operating cash flows during the next twelve month period will be sufficient to provide for new investments in equipment and any working capital needed during the period. At March 31, 1997, the Company was committed to purchase approximately $3.3 million of inventory associated with new products over the remainder of this year. The Company did not have any other material purchase commitments. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ (a) EXHIBITS A list of all exhibits filed or included as part of this quarterly report on Form 10-Q is as follows: Exhibit Description ------- ------------ 3.1 Restatement of Articles of Incorporation (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 3.2 Restated By-Laws of the Company (filed as Exhibit 3.3 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 4.1 Specimen Common Stock Certificate of the Company (filed as Exhibit 4.1 to the Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference). 10.1 Agreement dated September 29, 1987, by and between the Company and Hill-Rom Company, Inc. (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.2 Employment and Non-Competition Agreement dated December 26, 1986, by and between the Company and James R. Leininger, M.D. (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.3 Contract dated September 30, 1985, by and between Ryder Truck Rental, Inc. and the Company regarding the rental of delivery trucks (filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.4 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). EXHIBITS (continued) --------------------- 10.5 Kinetic Concepts, Inc. Employee Stock Ownership Plan and Trust dated January 1, 1989 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, and incorporated herein by reference). 10.6 1987 Key Contributor Stock Option Plan, as amended, dated October 27, 1989 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). 10.7 Amendment No. 1 to Asset Purchase Agreement dated September 30, 1994 by and among Kinetic Concepts, Inc., a Texas corporation, KCI Therapeutic Services, Inc., a Delaware corporation, MEDIQ Incorporated, a Delaware corporation, PRN Holdings, Inc., a Delaware corporation and MEDIQ/PRN Life Support Services-I, Inc., a Delaware corporation (filed as Exhibit 2.2 to the Company's Form 8- K dated October 17, 1994, and incorporated herein by reference). 10.17 Credit Agreement dated as of May 8, 1995 by and among the Company and Bank of America National Trust and Savings Association, as Agent (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference). 10.18 Purchasing Agreement, dated February 1, 1994, between the Company, KCI Therapeutic Services, Inc. and Voluntary Hospitals of America, Inc.(filed as Exhibit 10.18 to the Company's Amended Annual Report on Form 10- K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.19 Rental/Purchasing Agreement, dated April 1, 1993 between the Company, KCI Therapeutic Services, Inc. and AmHS Purchasing Partners, L.P. (filed as Exhibit 10.19 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.20 KCI Management 1994 Incentive Program (filed as Exhibit 10.20 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). EXHIBITS (continued) -------------------- 10.21 KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.22 Letter, dated September 19, 1994, from the Company to Raymond R. Hannigan outlining the terms of his employment (filed as Exhibit 10.22 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.23 Letter, dated November 22, 1994, from the Company to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.24 Option Agreement, dated November 21, 1994, between Dr. James R. Leininger, Cecilia Leininger and Raymond R. Hannigan (filed as Exhibit 10.24 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.25 Option Agreement, dated August 23, 1995, between Dr. James R. Leininger, Cecilia Leininger and Bianca A. Rhodes (filed as Exhibit 10.25 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.26 Stock Purchase Agreement dated June 15, 1995 among KCI Financial Services, Inc., Kinetic Concepts, Inc., Cura Capital Corporation, MG Acquisition Corporation and the Principal Shareholders of Cura Capital Corporation (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 10.27 Promissory Note dated August 21, 1995 in the principal amount of $10,000,000 payable to James R. Leininger, M.D. to the order of Kinetic Concepts, Inc., a Texas corporation (filed as Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference). EXHIBITS (continued) -------------------- 10.28 Stock Pledge Agreement dated August 21, 1995 by and between James R. Leininger, M.D. and Kinetic Concepts, Inc., a Texas corporation (filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference). 10.29 Executive Committee Stock Ownership Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 10.30 Deferred Compensation Plan (filed as Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 10.31 Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.32 Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). * 10.33 Asset Purchase Agreement dated January 3, 1997 by and among Trac Medical, Inc., a North Carolina corporation, Terry Williams, David Mattis, George Parrish and KCI Therapeutic Services, Inc., a Delaware corporation. * 10.34 Asset Purchase Agreement dated January 27, 1997 by and among Hydrothermic Floatation Systems, Inc., a California corporation, Y. Jeremy Levy and KCI Therapeutic Services, Inc., a Delaware corporation. 11.1 Earnings Per Share Computation (filed as Exhibit 11.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 13.1 Kinetic Concepts, Inc. 1996 Annual Report to Shareholders (furnished for the information of the Commission and not deemed to be "filed," except for those portions expressly incorporated herein by reference)(filed as Exhibit 13.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). EXHIBITS (continued) -------------------- 16.1 Letter from KPMG Peat Marwick LLP to the Securities and Exchange Commission regarding agreement with statements made by Registrant under Item 9 of its Form 10-K dated March 28, 1997 (filed as Exhibit 16.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 22.1 List of Subsidiaries (filed as Exhibit 22.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). * 23.1 Acknowledgment by Ernst & Young dated May 8, 1997. * 27.1 Financial Data Schedule Note: (*) Exhibits filed herewith. (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated February 25, 1997, with respect to the change of the Company's certifying accountant for the year ending December 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KINETIC CONCEPTS, INC. (REGISTRANT) By: /S/ JAMES R. LEININGER, M.D. ---------------------------- James R. Leininger, M.D. Chairman of the Board By: /S/ RAYMOND R. HANNIGAN ---------------------------- Raymond R. Hannigan President and Chief Executive Officer By: /S/ BIANCA A. RHODES ---------------------------- Bianca A. Rhodes Senior Vice President, Chief Financial Officer and Chief Accounting Officer Date: May 8, 1997 EX-10 2 EXHIBIT 10.33 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement") is made and entered into as of the 3rd day of January, 1997 by and among Trac Medical, Inc., a North Carolina corporation ("Seller"), Terry Williams ("Williams"), David Mattis ("Mattis"), George Parrish ("Parrish") (Williams, Mattis and Parrish are hereinafter collectively referred to as the "Shareholders"), and KCI Therapeutic Services, Inc., a Delaware corporation ("Buyer"); W I T N E S S E T H: WHEREAS, Seller has developed technologies related to control systems mountable on beds and is engaged in the marketing and manufacture thereof (the "Business"); and WHEREAS, Seller and the Shareholders desire to sell, assign and convey to Buyer, and Buyer desires to purchase from Seller, the assets of Seller relating to the Trac ACCESS Device (as hereinafter specifically defined); NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties hereinafter contained, it is agreed by and between the parties as follows: ARTICLE 1 SALE OF ASSETS 1.01 Sale of Assets. Seller hereby agrees that, subject to the terms, provisions and conditions of this Agreement, Seller shall transfer, sell, assign, convey and deliver to Buyer, and Buyer shall purchase from Seller, on the Closing Date (as hereinafter defined) the Trac ACCESS Device as described and identified at Schedule 1.01 (the "Current Embodiment") and other existing or presently conceived technology related to control systems mountable on beds (the "Conceptions") (collectively, the "Trac ACCESS Device"), all of the assets utilized, developed or acquired by Seller related to the Trac ACCESS Device, all right, title and interest in all patents, patent applications, patent rights, inventions, products, product enhancements, concepts, data, information, source code, government permits (to the extent such permits are assignable), know how, trade secrets, trademarks, copyrights, licenses, contractual rights, causes of action, customer lists, goodwill, vendor relationships, inventory, business, accounts, parts lists, and the like, and all other rights related to the manufacture, sale or use of the Trac ACCESS Device, and all other assets (i.e. blueprints, tooling, fixtures, testing devices, etc.) necessary to manufacture and assemble the Trac ACCESS Device (collectively, the "Assets"). With respect to the Conceptions, Seller shall (i) transfer to Buyer such right, title and interest which it has to the Conceptions at the time of Closing, (ii) not make any specific representations or warranties with respect to the Conceptions except as specifically set forth in Section 2.07 hereof and (iii) retain a non-exclusive worldwide license and right to use the technology underlying the Conceptions if, and only to the extent, such technology has a non medical use. 1.02 Purchase Price and Earnout Payment. In consideration of the transfer, sale, assignment, conveyance and delivery of the Assets to Buyer as described in Section 1.01 hereof, and subject to the conditions to Closing (as hereinafter defined) set forth in Article 7 hereto, Buyer agrees to pay to Seller an aggregate of $1,850,000 (the "Closing Purchase Price"), payable by means of a wire transfer in immediately available funds to the bank account designated by Seller (the "Purchase Price"). (a) Earnout Payment. (i) In addition to the Closing Purchase Price to be paid by Buyer at the Closing, Buyer shall deliver to Seller an earnout payment (the "Earnout Payments") based on the cumulative number of Units (as hereinafter defined) sold or leased to third party purchasers (including any leasing corporation as may exist or be organized by Buyer) in the first thirty-six (36) months (or portion thereof) (the "Earnout Period") following the Closing at the time each of the following hurdles (the "Hurdles") is reached: Hurdle - # Units Sold/Leased Earnout Payment ---------------------------- ----------------- 5,000 $550,000 10,000 $550,000 15,000 $550,000 20,000 $550,000 30,000 $550,000 40,000 $550,000 50,000 $550,000 (ii) "Units" shall mean the number of Base Units installed. "Base Unit" shall mean the Current Embodiment of the Trac ACCESS Device as described on Schedule 1.01 hereto and any successor product to the Trac ACCESS Device having a list price which is at least eighty percent (80%) of the list price of the Current Embodiment but shall not include units of the Trac ACCESS Device which are manufactured by Buyer or Seller for use in Buyer's rental fleet. The parties hereto agree to negotiate in good faith to determine the treatment of those units of successor products to the Trac ACCESS Device having a list price which is equal to or less than eighty percent (80%) of the list price of the Current Embodiment. Such negotiations shall be based upon the anticipated list price and gross profit margin of the successor product when compared to the Current Embodiment. No successor device shall be treated as a Base Unit unless it has a gross margin of at least fifty percent (50%). (iii) Notwithstanding anything contained herein to the contrary, those Base Units for which a purchase order has been received by Buyer at the end of the Earnout Period but which have not been installed shall be included in the number of Units for purposes of determining the Earnout Payments if such Base Units are ultimately installed within 90 days of the end of the Earnout Period, provided, however, if such Base Units have not been installed solely as a result of Buyers failure to supply Base Units for installation (as a result of a force majeure event or any other event which is not related to Seller's breach of a representation or warranty), the Base Units which Buyer failed to supply will be credited to Seller for purposes of the Earnout Payment. (iv) If Buyer shall become obligated to deliver an Earnout Payment, Buyer shall, within 30 days of reaching the Hurdle, deliver to Seller $550,000 in cash by wire transfer in immediately available funds to the bank account designated by Seller. For purposes of this Section 1.02(c)(iv), a Hurdle shall be deemed to be reached when the number of Units designated in Section 1.02(c)(i) have been installed. (v) Buyer shall provide Seller with a periodic accounting of the Units, which accounting shall be limited to the invoice numbers, customer names, quantities, product catalogue numbers and charge backs which have been made and reasonable access to Buyer's records which Seller may request in order to substantiate any such accounting. (b) Royalty. In addition to the Closing Purchase Price to be paid by Buyer at the Closing, Buyer shall pay Seller royalties in accordance with the Royalty Agreement by and between Buyer and Seller dated as of the date hereof. 1.03 No Assumption of Liabilities. Buyer does not and shall not assume or agree to assume, and shall not acquire or take over, the liabilities and obligations of Seller or the Shareholders of any nature, direct, contingent or otherwise, except the obligations (the "Assumed Liabilities") which arise out of the performance by Buyer from and after the Effective Date (as hereinafter defined) of the contracts and accounts set forth on Schedule 1.03 attached hereto and incorporated herein by reference (the "Contracts and Accounts"). Buyer shall have and assumes no liabilities, obligations, or responsibilities arising before or after the Effective Date which arise out of the activity or inactivity of Seller (including, without limitation, breach or default) prior to the Effective Date Without limiting the generality of the foregoing, it is expressly agreed that Buyer shall have no liability to, for, or in respect of, any employees of Seller including, without limitation, accrued payroll, salary, severance, accrued vacation, accrued sick leave or benefit claims of any nature, or any withholding or other tax or payment in respect thereof. 1.04 Closing; Effective Date. The Closing of the transactions provided for in this Article 1 (the "Closing") shall take place on January 3, 1997 at 10:00 a.m. at the offices of Kennedy Covington Lobdell & Hickman, L.L.P., Two Hannover Square, Suite 1900, 434 Fayetteville Street Mall, Raleigh, North Carolina or such other place, time and date as the parties may mutually agree. The date, as thus determined, on which the Closing is to take place is referred to herein as the "Closing Date." The transactions hereunder shall be effective as of 12:01 a.m. on the Closing Date or such other time and date as the parties may mutually agree. The date, as thus determined, on which the transactions hereunder shall be effective is referred to herein as the "Effective Date". Immediately prior to the Closing, Buyer shall conduct an inventory of the tangible assets. To the extent that there are tangible assets located at sites other than Seller's principal place of business, Seller shall provide Buyer a certificate at Closing which sets forth the identity and location of such assets. 1.05 Conveyance and Transfer. Seller hereby agrees that, at the Closing, it will deliver to Buyer: the Bill of Sale and Assumption Agreement in the form agreed to by the parties (the "Bill of Sale and Assumption Agreement") and all other bills of sale, endorsements, assignments, releases and other good and sufficient instruments of transfer, assignment and conveyance, in form satisfactory to Buyer and its counsel, as shall be effective to convey to Buyer good and marketable title in and to all of the Assets. Such bills of sale and other instruments of transfer shall contain covenants of general warranty and all other documents required to be delivered to Buyer under the provisions of this Agreement. Simultaneously with such deliveries, Seller will take all steps necessary to put Buyer in actual possession of the Assets. 1.06 Further Assurances. Seller and the Shareholders hereby agree that, from time to time, at Buyer's request and without further consideration, they will execute and deliver to Buyer such other and further instruments of conveyance, assignment and transfer and take such other action as Buyer may reasonably require to more effectively convey, transfer and assign to Buyer, and to put Buyer in possession of, the Assets. 1.07 Allocation of Sales Price. The aggregate consideration received by Seller pursuant to this Agreement shall be allocated as set forth below: Fixed Assets - $100,000 Inventory - $50,000 Non-Compete - $250,000 Other intangibles (including goodwill) - remainder of consideration 1.08 Taxes. Except for taxes owed by Buyer as a result of its use and operation of the Assets, from and after the Effective Date, Buyer shall have no liability or responsibility for any income, franchise, excise, sales, use or other taxes (other than income taxes based upon or measured by Buyer's net income) or charges or imposts of any kind relating to or arising out of the transactions contemplated by this Agreement. Seller shall be solely responsible for the payment of sales, transfer and use taxes arising out of the sale, transfer and assignment of the Assets. 1.09 Deliveries on Closing Date. Subject to the terms and provisions hereof, on or before the Closing, Seller shall deliver to Buyer the originals of any contracts assumed by Buyer and all other written contracts, books, records and other data of Seller relating to the Assets or the Business and performance of services by Seller in connection therewith. Subject to the confidentiality provisions of the Non-Competition and Continuity of Business Dealings Agreement referred to in Section 4.04 hereof to the extent necessary, and for the sole purpose of, the preparation of its tax returns, Seller may retain copies of all such documents and data. 1.10 Books and Records. All other books and records with respect to Seller shall be retained by Seller and such books and records as relate to the Assets and the Business shall be open for inspection and copying upon reasonable notice at any time during regular business hours for a period of five (5) years from and after the Effective Date. Seller agrees that all such books and records will be kept and maintained or made available at Seller's corporate office in Raleigh, North Carolina or such other location as the parties may mutually agree. 1.11 Right of First Refusal. Seller hereby grants to Buyer a right of first refusal (the "Right of First Refusal") to purchase any New Invention (as hereinafter defined) during the period beginning on the Effective Date and ending five years thereafter. "New Inventions" shall mean medical device inventions conceived by Seller, or which Seller is entitled to manufacture or market, which are unrelated to the Trac ACCESS Device. Seller shall provide Buyer with written notice ("Seller's Notice") of its intent to enter into any agreement or other arrangement providing for the sale or disposition of any New Invention. Buyer may exercise the Right of First Refusal by notifying Seller, in writing, within thirty days after Seller's Notice, of Buyer's agreement to purchase such New Invention on terms and conditions of substantially equivalent to such agreement or arrangement. 