-----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, SZHiUIrTaQRJu4Q0goVceW3nepHIOIay5lII74t5tYZnEZ2LWU5067/VX1Ma1gTW rmvgDJ1F1S6f8hpsZsRklw== 0000950123-97-008385.txt : 19971009 0000950123-97-008385.hdr.sgml : 19971009 ACCESSION NUMBER: 0000950123-97-008385 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19971008 SROS: NONE GROUP MEMBERS: FREMONT PURCHASER II, INC. GROUP MEMBERS: JAMES R. LEININGER, M.D. GROUP MEMBERS: KINETIC CONCEPTS INC /TX/ GROUP MEMBERS: RCBA PURCHASER I, L.P. SUBJECT COMPANY: 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: SC 13E3 SEC ACT: SEC FILE NUMBER: 005-39973 FILM NUMBER: 97692426 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 FILED BY: 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: SC 13E3 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 SC 13E3 1 KINETIC CONCEPTS, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934) ------------------------ KINETIC CONCEPTS, INC. (NAME OF ISSUER) ------------------------ KINETIC CONCEPTS, INC. FREMONT PURCHASER II, INC. RCBA PURCHASER I, L.P. JAMES R. LEININGER, M.D. (NAME OF PERSON(S) FILING STATEMENT) ------------------------ COMMON STOCK, PAR VALUE $.001 PER SHARE (TITLE OF CLASS OF SECURITIES) ------------------------ 49460W-01-0 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ DENNIS E. NOLL SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY KINETIC CONCEPTS, INC. 8023 VANTAGE DRIVE SAN ANTONIO, TEXAS 78230 TELEPHONE: (210) 524-9000 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT) ------------------------ WITH COPIES TO: DAVID W. HELENIAK, ESQ. STEPHEN D. SEIDEL, ESQ. SHEARMAN & STERLING COX & SMITH INCORPORATED 599 LEXINGTON AVENUE 112 E. PECAN STREET, SUITE 1800 NEW YORK, NEW YORK 10022 SAN ANTONIO, TEXAS 78205 (212) 848-4000 (210) 554-5500
This statement is filed in connection with (check the appropriate box): a. [ ] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [X] A tender offer. d. [ ] None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies: [ ] CALCULATION OF FILING FEE
==================================================================================================================================== TRANSACTION VALUATION AMOUNT OF FILING FEE - ------------------------------------------------------------------------------------------------------------------------------------ $654,293,626.90* $130,858.73 ====================================================================================================================================
* For purposes of calculating fee only. This transaction applies to an aggregate of 35,440,157 shares (sum of (i) 32,633,971 outstanding shares of common stock (not including 186,824 treasury shares or 6,064,155, 100,000 and 3,837,890 shares of common stock held by James R. Leininger, M.D., Peter A. Leininger, M.D. and Richard C. Blum & Associates, L.P., respectively, to remain outstanding after the Offer) and (ii) 2,806,186 outstanding options to purchase shares of Common Stock). Except as otherwise noted, the per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 is $19.25 per unit. The per unit price with respect to 723,300 options to purchase shares of Common Stock is $19.9375 per unit. The proposed maximum aggregate value of transaction is $654,293,626.90 (sum of (i) product of 32,633,971 shares of Common Stock and $19.25, (ii) product of (A) 2,082,886 options to purchase shares of Common Stock and (B) the difference between $19.25 and the exercise price of such options and (iii) product of (A) 723,300 options to purchase shares of Common Stock and (B) the difference between $19.9375 and the exercise price of such options). The total fee is $130,858.73 paid by wire transfer on October 7, 1997 to the designated lockbox depository maintained by the Commission at Mellon Bank. The amount of the filing fee, calculated in accordance with Rule 0-11 promulgated under the Securities Exchange Act of 1934, as amended, equals 1/50 of one percent of the Common Stock to be acquired. [X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: $130,858.73 Form or Registration No.: SC13E4 Filing Party: Kinetic Concepts, Inc. Date Filed: October 8, 1997 ================================================================================ 2 INTRODUCTION This Rule 13e-3 Transaction Statement (the "Statement") on Schedule 13E-3 (the "Schedule 13E-3") is being filed by Kinetic Concepts, Inc., a Texas corporation (the "Company"), Fremont Purchaser II, Inc. ("F Purchaser"), RCBA Purchaser I, L.P. ("B Purchaser" and, together with F Purchaser, "Purchasers") and James R. Leininger, M.D. ("Dr. James Leininger") pursuant to Section 13(e) of the Securities Exchange Act of 1934, as amended, and Rule 13e-3 thereunder in connection with the tender offer by the Company for all the issued and outstanding shares of its common stock, $.001 par value per share (the "Shares"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated October 8, 1997 (the "Offer to Purchase") and the related Letter of Transmittal (which together constitute the "Offer"), copies of which are filed as Exhibits (d)(1) and (d)(2) hereto, respectively. The following Cross Reference Sheet, prepared pursuant to General Instruction F to Schedule 13E-3, shows the location in the Issuer Tender Offer Statement on Schedule 13E-4 filed by the Company (the "Schedule 13E-4") with the Securities and Exchange Commission on the date hereof of the information required to be included in this Schedule 13E-3. The information set forth in the Schedule 13E-4, including all exhibits thereto, is hereby expressly incorporated herein by reference as set forth in the Cross Reference Sheet and the responses in this Schedule 13E-3, and such responses are qualified in their entirety by reference to the information contained in the Offer to Purchase and the schedules thereto. 2 3 CROSS REFERENCE SHEET
ITEM IN WHERE LOCATED IN SCHEDULE 13E-3 SCHEDULE 13E-4 ---------------- ---------------- Item 1(a).................................................................... Item 1(a) Item 1(b).................................................................... Item 1(b) Item 1(c).................................................................... Item 1(c) Item 1(d).................................................................... * Item 1(e).................................................................... * Item 1(f).................................................................... Item 4 Item 2(a).................................................................... * Item 2(b).................................................................... * Item 2(c).................................................................... * Item 2(d).................................................................... * Item 2(e).................................................................... * Item 2(f).................................................................... * Item 2(g).................................................................... * Item 3(a).................................................................... * Item 3(b).................................................................... * Item 4(a).................................................................... * Item 4(b).................................................................... * Item 5(a)-(g)................................................................ Item 3(a)-(j) Item 6(a).................................................................... Item 2(a) Item 6(b).................................................................... * Item 6(c).................................................................... * Item 6(d).................................................................... * Item 7(a).................................................................... Item 3 Item 7(b).................................................................... * Item 7(c).................................................................... * Item 7(d).................................................................... * Item 8(a).................................................................... * Item 8(b).................................................................... * Item 8(c).................................................................... * Item 8(d).................................................................... * Item 8(e).................................................................... * Item 8(f).................................................................... * Item 9(a)-(c)................................................................ * Item 10(a)................................................................... * Item 10(b)................................................................... Item 4 Item 11...................................................................... Item 5 Item 12(a)................................................................... * Item 12(b)................................................................... * Item 13(a)................................................................... * Item 13(b)................................................................... * Item 13(c)................................................................... * Item 14(a)-(b)............................................................... Item 7 Item 15(a)................................................................... * Item 15(b)................................................................... Item 6 Item 16...................................................................... Item 8(e) Item 17(a)................................................................... Item 9(b) Item 17(b)................................................................... * Item 17(c)................................................................... Item 9(c) Item 17(d)................................................................... Item 9(a) Item 17(e)................................................................... * Item 17(f)................................................................... *
- --------------- * The Item is inapplicable or the answer thereto is negative. 3 4 ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION. (a) The name of the issuer is Kinetic Concepts, Inc., a Texas corporation, which has its principal executive offices at 8023 Vantage Drive, San Antonio, Texas 78230. (b) This Statement relates to the offer by the Company to purchase all of the Shares for $19.25 per Share, net to seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase. The information set forth in the Offer to Purchase under "INTRODUCTION," "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends" and "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions" is incorporated herein by reference. (c) The information set forth in the Offer to Purchase under "INTRODUCTION" and "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends" is incorporated herein by reference. (d) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends" and "THE TENDER OFFER -- Section 9. Dividends and Distributions" is incorporated herein by reference. (e) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated herein by reference. (f) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. This Statement is being filed by the Company, which is the issuer of the class of equity securities which is the subject of the Rule 13e-3 transaction and by Purchasers and Dr. James Leininger, all of whom are affiliates of the Issuer. (a) - (d) and (g). The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 7. Certain Information Concerning the Company," "THE TENDER OFFER -- Section 14. Certain Information Concerning Purchasers" and "SCHEDULE I. Directors and Executive Officers of the Company" is incorporated herein by reference. (e) - (f). Neither the Company, Purchasers, Dr. James Leininger nor any natural person listed in "SCHEDULE I. Directors and Officers of the Company" or "THE TENDER OFFER -- Section 14. Certain Information Concerning Purchasers" of the Offer to Purchase during the past five years, to its knowledge, (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which any such person was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS. (a) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Related Party Transactions" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "INTRODUCTION" and "SPECIAL FACTORS -- Background of the Transactions" is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. (a) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL FACTORS -- Rights of the Shareholders in the Transactions", "SPECIAL FACTORS -- Plans for the Company after the Transactions; Certain Effects of the Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement 4 5 Among Bidders," "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date," "THE TENDER OFFER -- Section 2. Acceptance for Payment and Payment for Shares," "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares," "THE TENDER OFFER -- Section 4. Withdrawal Rights," "THE TENDER OFFER -- Section 8. Financing of the Transactions," "THE TENDER OFFER -- Section 10. Effect of the Transactions on the Market for Shares; Exchange Act Registration," "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer," "THE TENDER OFFER -- Section 12. Certain Legal Matters and Regulatory Approvals" and "THE TENDER OFFER -- Section 16. Miscellaneous" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" and "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" is incorporated herein by reference. ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a)-(g) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions," "SPECIAL FACTORS -- Plans for the Company after the Transactions; Certain Effects of the Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders," "THE TENDER OFFER -- Section 9. Dividends and Distributions" and "THE TENDER OFFER -- Section 10. Effects of the Transactions on the Market for Shares; Exchange Act Registration" is incorporated herein by reference. ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth in the Offer to Purchase under "INTRODUCTION" and "THE TENDER OFFER -- Section 8. Financing of the Transactions" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 13. Fees and Expenses" is incorporated herein by reference. (c) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 8. Financing of the Transactions" is incorporated herein by reference. (d) Not applicable. ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS. (a) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions" and "SPECIAL FACTORS -- Plans for the Company After the Transactions; Certain Effects of the Transactions" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Background of the Transactions" and "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions" is incorporated herein by reference. (c) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions," "SPECIAL FACTORS -- Position of Purchasers and Dr. James 5 6 Leininger Regarding Fairness of the Transactions," and "SPECIAL FACTORS -- Plans for the Company after the Transactions; Certain Effects of the Transactions," is incorporated herein by reference. (d) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Plans for the Company after the Transactions; Certain Effects of the Transactions," "SPECIAL FACTORS -- Rights of the Shareholders in the Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares," "THE TENDER OFFER -- Section 5. Certain U.S. Federal Income Tax Consequences," "THE TENDER OFFER -- Section 8. Financing of the Transactions" and "THE TENDER OFFER -- Section 10. Effect of the Transactions on the Market for Shares; Exchange Act Registration" is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a) -- (e) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions," "SPECIAL FACTORS -- Opinion of BT Alex. Brown Incorporated," "SPECIAL FACTORS -- Position of Purchasers and Dr. James Leininger Regarding Fairness of the Transactions," "SCHEDULE II. Opinion of BT Alex. Brown Incorporated" and "SPECIAL FACTORS -- Rights of the Shareholders in the Transactions" is incorporated herein by reference. (f) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Background of the Transactions" is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a) -- (c) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions," "SPECIAL FACTORS -- Opinion of BT Alex. Brown Incorporated," and "SCHEDULE II -- Fairness Opinion of BT Alex. Brown Incorporated" is incorporated herein by reference. ITEM 10. INTEREST IN SECURITIES OF THE ISSUER. (a) The information set forth in the Offer to Purchase under "INTRODUCTION" and "SPECIAL FACTORS -- Beneficial Ownership of Common Stock" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" and "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated herein by reference. ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of the Company for the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions," "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" and "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" is incorporated herein by reference. ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION. (a) -- (b) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions," "SPECIAL FACTORS -- Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions," "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the 6 7 Shares" "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders," "SPECIAL FACTORS -- Beneficial Ownership of Common Stock" and "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions" is incorporated herein by reference. ITEM 13. OTHER PROVISIONS OF THE TRANSACTION. (a) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Rights of the Shareholders in the Transactions" and "SCHEDULE III. Articles 5.11 through 5.13 of the Texas Business Corporation Act" is incorporated herein by reference. (b) Not applicable. (c) Not applicable. ITEM 14. FINANCIAL INFORMATION. (a) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 7. Certain Information Concerning the Company" is incorporated herein by reference. In addition, the Company's audited financial statements for the fiscal years ended December 31, 1995 and December 31, 1996 and the Company's unaudited financial statements three-month and six-month periods ended June 30, 1996 and June 30, 1997 are attached to the Offer to Purchase as Schedules IV and V thereto, respectively. (b) Not applicable. ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED. (a) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Background of the Transactions" and "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions," "SPECIAL FACTORS -- Transactions and Arrangements Concerning the Shares" and "THE TENDER OFFER -- Section 13. Fees and Expenses" is incorporated herein by reference. ITEM 16. ADDITIONAL INFORMATION. The information set forth in the Offer to Purchase and the related Letter of Transmittal, copies of which are attached hereto as Exhibits (d)(1) and (d)(2), respectively, are incorporated herein by reference in their entirety. ITEM 17. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Commitment Letter, dated October 1, 1997, from Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens, Bankers Trust Company and BT Alex. Brown Incorporated. (a)(2) Engagement Letter, dated October 1, 1997, from BT Alex. Brown Incorporated and BancAmerica Robertson Stephens. (a)(3) Commitment Letter, dated October 1, 1997, from Bankers Trust New York Corporation and Bank of America National Trust and Savings Association. (b)(1) Opinion of BT Alex. Brown Incorporated (included as Schedule II to the Offer to Purchase filed as Exhibit (d)(1) below). (b)(2) Presentation of BT Alex. Brown Incorporated, dated October 1, 1997. (c)(1) Transaction Agreement, dated as of October 2, 1997, among Fremont Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company. (c)(2) Shareholder Support Agreement, dated as of October 2, 1997, among F Purchaser, B Purchaser and Dr. James Leininger. (c)(3) Agreement Among Bidders, dated as of October 2, 1997, between Fremont Partners, L.P. and Richard C. Blum & Associates, L.P. 7 8 (c)(4) Kinetic Concepts, Inc. Management Equity Plan. (c)(5) Form of Stock Retention Agreement. (c)(6) Management Equity Agreement for Raymond R. Hannigan, dated October 2, 1997. (c)(7) Guarantee, dated October 2, 1997 by Fremont Partners, L.P. (d)(1) Offer to Purchase, dated October 8, 1997. (d)(2) Letter of Transmittal, dated October 8, 1997. (d)(3) Notice of Guaranteed Delivery, dated October 8, 1997. (d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, dated October 8, 1997. (d)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, dated October 8, 1997. (d)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (d)(7) Summary Advertisement as published in The Wall Street Journal on October 8, 1997. (d)(8) Press Release issued by the Company on October 3, 1997. (d)(9) Letter to the Company's Shareholders from Raymond R. Hannigan, President and Chief Executive Officer of the Company, dated October 8, 1997. (e) Articles 5.11 through 5.13 of the Texas Business Corporation Act (included as Schedule III to the Offer to Purchase filed as Exhibit (d)(1) above). (f) Not applicable. - --------------- 8 9 After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. October 8, 1997 Kinetic Concepts, Inc. By: /s/ DENNIS E. NOLL ------------------------------------ Name: Dennis E. Noll Title: Senior Vice President Fremont Purchaser II, Inc. By: /s/ R.S. KOPF ------------------------------------ Name: R.S. Kopf Title: General Counsel and Secretary RCBA Purchaser I, L.P. By Richard C. Blum & Associates, L.P., its General Partner By: /s/ MURRAY A. INDICK ------------------------------------ Name: Title: /s/ JAMES R. LEININGER, M.D. -------------------------------------- James R. Leininger, M.D. 9 10 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- (a)(1) Commitment Letter, dated October 1, 1997, from Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens, Bankers Trust Company and BT Alex. Brown Incorporated. (a)(2) Engagement Letter, dated October 1, 1997, from BT Alex. Brown Incorporated and BancAmerica Robertson Stephens. (a)(3) Commitment Letter, dated October 1, 1997, from Bankers Trust New York Corporation and Bank of America National Trust and Savings Association. (b)(1) Opinion of BT Alex. Brown Incorporated (included as Schedule II to the Offer to Purchase filed as Exhibit (d)(1) below). (b)(2) Presentation of BT Alex. Brown Incorporated dated October 1, 1997. (c)(1) Transaction Agreement, dated as of October 2, 1997, among Fremont Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company. (c)(2) Shareholder Support Agreement, dated as of October 2, 1997, among F Purchaser, B Purchaser and Dr. James Leininger. (c)(3) Agreement Among Bidders, dated as of October 2, 1997, between Fremont Partners, L.P. and Richard C. Blum & Associates, L.P. (c)(4) Kinetic Concepts, Inc. Management Equity Plan. (c)(5) Form of Stock Retention Agreement. (c)(6) Management Equity Agreement for Raymond R. Hannigan, dated October 2, 1997. (c)(7) Guarantee, dated October 2, 1997, by Fremont Partners, L.P. (d)(1) Offer to Purchase, dated October 8, 1997. (d)(2) Letter of Transmittal, dated October 8, 1997. (d)(3) Notice of Guaranteed Delivery, dated October 8, 1997. (d)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, dated October 8, 1997. (d)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, dated October 8, 1997. (d)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (d)(7) Summary Advertisement as published in The Wall Street Journal on October 8, 1997. (d)(8) Press Release issued by the Company on October 3, 1997. (d)(9) Letter to the Company's Shareholders from Raymond R. Hannigan, President and Chief Executive of the Company, dated October 8, 1997. (e) Articles 5.11 through 5.13 of the Texas Business Corporation Act (included as Schedule III to the Offer to Purchase filed as Exhibit (d)(1) above). (f) Not applicable.
EX-99.A.1 2 COMMITMENT LETTER 1 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION BANKERS TRUST COMPANY 231 South LaSalle Street 130 Liberty Street Chicago, Illinois 60697 New York, New York 10006 BANCAMERICA ROBERTSON STEPHENS BT ALEX. BROWN INCORPORATED 231 South LaSalle Street 130 Liberty Street Chicago, Illinois 60697 New York, New York 10006 October 1, 1997 Senior Credit Facilities Commitment Letter Fremont Purchaser II, Corp. Fifty Fremont Street, Suite 3700 San Francisco, California 94105 Attention: Mr. James T. Farrell RCBA Purchaser I, L.P. 909 Montgomery Street, Suite 400 San Francisco, California 94105 Attention: Mr. John C. Walker Kinetic Concepts, Inc. 8023 Vantage Drive San Antonio, Texas 78230 Attention: Mr. Raymond R. Hannigan Ladies and Gentlemen: You have advised BancAmerica Robertson Stephens ("BRS"), Bank of America National Trust and Savings Association ("Bank of America"), BT Alex. Brown Incorporated ("BT Alex. Brown") and Bankers Trust Company ("Bankers Trust") that Fremont Purchaser II, Corp. ("Fremont"), RCBA Purchaser I, L.P. ("RCBA" and, together with Fremont, the "Sponsors") and Kinetic Concepts, Inc. (the "Borrower") intend to enter into a transaction agreement (the "Transaction Agreement") pursuant to which the Sponsors, together with certain of their affiliates and investors (the Sponsors and such affiliates and investors are collectively referred to herein as the "New Investor Group"), will participate and invest in a leveraged recapitalization transaction involving the Borrower (the "Recapitalization"). 2 2 We understand that the Recapitalization will be accomplished through the following steps: (a) the Sponsors will purchase for cash from the Borrower up to $154,700,000 (but not less than $125,000,000) of newly issued shares of common stock ("Shares") of the Borrower (the "New Investor Shares"); (b) the Borrower will make an all cash tender offer (the "Tender Offer") to acquire all of its issued and outstanding Shares (and related options), other than the New Investor Shares, Shares and certain management options (such Shares and management options, together with the New Investor Shares, the "Rollover Shares") owned by certain existing stockholders of the Borrower, including members of the Borrower's Board of Directors and/or management and (the "Rollover Shareholders" and, together with the New Investor Group, the "Buyers"), for a maximum aggregate repurchase price not to exceed $655,000,000; (c) any Shares (and related options) acquired by the Borrower pursuant to the Tender Offer will immediately be cancelled; (d) any Shares (and related options) not acquired pursuant to the Tender Offer (other than the Rollover Shares) will be acquired in a merger in which such Shares will be converted to the right to receive the consideration paid in the Tender Offer (the "Merger"); and (e) pursuant to the Merger, the Rollover Shares (which shall have an aggregate value of at least $355,200,000) shall be converted to shares of the Borrower as the surviving corporation of the Merger, which shares shall represent all of the issued and outstanding common stock of the Borrower immediately following the Merger. References herein to the "Recapitalization" shall include all of the foregoing transactions and all related financings and other transactions. Upon consummation of the Recapitalization, the New Investor Group will own at least 66-2/3% of the then outstanding shares of common stock of the Borrower. You have also advised us that you propose to finance the Recapitalization (including the refinancing of existing indebtedness) and the related premiums, fees and expenses from the following sources: (a) the Borrower will receive at least $125,000,000 in cash proceeds from the sale of the New Investor Shares prior to the consummation of the Tender Offer on terms to be agreed upon by you and us; (b) the Borrower will require senior secured credit facilities (such credit facilities, the "Credit Facilities") comprised of term loan facilities aggregating $300,000,000 (the "Term Loan Facilities"), a $130,000,000 tender facility (the "Tender Facility"), a $50,000,000 revolving credit facility (the "Revolving Credit Facility") and a $50,000,000 acquisition facility (the "Acquisition Facility"), the proceeds of which will be used to finance a portion of the Recapitalization and to finance the working capital requirements and other corporate purposes (including permitted acquisitions) of the Borrower and its subsidiaries; and (c) the Borrower will, prior to the consummation of the Merger, require at least $200,000,000 in cash proceeds from either (i) the issuance of senior subordinated unsecured notes (the "Senior Subordinated Notes") in a public offering or Rule 144A private placement or (ii) the proceeds of borrowings under a subordinated bridge facility made available to the Borrower as interim bridge financing to the Senior Subordinated Notes (the "Subordinated Facility"). Bank of America and Bankers Trust are each pleased to advise you of their several commitments to provide one-half of the Credit Facilities. The Statement of Terms and Conditions attached as Exhibits A and B hereto (collectively, the "Term Sheet") sets forth the principal terms and conditions on and subject to which Bank of America and Bankers Trust are willing to make available their respective portions of the Credit Facilities. It is agreed that Bank of America will act as the administrative agent in respect of the Credit Facilities and that Bankers Trust will act as the syndication agent in respect of the Credit Facilities, and each will, in such capacities, perform the duties and exercise the authority customarily performed and exercised by it in such roles in accordance with the terms of this Commitment Letter. You agree that no other agents, co-agents or arrangers will be appointed, no other titles will be 3 3 awarded and no compensation (other than that expressly contemplated by the Term Sheet and the Fee Letter referred to below) will be paid in connection with the Credit Facilities unless you and we shall so agree. We intend to syndicate the Credit Facilities to a group of financial institutions (together with Bank of America and Bankers Trust, the "Lenders") identified by us in consultation with you. BRS and BT Alex. Brown intend to commence syndication efforts promptly, and you agree actively to assist BRS and BT Alex. Brown in completing a syndication satisfactory to them. Such assistance shall include (a) your using reasonable efforts to ensure that the syndication efforts benefit materially from the existing lending relationships of the Sponsors, the Borrower and the affiliates of the Sponsors which own a direct or indirect interest in the Borrower, (b) direct contact between senior management of the Sponsors and the Borrower and the proposed Lenders, (c) assistance in the preparation of a Confidential Information Memorandum and other marketing materials to be used in connection with the syndication and (d) the hosting, with BRS and BT Alex. Brown, of one or more meetings of prospective Lenders. BRS and BT Alex. Brown, in consultation with you, will manage all aspects of the syndication, including decisions as to the selection of institutions to be approached and when they will be approached, when their commitments will be accepted, which institutions will participate, the allocations of the commitments among the Lenders and the amount and distribution of fees among the Lenders. BRS and BT Alex. Brown will each have syndication discussions with one-half of the number of invited institutions, except that BRS will have the exclusive right to have syndication discussions with respect to the institutions invited to participate in the Tranche B Term Loan Facility and the Tranche C Term Loan Facility (as such terms are defined in the Term Sheet). To assist BRS and BT Alex. Brown in their syndication efforts, you agree promptly to prepare and provide to us all information with respect to the Borrower and its respective subsidiaries, the Recapitalization and the other transactions contemplated hereby, including all financial information and projections (the "Projections"), as we may reasonably request in connection with the arrangement and syndication of the Credit Facilities. You hereby represent and covenant that (a) all information other than the Projections (the "Information") that has been or will be made available to any of us by you or any of your representatives (in each case, with respect to Information furnished to any of us prior to the date of commencement of the syndication of the Credit Facilities, as supplemented from time to time prior to such date) is or will be, to the best of your knowledge, complete and correct in all material respects and does not or will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements are made and (b) the Projections that have been or will be made available to any of us by you or any of your representatives have been or will be prepared in good faith based upon assumptions you believe to be reasonable (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond your control, and that no assurance can be given that such Projections will be realized). You understand that in arranging and syndicating the Credit Facilities we may use and rely on the Information and Projections without independent verification thereof. As consideration for Bank of America's and Bankers Trust's commitments hereunder and BRS's and BT Alex. Brown's agreements to perform the services described herein, you agree to pay, or to cause the Borrower to pay, to Bank of America and Bankers Trust the nonrefundable fees set forth in the Term Sheet and in the fee letter dated the date hereof and delivered herewith (the "Fee Letter"). 4 4 We shall be entitled, with your consent (which shall not be unreasonably withheld), to change the structure or amount of, or to eliminate, any of the Credit Facilities if we determine that such changes are advisable in order to ensure a successful syndication or an optimal credit structure and if the aggregate amount of the Credit Facilities shall remain unchanged and the amount of the Tender Facility shall not be increased. Bank of America's and Bankers Trust's commitments hereunder and BRS's and BT Alex. Brown's agreements to perform the services described herein are subject to (a) our completion of and satisfaction in all respects with our continuing legal and environmental due diligence investigation of the Borrower and its subsidiaries, (b) there not occurring or becoming known to us any change, occurrence or development that would reasonably be expected to have a material adverse effect on the business, assets, liabilities, condition (financial or otherwise) or results of operations of the Borrower and its subsidiaries, taken as a whole, (c) our not becoming aware after the date hereof of any material negative information or other matter affecting the Borrower and its subsidiaries, taken as a whole, or the transactions contemplated hereby which is inconsistent in a material and adverse manner with any such information or other matter disclosed to us prior to the date hereof, (d) there not having occurred and being continuing a material disruption of or material adverse change in the financial, banking or capital markets generally affecting credit facilities similar to the Credit Facilities which, in our reasonable judgment, could reasonably be expected to materially impair the syndication of the Credit Facilities, (e) our satisfaction that prior to and during the syndication of the Credit Facilities there shall be no competing offering, placement or arrangement of any debt securities (other than the Senior Subordinated Notes) or bank financing by or on behalf of the Borrower or any of its affiliates, (f) the negotiation, execution and delivery on or before January 31, 1998 of customary definitive documentation with respect to the Credit Facilities satisfactory to Bank of America, Bankers Trust and their counsel, and (g) the other conditions set forth or referred to in the Term Sheet. You agree (a) to indemnify and hold harmless Bank of America, Bankers Trust, BRS, BT Alex. Brown, their affiliates and their respective officers, directors, employees, advisors, and agents (each, an "indemnified person") from and against any and all losses, claims, damages and liabilities to which any such indemnified person may become subject arising out of or in connection with this Commitment Letter, the Credit Facilities, the use of the proceeds thereof, the Recapitalization or any related transaction or any claim, litigation, investigation or proceeding relating to any of the foregoing, regardless of whether any indemnified person is a party thereto, and to reimburse each indemnified person upon demand for any legal or other expenses incurred in connection with investigating or defending any of the foregoing, provided that the foregoing indemnity will not, as to any indemnified person, apply to losses, claims, damages, liabilities or related expenses to the extent they are determined by a final judgment of a court of competent jurisdiction to arise from the willful misconduct or gross negligence of such indemnified person, and (b) to reimburse Bank of America, Bankers Trust, BRS, BT Alex. Brown and their affiliates on demand for all reasonable out-of-pocket expenses (including due diligence expenses, syndication expenses, consultant's fees and expenses, travel expenses, and reasonable fees, charges and disbursements of counsel (including, without duplication of effort, allocated costs of internal counsel)) incurred in connection with the Credit Facilities and any related documentation (including this Commitment Letter, the Term Sheet, the Fee Letter and the definitive financing documentation) or the administration, amendment, modification or waiver thereof. No indemnified person shall be liable for any indirect or consequential damages in connection with its activities related to the Credit Facilities. This Commitment Letter shall not be assignable by you without the prior written consent of Bank of America, Bankers Trust, BRS and BT Alex. Brown (and any purported assignment without such consent shall be null and void), is intended to be solely for the benefit of the parties 5 5 hereto and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto, provided that each of Fremont and RCBA may assign its rights and obligations under this Commitment Letter and the Fee Letter to any other affiliate of Fremont Partners, L.L.C. or Richard C. Blum & Associates, L.P., respectively, in connection with the assignment by Fremont or RCBA, as the case may be, to such affiliate of all of its Shares and all of its rights and obligations under the Transaction Agreement and the other Recapitalization Documentation (as defined in Exhibit A). This Commitment Letter may not be amended or waived except by an instrument in writing signed by each of you, Bank of America, Bankers Trust, BRS and BT Alex. Brown. This Commitment Letter may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Commitment Letter by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. This Commitment Letter, together with the Term Sheet and the Fee Letter are the only agreements that have been entered into among us with respect to the Credit Facilities and set forth the entire understanding of the parties with respect thereto. This Commitment Letter shall be governed by, and construed in accordance with, the laws of the State of New York. All of your obligations under this Commitment Letter and the Fee Letter shall be joint and several obligations. This Commitment Letter is delivered to you on the understanding that neither this Commitment Letter, the Term Sheet or the Fee Letter nor any of their terms or substance shall be disclosed, directly or indirectly, to any other person except (a) to the officers, agents and advisors of the Sponsors and the Borrower who are directly involved in the consideration of this matter or (b) as may be compelled in a judicial or administrative proceeding or as otherwise required by law (in which case you agree to inform us promptly thereof), provided, that the foregoing restrictions shall cease to apply (except in respect of the Fee Letter and its terms and substance) after this Commitment Letter has been accepted by you. The compensation, reimbursement, indemnification and confidentiality provisions contained herein and in the Fee Letter shall remain in full force and effect regardless of whether definitive financing documentation shall be executed and delivered and notwithstanding the termination of this Commitment Letter or Bank of America's and Bankers Trust's commitments hereunder; provided, that your obligations under this Commitment Letter, other than those arising under the sixth and thirteenth paragraphs hereof, shall automatically terminate and be superseded by the provisions of the definitive documentation relating to the Credit Facilities upon the consummation of the Recapitalization, and you shall automatically be released from all liability in connection therewith at such time. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof and of the Term Sheet and the Fee Letter by returning to us executed counterparts hereof and of the Fee Letter, not later than 5:00 p.m., Chicago time, on October 3, 1997. Bank of America's and Bankers Trust's commitments and BRS's and BT Alex. Brown's agreements herein will expire at such time in the event Bank of America and Bankers Trust have not received such executed counterparts in accordance with the immediately preceding sentence. 6 6 We are pleased to have been given the opportunity to assist you in connection with this important financing. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Kevin Morrison ____________________________ Name: Kevin Morrison Title: Vice President BANCAMERICA ROBERTSON STEPHENS By: /s/ Mark Lies ____________________________ Name: Mark Lies Title: Managing Director BANKERS TRUST COMPANY By: /s/ Victoria T. Page ____________________________ Name: Victoria T. Page Title: Managing Director BT ALEX. BROWN INCORPORATED By: /s/ Kate W. Cook ____________________________ Name: Kate W. Cook Title: Managing Director Accepted and agreed to as of the date first written above by: FREMONT PURCHASER II, INC. By: /s/ R.S. Kopf ____________________________ Name: R.S. Kopf Title: General Counsel and Secretary 7 7 RCBA PURCHASER I, L.P. By:/s/ N. Colin Lind _____________________________ Name: N. Colin Lind Title: Managing Director KINETIC CONCEPTS, INC. By:/s/ Raymond R. Hannigan ____________________________ Name: Raymong R. Hannigan Title: President and Chief Executive Officer 8 EXHIBIT A SENIOR CREDIT FACILITIES Statement of Terms and Conditions --------------------------- Fremont Purchaser II, Corp. ("Fremont"), RCBA Purchaser I, L.P. ("RCBA" and, together with Fremont, the "Sponsors") and Kinetic Concepts, Inc. (the "Borrower") have entered into a transaction agreement (the "Transaction Agreement") pursuant to which the Sponsors, together with certain of their affiliates and investors (the Sponsors and such affiliates and investors are collectively referred to herein as the "New Investor Group"), will participate and invest in a leveraged recapitalization transaction involving the Borrower (the "Recapitalization"). The Recapitalization will be accomplished through the following steps: (a) the Sponsors will purchase for cash from the Borrower up to $154,700,000 (but not less than $125,000,000) of newly issued shares of common stock ("Shares") of the Borrower (the "New Investor Shares"); (b) the Borrower will make an all cash tender offer (the "Tender Offer") to acquire all of its issued and outstanding Shares (and related options), other than the New Investor Shares and Shares and certain management options (such Shares and management options, together with the New Investor Shares, the "Rollover Shares") owned by certain existing stockholders of the Borrower, including members of the Borrower's Board of Directors and/or management (the "Rollover Shareholders" and, together with the New Investor Group, the "Buyers"), for a maximum aggregate repurchase price not to exceed $655,000,000; (c) any Shares (and related options) acquired by the Borrower pursuant to the Tender Offer will immediately be cancelled; (d) any Shares (and related options) not acquired pursuant to the Tender Offer (other than the Rollover Shares) will be acquired in a merger in which such Shares will be converted to the right to receive the consideration paid in the Tender Offer (the "Merger"); and (e) pursuant to the Merger, the Rollover Shares (which shall have an aggregate value of at least $355,200,000) shall be converted to newly issued shares of the Borrower as the surviving corporation of the Merger, which newly issued shares shall represent all of the issued and outstanding common stock of the Borrower immediately following the Merger. References herein to the "Recapitalization" shall include all of the foregoing transactions and all related financings and other transactions. Upon consummation of the Recapitalization, the New Investor Group will own at least 66-2/3% of the then outstanding shares of common stock of the Borrower. Set forth below is a statement of the terms and conditions for the Senior Merger Facilities: I. Parties Borrower: Kinetic Concepts, Inc. (the "Borrower"). Guarantors: Each of the Borrower's direct and indirect domestic subsidiaries (collectively, the "Guarantors"). In addition, the holding company parent of the Borrower ("Holdings"), if any such holding company exists, shall also be a "Guarantor." Administrative Agent: Bank of America National Trust and Savings Association ("Bank of America" and, in such capacity, the "Administrative Agent"). 9 2 Syndication Agent: Bankers Trust Company ("Bankers Trust" and, in such capacity, the "Syndication Agent"; together with the Administrative Agent, the "Agents"). Lenders: A syndicate of banks, financial institutions and other entities, including Bank of America or one of its affiliates and Bankers Trust, arranged by the Agents in consultation with the Borrower (collectively, the "Lenders"). II. Types and Amounts of Senior Merger Facilities A. Term Loan Facilities Types and Amounts of Facilities: Term loan facilities ("Term Loan Facilities") in an aggregate amount of $300,000,000 (the loans thereunder, the "Term Loans") comprised of the following: Tranche A Term Loan Facility: A six year term loan facility (the "Tranche A Term Loan Facility") in an aggregate principal amount equal to $120,000,000 (the loans thereunder, the "Tranche A Term Loans"). The Tranche A Term Loans shall be repayable in quarterly installments payable at the end of March, June, September and December of each year, commencing March 31, 1998, with the aggregate amount payable in each year equal to the amount set forth below opposite such year (and the installments in each year being equal);
Year Amount ---- ------ 1998 $ 3,000,000 1999 7,000,000 2000 15,000,000 2001 30,000,000 2002 30,000,000 2003 35,000,000
Tranche B Term Loan Facility: A seven year term loan facility (the "Tranche B Term Loan Facility") in an aggregate principal amount equal to $90,000,000 (the loans thereunder, the "Tranche B Term Loans"). The Tranche B Term Loans shall be repayable in quarterly installments payable at the end of March, June, September and December of each year, commencing March 31, 1998, with the aggregate amount payable in each year equal to the amount set forth below opposite such year (and the installments in each year being equal, except that the first three installments in 2004 shall be equal to $225,000 and the final installment shall be equal to $83,925,000): 10 3
Year Amount ---- ------ 1998 $ 900,000 1999 900,000 2000 900,000 2001 900,000 2002 900,000 2003 900,000 2004 84,600,000
Tranche C Term Loan Facility: An eight year term loan facility (the "Tranche C Term Loan Facility") in an aggregate principal amount equal to $90,000,000 (the loans thereunder, the "Tranche C Term Loans"). The Tranche C Term Loans shall be repayable in quarterly installments payable at the end of March, June, September and December of each year, commencing March 31, 1998, with the aggregate amount payable in each year equal to the amount set forth below opposite such year (and the installments in each year being equal, except that the first three installments in 2005 shall be equal to $225,000 and the final installment shall be equal to $83,025,000):
Year Amount ---- ------ 1998 $ 900,000 1999 900,000 2000 900,000 2001 900,000 2002 900,000 2003 900,000 2004 900,000 2005 83,700,000