1.12 Future Development. All rights related to the manufacture, sale or use of any inventions related to the Trac ACCESS Device or its Improvements (as hereinafter defined) will be assigned to Buyer to the extent such invention is either conceived or acquired by Seller or its employees or representatives during the five year period immediately following the Closing. Seller agrees to have its employees sign agreements which provide that inventions conceived during the course of their employment with Seller belong to Seller. Seller shall retain a non-exclusive worldwide license with respect to such inventions if, and only to the extent, such inventions have a non-medical use. "Improvements" of the Trac ACCESS Device means: (a) anything that performs the same general function as the Trac ACCESS Device or any components of the Trac ACCESS Device, and (b) anything that, if commercialized, would infringe upon any rights included in the Assets. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS Seller and the Shareholders jointly and severally represent and warrant to Buyer as follows: 2.01 Organization, Power and Subsidiaries of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. Seller has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Seller has been duly qualified to do business in all states in which the nature of its business or the character ofits properties requires it to be so qualified. Seller has no subsidiaries. The Shareholders are the lawful record and beneficial owners of all of the issued and outstanding shares of capital stock of Seller. 2.02 Authority for Agreement. The execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate and other action on the part of Seller and the Shareholders and assuming the binding and enforceable effect thereof on Buyer, this Agreement constitutes a valid and legally binding obligation of Seller and the Shareholders enforceable against them in accordance with its terms. 2.03 Brokers and Finders. Neither Seller, the Shareholders nor any of their respective officers, directors, agents, employees or affiliates has employed any broker, agent or finder or incurred any liability for any brokerage fees, agents' commissions or finders' fees in connection with the transactions contemplated by this Agreement. 2.04 Good Title; No Encumbrances; Condition of the Assets. Except as set forth at Schedule 2.04, Seller is the owner of all right, title and interest in and to the Assets and is conveying to Buyer good title to the Assets. Seller has good right, power and authority to sell, convey and assign the Assets to Buyer. Except as set forth at Schedule 2.04, none of the Assets is subject to any mortgage, pledge, lien, charge, security interest, encumbrance, restriction, lease, license, easement, liability or adverse claim of any nature whatsoever, direct or indirect, whether accrued, absolute, contingent or otherwise (collectively,"Liens") and except as set forth at Schedule 2.04, Seller has the unrestricted right to commercially use all the Assets throughout the United States without payment or other obligation to any third party. Upon the Closing, Buyer shall have the exclusive right to make, use and/or sell the Trac ACCESS Device which is specifically described and identified at Schedule 1.01 without infringing upon the rights of any party. All of the operating Assets owned, leased or used by Seller are in good operating condition and repair, ordinary wear and tear excepted, are suitable for the purposes used, and are adequate and sufficient for all current operations of Seller. Except as set forth at Schedule 2.04, to the knowledge of Seller and the Shareholders, there have been no safety problems or defects encountered in relation to the Trac ACCESS Device and/or components thereof. 2.05 Assets. Set forth on Schedule 2.05 hereto is an accurate and complete list of the following with respect to the Business: (a) All machinery, tools, equipment and other tangible personal property (other than inventory and supplies), owned or used by Seller except for items having a value of less than $50 which do not, in the aggregate, have a total value of more than $1,000. (b) All patents, patent applications, licenses, trademarks, trademark registrations, service marks, service names, trade names, copyrights and copyright registrations and applications for any of the foregoing, wholly or partially owned or held by Seller or used in the operation of the Business. (c) All sales agency or distributorship agreements or franchises or agreements providing for the services of an independent contractor to which Seller is a party or by which it is bound as of the Closing Date. (d) All contracts, agreements, commitments or licenses relating to patents, trademarks, trade names, copyrights, inventions, processes, know-how, formulae or trade secrets to which Seller is a party or by which it is bound. (e) All loan agreements, indentures, mortgages, pledges, conditional sale or title retention agreements, security agreements, equipment obligations, guaranties, leases or lease purchase agreements to which Seller is a party or by which it is bound and which relate to the Business or encumber any of the Assets. (f) All contracts, agreements, commitments or other understandings or arrangements concerning the Business to which Seller is a party or by which it or any of its property is bound or affected. (g) All collective bargaining agreements, employment and consulting agreements. All of the contracts, agreements, leases, licenses and commitments required to be listed on Schedule 2.05 hereto (the "Agreements"), are valid and binding, enforceable in accordance with their respective terms, in full force and effect and, except as otherwise specified in Schedule 2.05 hereto, validly assignable to Buyer without the consent of any other party so that, after the assignment thereof to Buyer pursuant hereto, Buyer will be entitled to the full benefits thereof accruing after Closing. Except as disclosed in Schedule 2.05 hereto, (i) none of the Agreements has been amended, modified or altered in any material manner, (ii) to the best of the Shareholder's knowledge with respect to third party defaults, there is not under any of the Agreements any existing default and (iii) no oral or written notice of termination or indication of an intention to terminate has been given by any party to any of the Agreements. True and complete copies of all of the Agreements (together with any and all amendments thereto) have been delivered to Buyer. 2.06 Inventory. Except as set forth at Schedule 2.06, all items of Seller's inventory and related supplies (including raw materials, work-in-process and finished goods) which are included in the Assets are suitable and usable for the production or completion of products for sale in the ordinary course of business as first quality goods at normal mark- ups, and none of such items is obsolete or below standard quality. 2.07 Intellectual Property. Except as set forth in Schedule 2.07 hereto, Seller owns or possesses all patents, patent applications, patent rights, trade secrets, trademarks, copyrights, licenses and service marks and other proprietary rights necessary to conduct the Business as presently conducted by Seller (the "Intellectual Property Rights"). The Current Embodiment does not and the embodiment described in the patents included in the Assets, if reduced to practice and commercialized, would not infringe upon any intellectual property rights or other proprietary rights owned by any other person or persons, and there is no claim or action by any such person pending or to the knowledge of Seller threatened with respect thereto. To the best of the Shareholders' and the Company's actual knowledge, no other person has good title to or an interest in the Conceptions and the Conceptions do not infringe on the intellectual property rights of any third party. All of the trademark registrations, copyright registrations and patents that are included in the Assets are valid and enforceable in their entirety in all material respects, and Seller and the Shareholders are aware of no prior art more pertinent to the validity of such patents than has already been disclosed in the prosecution of such patents. 2.08 Litigation. Except as set forth on Schedule 2.08 hereto, there is no (a) claim, suit, action, arbitration, proceeding, governmental investigation or other legal or administrative proceeding (collectively, "Claims") in progress, pending or to the knowledge of Seller or the Shareholders threatened against or relating to Seller, the Shareholders or the Business or the transactions contemplated by this Agreement, nor is there any basis for any such Claims known to Seller or the Shareholders including, without limitation, Claims relating to safety problems or defects in connection with the Trac ACCESS Device and/or components thereof or (b) order, decree or ruling of any court or administrative agency to which Seller, the Shareholders or any of their affiliates is a party or bound, which matters identified at (a) and (b) could adversely affect Seller, the Business, the Assets or the performance of the obligations of Seller or the Shareholders hereunder and Seller is not in default in respect of any such order, decree or ruling. 2.09 No Conflict with Other Instruments. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not (a) constitute a default under, conflict with, result in a right to accelerate, loss of rights under or a breach of any of the terms, conditions or provisions of, Seller's organizational documents or any agreement or instrument to which Seller or any of the Shareholders is now a party, (b) result in the creation or imposition of any Lien upon the Assets or the Business or (c) result in the violation of any applicable law, ordinance, regulation, permit, authorization, decree or order of any court or other government agency. 2.10 Compliance with Applicable Laws. The Business has been, and until the Effective Date will be, conducted in material compliance with all applicable laws, common law doctrine, ordinances, regulations, permits, authorizations, decrees and orders (collectively "laws and regulations"), including laws and regulations concerning the environment, occupational health and safety and the marketing of medical devices, the noncompliance with which will have a material adverse effect on the Business or the Assets. Seller has all licenses, permits, orders, approvals or other authorizations of governmental, regulatory or administrative agencies or authorities required to conduct the Business and own and operate the Assets (the "Permits"), the absence of which would have a material adverse effect on the Business or the Assets. 2.11 Insurance. Set forth on Schedule 2.11 hereto is an accurate and complete list of all liability and other insurance policies insuring Seller or its properties or interests therein, specifying with respect to each such policy the name of the insurer, the risk insured against, the limits of coverage, the deductible amount (if any), the premium rate and the date through which coverage will continue by virtue of premiums already paid. Seller and the Shareholders have obtained and maintained in full force and effect insurance to protect them and the Business against the types of liabilities customarily insured against by persons in connection with the operation of similar practices, and all premiums due on such policies have been paid. All of such policies are "occurrence" policies and are not "claims made" policies. 2.12 Consents. Except as disclosed at Schedule 2.12, there are no (a) consents or approvals of any public body or authority, (b) filings with any public body or authority or (c) consents or waivers from other parties to the Agreements or other instruments, that are required for the lawful consummation of the transactions contemplated hereby or necessary in order that the Business can be conducted by Buyer in the same manner after the Closing as heretofore conducted by Seller. 2.13 Undisclosed Liabilities. Seller does not have any liability or obligations whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, due or to become due, and choate or inchoate ("Liabilities") individually or in the aggregate in excess of $10,000 (including, without limitation, liabilities or obligations arising out of claims based on products liability), and, to the best of the Shareholder's knowledge, there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller giving rise to any such liabilities or obligations, except as set forth in Schedule 2.13 hereto. 2.14 Absence of Changes or Events. Except as set forth in Schedule 2.14 hereto, since May 1, 1996, Seller has conducted the Business only in the ordinary course of business, and Seller has not: (a) incurred any Liabilities which individually or in the aggregate have had or might have a material adverse effect on the Assets or the Business; (b) pledged or subjected to any Lien any of the Assets, other than liens arising by operation of law to secure payment of ad valorem or personal property taxes or securing credit facilities which will not encumber the Assets after Closing; (c) sold, transferred, leased to others or otherwise disposed of any of the Assets, except in the ordinary course of the business of Seller; (d) received any notice of termination of any contract, lease or other agreement, or suffered any damage, destruction or loss that, individually or in the aggregate, has had or might have a material adverse effect on the Assets or the Business; (e) suffered any event or events, whether individually or in the aggregate, that has had or could be reasonably expected by Seller to have a material adverse effect on the Assets or the Business; (f) entered into any agreement or made any commitment to take any of the actions described in Subsections (a) through (e) inclusive of this Section 2.14. 2.15 Taxes. All taxes that relate to, arise out of or impact upon the Business or the Assets, including, without limitation, income, property, sales, use, franchise, added value, employees' income withholding, unemployment disability and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority (collectively, "Taxes"), which are due or payable by Seller and all interest and penalties thereon, whether disputed or not, have been timely paid in full, all tax returns required to be filed in connection therewith have been accurately prepared in all material respects and duly and timely filed, all deposits required by law to be made by Seller with respect to employees' income withholding and other taxes have been duly made and in the case of Taxes for which payment is not yet required, such Taxes have been adequately accrued for on the Financial Statements of Seller. Buyer will not after the Closing owe to any person or entity or be liable for, directly or indirectly, any Taxes imposed on Seller or the Shareholders. There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the Assets. 2.16 Labor and Employment Contracts. Seller has not (a) been a party to a collective bargaining agreement, (b) had any organization certified as a bargaining agent on behalf of all or any portion of Seller's employees, (c) received a demand for recognition from any union or other organization, (d) had any attempt made to organize any of Seller's employees, (e) encountered any labor union organizing activity or (f) encountered any actual or threatened employee strikes, work stoppages, jurisdictional disputes, slow-downs or lock-outs. Seller has provided Buyer a written list of all agreements and understandings, whether written or oral, between Seller and any of its officers, employees or agents that contain a non-competition or confidentiality agreement and/or covenant or any other terms of employment. 2.17 Books and Records. All of the books and records of Seller are complete and correct in all material respects and have been adequately maintained in accordance with good business practice and there have been no transactions involving the Business which are required to have been set forth therein and which have not been accurately so set forth. 2.18 Disclosures to Third Parties. Except as set forth on Schedule 2.18 hereto, neither Seller, the Shareholders nor any of their respective brokers, representatives, accountants, attorneys or agents has disclosed any confidential customerlists, contract terms, pricing information, margin information, trade secrets or other confidential information to any other person or other entity. 2.19 Disclosure. No representation or warranty made by Seller or the Shareholders contained in this Agreement nor any exhibit, schedule, statement or certificate furnished or to be furnished by Seller or the Shareholders to Buyer or its representatives pursuant hereto, contains or will contain on the Closing Date any untrue statement of a material fact, or omits or will omit on the Closing Date to state any material fact required to make the statements herein or therein contained not misleading. The representations and warranties contained in this Article 2 or elsewhere in this Agreement or any document delivered pursuant hereto shall not be affected or deemed waived by reason of the fact that Buyer and/or its representatives knew or should have known that any such representation or warranty is or might be inaccurate in any respect provided, however, that Buyer shall inform Seller at or prior to Closing with respect to any information it has uncovered in its due diligence which indicates that a representation or warranty in this Agreement is inaccurate. In the event such breaches could result in a claim by Buyer for indemnification in excess of $18,500, Seller's sole remedy shall be to elect not to close the transaction. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller and the Shareholders as follows: 3.01 Organization; Valid Authorization; Good Standing. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Buyer has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate and other action on the part of Buyer, and this Agreement constitutes a valid and legally binding obligation of Buyer enforceable against it in accordance with its terms. 3.02 Compliance. The execution and delivery ofthis Agreement and the consummation of the transactions contemplated hereby by Buyer will not (a) violate any provision of its charter or bylaws, (b) violate any material provision of or result in the breach of or entitle any party to accelerate (whether after the giving of notice or lapse of time or both) any material obligation under, any mortgage, lien, lease, contract, license, instrument or any other agreement to which Buyer is a party, (c) result in the creation or imposition of any material lien, charge, pledge, security interest or other encumbrance upon any property of Buyer or (d) violate or conflict with any order, award, judgment or decree or other material restriction or any law, ordinance or regulation to which Buyer or its property is subject. 3.03 Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other person not yet obtained is required in connection with the execution and delivery of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated hereby. 3.04 Brokers. Neither Buyer nor any of its officers, directors, agents, employees or affiliates has employed any broker, agent or finder or incurred any liability for any brokerage fees, agents' commissions or finders' fees in connection with the transactions contemplated by this Agreement. 3.05 Disclosure. No representation or warranty made by Buyer contained in this Agreement nor any exhibit, schedule, statement or certificate furnished or to be furnished by Buyer to Seller or its representatives in connection herewith or pursuant hereto, contains or will contain on the Closing Date any untrue statement of a material fact, or omits or will omit on the Closing Date to state any material fact required to make the statements herein or therein contained not misleading. The representations and warranties contained in this Article 3 or elsewhere in this Agreement or any document delivered pursuant hereto shall not be affected or deemed waived by reason of the fact that Seller and/or its representatives knew or should have known that any such representation or warranty is or might be inaccurate in any respect. ARTICLE 4 COVENANTS OF SELLER AND THE SHAREHOLDERS 4.01 Conduct Prior to Effective Date. Unless otherwise expressly consented to in writing by Buyer, from and after the date of this Agreement through the Effective Date, Seller agrees to (and the Shareholders agree, jointly and severally, to cause Seller to): (a) carry on the Business in the ordinary and usual course as has been conducted since January 1, 1995; (b) keep and preserve the Assets in good condition and repair, ordinary wear and tear excepted; (c) maintain in full force and effect insurance comparable in amount and in scope of the current policies listed on Schedule 2.11 hereto; (d) to the extent within the control of Seller, maintain in full force and effect in accordance with the terms thereof, perform all of its obligations under and not change any of the material terms under, the contracts to be assumed by Buyer and all other agreements, leases and other commitments relating to or affecting the Assets or the Business; (e) comply in all material respects with and perform in all material respects, all obligations and duties imposed upon it by all federal and state laws and all rules, regulations and orders imposed by federal or state governmental authorities; (f) not dispose of or encumber any of the Assets; (g) not change its certificate of incorporation or bylaws or merge or consolidate or obligate itself to do so with or into any other entity; and (h) cause Buyer, its counsel, accountants and other representatives, to have full access, during normal business hours, to the properties, books and records of Seller and will furnish to Buyer and its representatives during such period all such information concerning the Assets and the Business as Buyer or its representatives may reasonably request. 4.02 Use of Names. Seller and the Shareholders agree, jointly and severally, that they shall not for a period of ten years from and after the Effective Date, use or grant any rights to any individual, corporation, partnership or other entity to use, or otherwise consent to the use of, any name or mark that is deceptively similar to any of the service marks, trademarks or trade names of Seller included within the Assets conveyed hereunder, as a name, trade name, service mark, trademark or otherwise. Seller shall have the right to use tradenames or trademarks owned by Buyer only to the extent that it is specifically granted the right to do so under the Distribution and Services Agreement. Seller shall retain and use its corporate name. 4.03 Advice of Change. Seller and the Shareholders shall advise Buyer in writing prior to the Effective Date of any material adverse change in the Business, or the occurrence of any event which involves any substantial possibility of any material adverse change in the Assets, in the condition, financial or otherwise, of the Business or the Assets or in any of the information contained in the representations and warranties made in Article 2 or elsewhere in this Agreement or the schedules or exhibits hereto that has occurred since the date of this Agreement. 4.04 Non-Competition and Continuity of Business Dealings Agreement. In consideration for the purchase of the Assets hereunder and other good and valuable consideration, at the Closing, Seller and the Shareholders shall each execute and deliver the Non-Competition and Continuity of Business Dealings Agreement in the form agreed to by the parties. 4.05 Bill of Sale and Assumption Agreement. At the Closing, Seller shall execute and deliver the Bill of Sale and Assumption Agreement in the form agreed to by the parties (the "Bill of Sale and Assumption Agreement"). 4.06 Royalty Agreement. At the Closing, Seller shall execute and deliver the Royalty Agreement in the form agreed to by the parties (the "Royalty Agreement"). 4.07 Distribution and Services Agreement. At the Closing, Seller shall execute and deliver the Distribution and Services Agreement in the form agreed to by the parties (the "Distribution and Services Agreement"). 4.08 Injunctive Relief. Since Buyer will be irreparably damaged if the provisions of Section 4.02 are not specifically enforced, Buyer shall be entitled to an injunction restraining any violation of such section by Seller or the Shareholders, or any other appropriate decree of specific performance. Such remedies shall not be exclusive, shall not be construed to limit the right for injunctive relief under any other provision of this Agreement and shall be in addition to any other remedies which Buyer may have. 4.09 Cooperation. Subject to the terms and conditions herein provided, Seller and the Shareholders will each use their best efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law, to consummate and make effective all of the transactions contemplated by this Agreement. ARTICLE 5 COVENANTS OF BUYER Buyer covenants and agrees with Seller and Shareholders as follows: 5.01 Cooperation. Subject to the terms and conditions herein provided, Buyer will use its best efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective all of the transactions contemplated by this Agreement. 5.02 Distribution and Services Agreement. At the Closing, Buyer shall execute and deliver the Distribution and Services Agreement. 5.03 Royalty Agreement. At the Closing, Buyer shall execute and deliver the Royalty Agreement. 5.04 Bill of Sale and Assumption Agreement. At the Closing, Buyer shall execute and deliver the Bill of Sale and Assumption Agreement. 5.05 Marketing and Distribution. Buyer agrees that it will use its best efforts to market and distribute the Trac ACCESS Device in a commercially reasonable manner. Buyer's obligation under this Section 5.05 is subject to the ongoing commercial viability and profitability of the Trac ACCESS Device. ARTICLE 6 CONDITIONS TO OBLIGATIONS OF SELLER AND THE SHAREHOLDERS All obligations of Seller and the Shareholders to be discharged under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, unless waived in writing by Seller and the Shareholders at any time prior to or at the Closing: 6.01 Representations and Warranties of Buyer. All of the representations and warranties of Buyer contained in this Agreement shall be true as of the date of this Agreement in all material respects. All such representations and warranties shall be deemed to have been made again as of the Closing Date, and shall be true in all material respects as of the time of the Closing. 6.02 Covenants and Agreements of Buyer. Buyer shall have caused all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing to be so performed or complied with. 6.03 Distribution and Services Agreement. Buyer shall have executed and delivered the Distribution and Services Agreement. 6.04 Royalty Agreement. Buyer shall have executed and delivered the Royalty Agreement. 6.05 Opinion of Counsel. Cox & Smith Incorporated, counsel for Buyer shall have delivered to Seller an opinion, dated the Closing Date, in the form agreed to by the parties. 6.06 Bill of Sale and Assumption Agreement. At the Closing, Seller shall execute and deliver the Bill of Sale and Assumption Agreement. ARTICLE 7 CONDITIONS TO OBLIGATIONS OF BUYER All obligations of Buyer to be discharged under this Agreement at the Closing are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, unless expressly waived in writing by Buyer at any time prior to or at the Closing: 7.01 Representations and Warranties of Seller and the Shareholders. All of the representations and warranties of Seller and the Shareholders contained in this Agreement shall be true as of the date of this Agreement in all material respects. All of such representations and warranties shall be deemed to have been made again as of the Closing Date, and shall be true in all material respects as of the time of the Closing. 7.02 Covenants and Agreements of Seller and the Shareholders. Seller and the Shareholders shall have caused all covenants, agreements and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing to be so performed or complied with. 7.03 Consents. All of the consents necessary or advisable to transfer the Assets to Buyer and for Buyer to operate the Business from and after the Effective Date in the manner owned and operated by Seller shall have been secured in form reasonably satisfactory to Buyer. 7.04 Opinion of Counsel. Kennedy Covington Lobdell & Hickman, L.L.P., counsel for Seller and the Shareholders, shall have delivered to Buyer an opinion, dated the Closing Date, in the form agreed to by the parties. 7.05 No Material Adverse Changes. There shall not have been any material adverse changes to the Assets or the Business after the date hereof prior to the Closing. 7.06 Releases. All of the liens, charges, security interests and encumbrances outstanding on any of the Assets shall have been terminated and released prior to or at the Closing. 7.07 Agreements. Seller and the Shareholders shall have each executed and delivered a Non- Competition and Continuity of Business Dealings Agreement, and Seller shall have executed and delivered the Bill of Sale and Assumption Agreement, the Royalty Agreement and the Distribution and Services Agreement. ARTICLE 8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 8.01 Survival of Representations and Warranties. The representations, warranties, covenants and agreements made by Seller and the Shareholders hereunder, except as they may be fully performed prior to or at the Closing, shall survive Closing and shall thereafter terminate and expire on April 30, 1998 and shall be fully enforceable by Buyer, its successors and assigns, at law or in equity, against the Shareholders and Seller, their successors and assigns; provided, however, that the representations, warranties, covenants and agreements made in Sections 2.04 (with respect to title matters), 2.07 (with respect to non infringement of third party intellectual property rights and the validity and enforceability of the patents included in the Assets), 2.08, 2.10, 2.13 and 2.15 shall survive until the expiration of the applicable statute of limitations (except in respect to covenants to be performed after Closing which shall survive in accordance with the terms thereof). All of the representations, warranties, covenants and agreements made by Buyer hereunder, except as they may be fully performed prior to or at the Closing, shall survive Closing and shall thereafter terminate and expire on April 30, 1998 except in respect to covenants to be performed after Closing which shall survive in accordance with the terms thereof and shall be fully enforceable by the Shareholders and Seller, their respective successors and assigns, at law or in equity, against Buyer and its successors and assigns. Any representation, warranty, covenant or agreement scheduled to expire pursuant to this Section 8.01 shall not expire with respect to any claim received by Seller or the Shareholders prior to the scheduled expiration date. 8.02 Indemnification by Seller and the Shareholders. Seller and the Shareholders, jointly and severally, agree to indemnify and hold Buyer harmless from all liabilities, damages, losses, costs, reasonable attorneys' fees and other expenses (collectively, "Losses") resulting from, arising out of or incurred with respect to, the falsity of any representation or the breach of any warranty or covenant made by Seller or the Shareholders herein or in accordance herewith or in enforcing any agreement or indemnity hereunder; provided, however, that Seller and the Shareholders shall be obligated to indemnify Buyer only to the extent that Buyer's Losses exceed $18,500 in the aggregate. Seller and the Shareholders shall not be required to indemnify Buyer for amounts in excess of the aggregate of the payments actually made to Seller under Sections 1.02(a), (b) and (c) provided, however, that, if Buyer is entitled to indemnification in excess of the amounts paid as of a particular date, Buyer may elect to utilize the Right of Offset provided for in Section 8.05 with respect to payments to be made after that date. Except as expressly provided in Section 1.03, Buyer has not assumed, or agreed to assume, any liabilities or obligations of any kind or nature whatsoever of Seller, whether direct, contingent or otherwise. In connection therewith, Seller and the Shareholders agree, jointly and severally, to indemnify and hold Buyer harmless from all Losses resulting from or arising out of or incurred in connection with any actual or alleged liability or obligation of Seller or the Shareholders not expressly assumed by Buyer. 8.03 Indemnification by Buyer. Buyer agrees to indemnify and hold Seller and the Shareholders harmless from all Losses resulting from, arising out of or incurred with respect to, the falsity of any representation or the breach of any warranty or covenant made by Buyer herein or in accordance herewith or in enforcing any agreement or indemnity hereunder. Buyer agrees to indemnify and hold Seller and the Shareholders harmless from all Losses resulting from, arising out of or incurred in connection with, the Assumed Liabilities and the operation of the Business after the Effective Date. 8.04 Notice of Claim. The party seeking indemnification (the "Indemnified Party") shall give notice to the party obligated to indemnify and hold the other harmless (the "Indemnifying Party") of an event giving rise to the obligation to indemnify, allow the Indemnifying Party to assume and conduct the defense of the claim or action and cooperate with the Indemnifying Party in the defense thereof. If the Indemnifying Party wrongfully refuses to assume the defense of the Indemnified Party, the Indemnifying Party shall be responsible for all legal and other expenses incurred by the Indemnified Party in connection with the investigation or defense of such claim or action including, without limitation, expenses incurred in enforcing such obligation to indemnify. 8.05 Offset. In the event Buyer shall be entitled (a) to indemnification pursuant to this Article 8 or (b) any other payments or claims from or against Seller and/or the Shareholders, Buyer shall have the right to offset the amount of such claim, debt or obligation against the amounts owed by Buyer to Seller pursuant to the provisions of Section 1.02 hereto (the "Right of Offset"). In the event it is later determined that Buyer is not entitled to a recovery for the amount offset, Buyer shall repay to Seller the amount improperly offset plus accrued interest on such amount at the rate of 10% per annum from the date that payment would have been due had such amount not been improperly offset. The Right of Offset shall in no way limit or impair any other remedies available to Buyer. Buyer shall not enforce the Right of Offset unless it has received an opinion from Cox & Smith Incorporated (and delivered a copy thereof to Seller) that it has the legal right under this Agreement to effect the Right of Offset. The failure of Buyer to exercise its Right of Offset shall not affect its right to indemnification hereunder. To the extent that the event giving rise to the Right of Offset is curable, Buyer shall give Seller notice of the event and a thirty day opportunity to cure, provided, however, that Buyer need not give such notice prior to exercising its Right of Offset. ARTICLE 9 GENERAL 9.01 Notices, Etc. All notices, requests,demands and other communications hereunder shall be in writing and, unless otherwise provided herein, shall be deemed to have been duly given upon delivery in person, by telecopy, by overnight courier or by certified or registered mail, return receipt requested, as follows: If to Seller or any Trac Medical, Inc. of the sharholders: 2801 Spring Forest Road Raleigh, North Carolina 27604 Attention: Mr. Terry Williams, President Facsimile No.: (919)876-1210 With a copy to: Kennedy Covington Lobdell & Hickman, L.L.P. Two Hannover Square, Suite 1900 434 Fayetteville Street Mall Raleigh, North Carolina 27602-1070 Attention: Mr. Kent F. Christison Facsimile No.: (919)743-7358 If to Buyer: KCI Therapeutic Services, Inc. 8023 Vantage Drive San Antonio, Texas 78230 Attention: Mr. Christopher M. Fashek, President Mr. Dennis E. Noll, General Counsel Facsimile No.: (210)255-6993 With a copy to: Cox & Smith Incorporated 112 E. Pecan, Suite 1800 San Antonio, Texas 78205 Attention: Mr. Stephen D. Seidel Facsimile No.: (210)226-8395 or at such other address as shall have been furnished to the other in writing in accordance herewith, except that such notice of such change shall be effective only upon receipt. 9.02 Amendments and Waiver. This Agreement may be amended or modified by, and only by, a written instrument executed by all the parties hereto. The terms of this Agreement may be waived by, and only by, a written instrument executed by the party against whom such waiver is sought to be enforced. 9.03 Expenses. Except as otherwise expressly herein provided, each party to this Agreement shall pay its own expenses (including, without limitation, the fees and expenses of such party's counsel incidental to the preparation of and/or consummation of this Agreement). 9.04 Section and Other Headings. The section and other headings contained in this Agreement are for convenience of reference only and shall not in any way affect the meaning or interpretation of this Agreement. 9.05 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 9.06 Parties in Interest. This Agreement shall inure to the benefit of and be binding upon parties hereto, and their respective successors and assigns. This Agreement shall not be assigned by any party hereto without the written consent of the other parties, except as otherwise expressly permitted herein. 9.07 No Implied Rights or Remedies. Except as otherwise expressly provided herein, nothing herein expressed or implied is intended or shall be construed to confer upon or to give any person, firm, or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 9.08 Exhibits and Schedules. All exhibits and schedules referred to herein and attached hereto are incorporated herein for all purposes. 9.09 Entire Agreement. This Agreement, together with all exhibits and schedules hereto, embodies the entire agreement and understanding between the parties hereto relating to the subject matter hereof and supersedes any prior agreements and understandings relating to the subject matter hereof. 9.10 Legal Invalidity. If any part or provision of this Agreement is or shall be deemed violative of any applicable laws, rules or regulations, such legal invalidity shall not void the Agreement or affect the remaining terms and provisions of this Agreement, and the Agreement shall be construed and interpreted to comport with all such laws, rules or regulations to the maximum extent possible. 9.11 Applicable Law. This Agreement and the rights and obligations of the parties hereto shall be construed under and governed by internal laws, and not the law of conflicts, of the State of Texas. 