On the basis of market reception during the syndication process, the Agents may determine, with the consent of the Borrower (which consent shall not be unreasonably withheld), to increase or decrease the amount of the Tranche B Term Loan Facility, and to correspondingly decrease or increase the amount of the Tranche C Term Loan Facility, provided that the aggregate amount of the Term Loan Facilities will equal $300,000,000. Availability: The Term Loans shall be made in a single drawing on the Closing Date (as defined in Exhibit B). Purpose: The proceeds of the Term Loans shall be used to finance a portion of the Recapitalization and to pay related fees and expenses. 11 4 B. Tender Facility Type and Amount of Facility: Tender facility ("Tender Facility") in the amount of $130,000,000 (the loans thereunder, the "Tender Loans"). Availability: The Tender Loans shall be made in a single drawing on the Closing Date. Amortization: The Tender Loans will be repayable in full on the day which is three weeks after the Closing Date (the "Maturity Date"). Purpose: The proceeds of the Tender Loans shall be used to finance (a) the purchase of outstanding shares of common stock of the Borrower pursuant to the Tender Offer and (b) the payment of interest, fees and other expenses incurred in connection with the Tender Offer. C. Revolving Credit Facility Type and Amount of Facility: Six year revolving credit facility ("Revolving Credit Facility") in the amount of $50,000,000 (or the equivalent thereof in foreign currencies under the multi-currency subfacility described below) at any one time outstanding (the loans thereunder, the "Revolving Credit Loans"). Availability: The Revolving Credit Facility shall be available on a revolving basis during the period commencing on the Closing Date and ending on December 31, 2003 (the "Revolving Credit Termination Date"). Letters of Credit: A portion of the Revolving Credit Facility not in excess of an amount to be agreed upon shall be available for the issuance of letters of credit (the "Letters of Credit") by Bank of America or one of its affiliates (in such capacity, the "Issuing Lender"). No Letter of Credit shall have an expiration date after the earlier of (a) one year after the date of issuance thereof and (b) thirty days prior to the Revolving Credit Termination Date, provided that any Letter of Credit with a one-year tenor may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (b) above). Drawings under any Letter of Credit shall be reimbursed by the Borrower (whether with its own funds or with the proceeds of Revolving Credit Loans) on the same business day. To the extent that the Borrower does not so reimburse the Issuing Lender, the Lenders under the Revolving Credit Facility shall be irrevocably and unconditionally obligated to reimburse the Issuing Lender on a pro rata basis. 12 5 Multi-Currency Subfacility: A portion of the Revolving Credit Facility not in excess of an amount to be agreed upon shall be available directly to certain foreign subsidiaries of the Borrower. Loans under the Multi-Currency Subfacility ("Multi-Currency Loans") shall be available in foreign currencies to be agreed, subject to sub-limits for each such currency to be agreed. The structure of the Multi-currency Subfacility (for example, as to which Lenders shall provide the loans thereunder) shall be determined by the Administrative Agent after consultation with the Borrower, but it is the intention of the Administrative Agent that all the Lenders shall share the risk on a pro rata basis. If one Lender fronts for the other Lenders in respect of a Multi-Currency Loan, such fronting Lender shall receive from the Borrower a fronting fee in respect thereof in an amount to be determined. Maturity: The Revolving Credit Termination Date. Purpose: The proceeds of the Revolving Credit Loans shall be used to finance a portion of the Recapitalization and related fees and expenses and to finance the working capital needs and general corporate purposes of the Borrower and its subsidiaries in the ordinary course of business, including to finance Permitted Acquisitions (as defined below). D. Acquisition Facility Type and Amount of Facility: Six year acquisition facility ("Acquisition Facility" and, together with the Term Loan Facilities, the Tender Facility and the Revolving Credit Facility, the "Credit Facilities") in the amount of $50,000,000 (the loans thereunder, the "Acquisition Loans" and, together with the Term Loans, the Tender Loans and the Revolving Credit Loans, the "Loans"). Availability: The Acquisition Loans will be available in one or more drawings during the period commencing on the Closing Date and ending on December 31, 2000 (the "Acquisition Facility Termination Date"). Acquisition Loans may not be repaid and reborrowed, except that Acquisition Loans made to finance the Recapitalization may be repaid on or prior to the date of the Merger as described under "Mandatory Prepayments and Commitments Reductions" below and reborrowed after the date of such repayment to finance Permitted Acquisitions and to pay related fees and expenses. Maturity: The aggregate principal amount of Acquisition Loans outstanding on the Acquisition Facility Termination Date shall be repayable in twelve equal quarterly installments payable at the end of March, June, September and December of each year, commencing March 31, 2001. 13 6 Purpose: The proceeds of the Acquisition Loans shall be used to finance, the Recapitalization, Permitted Acquisitions and related fees and expenses. III. Certain Payment Provisions Fees and Interest Rates: As set forth on Annex I. Optional Prepayments and Commitment Reductions: Loans (including the Tender Loans) may be prepaid and commitments may be reduced by the Borrower in minimum amounts to be agreed upon. No prepayment of Term Loans shall be permitted if any Tender Loans are outstanding. Optional prepayments of the Term Loans and Acquisition Loans shall be applied pro rata to the Tranche A Term Loans, the Tranche B Term Loans, the Tranche C Term Loans and the Acquisition Loans, and ratably to the remaining installments thereof. Notwithstanding the foregoing, in the case of any optional prepayment to be applied to the Tranche B Term Loans and the Tranche C Term Loans, the Borrower may (at its option) offer the holders of such Tranche B Term Loans and Tranche C Term Loans the opportunity to waive the right to receive the amount of such optional prepayment. In the event such holders elect to waive such right, the amount that would otherwise have been applied as such optional prepayment of the applicable Tranche B Term Loans and/or Tranche C Term Loans shall be applied to prepay the Tranche A Term Loans and Acquisition Loans pro rata and, after the Tranche A Term Loans and Acquisition Loans have been paid in full, any remaining amount shall be applied to the prepayment of the other Tranche B Term Loans and Tranche C Term Loans pro rata. Optional prepayments of the Term Loans and (except as otherwise provided under "Acquisition Facility -- Availability" above) Acquisition Loans may not be reborrowed. Mandatory Prepayments and Commitment Reductions: The following amounts shall be applied to prepay the Tender Loans, the Term Loans and/or Acquisition Loans and/or reduce the commitments under the Acquisition Facility and/or the Revolving Credit Facility: (a) subject to exceptions to be agreed, 50% of the net proceeds of the sale or issuance of equity (other than (i) any sale or issuance of equity the proceeds of which are used to refinance the Subordinated Facility and (ii) up to $25,000,000 of equity contributed by the Buyers to the Borrower, the proceeds of which are used to fund Permitted Acquisitions) and 100% of the net proceeds of the incurrence of certain indebtedness after the Closing Date by the Borrower or any of its subsidiaries (other than proceeds of the Senior Subordinated Notes and the 14 7 Subordinated Facility and any proceeds of any other subordinated debt to the extent applied to repay the Subordinated Facility); (b) subject to exceptions to be agreed, 100% of the net proceeds of any sale or other disposition (including as a result of casualty or condemnation) by the Borrower or any of its subsidiaries of any assets, except for the sale of inventory or obsolete or worn-out property in the ordinary course of business and subject to certain other customary exceptions (including a basket and capacity for reinvestment) to be agreed upon; and (c) 50% of excess cash flow (to be defined in a mutually satisfactory manner) for each fiscal year of the Borrower (commencing with the 1998 fiscal year) payable within 90 days after the relevant fiscal year-end. Step-downs in the percentage of excess cash flow resulting in prepayments and commitment reductions will be made following reductions of leverage below levels to be negotiated. All such mandatory prepayments of Loans and/or reductions of commitments shall be applied first to prepay any outstanding Tender Loans. After the Tender Loans shall have been repaid in full, the Term Loans and Acquisition Loans shall be prepaid or reduced, as the case may be. Mandatory prepayments of the Term Loans and Acquisition Loans shall be applied pro rata to the Tranche A Term Loans, the Tranche B Term Loans, the Tranche C Term Loans and the Acquisition Loans, and ratably to the remaining installments thereof. After the Term Loans and Acquisition Loans have been repaid in full, the commitments under the Revolving Credit Facility and the unused commitments under the Acquisition Facility and shall be permanently reduced on a ratable basis. Notwithstanding the foregoing, in the case of any mandatory prepayment to be applied to the Tranche B Term Loans and the Tranche C Term Loans, the Borrower may (at its option) offer the holders of such Tranche B Term Loans and Tranche C Term Loans the opportunity to waive the right to receive the amount of such mandatory prepayment. In the event such holders elect to waive such right, the amount that would otherwise have been applied as such mandatory prepayment of the applicable Tranche B Term Loans and/or Tranche C Term Loans shall be applied to prepay the Tranche A Term Loans and Acquisition Loans pro rata and, after the Tranche A Term Loans and Acquisition Loans have been paid in full, any remaining amount shall be applied to the prepayment of the other Tranche B Term Loans and Tranche C Term Loans pro rata. Mandatory prepayments of the Term Loans and Acquisition Loans may not be reborrowed. Proceeds of the Senior Subordinated Notes and the Subordinated Facility (other than proceeds of Senior Subordinated Notes and 15 8 other subordinated debt to the extent applied to repay the Subordinated Facility) shall be applied as follows: first, the outstanding Tender Loans shall be repaid in full, second, an amount (the "Escrow Amount") equal to the amount required to purchase any Shares (and related options) not acquired pursuant to the Tender Offer (other than the Rollover Shares) shall be deposited in escrow pending purchase of such Shares on terms and conditions satisfactory to the Administrative Agent, third (a) in the event the RIK Acquisition is not consummated prior to the receipt of such proceeds, the outstanding Acquisition Loans shall be repaid in full, or (b) in the event the RIK Acquisition is consummated prior to receipt of such proceeds, the Acquisition Loans shall be repaid to the extent the aggregate outstanding principal amount thereof exceeds $23,000,000, and fourth any remaining proceeds shall be applied to repay any outstanding Revolving Credit Loans (but shall not reduce any commitments under the Revolving Credit Facility). As used herein, "RIK Acquisition" means the acquisition by the Borrower of the assets of RIK Medical, L.L.C. and RIK Medical East, L.L.C. IV. Collateral The obligations of each of the Borrower and each Guarantor (collectively, the "Credit Parties") in respect of the Credit Facilities and any interest rate or foreign currency protection agreements in respect thereof provided by any Lender (or any affiliate of a Lender) shall be secured by a perfected first priority security interest in all of its tangible and intangible assets (including, without limitation, intellectual property, real property (other than leasehold interest which are not material), all of the capital stock of the Borrower's direct and indirect subsidiaries (limited to 65% of such capital stock in the case of foreign subsidiaries), and, if any holding company parent of the Borrower exists, all of the capital stock of the Borrower, and rights under the Recapitalization Documentation (as defined in Exhibit B)), except for those assets as to which the Administrative Agent shall determine in its sole discretion that the costs of obtaining such a security interest are excessive in relation to the value of the security to be afforded thereby. V. Certain Conditions Initial Conditions: The availability of the Credit Facilities shall be conditioned upon the completion and/or satisfaction on or before January 31, 1998, of the applicable conditions set forth in Exhibit B and other customary corporate and document delivery requirements. On-Going Conditions: The making of each extension of credit shall be conditioned upon (a) the accuracy of all representations and warranties in the documentation (the "Credit Documentation") with respect to the Credit Facilities (including, without limitation, the material adverse change and litigation representations) and (b) there being 16 9 no default or event of default in existence at the time of, or after giving effect to the making of, such extension of credit. As used herein and in the Credit Documentation a "material adverse change" shall mean any event, development or circumstance that has had or would be reasonably likely to have a material adverse effect on (a) the Recapitalization, (b) the business, assets, property, condition (financial or otherwise) or prospects of the Borrower and its subsidiaries, taken as a whole, or (c) the validity or enforceability of any of the Credit Documentation or the rights and remedies of the Administrative Agent and the Lenders thereunder. VI. Certain Documentation Matters The Credit Documentation shall contain representations, warranties, covenants and events of default customary for financings of this type and other terms deemed appropriate by the Lenders, including, without limitation: Representations and Warranties: Financial statements (including pro forma financial statements); absence of undisclosed liabilities; no material adverse change; corporate existence; compliance with law; corporate power and authority; enforceability of Credit Documentation; no conflict with law or contractual obligations; no material litigation; no default; ownership of property; liens; intellectual property; no burdensome restrictions; taxes; Federal Reserve regulations; ERISA; Investment Company Act; subsidiaries; environmental matters; solvency; labor matters; accuracy of disclosure; Recapitalization Documentation; creation and perfection of security interests; and status of Credit Facilities as senior debt. Affirmative Covenants: Delivery of financial statements, reports, accountants' letters, projections, officers' certificates and other information requested by the Lenders; payment of other obligations; continuation of business and maintenance of existence and material rights and privileges; compliance with laws and material contractual obligations; maintenance of property and insurance; maintenance of books and records; right of the Lenders to inspect property and books and records; notices of defaults, litigation and other material events; compliance with environmental laws; further assurances (including, without limitation, with respect to security interests in after-acquired property); deposit of the Escrow Amount in escrow pending consummation of the Merger on terms and conditions reasonably satisfactory to the Administrative Agent; and agreement to obtain within 90 days after the Closing Date interest rate protection in an amount equal to 50% of the principal amount of the Term Loans for a period of three years in a manner satisfactory to the Administrative Agent. 17 10 Financial Covenants: To include minimum EBITDA, minimum interest coverage ratio and maximum leverage ratio. Negative Covenants: Limitations on: indebtedness; liens; guarantee obligations; mergers, consolidations, liquidations and dissolutions; sales of assets; leases; dividends and other payments in respect of capital stock and payments in respect of subordinated debt; capital expenditures; investments, loans and advances; optional payments and modifications of subordinated and other debt instruments; transactions with affiliates; sale-leasebacks; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; changes in lines of business; annual management fees and corporate allocations (not to exceed specified amounts); amendments to Recapitalization Documentation; and, if there is a holding company parent of the Borrower, changes in the passive holding company status of Holdings. Acquisitions will be permitted subject to the following conditions: (a) The Borrower satisfies, and will continue to satisfy, after giving effect (on a pro forma basis) to the relevant acquisition and any debt incurred in connection therewith, all financial covenants, and such acquisition is consummated on a "friendly" basis; (b) No default or event of default has then occurred and is continuing or would result therefrom; (c) The purchase price (including assumed indebtedness and the fair market value of any non-cash consideration) of the relevant acquisition does not exceed $25,000,000 individually and the purchase price of all such acquisitions since the Merger Closing Date does not exceed $70,000,000 in the aggregate (provided that such aggregate limitation may be increased by an aggregate amount of up to $25,000,000 of any equity infusions from the Buyers after the Merger Closing Date which are used to fund Permitted Acquisitions); and (d) An amount at least equal to $15,000,000 is available to be borrowed under the Revolving Credit Facility after giving effect to the relevant acquisition. Any acquisition which satisfies the foregoing conditions is referred to herein as a "Permitted Acquisition". Events of Default: Nonpayment of principal when due; nonpayment of interest, fees or other amounts after a grace period to be agreed upon; material inaccuracy of representations and warranties; violation of covenants (subject, in the case of certain affirmative covenants, to 18 11 a grace period to be agreed upon); cross-default; bankruptcy events; certain ERISA events; material judgments; actual or asserted invalidity of any guarantee, security document, security interest or subordination provision; failure to consummate the Merger; and a change of control (the definition of which is to be agreed). Voting: Amendments and waivers with respect to the Credit Documentation shall require the approval of Lenders holding not less than 51% of the aggregate amount of the Credit Facilities except that (a) the consent of each Lender directly affected thereby shall be required with respect to (i) reductions in the amount of any Loan or extensions of the final date of amortization or maturity of any Loan, (ii) reductions in the rate of interest or any fee or extensions of any due date thereof and (iii) increases in the amount or extensions of the expiry date of any Lender's commitment, (b) the consent of 100% of the Lenders shall be required with respect to (i) modifications to any of the voting percentages and (ii) releases of significant Guarantors or all or substantially all of the collateral and (c) subject to clause (a)(i) above, the consent of 66-2/3% of the Lenders shall be required to change the scheduled amortization of the Loans. In addition, the consent of Lenders holding a majority of the aggregate principal amount of each of the Tranche B Term Loans and the Tranche C Term Loans shall be required with respect to certain modifications affecting prepayment of the Term Loan Facilities. Assignments and Participations: The Lenders shall be permitted to assign and sell participations in their Loans and commitments, subject, in the case of assignments (other than to another Lender or to an affiliate of a Lender), to the consent of the Administrative Agent and (so long as no event of default has occurred and is continuing) the Borrower (which consent in each case shall not be unreasonably withheld). Non-pro rata assignments shall be permitted. In the case of partial assignments (other than to another Lender or to an affiliate of a Lender), the minimum assignment amount shall be $5,000,000 and, after giving effect thereto, the assigning Lender shall have commitments and Loans aggregating at least $5,000,000 in each case unless otherwise agreed by the Borrower and the Administrative Agent. Participants shall have the same benefits as the Lenders with respect to yield protection and increased cost provisions. Voting rights of participants shall be limited to those matters set forth in clause (a) above with respect to which the affirmative vote of the Lender from which it purchased its participation would be required as described under "Voting" above and those matters set forth in clause (b) above. Pledges of Loans in accordance with applicable law shall be permitted without restriction. 19 12 Yield Protection: The Credit Documentation shall contain customary provisions (a) protecting the Lenders against increased costs or loss of yield resulting from changes in reserve, tax, capital adequacy and other requirements of law and from the imposition of or changes in withholding or other taxes and (b) indemnifying the Lenders for "breakage costs" incurred in connection with, among other things, any prepayment of a Eurodollar Loan (as defined in Annex I) on a day other than the last day of an interest period with respect thereto. Expenses and Indemnification: The Borrower shall pay (a) all reasonable out-of-pocket expenses of the Agents, BancAmerica Robertson Stephens ("BRS") and BT Alex. Brown Incorporated ("BT Alex. Brown") associated with the syndication of the Credit Facilities and the preparation, execution, delivery and administration of the Credit Documentation and any amendment or waiver with respect thereto (including the reasonable fees, disbursements and other charges of counsel (including the allocated costs of internal counsel)) and (b) all out- of-pocket expenses of the Administrative Agent and the Lenders (including the fees, disbursements and other charges of counsel (including the allocated costs of internal counsel)) in connection with the enforcement of the Credit Documentation. The Agents, BRS, BT Alex. Brown and the Lenders (and their affiliates and their respective officers, directors, employees, advisors and agents) will have no liability for, and will be indemnified and held harmless against, any loss, liability, cost or expense incurred in respect of the financing contemplated hereby or the use or the proposed use of proceeds thereof (except to the extent resulting from the gross negligence or willful misconduct of the indemnified party). Governing Law and Forum: State of New York. Counsel to the Administrative Agent: Simpson Thacher & Bartlett. 20 Annex I to Exhibit A Interest and Certain Fees Interest Rate Options: The Borrower may elect that the Loans comprising each borrowing bear interest at a rate per annum equal to: the Base Rate plus the Applicable Margin; or the Eurodollar Rate plus the Applicable Margin. provided that all Multi-Currency Loans shall bear interest as described below. As used herein: "Base Rate" means the highest of (i) the rate of interest publicly announced by Bank of America as its "reference rate" (the "Reference Rate"), and (ii) the federal funds effective rate from time to time plus 0.5%. "Applicable Margin" means: (a) in the case of the Revolving Credit Loans, Tender Loans, Tranche A Term Loans and Acquisition Loans, (i) 1.25%, in the case of Base Rate Loans (as defined below) and (ii) 2.25%, in the case of Eurodollar Loans (as defined below); (b) in the case of the Tranche B Term Loans, (i) 1.50% in the case of Base Rate Loans and (ii) 2.50% in the case of Eurodollar Loans; and (c) in the case of Tranche C Term Loans, (i) 1.75% in the case of Base Rate Loans and (ii) 2.75% in the case of Eurodollar Loans. The foregoing margins applicable to Revolving Credit Loans and Tranche A Term Loans shall be subject to reduction after the end of the second full fiscal quarter after the Closing Date by amounts to be agreed upon based on the achievement of performance targets to be determined and provided that no event of default has occurred and is continuing. "Eurodollar Rate" means the rate (adjusted for statutory reserve requirements for eurocurrency liabilities) at which eurodollar deposits for one, two, three or six months (as selected by the 21 2 Borrower) are offered to Bank of America in the interbank eurodollar market, provided that, so long as any Tender Loans are outstanding, the Borrower will be permitted to select interest periods of one week with respect to Tender Loans and any Acquisition Loans and Revolving Credit Loans made on the Closing Date. Interest Payment Dates: In the case of Loans bearing interest based upon the Base Rate ("Base Rate Loans"), quarterly in arrears. In the case of Loans bearing interest based upon the Eurodollar Rate ("Eurodollar Loans"), on the last day of each relevant interest period and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period. Commitment Fees: The Borrower shall pay a commitment fee calculated at the rate of 0.50% per annum on the average daily unused portion of each of the Revolving Credit Facility and the Acquisition Facility, payable quarterly in arrears. The foregoing commitment fee shall be subject to reduction after the end of the second full fiscal quarter after the Closing Date by amounts to be agreed upon based on the achievement of performance targets to be determined and provided that no event of default has occurred and is continuing. Letter of Credit Fees: The Borrower shall pay a commission on all outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans that are Revolving Credit Loans on the face amount of each such Letter of Credit. Such commission shall be shared ratably among the Lenders participating in the Revolving Credit Facility and shall be payable quarterly in arrears. A fronting fee equal to 0.25% per annum on the face amount of each Letter of Credit shall be payable quarterly in arrears to the Issuing Lender for its own account. In addition, customary administrative, issuance, amendment, payment and negotiation charges shall be payable to the Issuing Lender for its own account. Multi-Currency Loan Interest and Fees: In the event that Multi-Currency Loans in a foreign currency are made available by all the Lenders, such Multi-Currency Loans shall bear interest at the applicable local base rate for such Multi-Currency Loans as determined by the Administrative Agent plus the Applicable Margin then in effect for Eurodollar Loans. In the event that Multi-Currency Loans in a foreign currency are fronted by a Lender, (a) such Multi-Currency Loans shall bear interest at 22 3 the applicable local base rate for such Multi-Currency Loans as determined by the relevant fronting Lender, (b) the Borrower shall pay a commission on such Multi-Currency Loans at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans on the face amount of each such Loan and (c) a fronting fee equal to an amount to be determined per annum on the face amount of each such Multi-Currency Loan shall be payable quarterly in arrears to the relevant fronting Lender for its own account. The commission payable pursuant to clause (b) of the immediately preceding sentence shall be shared ratably among the Lenders participating in the Revolving Credit Facility and shall be payable quarterly in arrears. Default Rate: At any time when the Borrower is in default in the payment of any amount due under the Credit Facilities, all Loans shall bear interest at 2% above the rate otherwise applicable thereto. Overdue interest, fees and other amounts shall bear interest at 2% above the rate applicable to the relevant Base Rate Loans. Rate and Fee Basis: All per annum rates shall be calculated on the basis of a year of 360 days (or 365/366 days, in the case of Base Rate Loans the interest rate payable on which is then based on the Reference Rate) for actual days elapsed. 