9.12 Enforcement; Venue; Service of Process. In the event either party shall seek enforcement of any covenant, warranty or other term or provision of this agreement, the party which prevails in such enforcement proceedings shall be entitled to recover reasonable attorneys' fees actually incurred by it in connection therewith. The parties hereto agree that this Agreement is performable in Bexar County, Texas. The parties hereto agree that the service of process or any other papers upon them or any of them by registered mail at their respective addresses where notices are to be sent pursuant to this Article 9 hereto shall be deemed good, proper and effective service upon them. 9.13 Arbitration. (a) The parties hereto agree that all disputes, controversies or claims that may arise among them (including their agents and employees) including, without limitation, any dispute, controversy or claim arising out of this Agreement, the Distribution Services Agreement or the Royalty Agreement, or the breach, termination or invalidity thereof, shall be submitted to, and determined by, binding arbitration. Such arbitration shall be conducted pursuant to the Commercial Arbitration Rules (the "Rules") then in effect of the American Arbitration Association, except to the extent such rules are inconsistent with this Section 9.13. If the arbitration controversy in the arbitration exceeds $200,000, exclusive of interest, attorneys' fees and costs, the arbitration shall be conducted by a panel of three (3) neutral arbitrators. Otherwise, the arbitration shall be conducted by a single neutral arbitrator. The arbitrator(s) shall be selected pursuant to the Rules. Exclusive venue for such arbitration shall be in San Antonio, Bexar County, Texas. The arbitrator(s) shall apply the internal laws of the State of Texas (without regard to conflict of law rules) in determining the substance of the dispute, controversy or claim and shall decide the same in accordance with applicable usages and terms of trade. Evidentiary questions shall be governed by the Federal Rules of Evidence. The arbitrator's award shall be in writing and shall set forth the findings and conclusions upon which the arbitrator(s) based the award. The prevailing party in any such arbitration shall be entitled to recover its reasonable attorneys' fees, costs and expenses incurred in connection with the arbitration. Any award pursuant to such arbitration shall be final and binding upon the parties, and judgment on the award may be entered in any federal or state court sitting or located in Bexar County, Texas, or in any other court having jurisdiction. The provisions of this Section 9.13 shall survive the termination of this Agreement. (b) The arbitration shall commence within thirty (30) days after the arbitrator(s) is selected in accordance with the provisions of this Section 9.l3. In fulfilling his or her duties, the arbitrator(s) may consider such matters as, in the opinion of the arbitrator(s), are necessary or helpful to render an appropriate decision. All discovery shall be expedited, consistent with the nature and complexity of the claim or dispute and consistent with the nature and complexity of the claim or dispute and consistent with fairness and justice. The arbitrator(s) shall have the power to compel any party to comply with discovery requests of the other parties and to issue binding orders relating to any discovery dispute which shall be enforceable in the same manner as awards. The arbitrator(s) also shall have the power to impose sanctions for abuse or frustration of the arbitration process, including without limitation, the refusal to comply with orders of the arbitrator(s) relating to discovery and compliance with subpoenas. (c) Without limiting the enforceability or scope of this Section 9.13, the parties to this Agreement agree that if a controversy or claim between them arises out of or relates to this Agreement and results in litigation, the courts of Bexar County, Texas or the courts of the United States of America located in Bexar County, Texas shall have jurisdiction to hear and decide such matter, and such parties hereby submit to jurisdiction of such courts. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date and year first above written. KCI THERAPEUTIC SERVICES, INC. By: /S/ DENNIS E. NOLL ___________________________ Title: Vice President ________________________ TRAC MEDICAL, INC. By:/S/ TERRY N. WILLIAMS ___________________________ Title: President ________________________ /S/ TERRY N. WILLIAMS ______________________________ Terry Williams, Individually /S/ DAVID MATTIS ______________________________ David Mattis, Individually /S/ GEROGE PARRISH ______________________________ George Parrish, Individually SCHEDULE 1.01 The Current Embodiment of the Trac Access Device is described in the Trac Medical ACCESS Environmental Control System Manual which is attached hereto and made a part hereof. Buyer acknowledges that the actual embodiment of the Trac Access Device may differ slightly from the descriptions contained in the Manual. The transfer of the Current Embodiment includes the transfer of all technology developed in connection with the Current Embodiment. The technology being transferred with the Trac Access Device includes the Infrared Technology. The following are not included within the definition of Assets: 1. Bed Exit Sensor Technology 2. Orthotrac 3. Physiotrac 4. Angiotrac 5. The Names "Trac" and "Trac Medical, Inc." 6. Surgical Staple Location Technology 7. Accounts Receivable 8. Investments 9. Cash 10. Cash Equivalents EX-10 3 EXHIBIT 10.34 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement") is made and entered into as of the 27th day of January, 1997 by and among Hydrothermic Floatation Systems, Inc., a California corporation ("Seller"), Y. Jeremy Levy ("Shareholder") and KCI Therapeutic Services, Inc., a Delaware corporation ("Buyer"). W I T N E S S E T H: WHEREAS, Seller is presently engaged in the specialty patient surface business, including, without limitation, the rental of specialty patient beds, overlays, mattress replacement systems or other therapeutic support surfaces (the "Business"); and WHEREAS, Seller and Shareholder desire to sell, assign and convey to Buyer, and Buyer desires to purchase from Seller, all of the assets of Seller except those expressly excluded herein; NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties hereinafter contained, the parties hereby agree as follows: ARTICLE I SALE OF ASSETS 1.01 Sale of Assets. Subject to the provisions of this Agreement, Buyer agrees to purchase and accept delivery of, and Seller agrees to sell, assign, convey and deliver to Buyer, at the Closing (as hereinafter defined), all of the business, assets, properties, goodwill and rights of Seller as a going concern, of every nature, kind or description, tangible and intangible, wheresoever located and whether or not carried or reflected on the books and records of Seller (hereinafter sometimes collectively called the "Assets"), including, without limitation, (i) the right to use Seller's corporate name and all variations thereof, (ii) the assets referred to in the form of Bill of Sale and Assumption Agreement attached hereto as Exhibit A (the "Bill of Sale and Assumption Agreement") and (iii) the assets reflected on the balance sheet of Seller dated December 31, 1996 referred to in Section 2.06 hereof, with only such dispositions of such Assets as shall have occurred in the ordinary course of business between the date thereof and the Closing and which are permitted by the terms hereof, and excluding only the minute books, corporate seal, stock records and other assets of Seller set forth on Exhibit B attached hereto. The Assets shall be conveyed free and clear of all liabilities, obligations, liens, security interests, encumbrances and restrictions. 1.02 Purchase Price and Earnout Payment. In consideration of the transfer, sale, assignment, conveyance and delivery of the Assets to Buyer, and subject to adjustments provided for herein and the conditions to Closing (as hereinafter defined) set forth in Article VII: (a) Payments Due at Closing. Buyer agrees to pay at the Closing an aggregate of Eight Million Forty- Nine Thousand Eight Hundred Ninety-Two Dollars ($8,049,892) (the "Purchase Price"), to be paid to Seller in cash by wire transfer in immediately available funds to the bank account designated by Seller. (b) Earnout Payment. In addition to the consideration paid to Seller pursuant to Section 1.02(a) hereof, Buyer shall pay to Seller an amount, not to exceed $2,500,000, determined in accordance with the calculations and procedures set forth on Exhibit C hereto. The amount of such payment, as thus determined, is hereinafter referred to as the "Earnout Payment." Within 5 days after the final determination, as provided in Exhibit C hereto, of the amount of the Earnout Payment, Buyer agrees to pay the Earnout Payment to Seller in cash by wire transfer of immediately available funds to the bank account designated by Seller. Interest shall accrue upon the unpaid portion of the Earnout Payment from the date such payment is due until paid at the annual "Prime Rate" of interest as published in the Wall Street Journal. In the event that the Earnout Payment as determined by the Earnout Arbitrator (as defined in Exhibit C hereto) in accordance with this Section 1.02(b) is more than $100,000 in excess of the amount of the Earnout Payment set forth in the Earnout Period Revenue Statement (as defined in Exhibit C hereto) delivered by Buyer, the fees and expenses of the Earnout Arbitrator shall be paid by Buyer. Otherwise, all such fees and expenses shall be paid by Seller. (c) Accounts Receivable Closing Adjustment. Notwithstanding anything contained herein to the contrary: (i) at the Closing, Seller and Shareholder shall jointly deliver a certificate (the "Accounts Receivable Certification") to Buyer, in form reasonably satisfactory to Buyer, certifying the aggregate amount of the accounts receivable being sold to Buyer at Closing, net of allowance for uncollectible accounts receivable, determined in accordance with generally accepted accounting principles, consistent with Seller's Financial Statements (as hereinafter defined); (ii) if and to the extent that the aggregate amount of accounts receivable, net of allowance for uncollected accounts receivable, reflected on the Accounts Receivable Certification is less than One Million Two Hundred Twenty-Four Thousand Five Hundred Forty Seven Dollars ($1,224,547), then at the Closing, the amount of the Purchase Price shall be adjusted downward on a dollar-for dollar basis to the extent of such difference (the "Closing Receivable Adjustment"). (d) Closing Asset Statement Adjustment. Notwithstanding anything contained herein to the contrary: (i) as soon as practicable following the date of this Agreement but in no event later than the Closing Date, Buyer shall cause a statement setting forth the book value of the Assets as of such date (the "Adjusted Assets Statement") to be calculated, prepared and adjusted in accordance with the principles and procedures set forth on Exhibit D hereto (the amount as thus determined shall hereinafter be referred to as the "Adjusted Book Value") and to be delivered to Seller. On the basis of the Adjusted Assets Statement, Seller and Shareholder jointly and severally, shall pay to Buyer the amount, if any, by which the amount of the Adjusted Book Value (as defined on Exhibit D hereto) of the Assets is less than $3,377,883 ("Seller's Adjustment Amount"). (ii) Within 5 days after the final determination, as provided for in Exhibit D hereto, of Seller's Adjustment Amount, Seller and Shareholder agree, jointly and severally, to pay to Buyer in cash by wire transfer of immediately available funds to the bank account designated by Buyer an amount equal to Seller's Adjustment Amount. Interest shall accrue on the unpaid portion of any such payment from the date such payment is due until paid at the annual "Prime Rate" of interest as published by the Wall Street Journal. In the event that the Adjusted Book Value as determined by the Adjusted Assets Arbitrator (as defined in Exhibit D hereto) in accordance with this Exhibit D hereto is more than $50,000 in excess of the amount set forth on the Adjusted Assets Statement delivered by Buyer at the Closing, the fees and expenses of the Adjusted Assets Arbitrator shall be paid by Buyer. Otherwise, all such fees and expenses shall be paid by Seller. 1.03 Assumption of Liabilities. Buyer does not and shall not assume or agree to assume, and shall not acquire or take over, the liabilities and obligations of Seller or Shareholder of any nature, direct, contingent or otherwise, except the obligations listed on Schedule 1.03 hereto (the "Assumed Liabilities"). Buyer shall not have, and assumes no, liabilities, obligations, or responsibilities arising before or after the Effective Time (as hereinafter defined) which arise out of the activity or inactivity of Seller (including, without limitation, breach or default) prior to the Effective Time. Without limiting the generality of the foregoing, it is expressly agreed that Buyer shall have no liability to, for, or in respect of, any employees of Seller including, without limitation, accrued payroll, salary, expenses, severance, accrued vacation, accrued sick leave or benefit claims of any nature, or any withholding or other tax or payment in respect thereof. 1.04 Closing; Effective Time. The closing (the "Closing") of the transactions provided for in this Article I shall take place on February 3, 1997 at 9:00 a.m. at the offices of Jeffer, Mangels, Butler & Marmaro LLP or such other place, time and date as the parties may mutually agree. The date, as thus determined, on which the Closing is to take place is referred to herein as the "Closing Date." The transactions hereunder shall be effective as of 12:01 a.m., Los Angeles time, on February 1, 1997 or such other time and date as the parties may mutually agree. The time and date, as thus determined, on which the transactions hereunder shall be effective is referred to herein as the "Effective Time" and the "Effective Date," respectively. 1.05 Conveyance and Transfer. Seller hereby agrees that, at Closing, it shall deliver to Buyer the Bill of Sale and Assumption Agreement and all other bills of sale, endorsements, assignments, releases and other goodand sufficient instruments of transfer, assignment and conveyance, in form satisfactory to Buyer and its counsel, as shall be effective to convey to Buyer good and marketable title in and to all of the Assets and all other documents required to be delivered to Buyer under the provisions of this Agreement. Simultaneously with such deliveries, Seller will take all steps necessary to put Buyer in actual possession of the Assets other than such Assets which are located on third-party premises. 1.06 Further Assurances. Seller and Shareholder hereby agree that, from time to time, at Buyer's request and without further consideration, they will execute and deliver to Buyer such other and further instruments of conveyance, assignment and transfer and take such other action as Buyer may reasonably require to more effectively convey, transfer and assign to Buyer, and to put Buyer in possession of, the Assets. 1.07 Allocation of Sales Price. (a) The aggregate consideration received by Seller pursuant to this Agreement shall be allocated as set forth on Exhibit E hereto. (b) The parties hereto covenant and agree with each other that this allocation was arrived at by arm's length negotiation and that none of them will take a position on any income tax return, before any governmental agency charged with the collection of any income tax or in any judicial proceeding that is in any manner inconsistent with the terms of this Section 1.07 without the written consent of the other parties to this Agreement. 1.08 Taxes. Except for taxes owed by Buyer as a result of its use and operation of the Assets, from and after the Effective Time, Buyer shall have no liability or responsibility for any income, franchise, excise, sales, use or other taxes (other than income taxes based upon or measured by Buyer's net income) or charges or imposts of any kind relating to or arising out of the transactions contemplated by this Agreement. Seller shall be solely responsible for the payment of sales, transfer and use taxes arising out of the sale, transfer and assignment of the Assets. 1.09 Deliveries on Closing Date. (a) Subject to the terms and provisions hereof, on or before the Closing Date, Seller shall deliver to Buyer the originals of all written contracts, books, records and other data of Seller relating to the Assets, the Business and the performance of services by Seller in connection therewith (except Seller's minute books, and all other corporate seal, stock records and other corporate records (together, Seller's "Corporate Records")). Buyer shall retain, and shall make available for inspection by Seller all written contracts, books, records and other data of Seller delivered to Buyer at the Closing at an office of Buyer in California, at any time, on reasonable notice, during regular business hours for a period of seven (7) years from and after the Closing Date. (b) Seller shall retain Seller's Corporate Records and shall make Seller's Corporate Records available to Buyer for inspection and copying at any time, on reasonable notice, during regular business hours for a period of seven (7) years from and after the Effective Time. Seller agrees that all Seller's Corporate Records will be kept and maintained or made available to Buyer at Seller's corporate office in Los Angeles, California or such other location as the parties may mutually agree. 1.10 Accrued Vacation. At the Closing, Seller shall provide a schedule to Buyer detailing the accrued vacation and sick leave owed to each of Seller's employees that Buyer intends to employ. Seller agrees to pay to such employees at the Closing an amount equal to the total of such accrued vacation and sick leave. 1.11 Employment Agreement. At the Closing, Shareholder and Buyer shall execute and deliver the Employment Agreement in the form of Exhibit F attached hereto (the "Levy Employment Agreement"). 1.12 Guarantee of Collectibility of Receivables of Seller. (a) Subject to the limitations set forth in this Section 1.12, Seller and Shareholder, jointly and severally, guarantee to Buyer that, except to the extent of the reserve for doubtful accounts shown on the Accounts Receivable Certification, all accounts and notes receivable and other receivables reflected on the Accounts Receivable Certification (the "Receivables") will be valid and legally binding obligations of the persons owing said amounts to Seller and that the full amount of the Receivables will be paid to Buyer on or before February 28, 1998. (b) If any part of the Receivables has not been paid on or before February 28, 1998, then to the extent that such unpaid part of the Receivables exceeds the reserve for doubtful accounts shown on the Accounts Receivable Certification, Buyer may reassign on or before March 31, 1998 to Seller all or any part of the unpaid part of the Receivables, free and clear of any security interest, lien or other encumbrance arising on or after the Closing, in which event Seller shall pay to Buyer in cash or by certified check that amount equal to such reassigned part of the unpaid part of the Receivables net of the reserve for doubtful accounts shown on the Accounts Receivable Certification. Buyer shall deliver to Seller reasonably detailed information supporting the determination of the amount of such unpaid portion of the Receivables. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDER Seller and Shareholder jointly and severally represent and warrant to Buyer as follows: 2.01 Organization, Standing and Power of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Seller has no subsidiaries and does not conduct business in any state other than California. Shareholder is the lawful record and beneficial owner of all of the issued and outstanding shares of capital stock of Seller, free and clear of all security interests, liens, proxies, voting trusts, voting agreements and other encumbrances and restrictions of any kind, and all of such shares are validly issued and outstanding and are fully paid and nonassessable. 2.02 Authority for Agreements. Seller has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and all other agreements, instruments and documents which are contemplated by this Agreement and the performance of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate and other action on the part of Seller and Shareholder and when executed and delivered on behalf of Seller this Agreement and all agreements contemplated by this Agreement will constitute a valid and legally binding obligation of Seller and Shareholder enforceable against them in accordance with its terms. 2.03 Brokers and Finders. Neither Seller, Shareholder nor any of their respective officers, directors, agents, employees or affiliates has employed any broker, agent or finder or incurred any liability for any brokerage fees, agents' commissions or finders' fees in connection with the transactions contemplated by this Agreement. 2.04 Good Title; No Encumbrances; Condition of the Assets. Except as set forth on Schedule 2.04, Seller is the owner of and has all right, title and interest in and to the Assets and is conveying to Buyer good and marketable title to the Assets. Seller has good right, power and authority to sell, convey and assign the Assets to Buyer. Except as set forth on Schedule 2.04, none of the Assets is subject to any mortgage, pledge, lien, charge, security interest, encumbrance, restriction, lease, license, easement, liability or adverse claim of any nature whatsoever, direct or indirect, whether accrued, absolute, contingent or otherwise (collectively, "Liens"). Except as set forth on Schedule 2.04, all of the Assets owned, leased or used by Seller are in good operating condition and repair, subject to ordinary wear and tear, are suitable for the purposes used, are adequate and sufficient for all current operations of Seller and are directly related to the Business. 2.05 Assets. Set forth on Schedule 2.05 hereto is an accurate and complete list of: (a) All real property owned by Seller or in which Seller has a leasehold or other interest or which is used by Seller in connection with the operation of its business, together with a description of each lease, sublease, license or any other instrument under which Seller claims or holds such leasehold or other interest or right to the use thereof or pursuant to which Seller has assigned, sublet or granted any rights therein, identifying the parties thereto, the rental or other payment terms, expiration date and cancellation and renewal terms thereof. (b) All machinery, tools, equipment, motor vehicles, rolling stock and other tangible personal property (other than inventory and supplies), owned, leased or used by Seller, setting forth with respect to all such listed property a summary description of all Liens relating thereto, identifying the parties thereto, the rental or other payment terms, expiration date and cancellation and renewal terms thereof. (c) All patents, patent applications, licenses, trademarks, trademark registrations, service marks, service names, trade names, copyrights and copyright registrations and applications for any of the foregoing, wholly or partially owned or held by Seller or used in the operation of Seller's business. (d) All fire, theft, casualty, liability and other insurance policies insuring Seller or its properties or interests therein, specifying with respect to each such policy the name of the insurer, the risk insured against, the limits of coverage, the deductible amount (if any), the premium rate and the date through which coverage will continue by virtue of premiums already paid. (e) All sales agency or distributorship agreements or franchises or agreements providing for the services of an independent contractor to which Seller is a party or by which it is bound. (f) All contracts, agreements, commitments or licenses relating to patents, trademarks, trade names, copyrights, inventions, processes, know-how, formulae or trade secrets to which Seller is a party or by which it is bound. (g) All loan agreements, indentures, mortgages, pledges, conditional sale or title retention agreements, security agreements, equipment obligations, guaranties, leases or lease purchase agreements to which Seller is a party or by which it is bound. (h) All contracts, agreements and commitments, whether or not fully performed, in respect of the issuance, sale or transfer of the capital stock, bonds or other securities of Seller or pursuant to which Seller has acquired any substantial portion of its business or assets. (i) All contracts, agreements, commitments or other understandings or arrangements to which Seller is a party or by which it or any of its property is bound or affected but excluding purchase and sales orders and commitments made in the ordinary course of business involving payments or receipts by Seller of less than $10,000 in any single case but not more than $30,000 in the aggregate. (j) All collective bargaining agreements, employment and consulting agreements, executive compensation plans, bonus plans, deferred compensation agreements, employee pension plans or retirement plans, employee stock options or stock purchase plans and group life, health and accident insurance and other employee benefit plans agreements, arrangements or commitments, whether or not legally binding, including, without limitation, holiday, vacation and other bonus practices, to which Seller is a party or is bound or which relate to the operation of Seller's business. (k) The names and current annual salary rates of all employees of Seller, (including independent commission agents) showing separately for each such person the amounts paid or payable as salary, bonus payments and any indirect compensation for the year ended December 31, 1996. (l) The names of all of Seller's directors and officers; and the names of all persons, if any, holding tax or other powers of attorney from Seller and a summary of the terms thereof. All of the contracts, agreements, leases, licenses and commitments required to be listed on Schedule 2.05 hereto (the "Agreements"), other than those which have been fully performed, are valid and binding, enforceable in accordance with their respective terms, in full force and effect and, except as otherwise specified in Schedule 2.05 hereto, validly assignable to Buyer without the consent of any other party so that, after the assignment thereof to Buyer pursuant hereto, Buyer will be entitled to the full benefits thereof. Except as disclosed in Schedule 2.05 hereto, (i) none of the Agreements has been amended, modified or altered in any manner, (ii) there is not under any of the Agreements any existing default or other condition on the part of Seller which would result in a right to accelerate or a loss of rights, (iii) none of the Agreements is, either when considered singly or in the aggregate with others, unduly burdensome, onerous or materially adverse to Seller's business, properties, assets, earnings or prospects or likely, either before or after Closing, to result in any material loss or liability, (iv) other than in the ordinary course of business consistent with past practice, no oral or written notice of termination or indication of an intention to terminate has been given by any party to any of the Agreements and (v) except as set forth on Schedule 2.05, Seller is not providing any additional products or services, without charge, to any customer covered by any of the Agreements. True and complete copies of all of the Agreements (together with any and all amendments thereto) have been delivered to Buyer. 2.06 Financial Information. Seller has delivered to Buyer copies of the balance sheets of Seller for each of the past two (2) fiscal years, and the related statements of income for each of the fiscal years ended December 31, 1995 and December 31, 1996 (collectively, "Seller's Financial Statements"), all of which are complete and correct in all material respects, have been prepared from the books and records of Seller in accordance with generally accepted accounting principles consistently applied and maintained throughout the periods indicated, and fairly present the financial condition of Seller as at their respective dates and the results of its operations for the periods covered thereby. Except as set forth on Schedule 2.06, Seller's Financial Statements do not contain any items of special or nonrecurring revenue or any other revenue not earned in the ordinary course of business except as expressly specified therein. For purposes of this Agreement, Seller's Financial Statements shall include any notes and schedules attached to such financial statements. 2.07 Inventory. All items of Seller's inventory and related supplies (including finished goods and disassembled inventory) are suitable and usable for rental in the ordinary course of business, except as set forth on Schedule 2.07, none of such items is obsolete or below standard quality and each item of such inventory reflected on the balance sheet of Seller as at December 31, 1996 (the "Base Balance Sheet") and the books and records of Seller is so reflected on the basis of a complete physical count and is valued in accordance with generally accepted accounting principles consistently applied. Except as set forth on Schedule 2.07, the Assets include a sufficient but not an excessive quantity of each type of such inventory and supplies in order to meet the normal requirements of Seller's business. 2.08 Accounts Receivable. Schedule 2.08 hereto sets forth a complete list of all accounts receivable of Seller arising out of the Business showing the amounts due and an aging analysis thereof. The accounts and other receivables shown on Schedule 2.08 hereto have arisen in the ordinary course of business, are valid and enforceable and are not in dispute by the respective obligors therefore and are collectible consistent with past experience. Schedule 2.08 hereto sets forth a list of any oral or written communication to Seller of any dispute relating to such accounts receivable. 2.09 Intellectual Property. Except as set forth on Schedule 2.09 hereto, Seller owns or has the legal right to utilize as presently used by Seller all inventions, patents, patent applications, patent rights, trade secrets, licenses, transferable permits and transferable franchises, trademarks, trade names, service marks, copyrights and copyright applications and applications for any of the foregoing, know how (collectively, the "Intellectual Property Rights"), including the exclusive right to use the name "Hydrothermic Floatation Systems, Inc.," necessary to manufacture and sell its products and to conduct its business as it is presently operated, free and clear of all liens or claims of others. Seller is not infringing upon any Intellectual Property Rights owned by any other person or persons, there is no claim or action by any such person pending or to Seller's Knowledge (as hereinafter defined), threatened against Seller or any of its affiliates with respect thereto and to Seller's Knowledge, there is no person or persons infringing upon any Intellectual Property Rights used by Seller. Subject to periodic filing reports due after the Closing, all of the trademark registrations, copyright registrations and patents that are included in the Assets are valid and enforceable in their entirety in all material respects. 2.10 Litigation. Except as set forth on Schedule 2.10 hereto, there is no (a) claim, suit, action, arbitration, proceeding, governmental investigation or other legal or administrative proceeding (collectively, "Claims") in progress, pending or to Seller's Knowledge, threatened against or relating to Seller, Shareholder or any of their officers, directors or employees, affiliates, properties, assets or the Business or the transactions contemplated by this Agreement, nor to Seller's Knowledge, is there any basis for any Claims or (b) order, decree or ruling of any court or administrative agency to which Seller, Shareholder or any of their affiliates is a party or bound, which could adversely affect Seller, the Business, the Assets or the performance of the obligations of Seller or Shareholder hereunder and Seller is not in default in respect of any such order, decree or ruling. As used herein, the term "Seller's Knowledge" shall mean the actual knowledge of Y. Jeremy Levy, Shawn Lipman and Rick Bowen and such knowledge as a reasonably prudent person would have in the ordinary exercise of his affairs in the capacity in which his knowledge is at issue. 2.11 No Conflict with Other Instruments. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not (a) constitute a default under, conflict with, result in a right to accelerate, loss of rights under or a breach of any of the terms, conditions or provisions of, Seller's organizational documents or any agreement or instrument to which Seller or Shareholder is now a party or by which Seller or Shareholder is bound or to which any property or asset of any of them is bound, (b) result in the creation or imposition of any Lien upon Seller's capital stock, the Assets or the Business or (c) result in the violation of any applicable law, ordinance, regulation, permit, authorization, decree or order of any court or other government agency. 2.12 No Guaranties. Except as set forth on Schedule 2.12, none of the obligations or liabilities of Seller is guaranteed by, or subject to a similar contingent liability of, any other person, firm or corporation, nor has Seller guaranteed, or otherwise become contingently liable for, the obligations or liabilities of any other person, firm or corporation. 2.13 Compliance with Applicable Laws. Except as set forth on Schedule 2.13, the Business has been, and until the Effective Time will be, conducted in compliance in all material respects with all applicable laws, ordinances, regulations, permits, authorizations, decrees and orders (collectively, "Laws and Regulations"), including Laws and Regulations concerning the environment, occupational health and safety and the marketing of medical devices. Seller has all licenses, permits, orders, approvals or other authorizations of governmental, regulatory or administrative agencies or authorities required to conduct the Business and own and operate the Assets and neither Seller nor Shareholder has received any written notice or, to Seller's knowledge, any other notice, that any governmental authority intends to cancel, terminate or not renew any such license, permit, order, approval or other authorization. Neither Seller nor Shareholder has received any opinion or memorandum of legal advice from any legal counsel to the effect that either of them is exposed to any liability or disadvantage that is or may be material to Seller. 2.14 Insurance. Schedule 2.14 hereto sets forth a list of all insurance policies carried by Seller during the period beginning January 1, 1994, including types and limits of coverages and all claims, notice of which were submitted to any insurer pursuant to any insurance policy since January 1, 1994. True and complete copies of such policies have been furnished to Buyer. Seller has made available to Buyer all files and other information known to Seller or Shareholder with respect to any claims made or threatened against Seller arising out of the Business during the period beginning January 1, 1994, regardless of whether covered by insurance and regardless of whether notice thereof was submitted to any insurer. Except as indicated on Schedule 2.14 hereto, all of such policies are "occurrence" policies and are not "claims made" policies. In the event any such policies are on a claims made basis, Seller shall, at Seller's expense, purchase insurance with similar coverage which shall insure Seller for claims made after the Closing Date with respect to Seller's provision of services before the Closing Date. 2.15 Consents. There are no (a) consents or approvals of any public body or authority, (b) filings with any public body or authority or (c) except as set forth on Schedule 2.15, consents or waivers from other parties to the Agreements or other instruments, that are required for the lawful consummation of the transactions contemplated hereby or necessary in order that the Business can be conducted by Buyer in the same manner after Closing as heretofore conducted by Seller. 2.16 Undisclosed Liabilities. Except as set forth on Schedule 2.16 hereto or as reflected on the Base Balance Sheet, Seller does not have any liability or obligations whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, due or to become due, and choate or inchoate that would be required under generally accepted accounting principles to be reflected in a balance sheet of Seller (including footnotes thereto) ("Liabilities") individually or in the aggregate in excess of $10,000 (including, without limitation, liabilities or obligations arising out of claims based on products liability), and to Seller's Knowledge there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller giving rise to any such liabilities or obligations, except as set forth in Schedule 2.16 hereto or incurred after December 31, 1996 in the ordinary course of business consistent with prior practices. 2.17 Absence of Changes or Events. Except as set forth in Schedule 2.17 hereto or as contemplated by this Agreement, since July 31, 1996, Seller has conducted the Business only in the ordinary course of business, and Seller has not: (a) incurred any Liabilities which individually or in the aggregate have had or might have a material adverse effect on the Assets or the Business; (b) pledged or subjected to any Lien any of the Assets, other than liens arising by operation of law to secure payment of ad valorem or personal property taxes or arising in the ordinary course of business of Seller; (c) sold, transferred, leased to others or otherwise disposed of any of the Assets, except in the ordinary course of business of Seller; (d) discharged, satisfied, canceled or compromised any material debt or claim, or waived or released any right of substantial value except for fair value or in the ordinary course of business; (e) received any notice of termination of any contract, lease or other agreement, or suffered any damage, destruction or loss that, individually or in the aggregate, has had or might have a material adverse effect on the Assets or the Business; (f) instituted, settled or agreed to settle any litigation, action, proceeding or arbitration; (g) failed to replenish its inventory or supplies in a normal and customary manner or made any material purchase commitment other than in the ordinary course of business of Seller; (h) failed to pay any accounts or notes payable or any other obligations on a timely basis consistent with the practices of Seller; (i) entered into any material transaction, contract or commitment other than in the ordinary course of the business of Seller; (j) suffered any event or events, whether individually or in the aggregate, that has had or could be reasonably expected to have a material adverse effect on the Assets or the Business; (k) made any material change in the rate of compensation, commission, bonus or other remuneration payable, or paid or agreed to pay any material bonus, extra compensation, pension, severance or vacation pay, to Shareholder or any director, officer, salesman, distributor, agent or employee of Seller other than periodic salary increases consistent with past practices; (l) issued any equity interests, declared or paid any distribution on equity interests (not including bonuses) or entered into any agreement or understanding to do or engage in any of the foregoing actions; (m) engaged in any activities or practices other than the Business; or (n) entered into any agreement or made any commitment to take any of the actions described in Subsections (a) through (m) inclusive of this Section 2.17. 