23 EXHIBIT B The availability of the Credit Facilities, in addition to the conditions set forth in Exhibit A, shall be subject to the satisfaction of the following conditions (the date upon which such conditions are satisfied is referred to as the "Closing Date"). Capitalized terms used but not defined herein have the meanings given in said Exhibit. (a) Each Credit Party shall have executed and delivered satisfactory definitive Credit Documentation and all conditions to the initial borrowings thereunder shall have been satisfied. (b) The Borrower shall have received at least $125,000,000 in cash proceeds from the sale of the New Investor Shares prior to the consummation of the Tender Offer on satisfactory terms and conditions. (c) The Tender Offer shall have been consummated in accordance with applicable law and on satisfactory terms and all conditions to the Tender Offer contained in the Transaction Agreement shall have been satisfied or complied substantially on the terms set forth therein and not waived without the Administrative Agent's consent (which shall not be unreasonably withheld). The Transaction Agreement and other documentation (collectively, the "Recapitalization Documentation") relating to the Recapitalization shall have satisfactory terms and conditions, shall be in full force and effect and no provision of such documentation shall have been waived, amended, supplemented or otherwise modified in any material respect. Without limiting the foregoing, the Transaction Agreement shall provide that, pursuant to the Merger, the Rollover Shares (which shall have an aggregate value of at least $355,200,000) shall be converted to newly issued shares of the Borrower as the surviving corporation of the Merger, which newly issued shares shall represent all of the issued and outstanding common stock of the Borrower immediately following the Merger. (d) (i) (A) The Borrower shall have entered into a loan or credit agreement with financial institutions satisfactory to the Lenders pursuant to which such financial institutions shall have agreed to provide to the Borrower a $200,000,000 subordinated bridge facility to the Borrower as interim bridge financing to the Senior Subordinated Notes (as defined below) on terms and conditions satisfactory to the Lenders (the "Subordinated Facility"), (B) all conditions precedent to the effectiveness of such loan or credit agreement shall have been satisfied and (C) the Borrower shall have engaged one or more financial institutions satisfactory to the Lenders to publicly sell or privately place at least $200,000,000 of senior subordinated unsecured notes (the "Senior Subordinated Notes") in a public offering or Rule 144A private placement on 24 2 terms and conditions satisfactory to the Lenders or (ii) the Borrower shall have received the proceeds from the issuance of $200,000,000 of Senior Subordinated Notes. (e) At least 27,000,000 of the issued and outstanding Shares (other than the Rollover Shares) shall have validly tendered and accepted for payment pursuant to the Tender Offer. All documents and materials filed publicly by the Buyers in connection with the Tender Offer and the Merger shall have been furnished to the Lenders and shall be satisfactory in from and substance to the Lenders. In addition, after giving effect to the Tender Offer and the cancellation of the Shares purchased pursuant to the Tender Offer, the New Investor Group shall control (by direct ownership or contractual undertakings) at least 66-2/3% (or such greater percentage as shall be required to approve the Merger), on a fully diluted basis, of the aggregate voting power of the Shares which may be voted in connection with the approval of the Merger. (f) The Lender shall have received evidence satisfactory to them that (i) the aggregate purchase price for all of the issued and outstanding Shares and related options shall not exceed $855,000,000 and (ii) the aggregate fees and expenses with respect to the Recapitalization shall not exceed $44,000,000. (g) Substantially all of the existing indebtedness of the Borrower and its subsidiaries shall have been repaid on satisfactory terms. The capitalization and structure of each Credit Party after the Recapitalization shall be reasonably satisfactory in all respects. The Administrative Agent shall be satisfied with senior management and their employment contracts and proposed ownership interests in the Borrower. (h) The Lenders, the Agents, BRS and BT Alex. Brown shall have received all fees required to be paid, and all expenses for which invoices have been presented, on or before the Closing Date. (i) All governmental and third party approvals necessary in connection with the Recapitalization (other than with respect to the Merger), the financing contemplated hereby and the continuing operations of the Borrower and its subsidiaries shall have been obtained on terms reasonably satisfactory to the Administrative Agent and shall be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Recapitalization or the financing thereof, except for such governmental and third party approvals the failure to obtain which could not, individually or in the aggregate, reasonably be expected 25 3 to have a material adverse effect on the condition (financial or otherwise), business, assets, liabilities, properties, results of operations or prospects of the Borrower and its subsidiaries, taken as a whole. (j) The Lenders shall have received (i) audited financial statements of the Borrower for the fiscal years ending in 1994, 1995 and 1996 and (ii) unaudited interim consolidated financial statements of the Borrower for each fiscal month and quarterly period ended after the latest fiscal year referred to in clause (i) above as to which such financial statements are available and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of the Borrower and its subsidiaries, from what was reflected in the financial statements or projections previously furnished to the Lenders. (k) The Lenders shall have received a pro forma consolidated balance sheet of the Borrower and its subsidiaries as at the date of the most recent consolidated balance sheet delivered pursuant to the preceding paragraph, adjusted to give effect to the consummation of the Recapitalization and the financings contemplated hereby as if such transactions had occurred on such date prepared in accordance with Regulation S-X under the Securities Act and consistent in all material respects with the sources and uses of cash for the Recapitalization as previously described to the Lenders and the forecasts previously provided to the Lenders. (l) The Lenders shall have received the results of a recent lien search in each relevant jurisdiction with respect to the Borrower and its subsidiaries, and such search shall reveal no liens on any of the assets of the Borrower and its subsidiaries except for liens permitted by the Credit Documentation. (m) All documents and instruments required to perfect the Administrative Agent's security interest in the collateral under the Credit Facilities shall have been executed and be in proper form for filing, and, in connection with the real estate collateral, the Administrative Agent shall have received title insurance policies, surveys, permits, certificates of occupancy and other customary documentation to the extent reasonably determined to be required by the Administrative Agent. (n) The Administrative Agent shall be reasonably satisfied with the insurance program to be maintained by the Borrower and its subsidiaries after the Tender Offer. (o) The Lenders shall have received a satisfactory solvency certificate of management of the Borrower and a satisfactory 26 4 solvency opinion from Houlihan Lokey Howard & Zukin, in each case which shall document the solvency of the Borrower and its subsidiaries after giving effect to the Recapitalization and the other transactions contemplated hereby. (p) The Lenders shall have received a reasonably satisfactory environmental audit with respect to certain real property owned or leased by the Borrower and its subsidiaries. (q) Neither the Borrower nor any Buyer shall be in breach or violation of any of its obligations under the documentation relating to the Recapitalization or the financing thereof. (r) Neither the Borrower nor any of its affiliates and subsidiaries shall be subject to material contractual or other material restrictions that would be violated by the Recapitalization. (s) The Lenders shall have received such legal opinions (including opinions (i) from counsel to the Borrower and its subsidiaries, (ii) if reasonably available, delivered pursuant to the Recapitalization Documentation, accompanied by reliance letters in favor of the Lenders and (iii) from such special and local counsel as may be required by the Administrative Agent), documents and other instruments as are customary for transactions of this type or as they may reasonably request. (t) The Lenders shall be satisfied that the making of the Loans will not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve. (u) (i) As a condition to the making of the Tender Loans, the Term Loan Facilities shall have been fully drawn and (ii) as a condition to the making of Acquisition Loans to finance the Recapitalization, the Tender Facility shall have been fully drawn. (v) All representations and warranties of the Borrower and its subsidiaries under the Credit Documentation shall be true and correct and no default or event of default under the Credit Documentation shall have occurred and be continuing. EX-99.A.2 3 ENGAGEMENT LETTER 1 BT ALEX. BROWN INCORPORATED BANCAMERICA ROBERTSON STEPHENS 130 LIBERTY STREET 231 SOUTH LASALLE STREET NEW YORK, NY 10006 CHICAGO, ILLINOIS 60697 October 1, 1997 RCBA Purchaser I, L.P. 909 Montgomery Street Suite 400 San Francisco, CA 94133 Attention: John C. Walker, Managing Director Fremont Purchaser II, Corp. 50 Fremont Street Suite 3700 San Francisco, CA 94105 Attention: James T. Farrell, President Kinetic Concepts, Inc. 8023 Vantage Drive P.O. Box 659508 San Antonio, TX 78285-9508 Attention: Mr. Raymond R. Hannigan Re: Kinetic Concepts, Inc. Ladies and Gentlemen: You have advised BT Alex. Brown Incorporated ("BT Alex. Brown") and BancAmerica Robertson Stephens ("BRS") that RCBA Purchaser I, L.P. ("RCBA") and Fremont Purchaser II, Corp. ("Fremont"), together with certain other investors satisfactory to us (RCBA, Fremont and such other investors being herein collectively referred to as the "New Investor Group"), intend to invest in a leveraged recapitalization transaction (the "Recapitalization") involving Kinetic Concepts, Inc. (the "Company"). We understand that the Recapitalization will be accomplished through the repurchase by the Company of all of its shares of common stock (including certain options) other than at least $200.5 million of shares of common stock and options (the "Rollover Shares") to be retained by certain existing stockholders of the Company, including members of the Com- 2 -2- pany's Board of Directors and/or management (the "Rollover Shareholders" and, together with the New Investor Group, the "Buyers"), for a maximum aggregate repurchase price not to exceed $655.0 million (the "Repurchase Shares"), and through the investment of not less than $355.2 million in equity in the Company (the "Equity Financing"), including the contribution of at least $200.1 million of Rollover Shares by the Rollover Shareholders and the purchase by the New Investor Group of not less than $155.1 million of shares of the Company's common stock directly from the Company (the "Equity Securities"); provided, that to the extent the Buyers increase the amount of Rollover Shares above $200.1 million after the date hereof, the amount of Rollover Shares shall be increased and the amount of Repurchase Shares and Equity Securities shall be decreased by the same amount; provided that in no event shall the Equity Securities be less than $125 million. In addition, in connection with the Recapitalization and related transactions, fees and expenses of up to $44 million will be paid. Upon consummation of the Recapitalization, the Buyers will own at least 66 2/3% of the then outstanding shares of Company common stock. You have advised BT Alex. Brown and BRS that the Recapitalization would be accomplished through a tender offer (the "Tender Offer") followed by a merger of corporations or other legal entities newly formed by the New Investor Group with the Company (the "Merger") pursuant to which all shares of common stock not tendered (in each case, other than Rollover Shares) will be cashed out. It is expected that the Tender Offer will be financed through (i) borrowings of up to $530 million under a senior secured credit facility to be provided to the Company (the "Credit Facility"), of which $300.0 million will be available to the Company under term loan facilities (the "Term Loans"), up to $130.0 million will be available to the Company under a tender facility, up to $50.0 million will be available to the Company under a revolving credit facility (the "Revolving Loans") and up to $50.0 million will be available to the Company under an acquisition facility (the "Acquisition Loans"), (ii) cash equity investments from the New Investor Group of the Equity Securities, but in no event shall the Equity Securities be less than $125 million, and (iii) cash on hand of the Company of $23.0 million or in lieu thereof ownership of RIK Medical, L.L.C. and RIK Medical East L.L.C. (collectively "RIK Medical"). You have further advised us that the amount of funds necessary to refinance a portion of the Credit Facility on the date which is twenty one days after the closing of the Credit Facility will be provided through the proceeds from the sale of 3 -3- not less than $200.0 million of senior subordinated notes (the "Securities") (which Securities may be issued with an equity component depending upon market conditions) to be issued by the Company (or, in lieu thereof, not less than $200.0 million of certain subordinated bridge financing made available to the Company (the "Bridge Financing")). You have further advised us that the Revolving Loans and Acquisition Loans will also be used to provide for working capital purposes, letters of credit and other corporate purposes, including permitted acquisitions, of the Company and its subsidiaries upon consummation of the Recapitalization; provided that no more than $25.0 million of Revolving Loans and Acquisition Loans shall be drawn on the closing date of the Merger (the "Closing Date") ($48.0 million if the acquisition of Rik Medical has been consummated prior to the Closing Date). Upon consummation of the Recapitalization, the Company and its subsidiaries will have no indebtedness other than the Credit Facility and the Securities (or, in lieu thereof, the Bridge Financing). To the extent the Securities are placed on or prior to the date which is twenty one days after the closing of the Credit Facility, the Credit Facility will be refinanced at such time. The Recapitalization, together with the issuance of the Securities (or, in lieu thereof, the Bridge Financing), the issuance of the Equity Securities, and the transactions contemplated by the definitive documents evidencing the Credit Facility and all related collateral and guarantees (collectively, the "Bank Documents"), are hereinafter referred to as the "Transactions." You have asked BT Alex. Brown and BRS to assist you, as exclusive underwriters or exclusive placement agents, in raising a portion of the funds required to consummate the Recapitalization through the sale or placement of the Securities. The purpose of this engagement letter (this "Engagement Letter") is to confirm the engagement by you of BT Alex. Brown and BRS as exclusive underwriters or placement agents in connection with the issuance or sale (whether pursuant to a public offering or a private placement) of the Securities for cash in connection with the Recapitalization. 1. Retention. You hereby retain BT Alex. Brown and BRS on an exclusive basis, and BT Alex. Brown and BRS agree to act, as exclusive joint co-lead managing underwriters or placement agents (with BT Alex. Brown as book running manager) in connection with the issuance or sale of $200.0 million of senior subordinated notes of the Company for cash in connection with the financing of the Recapitalization. Consistent with such appointments and subject to the last sentence of this Sec- 4 -4- tion 1, BT Alex. Brown and BRS will act as the Company's exclusive underwriters or placement agents with regard to each such proposed issuance pursuant to the terms of an underwriting or placement agreement and related transaction documents (collectively, the "Purchase Agreement"). The Purchase Agreement shall set forth the terms and conditions, including the discounts, commissions and fees, applicable to the respective transaction (and shall not be inconsistent with the terms of this Engagement Letter). Neither you nor the Company shall, directly or indirectly (except through BT Alex. Brown and BRS or as otherwise approved by BT Alex. Brown and BRS), sell or offer to sell any equity or debt security for cash or property in connection with the financing of the Recapitalization or any related refinancings (other than (a) loans incurred under and pursuant to the Credit Facility, (b) the Equity Securities and (c) any bridge loans incurred by the Company pursuant to the Bridge Financing (the foregoing, collectively, the "Permitted Dispositions")) during the term of this Engagement Letter. Any such offer, sale or other disposition of any equity or debt security for cash or property (other than a Permitted Disposition) during the term of this Engagement Letter will be treated for purposes of Section 2 as if such sale or disposition were undertaken by BT Alex. Brown and BRS directly. Notwithstanding anything to the contrary contained herein or any oral representations or assurances previously or subsequently made by the parties, this Engagement Letter is not intended to be and does not constitute a commitment or obligation by BT Alex. Brown or BRS to act as an underwriter or placement agent in connection with any offering or sale of securities; and no liability or obligation on the part of BT Alex. Brown or BRS to proceed with or participate in an offering of securities by the Company shall be created or exist unless or until BT Alex. Brown or BRS have executed and delivered a Purchase Agreement and then only in accordance with the terms and conditions set forth therein. 2. Fees. As compensation for the services of BT Alex. Brown and BRS hereunder, you shall pay to BT Alex. Brown and BRS the following non-refundable fees: (a) an underwriting or placement fee of 3.0% of the gross proceeds from the issuance of the Securities and any securities related to the Securities included within the engagement described in Section 1, payable 50% to BT Alex. Brown and 50% to BRS at the closing of such issuance; and (b) all reasonable legal and out-of-pocket expenses (including allocated internal legal expenses) 5 -5- incurred by BT Alex. Brown or BRS in connection with the contemplated transaction. To the extent BT Alex. Brown or BRS performs services other than the services specified in Section 1, each of you shall jointly and severally pay, or cause to be paid, to BT Alex. Brown or BRS, as the case may be, additional fees and/or commissions customary under the circumstances, to be agreed upon in writing by each of you and BT Alex. Brown or BRS, as the case may be, in advance of the performance thereof. 3. Other Agreements. (a) Term. The engagement of BT Alex. Brown and BRS hereunder may be terminated (i) by either BT Alex. Brown or BRS at any time, or (ii) by you after the earliest to occur of (1) the termination of the Recapitalization Agreement in accordance with its terms, (2) the use of the proceeds of the sale of the Securities contemplated by this Engagement Letter or (3) the second anniversary after the consummation of the Recapitalization, by prior written notice thereof to BT Alex. Brown and BRS; provided, however, that the provisions of Sections 2 (with respect to any fees earned prior to the date of such termination) and 3 shall survive such termination with respect to the Company only and RCBA and Fremont shall be released from all obligations hereunder and under the Indemnity Letter described in Section 3(c). (b) Information. During the course of the term of this Engagement Letter, you shall furnish BT Alex. Brown and BRS with such information about the Company as BT Alex. Brown and BRS reasonably request to be included in a private placement memorandum, offering circular or other disclosure document ("Company Information"). You represent and warrant to BT Alex. Brown and BRS that all Company Information included in the private placement memorandum will be complete and correct in all material respects and will not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of 6 -6- the circumstances under which such statements are made, not materially misleading, in each case as of the date of such memorandum. You agree to advise BT Alex. Brown and BRS during the period of the engagement of all developments known to you materially affecting the Company or the accuracy of Company Information previously furnished to BT Alex. Brown, BRS or prospective purchasers of Securities. In addition, any representations and warranties made by the Company to purchasers of the Securities shall be deemed to be incorporated into this Engagement Letter and any opinions delivered by or on behalf of the Company to the purchasers of any Securities shall expressly provide that BT Alex. Brown and BRS may rely upon such opinions. You acknowledge that BT Alex. Brown, BRS and their affiliates may share with each other, any information related to you or your respective affiliates (including information relating to creditworthiness), or the Recapitalization or the financing thereof, provided that BT Alex. Brown, BRS and such affiliates agree to hold any non-public information confidential in accordance with their respective customary policies. You acknowledge that BT Alex. Brown, BRS and their affiliates may share with each other, any information related to you or the Company and your and their respective affiliates (including information relating to creditworthiness), or the Recapitalization or the Transactions, provided that BT Alex. Brown, BRS and such affiliates agree to hold any non-public information confidential in accordance with their respective customary policies related to non-public information. (c) Indemnification. Each of you, on behalf of yourself and the Company, jointly and severally agree to indemnify BT Alex. Brown, BRS and their affiliates and each person in control of BT Alex. Brown, BRS and their affiliates and their respective officers, directors, employees, agents and representatives and their respective affiliates and control persons, in accordance with the Indemnity 7 -7- Letter dated the date hereof and attached hereto. (d) Other Services. You acknowledge and agree that BT Alex. Brown and/or BRS and/or their affiliates may be requested to provide additional services with respect to you and/or the Company, the Recapitalization or other matters contemplated hereby. Any such services will be set out in and governed by a separate agreement(s) (containing terms relating, without limitation, to services, fees and indemnification) in form and substance satisfactory to you and BT Alex. Brown or BRS (or any such affiliate). Nothing in this Engagement Letter is intended to obligate or commit BT Alex. Brown or BRS or any of their affiliates to provide any services or financing other than as set out herein. (e) No Shareholder Rights. You acknowledge and agree that BT Alex. Brown and BRS have been retained only by you and that your engagement of BT Alex. Brown and BRS is not deemed to be on behalf of and is not intended to confer rights upon any shareholder, owner or partner of you or any other person not a party hereto (other than the Company) as against BT Alex. Brown or BRS or any of their affiliates or the respective directors, officers, employees, agents and representatives of BT Alex. Brown or BRS and their affiliates. Unless otherwise expressly agreed, no person or entity other than you, the Company and any parent holding company of Company is authorized to rely upon your engagement of BT Alex. Brown and BRS or any statements, advice, opinions, or conduct by BT Alex. Brown or BRS. (f) Tombstone, Etc. Upon consummation of the transactions contemplated hereby, BT Alex. Brown and BRS may place the customary "tombstone" advertisement(s) in publication(s) of its choice at its own expense. You confirm that you and the Company will rely on your respective counsel, accountants and other similar expert advisors for legal, 8 -8- accounting, tax and other similar expert advice. (g) Miscellaneous. This Engagement Letter may be executed in two or more counterparts, all of which together shall be considered a single instrument. The term "affiliate" as used herein shall have the meaning ascribed to such term in the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. This Engagement Letter constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof and cannot be amended or otherwise modified except in writing executed by the parties hereof. (h) Successors and Assigns. The provisions of this Engagement Letter shall inure to the benefit of and be binding upon the successors and assignees of RCBA, Fremont, the Company, BT Alex. Brown and BRS. BT Alex. Brown or BRS may transfer or assign, in whole or from time to time in part, to one or more of their affiliates, their rights and obligations hereunder, but no such transfer or assignment will relieve BT Alex. Brown or BRS of their obligations hereunder without your prior written consent. By your acceptance hereof, each of you agrees to undertake the obligations described herein on your own behalf and on behalf of the Company, all such obligations to be joint and several, except that following the consummation of the Recapitalization all obligations of RCBA and Fremont shall be solely the obligations of the Company, and RCBA and Fremont shall be released from all such obligations. (i) GOVERNING LAW. THIS ENGAGEMENT LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION 9 -9- ARISING OUT OF THIS ENGAGEMENT LETTER OR CONDUCT IN CONNECTION WITH THIS ENGAGEMENT IS HEREBY WAIVED. YOU HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO THIS ENGAGEMENT LETTER OR ANY OF THE MATTERS CONTEMPLATED HEREBY. [Remainder of page intentionally left blank] 10 -10- We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this letter. Very truly yours, BT ALEX. BROWN INCORPORATED By: /s/ Kate W. Cook __________________________ Name: Kate W. Cook _____________________ Title: Managing Director ____________________ BANCAMERICA ROBERTSON STEPHENS By: /s/ Bruce R. Thompson __________________________ Name: Bruce R. Thompson _____________________ Title: Managing Director ____________________ AGREED AND ACCEPTED this 1st day of October, 1997: RCBA PURCHASER I, L.P. By: /s/ N. Colin Lind ______________________________________ Name: N. Colin Lind ______________________________ Title: A General Partner FREMONT PURCHASER II, INC. By: /s/ R.S. Kopf _______________________________________ Name: R.S. Kopf _______________________________ Title: General Counsel and Secretary ______________________________ KINETIC CONCEPTS, INC. By: /s/ Raymond R. Hanningan _______________________________________ Name: Raymond R. Hanningan _______________________________ Title: President and Chief Executive Officer EX-99.A.3 4 COMMITMENT LETTER 1 BANKERS TRUST NEW YORK BANK OF AMERICA NATIONAL TRUST CORPORATION AND SAVINGS ASSOCIATION 130 LIBERTY STREET 231 SOUTH LASALLE STREET NEW YORK, NY 10006 CHICAGO, ILLINOIS 60697 October 1, 1997 RCBA Purchaser I, L.P. 909 Montgomery Street Suite 400 San Francisco, CA 94133 Attention: John C. Walker, Managing Director Fremont Purchaser II, Corp. 50 Fremont Street Suite 3700 San Francisco, CA 94105 Attention: James T. Farrell, President Kinetic Concepts, Inc. 8023 Vantage Drive P.O. Box 659508 San Antonio, TX 78285-9508 Attention: Mr. Raymond R. Hannigan Re: Financing Letter (Bridge Financing) Ladies and Gentlemen: You have advised Bankers Trust New York Corporation and Bank of America National Trust and Savings Association (the "Lenders") that RCBA Purchaser I, L.P. ("RCBA") and Fremont Purchaser II, Corp. ("Fremont"), together with certain other investors satisfactory to us (RCBA, Fremont and such other investors being herein collectively referred to as the "New Investor Group"), intend to invest in a leveraged recapitalization transaction (the "Recapitalization") involving Kinetic Concepts, Inc. (the "Company"). We understand that the Recapitalization will be accomplished through the repurchase by the Company of all of its shares of common stock (including certain options) other than at least $200.5 million of shares of common stock and options (the "Rollover Shares") to be retained by certain existing stockholders of the Company, including members of the Company's Board of Directors and/or management (the "Rollover Shareholders" and, together with the New Investor Group, the "Buyers"), for a maximum aggregate repurchase price 2 -2- not to exceed $655.0 million (the "Repurchase Shares"), and through the investment of not less than $355.2 million in equity in the Company (the "Equity Financing"), including the contribution of at least $200.5 million of Rollover Shares by the Rollover Shareholders and the purchase by the New Investor Group of not less than $154.7 million of shares of the Company's common stock directly from the Company (the "Equity Securities"); provided, that to the extent the Buyers increase the amount of Rollover Shares above $200.5 million after the date hereof, the amount of Rollover Shares shall be increased and the amount of Repurchase Shares and Equity Securities shall be decreased by the same amount; provided that in no event shall the Equity Securities be less than $125 million. In addition, in connection with the Recapitalization and related transactions, fees and expenses of approximately $44 million will be paid. Upon consummation of the Recapitalization, the Buyers will own at least 66 2/3% of the then outstanding shares of Company common stock. You have advised the Lenders that the Recapitalization would be accomplished through a tender offer (the "Tender Offer") followed by a merger of corporations or other legal entities newly formed by the New Investor Group with the Company (the "Merger") pursuant to which all shares of common stock not tendered (in each case, other than Rollover Shares) will be cashed out. It is expected that the Tender Offer will be financed through (i) borrowings of up to $530 million under a senior secured credit facility to be provided to the Company (the "Credit Facility"), of which $300.0 million will be available to the Company under term loan facilities (the "Term Loans"), $130.0 million will be available to the Company under a tender facility, $50.0 million will be available to the Company under a revolving credit facility (the "Revolving Loans") and up to $50.0 million will be available to the Company under an acquisition facility (the "Acquisition Loans"), (ii) cash equity investments from the New Investor Group of the Equity Securities, but in no event shall the Equity Securities be less than $125 million, and (iii) cash on hand of the Company of $23.0 million or in lieu thereof ownership of RIK Medical, L.L.C. and RIK Medical East, L.L.C. (collectively "RIK Medical"). You have further advised us that the amount of funds necessary to refinance a portion of the Credit Facility on the date which is twenty one days after the closing of the Credit Facility will be provided through the proceeds from the sale of not less than $200.0 million of senior subordinated notes (the "Securities") (which Securities may be issued with an equity 3 -3- component depending upon market conditions) to be issued by the Company (or, in lieu thereof, not less than $200.0 million of certain subordinated bridge financing made available to the Company (the "Bridge Financing")). You have further advised us that the Revolving Loans and Acquisition Loans will also be used to provide for working capital purposes, letters of credit and other corporate purposes, including permitted acquisitions, of the Company and its subsidiaries upon consummation of the Merger; provided that no more than $25.0 million of Revolving Loans and Acquisition Loans shall be drawn on the closing date of the Merger (the "Merger Date") ($48.0 million if the acquisition of Rik Medical has been consummated prior to the Merger Date). Upon consummation of the Merger, the Company and its subsidiaries will have no indebtedness other than the Credit Facility and the Securities (or, in lieu thereof, the Bridge Financing). The Recapitalization (including the Tender Offer and the Merger), together with the issuance of the Securities (or, in lieu thereof, the Bridge Financing), the issuance of the Equity Securities, and the transactions contemplated by the definitive documents evidencing the Credit Facility and all related collateral and guarantees (collectively, the "Bank Documents"), are hereinafter referred to as the "Transactions." You have requested the Lenders to commit to provide to Company funds in an amount of $200.0 million in the form of an unsecured senior subordinated bridge loan to be made available on the date (the "Closing Date") which is the earlier of (i) 21 calendar days after the closing of the Credit Facility and (ii) after the closing of the Credit Facility, the date which is 2 business days after written notice from Company to Lenders that the senior subordinated bridge loan will be drawn. Accordingly, subject to the terms and conditions set forth or referred to in this letter and in reliance upon your representations, warranties and advice set forth or referred to in this letter, the Lenders agree with you as follows: 1. Senior Subordinated Bridge Loan. The Lenders hereby severally commit, subject to the terms and conditions contained herein, to provide to Company, and Company hereby engages the Lenders as the exclusive provider of, $100.0 million each of an unsecured senior subordinated bridge loan (the "Bridge Loan") in an aggregate principal amount of $200.0 million. The proceeds of the Bridge Loan shall be used to refinance the Credit Facility. The principal terms of the Bridge Loan are summarized in the term sheet attached hereto as Exhibit 1 (the "Term Sheet"). 4 -4- This letter is not meant to be, nor shall it be construed as, an attempt to define all of the terms and conditions of the transactions involved in the Bridge Loan. Rather, it is intended only to outline certain basic points of business understanding around which the legal documentation is to be structured. Further negotiations within the general scope of these major terms shall not be precluded by the issuance of this letter and its acceptance by you. Unless the Lenders' commitment hereunder shall have been terminated pursuant to Section 7, the Lenders shall have the exclusive right to provide the Bridge Loan required in connection with the Transactions. Representatives of the Lenders and their affiliates have reviewed certain historical and pro forma financial statements of Company and its subsidiaries and have met with your respective representatives and certain members of the management of Company regarding the transactions contemplated hereby, and we are pleased to advise you that the results of such investigation of Company and its subsidiaries to date are satisfactory. However, neither we nor our counsel have had the opportunity to complete our legal and environmental due diligence. Accordingly, the Lenders' commitment to provide the financings described in this letter is subject to our satisfaction of such legal and environmental due diligence. In the event that, prior to the funding of the Credit Facility, our continuing review of Company and its subsidiaries discloses information relating to conditions or events not previously disclosed to us or relating to new information or additional developments concerning conditions or events previously disclosed to us which we believe may have a material adverse effect on the business, results of operations, properties, assets, liabilities or condition (financial or otherwise) of Company and its subsidiaries, we may, in our sole discretion, suggest alternative financing amounts or structures that ensure adequate protection for the Lenders or decline to participate in the proposed financing. In addition, the Lenders' commitment is subject to the accuracy and completeness of the Information and the Projections described in the immediately succeeding paragraph, our satisfaction with the structure of the Recapitalization, and the satisfaction of the conditions to be set forth in the definitive documentation relating to the Credit Facility, including without limitation those conditions set forth in the Term Sheet. You hereby represent that, based on your review and analysis, to your knowledge (a) all information other than the 5 -5- Projections (as defined below), which has been taken or is hereafter made available to the Lenders by the New Investor Group or Company or any of your or their respective representatives in connection with the transactions contemplated hereby (the "Information") has been reviewed and analyzed by you in connection with the performance of your own due diligence and is now, and as supplemented by you prior to the funding of the Credit Facility, will be as of the funding of the Credit Facility, complete and correct in all material respects and does not now, and as supplemented by you prior to the funding of the Credit Facility, will not on the funding of the Credit Facility, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such statements were or are made, not materially misleading and (b) all financial projections concerning Company that have been or are hereafter made available to the Lenders by the New Investor Group or Company or any of your or their respective representatives prior to the funding of the Credit Facility in connection with the transactions contemplated hereby (the "Projections") have been or, in the case of such Projections made available after the date hereof, will be, prepared in good faith based upon reasonable assumptions, which assumptions are, or in the case of Projections made available after the date hereof will be, set forth therein (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond the control of Company and that no assurance can be given that such projections will be realized). You agree to supplement the Information and the Projections from time to time until the funding of the Credit Facility so that the representation and warranty in the preceding sentence is correct on the funding of the Credit Facility. In arranging and syndicating the Bridge Loan, the Lenders will be using and relying on the Information and the Projections, without independent verification thereof. The representations and covenants contained in this paragraph shall remain effective until definitive Financing Documentation (as defined below) is executed and thereafter the disclosure representations and covenants contained herein shall be superseded by those contained in such definitive Financing Documentation. 2. Financing Documentation. The making of the Bridge Loan will be governed by definitive loan and related agreements and documentation (collectively, the "Financing Documentation") prepared by special counsel to the Lenders. The Financing Documentation shall contain such covenants, terms and conditions as are consistent with this letter, will have the principal economic terms set forth in the Term Sheet and 6 -6- shall otherwise be satisfactory to the Lenders; it being understood that such terms and provisions may require the approval of the Lenders under the Bank Documents. 3. Conditions. The obligation of the Lenders under Section 1 of this letter to provide the Bridge Loan is subject to fulfillment of customary and appropriate conditions precedent, including, without limitation, the following: A. Recapitalization Agreement; Documentation. At the time of funding the Credit Facility, the structure of the Recapitalization shall be substantially similar to that previously described or otherwise satisfactory to the Lenders, and the definitive agreements relating to the Recapitalization, including, but not limited to, the Tender Offer and Merger (collectively, the "Recapitalization Agreement") shall be in form and substance satisfactory to the Lenders, shall be in full force and effect and shall not have been amended without the Lenders' consent, which consent shall not be unreasonably withheld. All conditions to the Tender Offer contained in the Recapitalization Agreement shall have been performed or complied with substantially on the terms set forth therein and not waived without the Lenders' consent, which consent shall not be unreasonably withheld. B. Financing Documentation. At the time of funding the Credit Facility, Company and the Lenders shall have entered into the Financing Documentation relating to the Bridge Loan and the transactions contemplated thereby. At the time of funding the Credit Facility, all documents required to be delivered under the Financing Documentation (other than those required to be delivered at the time of funding of the Bridge Loan), including any guarantees described in the Term Sheet, customary legal opinions, independent third party reports, corporate records and documents from public officials and officers' certificates, shall have been delivered. C. Due Diligence. At the time of funding the Credit Facility, the Lenders shall have completed their legal and environmental due diligence investigations of Company. The Lenders' commitment to provide the financing described in this letter is conditioned upon the results of such investigations being satisfactory to the Lenders prior to the funding of the Credit Facility. 7 -7- D. No Adverse Change or Development. (i) At the time of funding the Credit Facility, since December 31, 1996 there shall not have been, in the reasonable judgment of the Lenders, any material adverse change, or any development involving (or which may reasonably be expected to involve) a prospective material adverse change, in the condition (financial or other), business, assets, liabilities, properties or results of operations of Company; the Lenders shall have been promptly notified of any conditions or events not previously disclosed to the Lenders and of any new information or additional developments concerning conditions or events previously disclosed to the Lenders in each case which may have a material adverse effect on the condition (financial or otherwise), business, assets, liabilities, properties or results of operations of Company ("Material Adverse Effect"); (ii) prior to the funding of the Credit Facility, trading in securities generally on the New York or American Stock Exchange shall not have been suspended and minimum or maximum prices shall not have been established on any such exchange; (iii) prior to the funding of the Credit Facility, a banking moratorium shall not have been declared by New York or United States federal banking authorities; (iv) prior to the funding of the Credit Facility, there shall not have been (A) an outbreak or escalation of hostilities between the United States and any other power, or (B) an outbreak or escalation of any other incurrection or armed conflict involving the United States or any other national or international calamity or emergency, or (C) any material change in, or development with respect to, the financial markets of the United States or elsewhere which, in the reasonable judgment of the Lenders, makes it impracticable or inadvisable to proceed with the consummation of the Transactions or the Bridge Loan or any of the other transactions contemplated hereby or that would materially adversely affect the ability to sell or syndicate the Bridge Loan or sell or place the Securities, in each case, on the terms contemplated hereby; and (v) there shall be no issues of debt securities or commercial bank facilities (other than the Securities, the Bridge Loan and the Credit Facility) of Company being offered, placed or arranged that would, in the reasonable judgment of the Lenders, adversely affect the sale or syndication of the Bridge Loan or the sale or placement of the Securities. E. Capital Structure; Management. The pro forma consolidated capital structure of Company and its subsidiaries, after giving effect to the Transactions and the 8 -8- consummation of all other financial transactions relating to the transactions contemplated by this letter, shall be consistent with the capital structure contemplated herein, or otherwise satisfactory to the Lenders in their discretion. Prior to the funding of the Credit Facility, the Lenders shall be satisfied with senior management and their employment contracts, if any, and proposed ownership interests in Company, and such contracts, if any, and ownership interests shall be in full force and effect on the Closing Date. F. Solvency Opinion. Prior to the funding of the Credit Facility, the Lenders shall have received a solvency certificate of management of Company and a solvency letter from an independent firm, in each case satisfactory in form and substance to the Lenders, which may be Houlihan Lokey Howard & Zukin. G. Applicable Law. (i) Prior to the funding of the Credit Facility, there shall not have been any statute, rule, regulation, injunction or order applicable to any of the Transactions or the financing thereof, promulgated, enacted, entered or enforced by any state or federal government or governmental or regulatory authority or agency or by any federal or state court, or by any tribunal, and (ii) subsequent to the funding of the Credit Facility and prior to the funding of the Bridge Loan, there shall not have been any statute, rule, regulation, injunction or order applicable to any of the Transactions or the financing thereof, promulgated, enacted, entered or enforced by any state or federal government or governmental or regulatory authority or agency or by any federal or state court, or by any tribunal, in either case that would prohibit the making of the Bridge Loan or that would result in the making of the Bridge Loan causing a violation of any such statute, rule, regulation, injunction or order. H. Litigation. Prior to the funding of the Credit Facility, no litigation or similar proceeding (governmental or other) shall exist or be threatened with respect to or affecting (i) Company or any of its subsidiaries, any of the Transactions, any party to any of the Transactions or the Bridge Financing, which the Lenders shall determine is reasonably likely to have a Material Adverse Effect, or (ii) the Financing Documentation or any provision thereof, which the Lenders shall determine is reasonably likely to materially adversely affect the rights and remedies of the Lenders or any other Lenders 9 -9- thereunder, the ability of Company or any guarantor thereof to perform its obligations thereunder, the making, sale or syndication of the Bridge Loan or the sale or placement of the Securities. I. Credit Facility. Company shall have entered into Bank Documents with a commercial lender or a syndicate of commercial lenders, an institutional investor or syndicate of institutional investors, in form and substance satisfactory to the Lenders and providing for commitments thereunder in an amount that is, together with the proceeds of the other Transactions and the borrowing of the Bridge Loan, sufficient to consummate the Recapitalization, to pay all related fees and expenses and to have not less than $75.0 million of availability under the Credit Facility immediately after the consummation of the Recapitalization, which amount may be reduced to $52.0 million if the acquisition of Rik Medical has been consummated. Such documentation shall be in full force and effect. The initial borrowings under the Credit Facility as described above shall have been made in connection with the funding of the Tender Offer. Since the date of the funding of the Credit Facility, the Bank Documents shall not have been amended in a manner materially adverse to the Lenders. J. Equity Financing. The Equity Securities shall have been issued. K. Conduct of Business. Prior to the funding of the Credit Facility, Company and its subsidiaries shall have operated their respective businesses in the ordinary course, except as contemplated by the Transactions. L. Marketing of Debt Securities. Company shall have engaged one or more investment banks (collectively, the "Take-Out Banks") satisfactory to the Lenders to publicly sell or privately place the Securities the proceeds of which will be used to refinance the Bridge Loan. Such engagement shall have been definitively documented on terms and conditions satisfactory to the Lenders, such documentation shall be in full force and effect and the parties thereto shall be in compliance with all material agreements thereunder. M. Release of Collateral. Any and all security interests in the assets of Company granted in favor of holders of indebtedness (other than under the Bank Documents) 10 -10- shall have been terminated unless otherwise satisfactory to the Lenders. N. Financial Statements. Prior to the funding of the Credit Facility, the Lenders shall have received audited and unaudited historical financial statements of Company and pro forma financial statements of Company and its consolidated subsidiaries assuming consummation of the Recapitalization, in each case in form and presentation as required by the Securities Act of 1933, as amended, and the rules and regulations thereunder applicable to registration statements filed thereunder. O. Fees and Expenses. All fees and expenses, including without limitation, the Lenders' reasonable legal fees and out-of-pocket expenses (including allocated internal legal expenses), shall have been paid by you or Company, to the extent due. 4. Securities Demand. Upon request from the Take-Out Banks (a "Request"), Company shall take any and every action necessary or desirable, to the extent within the power of Company, so that the Take-Out Banks can, as soon as practicable after such a Request, publicly sell or privately place the Take-Out Securities. If the Take-Out Securities have not been sold or privately placed within three months of the Request, Company agrees that upon notice by the Take-Out Banks (a "Take-Out Securities Notice"), at any time and from time to time following the three-month anniversary of the Request, Company will cause the issuance and sale of Take-Out Securities upon such terms and conditions as specified in the Take-Out Securities Notice; provided that for either a Request or a Take-Out Securities Notice (i) interest and dividend rates (whether floating or fixed) shall be determined by the Take-Out Banks, in light of the then prevailing market conditions, but in no event shall the cash interest or dividend rates on the Take-Out Securities exceed 15.0% per annum; (ii) Company, in its reasonable discretion after consultation with the Take-Out Banks, shall determine whether the Take-Out Securities shall be issued through a public offering or a private placement; (iii) the scheduled final maturity of any Take-Out Securities shall not be earlier than one year after the scheduled termination date of the Credit Facility (as in effect on the Closing Date), but in no event later than the tenth anniversary of the Closing Date; (iv) the Take-Out Securities (to the extent they are debt securities) will be issued pursuant to an indenture and in the form negotiated by Company and the Take-Out Banks prior to the Closing Date and which shall contain such terms, conditions and 11 -11- covenants (consistent with Section 3 hereof) as are customary for similar financings and as are satisfactory in all respects to the Take-Out Banks and their counsel and Company and its counsel; and (v) all other arrangements with respect to the Take-out Securities shall be reasonably satisfactory in all respects to the Take-Out Banks and Company in light of the then prevailing market conditions; provided that the terms and conditions of the Take-Out Securities are satisfactory to the Lenders under the Bank Documents. Additionally, if it shall be determined by the Take-Out Banks, based on then prevailing market conditions, that it is necessary and advisable to sell Take-Out Securities that are debt securities in an aggregate principal amount in excess of the principal amount of the Bridge Loan to be refinanced with such Take-Out Securities, Company shall sell Take-Out Securities in the aggregate principal amount recommended by the Take-Out Banks; provided that in no event will Company be required to sell Take-Out Securities in an aggregate principal amount in excess of $200.0 million pursuant to this sentence. Further, if it shall be determined by the Take-Out Banks, based on then prevailing market conditions, that it is necessary and advisable to sell the Take-Out Securities with an equity component, Company shall issue common equity or common equity equivalents to the purchasers of the Take-Out Securities in such amount as is necessary in order for Company to receive net proceeds from the sale of Company's equity securities, if any) in an amount sufficient to repay the Bridge Loan, after taking into account the prevailing market conditions; provided that at no time shall Company be required to issue common equity or common equity equivalents to the purchasers of the Take-Out Securities in an amount greater than 5.0% of the aggregate amount of the common stock of Company on a fully-diluted basis. As used herein and in the attached fee letter of even date herewith with respect to the Bridge Loan (the "Fee Letter"), the term "fully diluted" shall be deemed to include all securities of Company (including all convertible, exchangeable or similar securities and determined without regard to whether such securities are then convertible or exchangeable), (i) issued and (ii) contemplated to be issued in connection with the Transactions even if not then issued. At the election, from time to time, of the Lenders, any such equity securities may be in the form of non-voting common stock exchangeable into voting common stock on certain terms requested by the Lenders. 12 -12- With respect to any equity securities issuable pursuant to this letter or the Fee Letter, the Lenders and their transferees shall be given tag-along, registration and other rights as are customary in transactions like that contemplated by this letter and the Fee Letter. 5. Indemnification and Contribution. Each of you agrees, jointly and severally, to indemnify each of the Lenders and their affiliates and each person in control of the Lenders and each of their affiliates and the respective officers, directors, employees, agents and representatives of the Lenders and their affiliates and control persons, as provided in the indemnity letter of even date herewith and attached hereto (the "Indemnity Letter"). 6. Expenses. In addition to any fees that may be payable to the Lenders hereunder and regardless of whether any of the transactions contemplated by this letter are consummated, each of you hereby agrees, jointly and severally, to reimburse the Lenders for all reasonable fees and disbursements of the Lenders' counsel, including, without limitation, allocated internal legal expenses, and all of the Lenders' travel and other reasonable out-of-pocket expenses incurred in connection with the Transactions or otherwise arising out of the Lenders' commitment hereunder. 7. Termination. The Lenders' commitment hereunder to provide the Bridge Loan shall terminate (a) if the Recapitalization Agreement has not been entered into on terms and in form and substance reasonably satisfactory to the Lenders on or prior to October 31, 1997, or (b) if the Bridge Loan is not funded by February 21, 1998. No such termination of the commitments hereunder shall affect your respective obligations under Section (a) or (b) of the Fee Letter or under Sections 5 and 6 hereof or this Section 7, which shall survive any such termination; provided that upon termination of the commitments hereunder, such obligations shall be solely the obligations of the Company, and RCBA and Fremont shall be released from all obligations under this Financing Letter (Bridge Financing), the Fee Letter and the Indemnity Letter. 