2.18 Transactions with Affiliates. Except as set forth on Schedule 2.18 hereto, during the past three years Seller has not, directly or indirectly, purchased, leased from others or otherwise acquired any property or obtained any services from, or sold, leased or otherwise disposed of any property or furnished any services to, or otherwise dealt with (except with respect to remuneration for services rendered as a director, officer or employee of Seller), in the ordinary course of business or otherwise, (i) any shareholder of Seller or (ii) any person, firm or corporation which, directly or indirectly, alone or together with others, controls, is controlled by or is under common control with, Seller or any shareholder of Seller. Except as set forth on Schedule 2.18 hereto, Seller does not owe any amount to, or have any contract with or commitment to, any of its shareholders, directors, officers, employees or consultants (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business), and none of such persons owes any amount to Seller. Except as set forth on Schedule 2.18 hereto, no part of the property or assets of Shareholder or any affiliate of Shareholder has, during the past three years, been used by Seller. 2.19 Taxes. All taxes that relate to, arise out of or impact upon the Business or the Assets, including, without limitation, income, property, sales, use, franchise, added value, employees' income withholding, unemployment disability and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority (collectively, "Taxes"), which are due or payable by Seller and/or Shareholder and all interest and penalties thereon, whether disputed or not, have been timely paid in full, all tax returns required to be filed in connection therewith have been accurately prepared and duly and timely filed, all deposits required by law to be made by Seller with respect to employees' income withholding and other taxes have been duly made and in the case of Taxes for which payment is not yet required, such Taxes have been fully accrued for on Seller's Financial Statements. 2.20 Labor and Employment Contracts. Seller has not (a) been a party to a collective bargaining agreement, (b) had any organization certified as a bargaining agent on behalf of all or any portion of Seller's employees, (c) received a demand for recognition from any union or other organization, (d) to Seller's Knowledge had any attempt made to organize any of Seller's employees, (e) encountered any labor union organizing activity or (f) encountered any actual or threatened employee strikes, work stoppages, jurisdictional disputes, slow-downs or lock-outs. Seller has provided Buyer a written list of all agreements and understandings, whether written or oral, between Seller and any of its officers, employees or agents that contain a noncompetition and confidentiality agreement and/or covenant or any other terms of employment. Except as set forth on Schedule 2.20 hereto, Seller does not have any labor disputes currently subject to any material grievance procedure, arbitration or litigation, unfair labor practice charges, Equal Employment Opportunity Commission charges, state or local fair employment practice charges, Department of Labor investigations, wage and hour claims or disputes or any other labor law related charges or investigations relating to or arising out of the Business or the Assets. 2.21 Environmental Matters. (a) Except as set forth in Schedule 2.21 hereto, (i) neither Seller nor any of its subsidiaries or affiliates has ever generated, transported, used, stored, treated, disposed of or managed any Hazardous Waste (as hereinafter defined); (ii) no Hazardous Material has ever been or is threatened to be spilled, released or disposed of at any site presently or formerly owned, operated, leased or used by Seller or any of its subsidiaries or affiliates, or has ever come to be located in the soil or groundwater at any such site; (iii) no Hazardous Material has ever been transported from any site presently or formerly owned, operated, leased or used by Seller or any of its subsidiaries or affiliates for treatment, storage or disposal at any other place; (iv) neither Seller nor any of its subsidiaries or affiliates presently owns, operates, leases or uses, and has not previously owned, operated, leased or used any site on which underground storage tanks are or were located and (v) no lien has ever been imposed by any governmental agency on any property, facility, machinery or equipment owned, operated, leased or used by Seller or any of its subsidiaries or affiliates in connection with the presence of any Hazardous Material. (b) Except as set forth in Schedule 2.21 hereto, (i) neither Seller nor any of its subsidiaries or affiliates has any liability under, and has not violated, any Environmental Law (as hereinafter defined); (ii) each of Seller and its subsidiaries and affiliates, any property, whether real, personal or mixed, owned, operated, leased or used by Seller or any of its subsidiaries or affiliates and any facilities and operations thereon are presently in compliance with all applicable Environmental Laws; (iii) neither Seller nor any of its subsidiaries or affiliates has entered into or been subject to any judgment, consent decree, compliance order or administrative order with respect to any environmental or health and safety matter or received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any Environmental Law and (iv) neither Seller nor Shareholder has any reason to believe that any of the items enumerated in clause (iii) of this paragraph will be forthcoming. (c) Except as set forth in Schedule 2.21 hereto, no site, improvements or other property of any kind owned, operated, leased or used by Seller or any of its subsidiaries or affiliates contains any lead-based paint, asbestos or asbestos-containing material, any polychlorinated biphenyls ("PCBs") or equipment containing PCBs or any urea formaldehyde foam insulation. (d) No condition exists affecting any property, whether real, personal or mixed, occupied, owned, used, operated, leased or possessed by Seller that might (i) result in a generation of or a release into the environment of Hazardous Materials or Hazardous Waste, (ii) create a risk of harm to human health or animal health or habitat or the Environment, (iii) require, under any Environmental Law, that such condition be contained, abated, remediated, removed, investigated or cleaned up (regardless of whether or not any government or regulatory body has ordered or required such action) or (iv) limit Buyer's full and beneficial use of such property in full compliance with all Environmental Laws. (e) Seller has provided to Buyer copies of all documents, records and information available to Seller concerning any environmental or health and safety matter relevant to Seller or any of its subsidiaries or affiliates, whether generated by Seller or any of its subsidiaries or affiliates, including, without limitation, environmental risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans, and reports, correspondence, permits, licenses, approvals, consents and other authorizations related to environmental or health and safety matters issued by any governmental agency. (f) For purposes of this Section 2.21, (i) "Hazardous Material" shall mean and include any hazardous waste, any reportable quantities of hazardous material, hazardous substance, petroleum product, oil, toxic substance, pollutant or contaminant, as defined or regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or regulated under any Environmental Law and (iii) "Environmental Law" shall mean any applicable environmental or health and safety- related law, regulation, rule, judgment, administrative order, decree, ordinance or by-law at the federal, state or local level, existing as of the date hereof or previously enforced and (iv) the "Environment" means any surface water, ground water,drinking water supply, land surface, subsurface strata, ambient air (including indoor air) and includes any property owned, used or occupied by Seller. 2.22 Employee Benefit Programs. (a) Schedule 2.22 hereto sets forth a list of every Employee Program (as hereinafter defined) that has been maintained (as such term is hereinafter defined) by Seller or any of its subsidiaries or affiliates at any time during the 5-year period ending on the date hereof. (b) Except as set forth in Schedule 2.22 hereto, each Employee Program which has been maintained by Seller or any of its subsidiaries or affiliates and which has at any time been intended to qualify under Section 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), has received a favorable determination or approval letter from the Internal Revenue Service ("IRS") regarding its qualification under such section and has, in fact, been qualified under the applicable section of the Code from the effective date of such Employee Program through and including the Closing (or, if earlier, the date that all of such Employee Program's assets were distributed). No event or omission has occurred which would cause any such Employee Program to lose its qualification under the applicable Code section. (c) Except as set forth in Schedule 2.22 hereto, there has not been any failure of Seller to comply with any laws applicable with respect to the Employee Programs that have been maintained by Seller or any of its subsidiaries or affiliates. With respect to any Employee Program now or heretofore maintained by Seller or any of its subsidiaries or affiliates,there has occurred no "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code, or breach of any duty under ERISA or other applicable law (including, without limitation, any health care continuation requirements or any other tax law requirements, or conditions to favorable tax treatment, applicable to such plan), which could result, directly or indirectly (including without limitation through any obligation of indemnification or contribution), in any taxes, penalties or other liability to Seller or any of its subsidiaries or affiliates. Except as set forth in Schedule 2.22 hereto, no litigation, arbitration, governmental administrative proceeding or investigation or other proceeding (other than those relating to routine claims for benefits) is pending or, to Seller's Knowledge, threatened with respect to any Employee Program. (d) Neither Seller nor any of its subsidiaries or affiliates has incurred any liability under Title IV of ERISA which will not be paid in full prior to Closing. Except as set forth in Schedule 2.22 hereto, there has been no "accumulated funding deficiency" (whether or not waived) with respect to any Employee Program ever maintained by Seller or any of its subsidiaries or affiliates and subject to Code Section 412 or ERISA Section 302. With respect to any Employee Program maintained by Seller or any of its subsidiaries or affiliates and subject to Title IV of ERISA, there has been no (nor will there be any as a result of the transaction contemplated by this Agreement) (i) "reportable event," within the meaning of ERISA Section 4043, or the regulations thereunder (for which the notice requirement is not waived under 29 C.F.R. Part 2615) or (ii) event or condition which presents a material risk of plan termination or any other event that may cause Seller or any of its subsidiaries or affiliates to incur liability or have a lien imposed on its assets under Title IV or ERISA. Except as set forth in Schedule 2.22 hereto, all payments and/or contributions required to have been made (under the provisions of any agreements or other governing documents or applicable law) with respect to all Employee Programs ever maintained by Seller or any of its subsidiaries or affiliates, for all periods prior to Closing, either have been made or have been accrued (and all such unpaid but accrued amounts are described on Schedule 2.22 hereto). Except as described in Schedule 2.22 hereto, no Employee Program maintained by Seller or any of its subsidiaries or affiliates and subject to Title IV of ERISA (other than a Multiemployer Plan as hereinafter defined) has any "unfunded benefit liabilities" within the meaning of ERISA Section 4001(a)(18), as of the Closing Date. Neither Seller nor any of its subsidiaries or affiliates has ever maintained a Multiemployer Plan. None of the Employee Programs ever maintained by Seller or any of its subsidiaries or affiliates has ever provided health care or any other non-pension benefits to any employees after their employment was terminated (other than as required by Part 6 of Subtitle B of Title I of ERISA or any other health benefits law) or has ever promised to provide such post- termination benefits. (e) With respect to each Employee Program maintained by Seller of any of its subsidiaries or affiliates within the five years preceding the date hereof, complete and correct copies of the following documents (if applicable to such Employee Program) have previously been delivered to Buyer: (i) all documents embodying or governing such Employee Program, and any funding medium for the Employee Program, including, without limitation, trust agreements) as they may have been amended through the date hereof; (ii) the most recent IRS determination or approval letter with respect to such Employee Program under Code Section 401 or 501(a), and any applications for determination or approval subsequently filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; (iv) the current summary plan description for such Employee Program (or other descriptions of such Employee Program provided to employees) and any material modifications to such summary plan descriptions or other descriptions; (v) any insurance policy (including any fiduciary liability insurance policy) related to such Employee Program; (vi) any documents evidencing any loan to an Employee Program that is a leveraged employee stock ownership plan; and (vii) with respect to any Multiemployer Plan, any participation or adoption agreement relating to any such participation in or contributions under such plan by Seller or any of its subsidiaries or affiliates. (f) Except as set forth in Schedule 2.22 hereto, each Employee Program maintained by Seller or any of its subsidiaries or affiliates as of the date hereof is subject to termination by the Board of Directors of such Seller or any of its subsidiaries or affiliates, as the case may be, without any further liability or obligation on the part of Seller or any of its subsidiaries or affiliates to make further contributions to any trust maintained under any such Employee Program following such termination. (g) Buyer will not adopt or in any way become a successor employer with respect to any such Employee Program. Except as otherwise required by law, any obligation, liabilities or responsibilities under COBRA with respect to any such Employee Program will be satisfied by Seller, and Buyer shall have no obligations, liabilities or responsibilities under COBRA with respect to any such Employee Program. Seller shall indemnify Buyer for any and all liability imposed by law under COBRA with respect to any such Employee Program. (h) For purposes of this Section 2.22: (i) "Employee Program" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, multiple employer welfare arrangements (within the meaning of ERISA Section 3(40)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; and (B) all stock option plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements and arrangements not described in (A) above. In the case of an Employee Program funded through an organization described in Code Section 501(c)(9), each reference to such Employee Program shall include a reference to such organization; (ii) an entity "maintains" an Employee Program if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Program, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Program, or if such Employee Program provides benefits to or otherwise covers employees of such entity (or their spouses, dependents, or beneficiaries); (iii) An entity is an "Affiliate" of Seller or any of its subsidiaries or affiliates for purposes of this Section 2.22 if it would have ever been considered a single employer with Seller or any of its subsidiaries or affiliates under ERISA Section 4001(b) or part of the same "controlled group" as Seller for purposes of ERISA Section 302(d)(8)(C), and in any case includes each subsidiary or affiliate of Seller; and (iv) "Multiemployer Plan" means a (pension or non-pension) employee benefit plan to which more than one employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 2.23 Books and Records. All of the books and records of Seller are complete and correct in all material respects and have been maintained in accordance with good business practice and there have been no transactions involving the Business which are required to have been set forth therein and which have not been accurately so set forth. 2.24 Other Names and Businesses. During the past five years, except for the names set forth on Schedule 2.24, Seller has used no trade names, fictitious names, assumed names, "doing business as" names or other names to conduct business nor has Shareholder had any interest in any other specialty patient surface or woundcare business other than Apex, Inc., a California corporation ("Apex"), Blue Line, Inc. and 9th Wave, Inc. 2.25 Disclosures to Third Parties. Except as set forth on Schedule 2.25 hereto, neither Seller, Shareholder nor any of their respective brokers, representatives, accountants, attorneys or agents has disclosed any customer lists, contract terms, pricing information, margin information, trade secrets or other confidential information to any other person or other entity. 2.26 Customer Relationships. The relationships of Seller with its customers and suppliers ("Customers") are generally satisfactory business relationships. Except as set forth on Schedule 2.26, no Customer which accounted for more than 1% of the revenues of Seller for the fiscal year ended December 31, 1996 has canceled or otherwise terminated its relationship with Seller or has during said period decreased materially its usage, purchase or provision, as the case may be, of the services or products of Seller, other than in the ordinary course of business consistent with past practice. Except as set forth on Schedule 2.26 hereto, no Customer has, to Seller's Knowledge, any plan or intention to terminate, cancel or otherwise adversely modify its relationship with Seller or to decrease or limit its usage, purchase or provision, as the case may be, of the services or products of Seller other than in the ordinary course of business consistent with past practice. 2.27 Affiliated Entities. Apex has no material assets and no longer conducts business. 2.28 Disclosure. No representation or warranty made by Seller or Shareholder contained in this Agreement nor any exhibit, schedule, statement or certificate furnished or to be furnished by Seller or Shareholder to Buyer or its representatives in connection herewith or pursuant hereto, contains or will contain on the Closing Date any untrue statement of a material fact, or omits or will omit on the Closing Date to state any material fact required to make the statements herein or therein contained not misleading. The representations and warranties contained in this Article II or elsewhere in this Agreement or any document delivered pursuant hereto shall not be affected or deemed waived by reason of the fact that Buyer and/or its representatives knew or should have known that any such representation or warranty is or might be inaccurate in any respect. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller and Shareholder as follows: 3.01 Organization; Valid Authorization; Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and all other agreements, instruments and documents which are contemplated by this Agreement and the performance of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate and other action on the part of Buyer, and when executed and delivered on behalf of Buyer, this Agreement and all agreements contemplated by this Agreement will constitute a valid and legally binding obligation of Buyer enforceable against it in accordance with its terms. 3.02 No Conflict with Other Instruments. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not (a) constitute a default under, conflict with, result in a right to accelerate, loss of rights under or a breach of any of the terms, conditions or provisions of, Buyer's organizational documents or any agreement or instrument to which Buyer is now a party or by which Buyer is bound or to which any property or asset of Buyer is bound or (b) result in the violation of any applicable law, ordinance, regulation, permit, authorization, decree or order of any court or other government agency. 3.03 Consents. There are no (a) consents or approvals of any public body or authority, (b) filings with any public body or authority or (c) consents or waivers from other parties to the Agreements or other instruments, that are required for the lawful consummation of the transactions contemplated hereby or necessary in order that the Business can be conducted by Buyer in the same manner after Closing as heretofore conducted by Seller. 3.04 Brokers. Neither Buyer nor any of its respective officers, directors, agents, employees or affiliates has employed any broker, agent or finder or incurred any liability for any brokerage fees, agents' commissions or finders' fees in connection with the transactions contemplated by this Agreement. 3.05 Disclosure. No representation or warranty made by Buyer contained in this Agreement nor any exhibit, schedule, statement or certificate furnished or to be furnished by Buyer to Seller, Shareholder or their representatives in connection herewith or pursuant hereto, contains or will contain on the Closing Date any untrue statement of a material fact, or omits or will omit on the Closing Date to state any material fact required to make the statements herein or therein contained not misleading. The representations and warranties contained in this Article III or elsewhere in this Agreement or any document delivered pursuant hereto shall not be affected or deemed waived by reason of the fact that Seller and/or its representatives knew or should have known that any such representation or warranty is or might be inaccurate in any respect. ARTICLE IV COVENANTS OF SELLER AND SHAREHOLDER Seller and Shareholder jointly and severally covenant and agree with Buyer as follows: 4.01 Conduct Prior to Effective Time. Unless otherwise expressly consented to in writing by Buyer, from and after the date of this Agreement through the Effective Time, Seller agrees to (and Shareholder agrees to cause Seller to): (a) carry on the Business in the ordinary and usual course as has been conducted since July 31, 1996; (b) keep and preserve the Assets in good condition and repair, ordinary wear and tear excepted; (c) preserve the goodwill of Seller's suppliers, customers, landlords and others having business relations with Seller; (d) maintain in full force and effect insurance comparable in amount and in scope of the current policies listed on Schedule 2.14 hereto; (e) maintain in full force and effect, perform all of its obligations under and not change any of the material terms under, the customer accounts of Seller and all other agreements, leases and other commitments relating to or affecting the Assets or the Business; (f) to cooperate with Buyer and use reasonable efforts to assist Buyer in obtaining the consent of any landlord or other party to any lease or contract with Seller where the consent of such landlord or other party may be required by reason of the transactions contemplated hereby; (g) comply in all material respects with and perform in all material respects, all obligations and duties imposed upon it by all federal and state laws and all rules, regulations and orders imposed by federal or state governmental authorities; (h) not grant any increase or make any change in the compensation of any employee employed in connection with the Business other than in the ordinary course of business consistent with past practices; (i) not dispose of or encumber any of the Assets other than in the ordinary course of business; (j) not take any actions of the type described in Section 2.17 other than in the ordinary course of business; (k) not take any actions that would be inconsistent with the intent of this Agreement; (l) not change its articles of incorporation or bylaws or merge or consolidate or obligate itself to do so with or into any other entity; (m) cause Buyer, its counsel, accountants and other representatives, to have full access, during normal business hours, to the properties, books and records of Seller and will furnish to Buyer and its representatives during such period all such information concerning the Business as Buyer or its representatives may reasonably request; and (n) give Buyer prompt written notice of any material change of any of the information contained in the representations and warranties made in Article II or elsewhere in this Agreement or the schedules or exhibits hereto which occurs prior to the Effective Time. 4.02 Advice of Change. Seller and Shareholder shall advise Buyer in writing prior to the Effective Time of any material adverse change, or the occurrence of any event which involves any substantial possibility of any material adverse change, in the condition, financial or otherwise, to the Business or the Assets that has occurred since the date of this Agreement. 4.03 Non-Competition Agreement. In consideration for the purchase of the Assets hereunder and other good and valuable consideration, at Closing, Seller and Shareholder shall, and shall cause Apex to, execute and deliver, the NonCompetition and Continuity of Business Dealings Agreement in the form of Exhibit G attached hereto (the "NonCompetition Agreement"). 4.04 Cooperation. Subject to the terms and conditions herein provided, Seller and Shareholder will each use all commercially reasonable efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law, to consummate and make effective all of the transactions contemplated by this Agreement. 4.05 Right to Name. Seller and Shareholder agreeto cause Seller, immediately after Closing, to change the name of Seller to a name which does not include "H.F.," "H.F. Systems" or "Hydrothermic Floatation Systems, Inc.," a similar name or any other name reasonably objected to by Buyer. Seller shall provide copies of all documents evidencing the change of name to Buyer. 4.06 Access and Information. From the date hereof until the first to occur of (i) the Closing Date and (ii) the termination of this Agreement in accordance with Section 9.01, Seller shall permit Buyer, its counsel, accountants and other representatives full and complete access during normal business hours to enable Buyer to make such investigation of the business, operations and properties of Seller relating to the Business as Buyer in its sole discretion deems necessary or desirable in connection with the transactions contemplated hereby. Such investigation shall include, without limitation, access to the directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of Seller relating to the Business and the properties, books, records and other documents of Seller relating to the Business. Buyer, Seller and Shareholder agree to use reasonable efforts wherever possible in conducting such investigation to keep confidential the existence of this Agreement and the proposed transactions contemplated hereby. Seller shall furnish Buyer and its representatives with such financial (including data with respect to billing and accounts receivable), operating and other data and information, and copies of documents with respect to the Business or any of the transactions contemplated hereby, as Buyer shall from time to time request. Such access and investigation shall be made upon reasonable notice and at reasonable places and times. Such access and information shall not in any way affect or diminish any of the representations or warranties hereunder. Without limiting the foregoing, during such period, Seller shall keep Buyer informed as to the business and operations of the Business and shall consult with Buyer with respect thereto as appropriate. 4.07 Termination of 401(k) Plan. Shareholder agrees to, and shall cause Seller to, take all actions necessary in accordance with all applicable laws to terminate Seller's 401(k) Plan. 4.08. Termination of Settlement Agreement. Shareholder agrees to, and shall cause Seller to, pay all amounts owed to Jack Sneh prior to the Closing. ARTICLE V COVENANTS OF BUYER Buyer covenants and agrees with Seller and Shareholder as follows: 5.01 Cooperation. Subject to the terms and conditions herein provided, Buyer will use its best efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective all of the transactions contemplated by this Agreement. 5.02 Confidentiality. In the event that the Closing does not occur,(i) the terms of the confidentiality provisions set forth in Section 9 of the letter of intent dated December 9, 1996 shall remain in full force and effect, (ii) Seller and Shareholder shall maintain, and shall require its accountants, attorneys, lenders, employees, officers and other representatives to maintain, the confidentiality of business methods, practices, customer lists, trade secrets, books and records of Buyer for a five-year period beginning on the date of this Agreement and ending on December 31, 2001, (iii) for a period of twelve (12) months beginning on the date of this Agreement, Buyer shall not solicit any individual currently employed by Seller ("Seller Employees") other than pursuant to a general solicitation or hire any of Seller's clinical consultants, and (iv) for a period of six (6) months beginning on the date of this Agreement, Buyer shall not hire any Seller Employees. 5.03 Employees. (a) On the date of this Agreement, Seller shall, to the extent not previously provided to Buyer, provide Buyer with a list of all of Seller's employees employed in the Business ("Employees") by name, date of hire, current salary and position and shall promptly provide to Buyer the most recent performance evaluation and other compensation information (including anticipated bonuses, if any) for any Employee who consents in writing to the provision of such information to Buyer. Buyer shall interview each Employee for employment effective as of the Closing Date and use its reasonable efforts to hire as many of the Employees as possible consistent with, and subject to, Buyer's requirements and employment policies. Seller shall permit Buyer to interview Employees at times and locations acceptable to each of Seller and Buyer. No later than seven (7) days from the date of this Agreement, Buyer shall provide to Seller a list of Employees it intends to employ following the Closing Date. Seller shall permit Buyer to communicate with Employees at reasonable times and upon reasonable notice concerning Buyer's plans, operations, business, customer relations and general personnel matters, provided that such contacts shall be conducted in a manner as is reasonably acceptable to Seller. Buyer shall pay to any Employee (other than Shareholder and Julie Levy) who is not offered employment by Buyer for a reason other than a failure to meet Buyer's standard pre-employment qualifications, or is terminated by Buyer without good cause after the Closing such amount, if any, as such Employee would have received pursuant to Buyer's severance policy had such Employee been an employee of Buyer since their date of hire by Seller. Each Employee offered employment by Buyer effective as of the Closing Date who accepts such employment shall be referred to herein as a "Transferred Employee." (b) Other than as set forth in Sections 5.03(a) and (c) and subject to the provisions of Buyer's policies and programs, each Transferred Employee shall be eligible to participate or eligible for accrual of benefits, vesting and contributions or accruals to be made or credited following the Closing Date under each of Buyer's employee benefit plans, programs or arrangements available to all or substantially all of Buyer's employees, subject to the terms upon which such plans allow new participation by Buyer's employees. Each Transferred Employee shall be deemed to have been hired by Buyer as of the Closing Date. Except as expressly provided in this Section 5.03, Buyer has no obligation to (i) make any contributions or accruals with respect to any period preceding the Closing Date, (ii) offer Transferred Employees the same or comparable employee plans or benefits as Seller, or (iii) assume any liability of Seller with respect to Seller's employee benefit plans or severance policy, accrued vacation or sick leave for Seller's employees, or Seller's employment of the Transferred Employees prior to the Closing Date. (c) With respect to Transferred Employees who regularly work less than 40 hours per week, Buyer shall not be required to offer or provide benefits, other than benefits offered or provided to Buyer's employees who work a similar number of hours per week. (d) This Agreement is not intended to create and does not create any contractual or legal rights in or enforceable by any employee of Seller employed with the Business or upon any party other than Seller, Shareholder and Buyer. Any written communications to the employees of Seller employed with the Business concerning the subject matter of this Section 5.03 shall be approved by Seller and Buyer. 5.04 Earnout Revenues. Buyer agrees to use commercially reasonable efforts to maximize the Earnout Revenue during the Earnout Period, subject to all applicable laws. ARTICLE VI CONDITIONS TO OBLIGATIONS OF SELLER AND SHAREHOLDER All obligations of Seller and Shareholder to be discharged under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, unless waived in writing by Seller and Shareholder at any time prior to or at the Closing: 6.01 Representations and Warranties of Buyer. All of the representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement. All such representations and warranties shall be deemed to have been made again as of the Closing Date, and shall be true and correct in all material respects as of the time of the Closing. Buyer shall have executed and delivered to Seller a Certificate, in form and substance reasonably satisfactory to Seller, dated the Closing Date, to such effect. 6.02 Covenants and Agreements of Buyer. Buyer shall have caused all covenants, agreements and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing to be so performed or complied with in all material respects. Buyer shall have executed and delivered to Seller a Certificate, in form and substance reasonably satisfactory to Seller, dated the Closing Date, to such effect. 6.03 Opinion of Counsel. Cox & Smith Incorporated, counsel for Buyer, shall have delivered to Seller and Shareholder an opinion, dated the Closing Date, in substantially the form of Exhibit H attached hereto. 6.04 Option. Kinetic Concepts, Inc., a Texas corporation ("KCI"), shall have granted to Shareholder an option (the "Option") pursuant to the 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the "Plan") to purchase Fifteen Thousand (15,000) shares of the common stock, par value $.001 per share, of KCI. The Option shall have all terms and conditions of other options granted under the Plan except the Option shall (i) vest as of the date of Closing and (ii) have an exercise price equal to $11.375. ARTICLE VII CONDITIONS TO OBLIGATIONS OF BUYER All obligations of Buyer to be discharged under this Agreement at the Closing are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, unless expressly waived in writing by Buyer at any time prior to or at the Closing: 7.01 Representations and Warranties of Seller and Shareholder. All of the representations and warranties of Seller and Shareholder contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement. All of such representations and warranties shall be deemed to have been made again as of the Closing Date, and shall be true and correct in all material respects as of the time of the Closing. Seller and Shareholder shall each have executed and delivered to Buyer a Certificate, in form and substance reasonably satisfactory to Buyer, dated the Closing Date, to such effect. 7.02 Covenants and Agreements of Seller and Shareholder. Seller and Shareholder shall have caused all covenants, agreements and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing to be so performed or complied with in all material respects. Seller and Shareholder shall each have executed and delivered to Buyer a Certificate, in form and substance reasonably satisfactory to Buyer, dated the Closing Date, to such effect. 7.03 Consents. All of the consents necessary or advisable to transfer the Assets to Buyer and for Buyer to operate the Business from and after the Effective Time shall have been secured in form reasonably satisfactory to Buyer, except for any such consents the failure of which to be made or obtained, individually or in the aggregate, would not have a material adverse effect on the Business or the Assets. 7.04 Opinion of Counsel. Jeffer, Mangels, Butler & Marmaro LLP, counsel for Seller and Shareholder, shall have delivered to Buyer an opinion, dated the Closing Date, in substantially the form of Exhibit I attached hereto. 7.05 No Material Adverse Changes. There shall not have been any material adverse changes to the Assets or the Business prior to the Closing; provided, however, for purposes of this Section 7.05, a material adverse change resulting solely from the announcement of the transactions contemplated hereby shall only be deemed to be a material adverse change under this Section 7.05 if (i) eight (8) or more of Seller's consulting clinicians elect to give notice to terminate their employment with Seller or (ii) 80 or more therapeutic support surface rentals are terminated, other than in the ordinary course of business. 7.06 Releases. All of the liens, charges, security interests and encumbrances outstanding on any of the Assets shall have been terminated and released prior to or at the Closing. 7.07 Agreements. Seller, Shareholder and Apex shall have each executed and delivered the Non-Competition Agreement. Seller shall have executed and delivered the Bill of Sale and Assumption Agreement. Shareholder shall have executed and delivered the Levy Employment Agreement. 7.08 Employment Agreements. Shawn Lipman and Rick Bowen shall have executed and delivered to Buyer Employment Agreements in form and substance reasonably satisfactory to Buyer. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 8.01 Survival of Representations and Warranties. Subject to the limitations set forth in Section 8.04, the representations, warranties, covenants, and agreements made by Seller and Shareholder hereunder, except as they may be fully performed prior to or at the Closing, shall survive Closing and shall be fully enforceable by Buyer and its successors and assigns, at law or in equity, against Seller and Shareholder and their respective successors or assigns. All of the representations, warranties, covenants, and agreements made by Buyer hereunder, except as they may be fully performed prior to or at the Closing, shall survive Closing and shall be fully enforceable by Seller, Shareholder, its successors, and assigns, at law or in equity, against Buyer and its successors and assigns. 8.02 Indemnification by Seller and Shareholder. Subject to the limitations set forth in Section 8.04, Seller and Shareholder, jointly and severally, agree to indemnify and hold Buyer harmless from all liabilities, damages, losses, costs, reasonable attorneys' fees and other expenses resulting from, arising out of or incurred with respect to, the falsity of any representation or the breach of any warranty or covenant made by Seller or Shareholder herein or in accordance herewith or in enforcing any agreement or indemnity hereunder. Except as expressly provided in Section 1.03, Buyer has not assumed, or agreed to assume, any liabilities or obligations of any kind or nature whatsoever of Seller, whether direct, contingent or otherwise. In connection therewith, Seller and Shareholder agree, jointly and severally, to indemnify and hold Buyer harmless from all liabilities, damages, losses, costs, reasonable attorneys' fees and other expenses resulting from or arising out of or incurred in connection with any actual or alleged liability or obligation of Seller or Shareholder not expressly assumed by Buyer. 8.03 Indemnification by Buyer. Buyer agrees to indemnify and hold Seller and Shareholder harmless from all liabilities, damages, losses, costs, reasonable attorneys' fees and other expenses resulting from, arising out of or incurred with respect to, the falsity of any representation or the breach of any warranty or covenant made by Buyer herein or in accordance herewith or in enforcing any agreement or indemnity hereunder. Buyer agrees to indemnify and hold Seller and Shareholder harmless from all liabilities, damages, losses, costs, reasonable attorneys' fees and other expenses resulting from, arising out of or incurred in connection with, (i) the Assumed Liabilities and (ii) the operation of the Business or the use of the Assets from and after the Closing Date. 8.04 Limitations on Indemnification. (a) If the Closing occurs, Seller and Shareholder will have no liability with respect to any representations or warranties in article II hereof, other than with respect to Sections 2.19, 2.21 and 2.22, unless on or before March 31, 1998, Buyer notifies Seller or Shareholder of a claim for indemnification. Any claim with respect to Sections 2.19, 2.21 and 2.22 may be made at any time. If the Closing occurs, Buyer will have no liability with respect to any representation or warranty made in Article III hereof, unless on or before March 31, 1998, Seller notifies Buyer of a claim for indemnification. (b) If the Closing occurs, Seller and Shareholder shall not be obligated to indemnify Buyer with respect to the representations and warranties set forth in Article II until and unless the cumulative amount of all indemnification claims with respect to the representations and warranties contained in Article II exceeds One Hundred Thousand Dollars ($100,000) (the 'Basket"), at which point Seller and Shareholder shall be obligated to indemnify Buyer for all such claims in excess of the Basket. (c) If the Closing occurs, Seller's and Shareholder's liability for and obligation to indemnify Buyer with respect to any breach of representations and warranties contained in Article II shall be limited to the aggregate amount of the consideration paid to Seller pursuant to Sections 1.02(a) and (b) hereof. The limitations set forth in this Section 8.04(c) shall only apply with respect to those claims based solely on the representations and warranties set forth in Article II hereof. (d) If the Closing occurs, the aggregate liability of Buyer for and obligation to indemnify Seller and Shareholder with respect to any breaches of representations and warranties contained in Article III shall be limited to the amount of One Million Dollars ($1,000,000), except for Buyer's obligations under Sections 1.02(b), 1.02(c) and 1.03. The limitations set forth in this Section 8.04(d) shall only apply with respect to claims based solely on the representations and warranties set forth in Article III hereof. (e) In calculating the amount of any loss incurred by any party hereto, such amount shall be reduced by the net amount of recovery (after deducting all attorneys' fees, expenses and other costs of recovery) from any insurer or other party liable for such loss, and the indemnified party shall use reasonable efforts to effect any such recovery. 8.05 Notice of Claim. The party seeking indemnification (the "Indemnified Party") shall give written notice to the party obligated to indemnify and hold the other harmless (the "Indemnifying Party") of an event giving rise to the obligation to indemnify, allow the Indemnifying Party to assume and conduct the defense of the claim or action and cooperate with the Indemnifying Party in the defense thereof. If the Indemnifying Party wrongfully refuses to assume the defense of the Indemnified Party, the Indemnifying Party shall be responsible for all legal and other expenses incurred by the Indemnified Party in connection with the investigation or defense of such claim or action including, without limitation, expenses incurred in enforcing such obligation to indemnify. 8.06 Offset. In the event Buyer shall be entitled (a) to indemnification pursuant to this Article VIII or (b) any other payments or claims from or against Seller and/or Shareholder, Buyer shall have the right to offset the amount of such claim, debt or obligation against any amounts or consideration to be paid to Seller and/or Shareholder after the Closing (the "Right of Offset"). In the event it is later determined that Buyer is not entitled to a recovery for the amount offset, Buyer shall repay to Seller the amount improperly offset plus accrued interest on such amount at the rate of 10% per annum from the date that payment would have been due had such amount not been improperly offset. The Right of Offset shall in no way limit or impair any other remedies available to Buyer. 8.07 Tax Treatment of Indemnification Payments. Unless otherwise required by law, each of the parties agree to treat any indemnification payments made pursuant to this Agreement as an adjustment to the purchase price for all tax purposes. 8.08 Exclusive Remedy. Except with respect to claims for actual fraud only, the parties hereto agree that their exclusive remedy after the Closing for any breach of any representation or warranty set forth in Articles II and III hereof contained in this Agreement shall be the indemnity contained in this Article VIII; provided, however, that nothing contained herein shall limit the rights of any party to seek and obtain injunctive relief to specifically enforce another party's obligations hereunder. ARTICLE IX GENERAL 9.01 Termination. (a) This Agreement may, by notice given prior to or at the Closing, be terminated: (i) by the mutual written agreement of Buyer and Seller and Shareholder; (ii) by either Buyer, on the one hand, or Seller and Shareholder, on the other hand, if a material breach of any provision of this Agreement has been committed by the other party and such breach has not been waived or cured without having a material adverse effect on the Business or the Assets; (iii) (I) by Buyer if any of the conditions in Section VII has not been satisfied as of the Closing, or if satisfaction of such a condition is or becomes impossible (other than through the failure of Buyer to comply with its obligations under this Agreement) and Buyer has not waived such condition on or before the Closing or (II) by Seller if any of the conditions in Section VI has not been satisfied as of the Closing, or if satisfaction of such a condition is or becomes impossible (other than through the failure of Seller to comply with its obligations under this Agreement) and Seller has not waived such condition on or before the Closing. (iv) the Closing shall not have occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) as of February 15, 1997, or such later date as the parties may agree upon in writing. (b) Nothing in this Section 9.01 shall relieve any party of any liability for a breach of this Agreement prior to the termination hereof. 9.02 Notices, Etc. All notices, requests, demands and other communications hereunder shall be in writing and, unless otherwise provided herein, shall be deemed to have been duly given upon delivery in person, by telecopy, by overnight courier or by certified or registered mail, return receipt requested, as follows: If to Seller Hydrothermic Floatation Systems, Inc or Shareholder: 127 North Bowling Green Way Los Angeles, California 90049 Attention: Mr. Jeremy Levy, President Facsimile No.: (310)476-2303 With a copy to: Jeffer, Mangels, Butler & Marmaro, LLP 2121 Avenue of the Stars, Tenth Floor Los Angeles, California 90067-5010 Attention: Mr. Joel I. Bennett Facsimile No.: (310)203-0567 If to Buyer: KCI Therapeutic Services, Inc. 8023 Vantage Drive San Antonio, Texas 78230 Attention: Mr. Dennis E. Noll, General Counsel Facsimile No.: (210)225-6993 With a copy to: Cox & Smith Incorporated 112 E. Pecan Street, Suite 1800 San Antonio, Texas 78205 Attention: Mr. Stephen D. Seidel Facsimile: (210)226-8395 or at such other address or telecopy number as shall have been furnished to the other in writing in accordance herewith, except that such notice of such change shall be effective only upon receipt. Each such notice, request, demand or other communication shall be effective when received or, if given my mail, when delivered at the address specified in this Section 9.02 or on the fifth business day following the date on which such communication is posted, whichever occurs first. 9.03 Amendments and Waiver. This Agreement may be amended or modified by, and only by, a written instrument executed by all the parties hereto. The terms of this Agreement may be waived by, and only by, a written instrument executed by the party against whom such waiver is sought to be enforced. 9.04 Section and Other Headings. The section and other headings contained in this Agreement are for convenience of reference only and shall not in any way affect the meaning or interpretation of this Agreement. 9.05 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 9.06 Parties in Interest. This Agreement shall inure to the benefit of and be binding upon parties hereto, and their respective successors and assigns. This Agreement shall not be assigned by any party hereto without the written consent of the other parties, except as otherwise expressly permitted herein. 9.07 No Implied Rights or Remedies. Except as otherwise expressly provided herein, nothing herein expressed or implied is intended or shall be construed to confer upon or to give any person, firm, or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 9.08 Exhibits and Schedules. All exhibits and schedules referred to herein and attached hereto are incorporated herein for all purposes. 9.09 Entire Agreement. This Agreement, together with all exhibits and schedules hereto and the letter agreement of even date herewith between Buyer, Seller, Shareholder, Apex and Blue Line, Inc., (the "Letter Agreement"), embodies the entire agreement and understanding between the parties hereto relating to the subject matter hereof and supersedes any prior agreements and understandings relating to the subject matter hereof. 9.10 Legal Invalidity. If any part or provision of this Agreement is or shall be deemed violative of any applicable laws, rules or regulations, such legal invalidity shall not void the Agreement or affect the remaining terms and provisions of this Agreement, and the Agreement shall be construed and interpreted to comport with all such laws, rules or regulations to the maximum extent possible. 9.11 Applicable Law. This Agreement and the rights and obligations of the parties hereto shall be construed under and governed by the laws of the State of Delaware, without giving effect to principles of conflict of laws. 9.12 Enforcement; Service of Process. In the event either party shall seek enforcement of any covenant, warranty or other term or provision of this agreement, the party which prevails in such enforcement proceedings shall be entitled to recover reasonable attorneys' fees actually incurred by it in connection therewith. The parties hereto agree that the service of process or any other papers upon them or any of them by registered mail at their respective addresses where notices are to be sent pursuant to this Article IX shall be deemed good, proper and effective service upon them. 9.13 Expenses; Taxes. Each party hereto shall pay its own expenses incurred in connection with the transactions contemplated hereby; provided, however, that Seller shall pay the cost of all income, single business, sales, transfer, use, value added, gross receipts, registration and similar taxes arising out of or in connection with the transactions contemplated by this Agreement, other than any sales or use tax that Buyer elects to pay, if such tax payment is not mandatory; provided, Buyer shall pay use tax with respect to any such election to the extent such payment does not adversely affect Buyer. 9.14 Waiver of Punitive Damages. EXCEPT WITH RESPECT TO FRAUD, THE PARTIES TO THIS AGREEMENT EXPRESSLY WAIVE AND FORGO ANY RIGHT TO RECOVER PUNITIVE AND EXEMPLARY DAMAGES IN ANY ARBITRATION, LAWSUIT, LITIGATION OR PROCEEDING ARISING OUT OF OR RESULTING FROM ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT, OR THE BREACH, TERMINATION OR VALIDITY OF ANY PROVISION OF THIS AGREEMENT, OR ANY RELATED DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED DOCUMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (a) NO REPRESENTATIVE, AGENT OR ATTORNEY OR ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (b) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THE WAIVER, (c) IT MAKES THIS WAIVER VOLUNTARILY, AND (d) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.14. 9.15 Exclusivity of Representations and Warranties; Relationship Between the Parties. It is the explicit intent and understanding of each of the parties hereto that neither party hereto nor any of its affiliates, representatives or agents is making any representation or warranty whatsoever, oral or written, express or implied, other than those set forth in this Agreement, and neither party hereto is relying on any statement, representation or warranty, oral or written, express or implied, made by the other party hereto or such other party's affiliates, representatives or agents, except for the representations and warranties set forth in this Agreement and the Exhibits, Schedules and other documents executed and delivered by the parties hereto pursuant to this Agreement. The parties hereto agree that this is an arms' length transaction in which the parties' undertakings and obligations are limited to the performance of their obligations under this Agreement and the Exhibits, Schedules and other documents executed and delivered by the parties hereto pursuant to this Agreement. 9.16 Arbitration. (a) The parties hereto agree that all disputes, controversies or claims that may arise among them (including their agents and employees) including, without limitation, any dispute, controversy or claim arising out of this Agreement, the Letter Agreement, the Non-Competition Agreement or the Levy Employment Agreement, or the breach, termination or invalidity thereof, shall be submitted to, and determined by, binding arbitration. The foregoing notwithstanding, the parties may seek and obtain from a court of competent jurisdiction a temporary restraining order, temporary injunction or other temporary emergency relief without first having to submit such dispute to arbitration. Such arbitration shall be conducted pursuant to the Commercial Arbitration Rules (the "Rules") then in effect of the American Arbitration Association, except to the extent such rules are inconsistent with this Section 9.16; provided; however, that any dispute relating to the calculation of the Earnout Revenue Statement or the Adjusted Assets Statement shall be resolved in accordance with Sections 1.02(b) and (d) hereof. If the amount in controversy in the arbitration exceeds $200,000, exclusive of interest, attorneys' fees and costs, the arbitration shall be conducted by a panel of three (3) neutral arbitrators. Otherwise, the arbitration shall be conducted by a single neutral arbitrator. The arbitrator(s) shall be selected pursuant to the Rules. Exclusive venue for such arbitration shall be in Phoenix, Arizona. The arbitrator(s) shall apply the internal laws of the State of Delaware (without regard to conflict of law rules) in determining the substance of the dispute, controversy or claim and shall decide the same in accordance with the applicable usages and terms of trade. Evidentiary questions shall be governed by the Federal Rules of Evidence. The arbitrator(s)' award shall be in writing and shall set forth the findings and conclusions upon which the arbitrator(s) based the award. The prevailing party in any such arbitration shall be entitled to recover its reasonable attorneys' fees, costs and expenses incurred in connection with the arbitration. Any award pursuant to such arbitration shall be final and binding upon the parties, and judgment on the award may be entered in any federal or state court sitting or located in Maricopa County, Arizona or in any other court having jurisdiction. The provisions of this Section 9.16 shall survive the termination of this Agreement. (b) The arbitration shall commence within thirty (30) days after the selection of neutral arbitrator(s) in accordance with the provisions of this Section 9.16. In fulfilling his or her duties, the arbitrator(s) may consider such matters as, in the opinion of the arbitrator(s), are necessary or helpful to render an appropriate decision. All discovery shall be expedited, consistent with the nature and complexity of the claim or dispute and consistent with fairness and justice. The arbitrator(s) shall have the power to compel any party to comply with discovery requests of the other parties and to issue binding orders relating to any discovery dispute which shall be enforceable in the same manner as awards. The arbitrator(s) also shall have the power to impose sanctions for abuse or frustration of the arbitration process, including without limitation, the refusal to comply with orders of the arbitrator(s) relating to discovery and compliance with subpoenas. (c) Without limiting the enforceability or scope of this Section 9.16, the parties to this Agreement agree that if a controversy or claim between them arises out of or relates to this Agreement and results in litigation, the courts of Maricopa County, Arizona or the courts of the United States of America located in Maricopa County, Arizona shall have jurisdiction to hear and decide such matter, and such parties hereby submit to jurisdiction of such courts. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date and year first above written. KCI THERAPEUTIC SERVICES, INC. /S/ DENNIS E. NOLL By:______________________________ Dennis E. Noll, Vice President HYDROTHERMIC FLOATATION SYSTEMS, INC. /S/ Y. JERMY LEVY By:______________________________ Y. Jeremy Levy, President /S/ Y. JEREMY LEVY _________________________________ Y. Jeremy Levy, Individually EX-23 4 Board of Directors Kinetic Concepts, Inc. San Antonio, Texas Ladies and Gentlemen: Re: Form 10-Q We are aware of the inclusion in Form 10-Q of Kinetic Concepts, Inc. of our report dated April 22, 1997 relating to the unaudited condensed consolidated interim financial statements of Kinetic Concepts, Inc. for the quarter ended March 31, 1997. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Very truly yours, /S/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP San Antonio, Texas May 8, 1997 EX-27 5
5 3-MOS DEC-31-1997 MAR-31-1997 41,394,150 0 79,894,273 (8,338,493) 21,366,599 143,308,447 194,484,215 (126,551,684) 267,550,914 45,690,652 0 0 0 42,289 215,448,141 267,550,914 11,356,375 73,180,822 4,242,325 52,721,476 0 0 (453,955) 16,670,976 6,668,390 10,002,586 0 0 0 10,002,586 $0.23 $0.23
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