8. Assignment. This letter shall not be assignable by the New Investor Group or the Company without the prior written consent of the Lenders; provided that any member of the New Investor Group may assign this letter to any of its affiliates. This letter may be assigned by the Lenders without the consent of the New Investor Group or the Company to affiliates of the Lenders (it being understood that any such affiliate 13 -13- shall be subject to the restrictions set forth in this Section 8 but no such assignment will relieve the Lenders of their obligations hereunder without your prior written consent); provided that the Lenders shall have the right (before and after funding the Bridge Loan), in its sole discretion to syndicate the Bridge Loan among banks or other financial institutions pursuant to the Financing Documentation or otherwise and to sell, transfer or assign all or any portion of, or interests or participation in, the Bridge Loan and any notes issued in connection therewith; provided, however, that upon delivery by the Lenders of a commitment letter for all or a portion of the Bridge Loan from a reputable financial institution (which reputable financial institution shall be reasonably acceptable to you) and otherwise containing terms and conditions reasonably acceptable to you and Company, the Lenders shall be fully relieved of their obligations hereunder to the extent of the commitment set forth in such commitment letter. 9. Confidentiality. This letter is confidential and shall not be disclosed by you to any person other than your respective accountants, attorneys and, to the extent approved by the Lenders, other advisors, and to Company and its attorneys and, to the extent approved by the Lenders, other advisors, and then only on a confidential basis and in connection with the Recapitalization and the related transactions contemplated herein. Additionally, you may make such disclosures of this letter as are required by law or judicial process or as may be required or appropriate in response to any summons or subpoena or in connection with any litigation; provided that you will use your best efforts to notify us of any such disclosure prior to making such disclosure. 10. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES GOVERNING CONFLICTS OF LAWS. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS LETTER IS HEREBY WAIVED. YOU HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO THIS LETTER OR ANY OF THE MATTERS CONTEMPLATED HEREBY. This letter (including the provisions of the Term Sheet, the Fee Letter and the Indemnity Letter specifically incorporated herein) embodies the entire agreement and understanding between you and the Lenders and supersedes all prior agreements and understandings relating to the subject matter hereof. This letter may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. 14 -14- You acknowledge that the Lenders and their affiliates may share with each other any information related to you or your respective affiliates (including information relating to creditworthiness) or the Transactions or the financing therefor; provided that the Lenders and such affiliates agree to hold any non-public information confidential in accordance with their respective customary policies related to non-public information. [remainder of page intentionally left blank] 15 If you are in agreement with the foregoing, please sign and return to the Lenders at 130 Liberty Street, New York, New York 10006, the enclosed copy of this letter no later than 5:00 p.m., New York time, on October 3, 1997, whereupon the undertakings of the parties shall become effective to the extent and in the manner provided hereby. This offer shall terminate if not so accepted by you on or prior to that time. By your acceptance hereof, you agree to undertake these obligations on your behalf and on behalf of Company, all such obligations to be joint and several, but such obligations as to RCBA and Fremont shall terminate upon consummation of the Recapitalization and shall be solely the obligations of Company, and RCBA and Fremont shall be released from all such obligations. Very truly yours, BANKERS TRUST NEW YORK CORPORATION By: /s/ Joseph A. Manganello, Jr. _______________________________ Name: Joseph A. Manganello, Jr. Title: Executive Vice President and Chief Credit Officer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Kevin P. Morrison ______________________________ Name: Kevin P. Morrison Title: Vice President 16 AGREED AND ACCEPTED this 1st day of October, 1997 RCBA PURCHASER I, L.P. By: /s/ N. Colin Lind ______________________________ Name: N. Colin Lind _________________________ Title:General Partner ________________________ FREMONT PURCHASER II, INC. By: /s/ R. S. Kopf ______________________________ Name: R.S. Kopf _________________________ Title: General Counsel and Secretary ________________________ KINETIC CONCEPTS, INC. By: /s/ Raymond R. Hannigan ______________________________ Name: Raymond R. Hannigan _________________________ Title: President and Chief Executive Officer ________________________ 17 Exhibit 1 RCBA Purchaser I, L.P. Fremont Purchaser II, Corp. Recapitalization of Kinetic Concepts, Inc. Bridge Loan and Term Loan Facility Summary Term Sheet * Borrower: Kinetic Concepts, Inc. Lenders: Bankers Trust New York Corporation and Bank of America National Trust and Savings Association (the "Lenders"). Facility: One-year unsecured senior subordinated bridge loan (the "Bridge Loan") generating gross proceeds of $200.0 million which, subject to the conditions outlined below under "Conditions to Conversion of the Bridge Loan," converts to an unsecured senior subordinated term loan facility (the "Term Loan," and, collectively with the Bridge Loan, the "Facility") on the date set forth be low under "Conditions to Conversion of the Bridge Loan." The Term Loan will mature on the tenth anniversary of the Funding Date (as described be low). Guarantors: Each subsidiary of Company that makes a guaranty in favor of the lenders under the Bank Documents (a "Guarantor") shall also make a guaranty (a "Guaranty") in favor of the - -------- * Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Financing Letter to which this Term Sheet is attached. T-1 18 Lenders, pursuant to which such Guarantor shall guarantee all of the obligations of the Company to the Lenders under the Financing Documentation. Use of Proceeds: Proceeds from borrowings under the Facility will be used to refinance a portion of the Credit Facility and be deposited in escrow pending acquisition of additional Shares. Funding Date: The date which is the earlier of (i) 21 days after the closing of the Credit Facility and (ii) after the closing of the Credit Facility, the date which is two business days after written notice from Company to Lenders that the Bridge Loan will be drawn. Interest Rate: The Bridge Loan and the Term Loan shall bear interest a rate equal to the greater of three-month LIBOR or the 90-day U.S. Treasury Rate, reset monthly, plus an initial spread of 6.0% (the "Interest Rate"), and such spread over LIBOR or U.S. Treasury Rate shall automatically increase by 0.5% for each period of three months that the Bridge Loan or the Term Loan is outstanding, as the case may be; provided, however, that in no event shall the Interest Rate exceed 14.0% per annum on a cash interest basis and 17.0% per annum on a cash and payment in kind ("PIK") basis. At any time after the Conversion Date (as hereinafter defined), the Term Loan of any lender shall, at the election of such lender, bear interest at a fixed rate per annum equal to the Fixed Rate (as hereinafter defined). The Fixed Rate, as of any date of determination, shall be a rate of interest per annum equal to T-2 19 17.0% per annum, subject to the limitations described below. Interest on the Bridge Loan and the Term Loan shall be payable on a quarterly basis; provided that at such time as the Term Loan bears interest at the Fixed Rate, interest on the Term Loan shall be payable on a semi-annual basis. Interest on the Bridge Loan and the Term Loan shall be paid (i) in cash to the extent that interest thereon is less than or equal to a rate per annum of 14.0% and (ii) in PIK securities having terms and provisions identical to the Bridge Loan or Term Loan, as the case may be, to the extent that interest thereon is greater than a rate per annum of 14.0% but less than or equal to a rate per annum of 17.0%. Fees: As set forth in the attached Fee Letter. Ranking: The obligations of Company under the Facility will be unsecured senior subordinated obligations and will rank (i) pari passu with all other unsubordinated indebtedness of Company (other than as provided in (iii) below), (ii) senior to any subordinated indebtedness of Company and (iii) subordinated in right of payment to obligations of Company under the Credit Facility and any refinancing thereof. The obligations of each Guarantor under its Guaranty will be senior subordinated obligations and will rank (i) pari passu with all other unsubordinated indebtedness of such Guarantor (other than as provided in (iii) below), (ii) senior to any subordinated indebtedness of such Guarantor and (iii) subordinated in T-3 20 right of payment to the obligations of each Guarantor under the Bank Documents to which it is a party and any refinancing thereof. Optional Prepayment: Company may prepay the Bridge Loan or the Term Loan, in whole or in part, at any time or from time to time in an amount equal to 100.0% of the principal amount thereof plus accrued interest thereon; provided that at such time as the Term Loan bears interest at the Fixed Rate, the Term Loan shall be subject to prepayment restrictions and premiums typical for high yield debt securities; and provided, further that at such time as the Bridge Loan is less than $100.0 million, or would become less than $100.0 million as the result of any optional prepayment, any such prepayment shall prepay the entire outstanding amount of the Bridge Loan. Mandatory Prepayment: Net proceeds of sales of Securities or, to the extent permitted pursuant to the terms of the Credit Facility, debt or equity securities, whether in a public offering or private placement by Company or any subsidiaries thereof, shall be used to prepay the Bridge Loan plus accrued interest and any other amount payable thereunder to the full extent of net proceeds so received. Participation/Assignment The Lenders may participate out or sell or assign, or or Syndication: syndicate to other lenders, the Bridge Loan or Term Loan, in whole or in part, at any time. Conditions to Conversion On the first anniversary of the Funding Date (the of the Bridge Loan: "Conversion Date"), unless (A) Company or any significant subsidiary (which shall be defined to mean any subsidiary of the Company T-4 21 which, would be a "Significant Subsidiary" as defined in Rule 1.02(w) of Regulation S-X promulgated under the Securities Act) thereof is subject to a bankruptcy or other insolvency proceeding, (B) there exists a payment default (whether or not matured) with respect to the Bridge Loan or the conversion fee set forth in the Fee Letter, or (C) there exists a default in the payment when due at final maturity of any indebtedness (excluding the indebtedness created under the Bridge Loan) of Company or any subsidiary thereof in excess of $20 million in the aggregate for any such default or all such defaults, or the maturity of such indebtedness shall have been accelerated, Company may convert all of the then outstanding Bridge Loan into the Term Loan; provided that if an event described in clause (C) is continuing at the scheduled Conversion Date but the applicable grace period, if any, set forth in the events of default provision of the Bridge Loan has not expired, the Conversion Date (and maturity date of the Bridge Loan) shall be deferred until the earlier to occur of (i) the cure of such event or (ii) the expiration of any applicable grace period. Debt Security Exchange: Any lender of the Term Loan may at any time after the Conversion Date require that Company exchange the Term Loan for long-term notes (the "Exchange Notes") which shall bear interest at the Fixed Rate, deter mined at such time, and shall have similar terms and conditions customary for high yield debt securities issued for cash in the then prevailing market and in all cases not in conflict with Company's other debt instruments and acceptable to such T-5 22 lender and shall in addition provide customary registration rights (including, without limitation, demand registrations). The lenders of the Term Loans may designate, at Company's request, one or more investment banks reasonably satisfactory to Company to place such long-term notes to be exchanged for the Term Loan and Company will pay customary fees in connection therewith. Conditions Precedent: The obligation of the Lenders to make funds available under the Bridge Loan shall be subject to (i) receipt by the Lenders of a borrowing request, (ii) satisfaction of the conditions set forth in the Financing Letter and (iii) satisfaction of other customary closing conditions. Covenants: Certain covenants will limit the ability of Company and its subsidiaries to incur additional indebtedness, pay certain dividends and make certain other restricted payments and investments, create liens, enter into transactions with affiliates, merge, consolidate or transfer substantially all of their respective assets, impose restrictions on the ability of Company to pay dividends or make certain payments to its shareholders, and impose restrictions on the ability of Company's subsidiaries to limit their ability pay dividends or make certain payments to Company. Further, during the term of the Bridge Loan, the covenants will be more restrictive than the covenants applicable to the Term Loan and the Take-Out Securities and will include additional prohibitive covenants relating to asset sales, certain acquisitions, certain debt incurrences, amendments to the Bank Documents that would modify any of the provisions or T-6 23 definitions thereof in respect of the issuance of Take-Out Securities, the Term Loans or the Exchange Notes in a manner adverse to the Lenders and certain other corporate transactions. Events of Default: Customary for transactions of this type, including without limitation, payment defaults, covenant defaults, bankruptcy and insolvency, judgments, cross acceleration of and failure to pay at final maturity other indebtedness aggregating an amount to be agreed upon and foreclosure under the Bank Documents, subject to, in certain cases, notice, grace periods and thresholds to be agreed upon. Governing Law and The State of New York. Forum: Indemnification and Ex- Customary for transactions of this type. pense Reimbursements: T-7 EX-99.B.2 5 PRESENTATION OF BT ALEX, BROWN INCORPORATED 1 EXHIBITS IN SUPPORT OF FAIRNESS OPINION FOR PROJECT ROYALTY [LOGO BT Alex. Brown] October 1, 1997 2 The information contained in this document was obtained from the management of KING and other sources. This document has been prepared for the use of the Board of Directors of KING only. It is confidential and may not be disclosed or provided to any third parties without the written permission of BT Alex. Brown Incorporated ("BT Alex. Brown"). This document is prepared as of October 1, 1997 and reflects information made available to us prior to such date. It does not include information regarding all of the assessments made by BT Alex. Brown in arriving at its conclusions. 3 TABLE OF CONTENTS I. EXECUTIVE SUMMARY - Financial Summary of the Proposed Transaction - Summary of Proposed Transaction Terms - Review of Process - KING Stock Price History II. REVIEW OF KING - Historical Financial Statements - Summary of Analyst Research - Ownership Profile - Liquidity Analysis III. VALUATION ANALYSIS - Analysis of Selected Public Companies - Analysis of Precedent Transactions - Precedent Financial Buyer Transactions - Discounted Cash Flow Analysis IV. PRO FORMA TRANSACTION ANALYSIS - Pro Forma Financial Statements V. APPENDIX - Premiums Paid Analysis PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 4 FINANCIAL SUMMARY OF THE PROPOSED TRANSACTION PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 5 FINANCIAL SUMMARY OF THE PROPOSED TRANSACTION I. VALUATION (in millions, except per share data) Offer Price per Share $ 19.25 Gross Equity Value $890.1 Less Option Proceeds 37.0 ------ Common Shares Outstanding 42.6 Total Options 3.6 Equity Value $853.0 ------ Plus: Debt $ 0.5 Total Shares & Options Outstanding 46.2 Less: Cash $ 38.4 ====== ------ Enterprise Value $815.2
KING as of Transaction Selected Public Selected Recent Financial II. MULTIPLES (06/30/97) Multiples Companies Transactions Buyer Transactions Enterprise Value Multiples LTM Revenues $286.2 2.8x 0.8x - 4.4x 0.9x - 2.0x 0.7x - 4.3x LTM EBITDA $ 82.4 9.9 8.1 - 21.9 8.8 - 13.4 8.6 - 10.9 LTM EBIT $ 61.4 13.3 10.3 - 27.4 11.3 - 21.4 12.2 - 16.2 Equity Value Multiples Book Value $222.5 3.8 1.1 - 7.7 1.1 - 4.9 2.3 - 7.9 LTM Net Income $ 38.8 22.0 16.6 - 41.0 19.0 - 47.6 19.4 - 28.8 CY 1997E Net Income (a) $ 41.7 20.5 16.8 - 33.9 NA NA NA NA CY 1998E Net Income (a) $ 47.0 18.2 14.4 - 28.2 NA NA NA NA Case One CY 1998E Net Income (b) $ 55.9 15.2 14.4 - 28.2 NA NA NA NA Case Two CY 1998E Net Income (b) $ 48.3 17.6 14.4 - 28.2 NA NA NA NA Forward Net Income $ 45.6 18.7 NA NA 19.5 - 25.8 NA NA
KING as of PREMIUM TO MARKET (06/30/97) Premium Analysis of Control Premiums (d) ----------------- ------- -------------------------------- Last Close (as of 09/30/97) $ 18.63 3.4% One Day Prior 27.6% One Month Prior (as of 08/31/97) $ 18.38 4.8% One Month Prior 38.9% Unaffected (as of 04/29/97) $ 14.81 30.0% HISTORICAL TRADING All-Time High (08/08/97) $19.94 All-Time Low (09/29/93) $ 3.38 III. STAND-ALONE DISCOUNTED CASH FLOW ANALYSIS (c) Discount Rates 14.0% - 22.0% Terminal Multiple 8.0x - 10.0x EBITDA $17.00 - $30.00
(a) I/B/E/S estimates. (b) Management estimates. (c) Range as calculated under Case One and Case Two scenarios, rounded to the nearest dollar. (d) Represents mean. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 6 SUMMARY OF PROPOSED TRANSACTION TERMS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 7 SUMMARY OF PROPOSED TRANSACTION TERMS TRANSACTION KING will offer $19.25 per share in cash for up to approximately 32.5 million KING shares (approximately 76% of KING shares outstanding) in a self-tender offer. James D. Leininger and Richard C. Blum & Associates, L.P. will rollover approximately 10.1 million KING shares (approximately 24% of existing ownership in KING) in a recapitalization of KING involving an approximately $152 million combined equity infusion from Richard C. Blum & Associates, L.P. and The Fremont Group and approximately $519 million in third party debt financing. POST-TRANSACTION Post-transaction, James D. Leininger, Richard C. Blum OWNERSHIP & Associates, L.P. and The Fremont Group will own approximately 34%, 26% and 40% of the recapitalized equity of KING. BOARD SEATS KING's eight member board will consist of James D. Leininger, Raymond R. Hannigan, President and Chief Executive Officer, two designees from Richard C. Blum & Associates, L.P., two designees from The Fremont Group and two independent designees. ACCOUNTING TREATMENT Recapitalization accounting treatment. TERMINATION FEE $30 million (or approximately 3.7% of the enterprise value) plus up to $2 million of expenses; triggered if (i) Board withdraws recommendation or (ii) in the event another party acquires 20% or more ownership in KING and completes an acquisition of KING within one year of the termination of the Agreement. KEY CONDITIONS TO KING Board approval, delivery of fairness opinion and CLOSING solvency opinion to KING's Board; filing of Schedule 13E-3 and 13E-4 Tender Offer Statements; KING shareholder approval as required under Texas law; all necessary regulatory consents; closing of third-party financing (commitment letters have been received); successful self-tender of KING shares and execution of Stock Retention Agreement with certain KING employees. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 8 SUMMARY OF PROPOSED TRANSACTION TERMS SHAREHOLDER SUPPORT Dr. Leininger agrees (i) to vote all shares in AGREEMENT support of the Transaction and (ii) grant Richard C. Blum & Associates, L.P. and the Fremont Group an option to acquire approximately 4.2 million of his shares at $19.25 per share in the event KING terminates the Agreement and completes a transaction with another party within 180 days after termination of the Agreement. KEY REPRESENTATIONS No material adverse change in KING; no undisclosed liabilities; compliance with all regulatory matters in conduct of business. DUE DILIGENCE Richard C. Blum & Associates, L.P. and The Fremont Group have completed their due diligence. TIMING Expected closing on or about November 15, 1997. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 9 SUMMARY OF PROPOSED TRANSACTION TERMS (dollars in thousands) SUMMARY SOURCES AND USES OF FUNDS
SOURCES Term (yrs) Interest Rate ---------- ------------- Revolver (Base Rate + 125) $ 18,841 6.0 7.35% Term Loan A (Base Rate + 125) 120,000 6.0 7.35% Term Loan B (Base Rate + 150) 90,000 7.5 7.60% Term Loan C (Base Rate + 175) 90,000 9.0 7.85% Senior Sub Note 200,000 10.0 10.24% Fremont New Equity 138,197 RCBA Total Equity (a) 91,294 Leininger "Rollover" Equity 116,735 Management "Rollover" Equity 8,974 Existing Cash in Company (b) 23,000 -------- Total Sources of Funds $897,041 ======== USES "Rollover" of Equity 203,484 Purchase of Primary Shares 617,037 Net Purchase of Options 32,514 Fees and Expenses 44,007 -------- Total Uses of Funds $897,041 ========
(a) Includes $77.8 million of "rollover equity" and net $13.5 million of new equity. (b) Prior to the funding of the RIK Medical acquisition. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 10 SUMMARY OF PROPOSED TRANSACTION TERMS PRO FORMA OWNERSHIP PROFILE
SHARES SHARES POST-DEAL PRE-DEAL ISSUED PURCHASED POST-DEAL FULLY DILUTED ---------- --------- ----------- ---------- ---------- James D. Leininger, M.D.(Chairman) 21,123,146 49.6% 0 (15,058,991) 6,064,155 33.5% 6,064,155 32.9% Richard C. Blum & Associates, L.P. 4,040,250 9.5% 702,286 0 4,742,536 26.2% 4,742,536 25.7% The Fremont Group 0 0.0% 7,179,066 0 7,179,066 39.7% 7,179,066 38.9% Other Management and Directors 1,967,166 4.6% 0 (1,867,166) 100,000 0.6% 100,000 0.5% Rolled Management Options (a) 0 0.0% 0 0 0 0.0% 366,176 2.0% ---------- ----- --------- ----------- ---------- ----- ---------- ----- Total Insider Holdings 27,130,562 63.7% 7,881,352 (16,926,157) 18,085,757 100.0% 18,451,933 100.0% Total Institutional Holdings 12,213,185 28.7% 0 (12,213,185) 0 0.0% 0 0.0% Retail and Other Holdings 3,280,730 7.7% 0 (3,280,730) 0 0.0% 0 0.0% ---------- ----- --------- ----------- ---------- ----- ---------- ----- Total Common Shares Outstanding 42,624,477 100.0% 7,881,352 (32,420,072) 18,085,757 100.0% 18,451,933 100.0%
(a) Based on 821,550 option shares with a strike price of $10.67 assuming $19.25 purchase price per share. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 11 REVIEW OF PROCESS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 12 REVIEW OF PROCESS - - Full auction process following public announcement that Company had retained BT Alex. Brown to explore strategic alternatives. - - Broad universe of both financial and strategic buyers contacted. - - Potential buyers included both domestic and international prospects. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 13 REVIEW OF PROCESS
PARTIES MATERIALS INDICATIONS MANAGEMENT CONTACTED SENT OF INTEREST PRESENTATION --------- ---- ----------- ------------ STRATEGIC BUYERS 16 13 0 0 FINANCIAL BUYERS 22 17 9 7 -- -- - - TOTALS 38 30 9 7
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 14 SELECTED CONSIDERATIONS OF INTERESTED PARTIES - - OVERALL IMPRESSIONS - Solid company with strong senior management - Well-established market position with broad product line - Established international distribution network and operating infrastructure - Steady historical performance - Positive overall impressions; issues related to growth - - INDUSTRY MARKET CONDITIONS - Presence of significant competitor with substantial resources - Changing reimbursement environment - Health care industry subject to intense cost pressures - - KING STAND-ALONE ISSUES - Capital intensive business - Shift from frames to overlays - Shift in customers from acute to extended care settings - New products (VAC, PlexiPulse) are early-stage - Treatment protocols for products dependent on collection of additional clinical data PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 15 KING STOCK PRICE HISTORY PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 16 KING ANNOTATED STOCK PRICE HISTORY 11/01/94 - 09/30/97 [graph] plot points on CM 59-74 PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 17 RELATIVE STOCK PRICE PERFORMANCE SINCE 01/01/97 [graph] PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 18 RELATIVE STOCK PRICE PERFORMANCE SINCE 05/29/97 [graph] PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 19 HISTORICAL FINANCIAL STATEMENTS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 20 KING HISTORICAL INCOME STATEMENTS
(dollars in thousands) FISCAL YEAR ENDED DECEMBER 31, 1994-96 LTM AS OF 1994 1995 1996 CAGR 09/30/97 (a) ---- ---- ---- ---- ------------ REVENUES $222,084 $243,443 $269,881 10.2% $294,489 EBITDA 63,437 66,552 77,148 10.3% 85,964 EBIT 38,636 43,792 55,354 19.7% 63,394 NET INCOME $20,505 $28,441 $38,987 37.9% $43,669 ======== ======== ======== ======== F.D. E.P.S. $0.46 $0.63 $0.86 35.8% $0.99 ======== ======== ======== ======== MARGINS: EBITDA 28.6% 27.3% 28.6% 29.2% EBIT 17.4% 18.0% 20.5% 21.5% Net Income 9.2% 11.7% 14.4% 14.8% GROWTH RATES: Revenue NA 9.6% 10.9% --- EBITDA NA 4.9% 15.9% --- EBIT NA 13.3% 26.4% --- Net Income NA 38.7% 37.1% ---
(a) Source: KING management. Based on 8 months actual and 1 month projected results. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 21 KING HISTORICAL BALANCE SHEET (dollars in thousands)
SEPTEMBER 30, 1995 1996 1997 (a) --------- --------- --------- ASSETS Cash and Cash Equivalents $52,399 $59,045 $37,630 Accounts Receivable, Net 56,032 58,241 74,835 Inventories 18,854 20,042 21,303 Other Current Assets 15,156 6,860 11,968 --------- --------- --------- Total Current Assets 142,441 144,188 145,736 PP&E, Net 62,276 65,224 74,303 Intangibles 13,968 13,541 27,370 Other Non-Current Assets 25,041 30,440 33,977 --------- --------- --------- Total Non-Current Assets 101,285 109,205 135,650 --------- --------- --------- TOTAL ASSETS $243,726 $253,393 $281,386 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Expenses $29,002 $33,766 $38,334 Current Portion of L-T Debt 0 0 134 Revolver -- -- -- Other Current Liabilities 4,026 3,088 2,594 --------- --------- --------- Total Current Liabilities 33,028 36,854 41,062 Deferred Taxes 374 5,065 9,516 Other Non-Current Liabilities 0 396 534 --------- --------- --------- Total Liabilities 33,402 42,315 51,112 --------- --------- --------- Stockholders' Equity 210,324 211,078 230,274 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $243,726 $253,393 $281,386 ========= ========= =========
(a) Source: KING management. Based on 8 months actual and 1 month projected results. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 22 SUMMARY OF ANALYST RESEARCH - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 23 SUMMARY OF ANALYST RESEARCH ON KING
Report 1997 1997 Long Term Financial Institution (Analyst) Stock Price Recommendation Date Estimate Estimate Growth Rate - ------------------------------- ----------- -------------- ---- -------- -------- ----------- Bear, Stearns & Co. (F. Wise) $17.96 Neutral 07/21/97 $0.94 $1.06 17% Brean Murray (P. Putnam) $17.71 Hold 07/18/97 $0.94 $1.05 15% BT Alex. Brown (A. Jay) $18.15 Buy 07/17/97 $0.93 $1.07 20% - -------------------------------------------------------------------------------------------------------------- I/B/E/S Inc. $18.63 -- 09/30/97 $0.94 $1.06 17% - --------------------------------------------------------------------------------------------------------------
- -- BEAR, STEARNS (07/21/97) -- KING reported 2Q EPS of $0.23, $0.02 above our estimates. Sales were up 17% over 1996 and slightly above our estimate despite a loss of $1.5 million due to foreign currency exchange. Lower-than-expected SG&A expenses also contributed to the EPS surprise. KING saw the first hints of erosion in its business with Premier in the second quarter, but still far below what had been expected and budgeted for since the contract was lost to a competitor last fall. KING actually saw revenue increases year-over-year in Acute care, thanks to aggressive marketing and replacement sales from other hospitals. Despite higher than expected sales into Premier, we are forecasting hospital sales to increase by only 2% total over the next two years, partly as a result of the loss of the Premier contract and partly as a result of a shrinking hospital market and price pressures. - -- BREAN MURRAY (07/18/97) -- Fueled by better than expected revenue growth, KING reported Q2 EPS of $0.23 versus our estimate of $0.21. Strong domestic sales of the Company's wound closure device (V.A.C.), continued improvement in domestic specialty patient surface revenues, including compared to last year, an incremental $2.0 million in revenues from the H.F. Systems acquisition, accounted for the revenue strength. We would continue to hold KING pending the outcome of this evaluation of strategic alternatives. - -- BT Alex. Brown (7/17/97) -- KING reported solid 2Q 1997 results, slightly exceeding our revenue and EPS estimates. The Company continues to capitalize on its technically rich product line to penetrate new accounts, without the need to bolster an already humming distribution infrastructure. Our investment thesis remains intact as KING continues to leverage its top-of-the-line, proprietary therapeutic beds to enter new accounts and gain share. The revenue growth can be leveraged into faster EPS growth because KING's distribution infrastructure is already in place. Management reported that the loss of the Premier hospital group purchasing contract to a competitor late in 1995 has not had a significant adverse impact on KING's business as pricing has not eroded. While KING has seen some leakage of business from Premier accounts, gains through a new preferred vendor relationship with the VHA purchasing group alliance are offsetting them. - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 24 OWNERSHIP PROFILE - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 25 OWNERSHIP PROFILE
PERCENT OF INSTITUTIONAL HOLDINGS (a) SHARES HELD OUTSTANDING - -------------------------- ----------- ----------- Richard C. Blum & Associates, L.P. 4,040,250 9.5% Wellington Management 1,787,400 4.2% Wanger Asset Management L.P. 1,448,000 3.4% Neuberger & Berman Institutional Investment 1,445,300 3.4% Edgemont Asset Management Corp 1,200,000 2.8% Neuberger & Berman Management 697,400 1.6% Barclays Bank PLC 552,937 1.3% Cullen / Frost Bankers Inc. 439,473 1.0% Roger H. Jenswold & Co. 410,068 1.0% Investco Management & Research 399,400 0.9% Dimensional Fund Advisors 388,900 0.9% Mellon Bank Corporation 380,643 0.9% Artisan Partners, L.P. 303,200 0.7% Putnam Investment Management 270,262 0.6% Guardian Investor Services 217,700 0.5% Luther King Capital Management 207,200 0.5% Morgan Stanley, Dean Witter 181,800 0.4% Peoples Bank (CT) 175,000 0.4% Chancellor LGT Asset Management 171,200 0.4% California State Teachers Retirement 165,087 0.4% Vanguard Group 163,100 0.4% Franklin Resources, Inc. 150,000 0.4% Grantham Mayo Van Otter 139,700 0.3% ANB Investment Management & Trust 126,400 0.3% First Union Corporation 102,500 0.2% Others 690,515 1.6% ----------- ----------- TOTAL 16,253,435 38.1% PERCENT OF OPTIONS INSIDER HOLDINGS (b) SHARES HELD (c) OUTSTANDING (c) HELD (d) - -------------------- --------------- --------------- -------- James D. Leininger, M.D. (Chairman) 21,123,146 49.6% NA Peter A. Leininger, M.D. (Executive 1,438,694 3.4% NA Vice President) Raymond R. Hannigan (President & CEO) 387,200 0.9% 340,000 Sam A. Brooks (Director) 69,000 0.2% 107,500 Frank A. Ehmann (Director) 2,500 0.0% 20,000 Wendy L. Gramm, Ph.D. (Director) 4,000 0.0% 20,000 Bernhard T. Mittemeyer, M.D. (Director) 1,200 0.0% 24,000 Christopher M. Fashek (President, KCTS) 16,600 0.0% 30,350 Frank DiLazzaro (President, KCII) 20,000 0.0% 20,284 --------------- --------------- -------- TOTAL 23,090,312 54.2% 541,850 INSTITUTIONAL HOLDINGS 16,253,435 38.1% INSIDER HOLDINGS 23,090,312 54.2% RETAIL AND OTHER HOLDINGS 3,280,730 7.7% --------------- --------------- TOTAL SHARES OUTSTANDING (e) 42,624,477 100.0% =============== ===============
- ---------- (a) Source: CDA Spectrum as of June 1997, except for Richard C. Blum & Associates, L.P. which is taken from 13-D amendment, dated July 10, 1997. (b) Source: Company Proxy dated May 13, 1997. (c) Excludes outstanding options. Excludes 143,014 shares (including 118,014 options) held by Bianca Rhodes, former CFO of the Company. (d) Includes options exercisable within sixty days. (e) Source: Company management. - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 26 LIQUIDITY ANALYSIS - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 27 LIQUIDITY ANALYSIS OF KING SHARES OUTSTANDING 42,624,477 FLOAT (a) 19,534,165 ADJUSTED FLOAT (b) 8,915,815 AVERAGE DAILY TRADING VOLUME 30-Day 85,807 60-Day 71,443 90-Day 78,594 180-Day 79,846 AVERAGE DAILY TURNOVER (c) 30-Day 0.4% 60-Day 0.4% 90-Day 0.4% 180-Day 0.4% AVERAGE DAILY ADJUSTED TURNOVER (d) 30-Day 1.0% 60-Day 0.8% 90-Day 0.9% 180-Day 0.9% NUMBER OF ACTIVE MARKET MAKERS 18 NUMBER OF RESEARCH ANALYSTS 6
STOCK PRICE AND VOLUME HISTORY [GRAPH]
DIVESTITURE DAYS BASED ON 25% OF AVERAGE DAILY TRADING VOLUME --------------------------------------------- CURRENT COMPANY HOLDINGS 30-DAY 60-DAY 90-DAY 180-DAY ------- --------- ------ ------ ------ ------- Richard C. Blum & Associates, L.P. 4,040,250 188.3 226.2 205.6 202.4 Wellington Management 1,787,400 83.3 100.1 91.0 89.5 Wanger Asset Management L.P. 1,448,000 67.5 81.1 73.7 72.5 Neuberger & Berman Institutional Investment 1,445,300 67.4 80.9 73.6 72.4 Edgemont Asset Management Corp 1,200,000 55.9 67.2 61.1 60.1 Neuberger & Berman Management 697,400 32.5 39.0 35.5 34.9 Barclays Bank PLC 552,937 25.8 31.0 28.1 27.7 Cullen/Frost Bankers Inc. 439,473 20.5 24.6 22.4 22.0 Roger H. Jenswold & Co. 410,068 19.1 23.0 20.9 20.5 Investco Management & Research 399,400 18.6 22.4 20.3 20.0
- ---------------- (a) Float represents Shares Outstanding less Insider Holdings. (b) Adjusted Float represents Float less five largest Institutional Holders (Neuberger Berman holdings are consolidated). (c) Average Daily Turnover represents Average Daily Trading Volume divided by Outstanding Float. (d) Adjusted Daily Turnover represents Average Daily Trading Volume divided by Adjusted Float. - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated -24- 28 ANALYSIS OF SELECTED PUBLIC COMPANIES - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 29 SELECTED PUBLICLY TRADED COMPANIES
SELECTED PUBLICLY TRADED KING COMPANY MULTIPLES TRANSACTION ------------------------- MULTIPLES MEAN RANGE ----------- ----- ------------------ VALUATION BASED ON LATEST TWELVE MONTHS STATISTICS (a) (b) LTM REVENUES 2.8x 2.1x 0.8x - 4.4x LTM EBITDA 9.9x 12.0x 8.1x - 21.9x LTM EBIT 13.3x 16.0x 10.3x - 27.4x LTM NET INCOME 22.0x 24.0x 16.6x - 41.0x VALUATION BASED ON PROJECTED STATISTICS CAL. 1997 NET INCOME (I/B/E/S) 20.5x 22.3x 16.8x - 33.9x CAL. 1998 NET INCOME (I/B/E/S) 18.2x 18.6x 14.4x - 28.2x CAL. 1998 NET INCOME (CASE ONE) (c) 15.2x 18.6x 14.4x - 28.2x CAL. 1998 NET INCOME (CASE TWO) (c) 17.6x 18.6x 14.4x - 28.2x
(a) Implied valuation based on revenues, EBITDA and EBIT are adjusted by adding cash of $38.4 and subtracting debt of $0.5. (b) LTM as of 06/30/97. (c) KING management estimates. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 30 SELECTED PUBLICLY TRADED COMPANIES (dollars in millions, except per share data)
MARKET STATISTICS ------------------------------------------- Stock Price Equity Enterprise Company 09/30/97 Value Value - ----------------------------------------------------------------------------- Becton, Dickinson & Company $47.88 $6,133.7 $6,806.5 C.R. Bard, Inc. $34.00 $1,979.0 $2,101.1 Hillenbrand Industries, Inc. $45.06 $3,115.0 $3,069.0 Invacare Corporation $23.50 $719.8 $887.2 Steris Corporation $41.13 $1,468.8 $1,479.2 Stryker Corporation $43.69 $4,292.5 $4,192.2 Sunrise Medical Inc. $15.63 $301.5 $498.6 - ----------------------------------------------------------------------------- MEAN: $2,572.9 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- KING $19.25 $853.0 $815.2 - -----------------------------------------------------------------------------
VALUATION BENCHMARKS ------------------------------------------------------------------------------------------------- Enterprise Value as a Multiple of Equity Value as a Multiple of ---------------------------------- ------------------------------------------------------------- Company Revenues EBITDA EBIT Training EPS Cal'97 EPS Cal'98 EPS Book Value - ---------------------------------------------------------------------------------------------------------------------------------- Becton, Dickinson & Company 2.4x 10.3x 15.0x 21.1x 19.2x 16.9x 4.6x C.R. Bard, Inc. 1.7x 8.1x 10.3x 16.6x 17.8x 15.8x 3.3x Hillenbrand Industries, Inc. 1.8x 8.6x 12.0x 20.8x 19.7x 17.1x 3.9x Invacare Corporation 1.4x 10.3x 13.0x 17.7x 16.8x 14.4x 2.8x Steris Corporation 2.4x 14.1x 17.0x 27.1x 23.8x 19.2x 4.8x Stryker Corporation 4.4x 21.9x 27.4x 41.0x 33.9x 28.2x 7.7x Sunrise Medical Inc. 0.8x 10.5x 17.5x NM 25.2x 18.6x 1.1x - ---------------------------------------------------------------------------------------------------------------------------------- MEAN: 2.1x 12.0x 16.0x 24.0x 22.3x 18.6x 4.0x - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- KING 2.8x 9.9x 13.3x 22.0x 20.5x 18.2x 3.8x - ----------------------------------------------------------------------------------------------------------------------------------
GROWTH RATES ------------------------------------------------------------------------------------------------- Historical (Most Recent Qtr.) Projected Calendar Year EPS ---------------------------- ------------------------------------------------ 1998 P/E to Company Revenues EPS 1996 to 1997 1997 to 1998 3-5 Year I/B/E/S Growth Rate - ---------------------------------------------------------------------------------------------------------------------------------- Bectonton, Dickinson & Company 2.0% -7.1% 14.0% 14.1% 13.8% 122.3% C.R. Bard, Inc. 3.0% -4.2% 3.8% 12.6% 11.7% 135.2% Hillenbrand Industries, Inc. 0.5% 12.5% 12.2% 15.0% 15.1% 113.4% Invacare Corporation 3.7% 3.4% 9.4% 16.4% 15.8% 91.2% Steris Corporation -7.7% -25.1% 38.6% 24.2% 21.9% 87.6% Stryker Corporation 10.0% 20.9% 19.4% 20.2% 19.5% 144.5% Sunrise Medical Inc. -6.6% NM 31.9% 35.5% 15.0% 124.0% - ---------------------------------------------------------------------------------------------------------------------------------- MEAN: 0.7% 0.1% 18.5% 19.7% 16.1% 116.9% - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- KING 16.7% 28.9% 9.3% 12.8% 17.3% 105.0% - ----------------------------------------------------------------------------------------------------------------------------------
MARGINS ------------------------------------------- Net Company EBITDA EBIT Income - ----------------------------------------------------------------------------- Becton, Dickinson & Company 23.6% 16.3% 10.7% C.R. Bard, Inc. 21.4% 16.8% 9.6% Hillenbrand Industries, Inc. 20.9% 15.0% 8.8% Invacare Corporation 13.4% 10.6% 6.3% Steris Corporation 17.0% 14.2% 8.4% Stryker Corporation 20.0% 16.1% 10.8% Sunrise Medical Inc. 7.2% 4.3% 0.2% - ----------------------------------------------------------------------------- MEAN: 17.7% 13.3% 7.8% - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- KING 28.8% 21.4% 13.6% - -----------------------------------------------------------------------------
PROJECT ROYALTY [BT Alex. Brown Incorporated Logo] 31 SELECTED PUBLICLY TRADED COMPANIES (dollars in millions, except per share data)
MARKET STATISTICS ---------------------------------------------------------- Stock 52-Week Price ------------ Price Change Price as a % Company 09/30/9 High(a) Low(a) Last Year of High - ------------------------------------------------------------------------------- Becton, Dickenson & Company $47.88 $55.63 $37.00 9.4% 86.1% C.R. Bard, Inc. $34.00 $39.00 $25.88 11.6% 87.2% Hillenbrand Industries, Inc. $45.06 $48.63 $33.88 25.4% 92.7% Invacare Corporation $23.50 $30.00 $16.50 -15.9% 78.3% Steris Corporation $41.13 $44.13 $22.63 21.4% 93.2% Stryker Corporation $43.69 $45.31 $24.25 45.5% 96.4% Sunrise Medical Inc. $15.63 $16.88 $ 9.50 - 1.6% 92.6% - ------------------------------------------------------------------------------- MEAN: 13.7% 89.5% - ------------------------------------------------------------------------------- KING: $19.25 $19.94 $11.38 34.7% 96.6% - -------------------------------------------------------------------------------
BALANCE SHEET STATISTICS - ------------------------------------------------------------------------------- Cash and Total Equivalents Assets Total Debt Book Value - ------------------------------------------------------------------------------- Becton, Dickinson & Company $155.1 $3,038.0 $828.0 $1,342.3 C.R. Bard, Inc. $ 75.7 $1,327.4 $197.8 $ 607.2 Hillenbrand Industries, Inc. $312.0 $3,542.0 $266.0 $ 802.0 Invacare Corporation $ 9.1 $ 522.8 $176.6 $ 255.2 Steris Corporation $ 25.4 $ 539.0 $ 35.9 $ 306.0 Stryker Corporation $302.7 $ 938.9 $147.7 $ 560.6 Sunrise Medical Inc. $ 0.7 $ 619.6 $197.8 $ 274.4 - ------------------------------------------------------------------------------- MEAN: - ------------------------------------------------------------------------------- KING: $ 38.4 $ 271.3 $ 0.5 $ 222.5 - -------------------------------------------------------------------------------
OPERATING DATA (LATEST TWELVE MONTHS) - ------------------------------------------------------------------------------- Company Revenues EBITDA EBIT Net Income - ------------------------------------------------------------------------------- Becton, Dickinson & Company $2,792.7 $659.5 $454.6 $297.9 C.R. Bard, Inc. $1,214.7 $260.5 $204.0 $117.2 Hillenbrand Industries, Inc. $1,698.0 $355.0 $255.0 $149.0 Invacare Corporation $ 642.4 $ 86.1 $ 68.3 $ 40.4 Steris Corporation $ 615.1 $104.7 $ 87.2 $ 51.8 Stryker Corporation $ 954.6 $191.3 $153.3 $102.8 Sunrise Medical Inc. $ 660.2 $ 47.7 $ 28.5 $ 1.6 - ------------------------------------------------------------------------------- MEAN: $1,225.4 $243.5 $178.7 $108.7 - ------------------------------------------------------------------------------- KING: $ 286.2 $ 82.4 $ 61.4 $ 38.8 - -------------------------------------------------------------------------------
EPS ESTIMATES - ------------------------------------------------------------------------------- Company Cal '97 Cal '98 - ------------------------------------------------------------------------------- Becton, Dickinson & Company $2.49 $2.84 C.R. Bard, Inc. $1.91 $2.15 Hillenbrand Industries, Inc. $2.29 $2.63 Invacare Corporation $1.40 $1.63 Steris Corporation $1.73 $2.14 Stryker Corporation $1.29 $1.55 Sunrise Medical Inc. $0.62 $0.84 - ------------------------------------------------------------------------------- MEAN: $1.67 $1.97 - ------------------------------------------------------------------------------- KING: $0.94 $1.06 - -------------------------------------------------------------------------------
CAPITALIZATION - ------------------------------------------------------------------------------- Total Debt/ Total Debt/ Total Debt/ Book Value Capitalization EBITDA - ------------------------------------------------------------------------------- Becton, Dickinson & Company 61.7% 38.2% 1.3 x C.R. Bard, Inc. 32.6% 24.6% 0.8 x Hillenbrand Industries, Inc. 33.2% 24.9% 0.7 x Invacare Corporation 69.2% 40.9% 2.1 x Steris Corporation 11.7% 10.5% 0.3 x Stryker Corporation 26.3% 20.9% 0.8 x Sunrise Medical Inc. 72.1% 41.9% 4.2 x - ------------------------------------------------------------------------------ MEAN: 43.8% 28.8% 1.4 x - ------------------------------------------------------------------------------- KING: 0.2% 0.2% 0.0 x - ------------------------------------------------------------------------------- (a) In intraday trading.
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 32 ANALYSIS OF PRECEDENT TRANSACTIONS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 33 SELECTED MERGER AND ACQUISITION TRANSACTIONS
KING SELECTED MERGERS AND ACQUISITIONS TRANSACTION ------------------------------------ MULTIPLES(a) MEAN RANGE ------------ ------ --------------------- VALUATION BASED ON LATEST TWELVE MONTHS (b) (c) LTM REVENUES 2.8x 1.5x 0.9x - 2.0x LTM EBITDA 9.9x 11.2x 8.8x - 13.4x LTM EBIT 13.3x 15.5x 11.3x - 21.4x LTM NET INCOME 22.0x 28.4x 19.0x - 47.6x VALUATION BASED ON PROJECTED STATISTICS FORWARD NET INCOME (I/B/E/S) 18.7x 21.6x 19.5x - 25.8x
(a) Multiples based on purchase price of $19.25. (b) Implied valuation based on revenues, EBITDA and EBIT are adjusted by adding cash of $38.4 and subtracting debt of $0.5. (c) LTM as of 06/30/97. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 34 SELECTED MERGER AND ACQUISITION TRANSACTIONS - ------------------------------------------------------------------------------- (dollars in thousands, except per share data) - -------------------------------------------------------------------------------
Equity Aggregate Date Target Company Purchase Purchase Ann. Acquiror Price Price(a) - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Sep-96 Aequitron Medical, Inc. $ 59,746 $ 58,891 Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. $ 400,000 $ 400,000 Advanced Medical, Inc. Dec-95 Amsco International, Inc. $ 669,124 $ 680,940 STERIS Corp. Jul-95 Arjo AB $ 325,000 $ 325,000 Getinge Industrier Jun-95 Bird Medical Technologies, Inc. $ 61,692 $ 76,998 Thermo Electron Corporation May-95 Puritan-Bennett Corporation $ 464,640 $ 546,284 Nellcor, Inc. Jul-94 Kendall International, Inc. $1,414,530 $1,623,318 Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. $ 73,600 $ 82,951 Marquette Electronics, Inc. MEAN: $ 433,542 $ 474,298 MEDIAN: $ 362,500 $ 362,500 LOW: $ 59,746 $ 58,891 HIGH: $1,414,530 $1,623,318
- --------------------------------------------------------------------------- Aggregate Purchase Price as a Multiple of Trailing: ----------------------------- Cash Oper. Revenue Flow Income - ---------------------------------------------------------------------------- Sep-96 Aequitron Medical, Inc. 1.5 x 11.9 x 15.7 x Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. 1.8 x 9.7 x NA Advanced Medical, Inc. Dec-95 Amsco International, Inc. 1.5 x 8.8 x 11.3 x STERIS Corp. Jul-95 Arjo AB 1.5 x NA 11.3 x Getinge Industrier Jun-95 Bird Medical Technologies, Inc. 1.5 x 13.4 x 21.4 x Thermo Electron Corporation May-95 Puritan-Bennett Corporation 1.6 x 12.7 x 19.9 x Nellcor, Inc. Jul-94 Kendall International, Inc. 2.0 x 9.3 x 12.0 x Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. 0.9 x 12.2 x 17.0 x Marquette Electronics, Inc. MEAN: 1.5 x 11.2 x 15.5 x MEDIAN: 1.5 x 11.9 x 15.7 x LOW: 0.9 x 8.8 x 11.3 x HIGH: 2.0 x 13.4 x 21.4 x
- ---------------------------------------------------------------------------- Equity Purchase Price as a Multiple of: - ---------------------------------------------------------------------------- Trailing Forward Latest Net Inc. Net Inc. Bk. Value - ---------------------------------------------------------------------------- Sep-96 Aequitron Medical, Inc. 24.8 x 19.9 x 3.6 x Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. 47.6 x NA NA Advanced Medical, Inc. Dec-95 Amsco International, Inc. 23.3 x NA 3.1 x STERIS Corp. Jul-95 Arjo AB 19.0 x NA NA Getinge Industrier Jun-95 Bird Medical Technologies, Inc. 40.1 x 25.8 x 3.3 x Thermo Electron Corporation May-95 Puritan-Bennett Corporation 29.4 x 19.5 x 3.7 x Nellcor, Inc. Jul-94 Kendall International, Inc. 21.9 x 21.0 x 4.9 x Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. 20.9 x NA 1.1 x Marquette Electronics, Inc. MEAN: 28.4 x 21.6 x 3.3 x MEDIAN: 24.0 x 20.5 x 3.4 x LOW: 19.0 x 19.5 x 1.1 x HIGH: 47.6 x 25.8 x 4.9 x
- ---------------------------------------------------------------------------- Premium to Market - ---------------------------------------------------------------------------- Day Month Prior Prior - ---------------------------------------------------------------------------- Sep-96 Aequitron Medical, Inc. 22.8% 48.3% Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. NA NA Advanced Medical, Inc. Dec-95 Amsco International, Inc. 13.8% 15.5% STERIS Corp. Jul-95 Arjo AB NA NA Getinge Industrier Jun-95 Bird Medical Technologies, Inc. 39.5% 89.5% Thermo Electron Corporation May-95 Puritan-Bennett Corporation 38.9% 65.2% Nellcor, Inc. Jul-94 Kendall International, Inc. 44.1% 50.6% Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. NA NA Marquette Electronics, Inc. MEAN: 31.8% 53.8% MEDIAN: 38.9% 50.6% LOW: 13.8% 15.5% HIGH: 44.1% 89.5%
(a) Defined as Equity Purchase Price plus debt less cash and equivalents. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 35 SELECTED MERGER AND ACQUISITION TRANSACTIONS - ------------------------------------------------------------------------------- (dollars in thousands, except per share data)
Equity Aggregate Date Target Company Purchase Total Purchase Ann. Acquiror Price Debt Cash Price (a) Sep-96 Aequitron Medical, Inc. $59,746 $2,288 $3,143 $58,891 Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. $400,000 NA NA $400,000 Advanced Medical, Inc. Dec-95 Amsco International, Inc. $669,124 $102,616 $90,800 $680,940 STERIS Corp. Jul-95 Arjo AB $325,000 NA NA $325,000 Getinge Industrier Jun-95 Bird Medical Technologies, Inc. $61,692 $15,886 $580 $76,998 Thermo Electron Corporation May-95 Puritan-Bennett Corporation $464,640 $82,806 $1,162 $546,284 Nellcor, Inc. Jul-94 Kendall International, Inc. $1,414,530 $222,709 $13,921 $1,623,318 Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. $73,600 $9,923 $572 $82,951 Marquette Electronics, Inc. - ----------------------------------------------------------------------------------------------------------- MEAN: $433,542 $72,705 $18,363 $474,298 MEDIAN: $362,500 $49,346 $2,153 $362,500 - ----------------------------------------------------------------------------------------------------------- LOW: $59,746 $2,288 $572 $58,891 HIGH: $1,414,530 $222,709 $90,800 $1,623,318 - -----------------------------------------------------------------------------------------------------------
Trailing ---------------------------------------------- Date Target Company Cash Oper. Net Forward Book Ann. Acquiror Revenues Flow Income Income Income Value Sep-96 Aequitron Medical, Inc. $ 38,478 $ 4,954 $ 3,750 $ 2,411 $ 3,002 $ 16,419 Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. $225,600 $41,200 NA $8,400 NA NA Advanced Medical, Inc. Dec-95 Amsco International, Inc. $464,624 $77,051 $60,462 $28,731 NA $216,639 STERIS Corp. Jul-95 Arjo AB $224,109 NA $28,707 $17,126 NA NA Getinge Industrier Jun-95 Bird Medical Technologies, Inc. $52,095 $5,726 $3,605 $1,539 $2,395 $18,980 Thermo Electron Corporation May-95 Puritan-Bennett Corporation $340,111 $42,911 $27,383 $15,793 $23,808 $124,172 Nellcor, Inc. Jul-94 Kendall International, Inc. $813,551 $174,436 $135,541 $64,629 $67,235 $287,967 Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. $93,584 $6,783 $4,884 $3,519 NA $67,845 Marquette Electronics, Inc. - --------------------------------------------------------------------------------------------------------------------------- MEAN: $281,519 $50,437 $37,762 $17,768 $24,110 $122,004 MEDIAN: $224,854 $41,200 $27,383 $12,096 $13,405 $96,009 - ---------------------------------------------------------------------------------------------------------------------------- LOW: $38,478 $4,954 $3,605 $1,539 $2,395 $16,419 HIGH: $813,551 $174,436 $135,541 $64,629 $67,235 $287,967 - ---------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------ (a) Defined as Equity Purchase Price plus debt less cash and equivalents.
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 36 SELECTED MERGER AND ACQUISITION TRANSACTIONS - ------------------------------------------------------------------------------- (dollars in thousands, except per share data)
Equity Aggregate Margins Date Target Company Purchase Purchase ----------------------------------- Ann. Acquiror Price Price(a) Cash Flow Operating Net Sep-96 Aequitron Medical, Inc. $59,746 $58,891 12.9% 9.7% 6.3% Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. $400,000 $400,000 18.3% NA 3.7% Advanced Medical, Inc. Dec-95 Amsco International, Inc. $669,124 $680,940 16.6% 13.0% 6.2% STERIS Corp. Jul-95 Arjo AB $325,000 $325,000 0.0% 12.8% 7.6% Getinge Industrier Jun-95 Bird Medical Technologies, Inc. $61,692 $76,998 11.0% 6.9% 3.0% Thermo Electron Corporation May-95 Puritan-Bennett Corporation $464,640 $546,284 12.6% 8.1% 4.6% Nellcor, Inc. Jul-94 Kendall International, Inc. $1,414,530 $1,623,318 21.4% 16.7% 7.9% Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. $73,600 $82,951 7.2% 5.2% 3.8% Marquette Electronics, Inc. MEAN: $433,542 $474,298 14.3% 10.3% 5.4% MEDIAN: $362,500 $362,500 12.9% 9.7% 5.4% - ---------------------------------------------------------------------------------------------------------------------- LOW: $59,746 $58,891 7.2% 5.2% 3.0% HIGH: $1,414,530 $1,623,318 21.4% 16.7% 7.9%
Historical Growth Date Target Company ----------------------- Percentage Accounting Ann Acquiror Revenue Earnings Cash Method Sep-96 Aequitron Medical, Inc. 24.9% 29.8% 0.0% Pooling Nellcor Puritan Bennett, Inc. Aug-96 Ivac Medical Systems, Inc. NA NA 100.0% Purchase Advanced Medical, Inc. Dec-95 Amsco International, Inc. -1.4% -30.2% 0.0% Purchase STERIS Corp. Jul-95 Arjo AB 7.7% -5.3% NA Pooling Getinge Industrier Jun-95 Bird Medical Technologies, Inc. 2.5% 29.7% 0.0% Pooling Thermo Electron Corporation May-95 Puritan-Bennett Corporation 5.8% -5.6% 0.0% Pooling Nellcor, Inc. Jul-94 Kendall International, Inc. 2.5% NA 0.0% Pooling Tyco International Ltd. Apr-94 Corometrics Medical Systems, Inc. -1.5% -30.9% 100.0% Purchase Marquette Electronics, Inc. MEAN: 5.8% -2.1% MEDIAN: 2.5% -5.4% - ----------------------------------------------------------------------- LOW: -1.5% -30.9% HIGH: 24.9% 29.8% - ------------------------------------------------------------------------ (a)Defined as Equity Purchase Price plus debt less cash and equivalent.
PROJECT ROYALTY BT Alex. Brown Incorporated 37 RECENT FINANCIAL BUYER TRANSACTIONS - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 38 SUMMARY OF RECENT FINANCIAL BUYER TRANSACTIONS IN THE HEALTH CARE INDUSTRY SELECTED FINANCIAL BUYER TRANSACTIONS IN THE HEALTH CARE INDUSTRY KING ------------------------------------ TRANSACTION MULTIPLES MEAN RANGE ----------- -------- ------------------------- LTM REVENUES 2.8 x 2.0 x 0.7 x - 4.3 x LTM EBITDA 9.9 x 10.0 x 8.6 x - 10.9 x LTM FREE CASH FLOW 15.2 x 16.2 x 15.9 x - 16.4 x LTM EBIT 13.3 x 13.7 x 12.2 x - 16.2 x LTM NET INCOME 22.0 x 24.1 x 19.4 x - 28.8 x ----------- -------- -------- --- ------- - -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 39 SUMMARY OF RECENT FINANCIAL BUYER TRANSACTIONS IN THE HEALTH CARE INDUSTRY (dollars in millions, except per share data)
Equity Purchase Enterprise Purchase Price Multiples of LTM Price Multiples of Date Target Company ------------------------------------------- ---------------------- Announced Acquiror Revenue EBITDA Free Cash Flow EBIT Net Income Book Value - --------- -------------- ------- ------ -------------- ---- ---------- ---------- 08/07/97 Fisher Scientific International, Inc. 0.7 x 9.6 x 16.4 x 13.8 x 25.5 x 2.8 x Thomas H. Lee Company 05/08/97 Living Centers of America, Inc. 1.0 x 8.6 x 15.9 x 12.4 x 19.4 x 2.3 x Apollo Management, L.P. 06/10/96 Community Health Systems, Inc. 2.2 x 10.9 x 16.4 x 16.2 x 28.8 x 4.3 x Forstmann Little & Co. 12/08/95 Transition Systems, Inc. 4.3 x 10.6 x NA 12.2 x 22.7 x 7.9 x Warburg Pincus Ventures, L.P. Premium to Market Price Date Target Company ------------------------ Announced Acquiror Day Prior 30 Day Prior - --------- -------------- --------- ------------ 08/07/97 Fisher Scientific International, Inc. 0.2% 10.9% Thomas H. Lee Company 05/08/97 Living Centers of America, Inc. 9.8% 13.3% Apollo Management, L.P. 06/10/96 Community Health Systems, Inc. 19.9% 18.9% Forstmann Little & Co. 12/08/95 Transition Systems, Inc. NA NA Warburg Pincus Ventures, L.P.
Mean: 2.0 x 10.0 x 16.2 x 13.7 x 24.1 x 4.3 x 10.0% 14.3% Median: 1.6 x 10.1 x 16.2 x 13.1 x 24.1 x 3.6 x 5.0% 12.1% High: 4.3 x 10.9 x 16.4 x 16.2 x 28.8 x 7.9 x 19.9% 18.9% Low: 0.7 x 8.6 x 15.9 x 12.2 x 19.4 x 2.3 x 0.2% 10.9%
- -------------------------------------------------------------------------------- PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 40 DISCOUNTED CASH FLOW ANALYSIS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 41 SUMMARY VALUATION DISCOUNTED CASH FLOW ANALYSIS
Per Share Valuation Range (a) --------------------- Case One $22.00 -- $30.00 Case Two $17.00 -- $23.00
(a) Assumes a 14.0-22.0% discount rate and a terminal value multiple range of 8.0x-10.0x EBITDA, rounded to nearest dollar. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 42 SUMMARY OF FINANCIAL PROJECTIONS
CAGR CAGR 1997E - 2001E 1994A - 1996A Case One Case Two ------------- -------- -------- Revenues 10.2% 15.2% 10.0% EBITDA 10.3% 24.3% 11.9% EBIT 19.7% 27.8% 12.0%
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 43 SUMMARY OF PROJECTIONS - REVENUES [graph] PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 44 SUMMARY OF PROJECTIONS - EBITDA [graph] PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 45 DISCOUNTED CASH FLOW ANALYSIS - CASE ONE (dollars in thousands, except per share data)
Fiscal Year Ended December 31, 1996 1997E (a) 1998E (a) 1999E (a) 2000E (a) 2001E (a) - ------------------------------ -------- -------- -------- -------- -------- -------- Revenue $269,881 $311,902 $361,398 $425,568 $492,982 $548,517 Growth Rate 10.9% 15.6% 15.9% 17.8% 15.8% 11.3% EBITDA $ 77,148 $ 93,321 $113,446 $146,279 $190,147 $222,664 EBITDA Margin 28.6% 29.9% 31.4% 34.4% 38.6% 40.6% EBIT 55,354 69,678 88,815 119,223 156,561 186,579 EBIT Margin 20.5% 22.3% 24.6% 28.0% 31.8% 34.0% EBIT After Tax (b) 33,212 41,807 53,289 71,534 93,937 111,948 plus: Depreciation & Amortization 21,794 23,643 24,631 27,056 33,586 36,085 less: Use of Non-cash Working Capital (Source) -- 4,918 3,821 9,866 11,537 9,233 less: Capital Expenditures 27,783 27,069 29,200 39,395 39,674 33,901 -------- -------- -------- -------- -------- -------- Unlevered Free Cash Flow $ 27,223 $ 33,464 $ 44,899 $ 49,329 $ 76,312 $104,898 ======== ======== ======== ======== ======== ========
PV Cash PV of Terminal Value as of 9/30/97 Plus: Discount Flows as of Multiple of 2001 EBITDA ($222.7 million) Net Cash Implied Equity Valuation Rate 9/30/97 8.0x 9.0x 10.0x @ 9/30/97 8.0x 9.0x 10.0x ------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 18.0% $ 199,152 $ 881,849 $ 992,080 $1,102,311 $ 36,937 $1,117,937 $1,228,168 $1,338,399 20.0% $ 191,053 $ 821,085 $ 923,720 $1,026,356 $ 36,937 $1,049,074 $1,151,710 $1,254,346 22.0% $ 183,513 $ 765,410 $ 861,086 $ 956,763 $ 36,937 $ 985,860 $1,081,536 $1,177,212
Discount Implied Equity Valuation per Share Rate 8.0x 9.0x 10.0x ----- --------- --------- --------- 18.0% $ 25.08 $ 27.47 $ 29.86 20.0% $ 23.58 $ 25.81 $ 28.04 22.0% $ 22.21 $ 24.28 $ 26.36
- ------------- (a) KING management estimates. (b) Assumes a 40% tax rate. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 46 DISCOUNTED CASH FLOW ANALYSIS - CASE TWO (dollars in thousands, except per share data)
Fiscal Year Ended December 31, 1996 1997E(a) 1998E(a) 1999E(a) 2000E(a) 2001E(a) ------------------------------ -------- -------- -------- -------- -------- -------- Revenue $269,881 $311,902 $342,991 $377,268 $414,847 $455,931 Growth Rate 10.9% 15.6% 10.0% 10.0% 10.0% 9.9% EBITDA $ 77,148 $ 93,321 $100,166 $113,418 $134,778 $146,408 EBITDA Margin 28.6% 29.9% 29.2% 30.1% 32.5% 32.1% EBIT 55,354 69,678 76,247 87,870 99,817 110,500 EBIT Margin 20.5% 22.3% 22.2% 23.3% 24.1% 24.2% EBIT After Tax (b) 33,212 41,807 45,748 52,722 59,890 66,300 plus: Depreciation & Amortization 21,794 23,643 23,919 25,548 34,960 35,909 less: Use of Non-cash Working Capital (Source) -- 4,918 327 4,188 5,473 5,496 less: Capital Expenditures 27,783 27,069 29,200 38,331 38,284 39,382 -------- -------- -------- -------- -------- -------- Unlevered Free Cash Flow $ 27,223 $ 33,464 $ 40,140 $ 35,751 $ 51,094 $ 57,331 ======== ======== ======== ======== ======== ========
PV Cash PV of Terminal Value as of 9/30/97 Plus: Discount Flows as of Multiple of 2001 EBITDA ($146.4 million) Net Cash Implied Equity Valuation Rate 9/30/97 8.0x 9.0x 10.0x @ 9/30/97 8.0x 9.0x 10.0x ------ ------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- 14.0% $ 158,852 $ 669,205 $ 752,855 $ 836,506 $ 36,937 $ 864,994 $ 948,644 $1,032,295 16.0% $ 152,741 $ 621,287 $ 698,948 $ 776,609 $ 36,937 $ 810,965 $ 888,626 $ 966,287 18.0% $ 147,053 $ 577,533 $ 649,725 $ 721,917 $ 36,937 $ 761,524 $ 833,715 $ 905,907
Discount Implied Equity Valuation per Share Rate 8.0x 9.0x 10.0x ---- ---- ---- ----- 14.0% $19.58 $21.40 $23.21 16.0% $18.41 $20.09 $21.78 18.0% $17.33 $18.90 $20.47
(a) Adjusted KING management estimates. (b) Assumes a 40% tax rate. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 47 PRO FORMA FINANCIAL STATEMENTS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 48 PRO FORMA BALANCE SHEET ADJUSTMENTS (dollars in thousands, except per share data)
ADJUSTMENTS ----------- 09/30/97 RECAPITALIZATION DEBT RECLASS PRO FORMA -------- ---------------- ------------ --------- ASSETS Cash and Cash Equivalents $ 37,630 ($ 23,000) $ 14,630 PP&E, Net 74,303 74,303 Intangibles 27,370 27,370 New Goodwill and Financing Costs 11,458 11,458 Other Non-Current Assets 33,977 0 33,977 --------- --------- ---- --------- Total Assets $ 281,386 ($ 11,542) $ 269,844 ========= ========= ==== ========= LIABILITIES Accounts Payable and Accrued Expense 38,334 38,334 Current Portion of L-T Debt 0 0 449 449 Revolver 0 18,841 0 18,841 Existing Long-Term Debt 0 0 0 0 New Long-Term Debt 0 500,000 (449) 499,551 Other Non-Current Liabilities 534 0 0 534 SHAREHOLDERS' EQUITY $ 230,274 ($530,384) ($300,110) --------- --------- ---- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 281,386 ($ 11,542) $ 269,844 ========= ========= ==== =========
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 49 KING PRO FORMA INCOME STATEMENT PROJECTIONS - CASE ONE (dollars in thousands, except per share data)
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, LTM AS OF -------------------------------------------------------------------------- 1997-2001 1996 09/30/97 1997E 1998E 1999E 2000E 2001E CAGR ---- -------- ----- ----- ----- ----- ----- ---- REVENUES $ 269,881 $294,489 $ 311,902 $ 361,398 $ 425,568 $ 492,982 $ 548,517 15.2% EBITDA 77,148 85,964 93,321 113,446 146,279 190,147 222,664 24.3% EBIT 55,354 63,394 69,340 87,458 117,866 155,204 185,222 27.8% NET INCOME $ 38,987 $ 43,669 $ 35,432 $ 28,091 $ 47,332 $ 71,480 $ 92,626 27.2% ========== ======== ========== ========== ========== ========== ========== MARGINS: EBITDA 28.6% 29.2% 29.9% 31.4% 34.4% 38.6% 40.6% EBIT 20.5% 21.5% 22.2% 24.2% 27.7% 31.5% 33.8% Net Income 14.4% 14.8% 11.4% 7.8% 11.1% 14.5% 16.9% GROWTH RATES: Revenue 10.9% -- 15.6% 15.9% 17.8% 15.8% 11.3% EBITDA 15.9% -- 21.0% 21.6% 28.9% 30.0% 17.1% EBIT 26.4% -- 25.3% 26.1% 34.8% 31.7% 19.3% Net Income 37.1% -- -9.1% -20.7% 68.5% 51.0% 29.6%
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 50 KING PRO FORMA BALANCE SHEET PROJECTIONS - CASE ONE (dollars in thousands, except per share data)
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, PRO FORMA ------------------------------------------------------------- 1996(a) 09/30/97 1997E 1998E 1999E 2000E 2001E ------- -------- ----- ----- ----- ----- ----- ASSETS Cash & Cash Equivalents $ 59,045 $ 14,630 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 Total Current Assets 144,188 122,736 106,236 115,176 130,725 147,346 160,918 --------- --------- --------- --------- --------- --------- --------- Total Assets $ 253,393 $ 269,844 $ 248,132 $ 261,674 $ 289,652 $ 312,506 $ 324,102 ========= ========= ========= ========= ========= ========= ========= LIABILITIES Total Current Liabilities 36,854 60,352 46,574 58,943 74,371 66,118 73,629 Total Debt 0 518,841 478,351 458,559 433,394 379,554 294,051 --------- --------- --------- --------- --------- --------- --------- SHAREHOLDERS' EQUITY $ 211,078 ($300,110) ($278,830) ($250,739) ($203,407) ($131,927) ($ 39,300) --------- --------- --------- --------- --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 253,393 $ 269,844 $ 248,132 $ 261,674 $ 289,652 $ 312,506 $ 324,102 ========= ========= ========= ========= ========= ========= ========= CAPITAL EXPENDITURES 27,783 NA 27,069 29,200 39,395 39,674 33,901 COVERAGE AND LEVERAGE RATIOS EBITDA / Interest NM 1.9X 2.1x 2.8x 3.7x 5.2x 7.2x (EBITDA - Cap Ex) / Interest NM NA 1.5x 2.1x 2.7x 4.1x 6.1x Total Debt / EBITDA 0.0X 6.0x 5.1x 4.0x 3.0x 2.0x 1.3x Total Debt / (EBITDA - Cap Ex) 0.0X NA 7.2x 5.4x 4.1x 2.5x 1.6x
- ---------- (a) Actual, not pro forma for the transaction. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 51 KING PRO FORMA INCOME STATEMENT PROJECTIONS - CASE TWO (dollars in thousands, except per share data)
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, LTM AS OF ---------------------------------------------------------------------- 1997-2001 1996 09/30/97 1997E 1998E 1999E 2000E 2001E CAGR ------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- REVENUES $ 269,881 $ 294,489 $ 311,902 $ 342,991 $ 377,268 $ 414,847 $ 455,931 10.0% EBITDA 77,148 85,964 93,321 100,166 113,418 134,778 146,408 11.9% EBIT 55,354 63,394 69,340 74,890 86,513 98,460 109,142 12.0% NET INCOME $ 38,987 $ 43,669 $ 35,432 $ 20,443 $ 27,994 $ 36,010 $ 43,789 5.4% ========== ========== ========== ========== ========== ========== ========== MARGINS: EBITDA 28.6% 29.2% 29.9% 29.2% 30.1% 32.5% 32.1% EBIT 20.5% 21.5% 22.2% 21.8% 22.9% 23.7% 23.9% Net Income 14.4% 14.8% 11.4% 6.0% 7.4% 8.7% 9.6% GROWTH RATES: Revenue 10.9% -- 15.6% 10.0% 10.0% 10.0% 9.9% EBITDA 15.9% -- 21.0% 7.3% 13.2% 18.8% 8.6% EBIT 26.4% -- 25.3% 8.0% 15.5% 13.8% 10.8% Net Income 37.1% -- -9.1% -42.3% 36.9% 28.6% 21.6%
PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 52 KING PRO FORMA BALANCE SHEET PROJECTIONS - CASE TWO (dollars in thousands, except per share data)
DECEMBER 3l, 1996(a) 09/30/97 ------------ --------- ASSETS Cash & Cash Equivalents $ 59,045 $ 14,630 Total Current Assets 144,188 122,736 --------- --------- Total Assets $ 253,393 $ 269,844 ========= ========= LIABILITIES Total Current Liabilities 36,854 60,352 Total Debt 0 518,841 --------- --------- SHAREHOLDERS' EQUITY $ 211,078 ($300,110) --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 253,393 $ 269,844 ========= ========= CAPITAL EXPENDITURES 27,783 NA COVERAGE AND LEVERAGE RATIOS EBITDA / Interest NM 1.9x (EBITDA - Cap Ex) / Interest NM NA Total Debt / EBITDA 0.0x 6.0x Total Debt / (EBITDA - CapEx) 0.0x NA
FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997E 1998E 1999E 2000E 2001E --------- --------- --------- --------- --------- ASSETS Cash & Cash Equivalents $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 Total Current Assets 106,236 110,722 118,768 128,593 139,231 --------- --------- --------- --------- --------- Total Assets $ 248,132 $ 257,933 $ 278,850 $ 292,145 $ 306,463 ========= ========= ========= ========= ========= LIABILITIES Total Current Liabilities Total Debt 46,574 57,983 71,586 87,198 78,040 478,351 463,425 452,364 425,166 390,419 SHAREHOLDERS' EQUITY --------- --------- --------- --------- --------- ($278,830) ($258,387) ($230,393) ($194,383) ($150,594) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY --------- --------- --------- --------- --------- $ 248,132 $ 257,933 $ 278,850 $ 292,145 $ 306,463 CAPITAL EXPENDITURES ========= ========= ========= ========= ========= 27,069 29,200 38,331 38,284 39,382 COVERAGE AND LEVERAGE RATIOS EBITDA / Interest 2.1x 2.4x 2.8x 3.5x 4.0x (EBITDA - Cap Ex) / Interest 1.5x 1.7x 1.9x 2.5x 2.9x Total Debt / EBITDA 5.1x 4.6x 4.0x 3.2x 2.7x Total Debt / (EBITDA - CapEx) 7.2x 6.5x 6.0x 4.4x 3.6x
(a) Actual, not pro forma for the transaction. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 53 PR0 FORMA COVERAGE RATIOS CASE ONE:
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, LTM AS OF ---------------------------------------------------------- 1996(a) 09/30/97(a) 1997E(a) 1998E 1999E 2000E 2001E ------------ ----------- -------- ----- ----- ----- ----- EBITDA/INTEREST 100% 1.7x 1.9x 2.1x 2.8x 3.7x 5.2x 7.2x 90% 1.6x 1.7x 1.9x 2.5x 3.4x 4.7x 6.4x 80% 1.4x 1.5x 1.7x 2.2x 3.0x 4.2x 5.7x 70% 1.2x 1.3x 1.5x 1.9x 2.6x 3.7x 5.0x 60% 1.0x 1.2x 1.3x 1.7x 2.2x 3.1x 4.3x 50% 0.9x 1.0x 1.0x 1.4x 1.9x 2.6x 3.6x
CASE TWO:
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, LTM AS OF ---------------------------------------------------------- 1996(a) 09/30/97(a) 1997E(a) 1998E 1999E 2000E 2001E ------------ ----------- -------- ----- ----- ----- ---- EBITDA/INTEREST 100% 1.7x 1.9x 2.1x 2.4x 2.8x 3.5x 4.0x 90% 1.6x 1.7x 1.9x 2.2x 2.5x 3.1x 3.6x 80% 1.4x 1.5x 1.7x 2.0x 2.3x 2.8x 3.2x 70% 1.2x 1.3x 1.5x 1.7x 2.0x 2.4x 2.8x 60% 1.0x 1.2x 1.3x 1.5x 1.7x 2.1x 2.4x 50% 0.9x 1.0x 1.0x 1.2x 1.4x 1.7x 2.0x
(a) Assumes interest on $518 million of debt. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 54 APPENDIX PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 55 PREMIUMS PAID ANALYSIS PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 56 PREMIUMS PAID
Premium to Market Value of ------------------- Date Transaction One Day Thirty Day Announced Target Name Acquiror Name (in millions) Prior Prior --------- ------------------------------- --------------------------- ------------- ------- ---------- 03/02/95 Abbey Healthcare Group Inc Homedco Group Inc $ 750.3 118.5% 118.5% 03/30/95 Circa Pharmaceuticals Inc Watson Pharmaceuticals Inc $ 621.1 57.5% 66.9% 04/20/95 Bruno's Inc Kohlberg Kravis Roberts & Co $1,160.7 28.9% 33.3% 07/17/95 Automotive Industries Holding Lear Seating Corp $ 613.1 3.9% 45.7% 07/27/95 Chipcom Corp 3Com Corp $ 680.9 34.7% 66.1% 08/10/95 Emphesys Financial Group Inc Humana Inc $ 642.8 13.6% 1.4% 08/24/95 Comdata Holdings Corp Ceridian Corp $ 845.3 20.2% 35.5% 09/20/95 Conner Peripherals Inc Seagate Technology Inc $1,164.6 23.7% 56.1% 09/25/95 National Gypsum Co (Delcor) CD Spangler $1,134.9 0.0% 0.9% 11/10/95 IES Industries Inc WPL Holdings Inc $1,120.7 40.9% 44.9% 11/13/95 Vigoro Corp IMC Global Inc $1,187.8 31.9% 34.2% 12/11/95 Maybelline Inc L'Oreal SA (Gesparal) $ 785.7 41.9% 93.4% 12/14/95 Alantec Corp FORE Systems Inc $ 779.1 20.6% 44.9% 12/18/95 AMSCO International Steris Corp $ 673.1 7.5% 15.7% 12/18/95 Cobra Golf Inc American Brands Inc $ 670.4 30.3% 32.7% 01/31/96 Tivoli Systems Inc IBM Corp $ 709.8 25.8% 41.8% 02/07/96 Pyxis Corp Cardinal Health Inc $ 907.3 53.3% 66.5% 02/13/96 Citicasters (American Finl Grp) Jacor Communications Inc $ 767.6 9.3% 28.3% 02/14/96 Helene Curtis Industries Inc Unilever NV $ 737.4 18.6% 71.8% 02/16/96 Circle K Corp Tosco Corp $ 983.0 45.8% 68.8% 02/16/96 Forum Group Inc Marriott International Inc $ 622.3 4.0% 44.4% 02/20/96 Davidson & Associates Inc CUC International Inc $1,145.0 72.3% 67.8% 02/20/96 Sierra On-Line Inc CUC International Inc $ 911.0 69.3% 90.4% 02/23/96 Cray Research Inc Silicon Graphics Inc $ 770.0 18.8% 20.6% 03/18/96 Athena Neurosciences Inc Elan Corp PLC $ 601.3 20.7% 40.4% 03/29/96 MediSense Inc Abbott Laboratories $ 821.6 48.8% 39.0% 04/15/96 Enserch Exploration Inc Shareholders $ 835.8 -22.0% -19.0% 04/25/96 Sterling Chemicals Inc Investor Group $ 798.4 29.7% 47.7% 06/06/96 Atria Software Inc Pure Software Inc $ 944.4 -2.8% 8.9% 06/11/96 Community Health Systems Inc Forstmann Little & Co $1,080.0 20.2% 18.9% 06/26/96 Kemet Corp Vishay Intertechnology Inc $ 854.2 30.4% -1.1%
Source: Securities Data Company, as of 09/30/97. Note: Includes non-financial company merger and acquisition transactions between $600 million and $1.2 billion. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 57 PREMIUMS PAID
Premium to Market Value of ------------------- Date Transaction One Day Thirty Day Announced Target Name Acquiror Name (in millions) Prior Prior - --------- ----------- ----------------------------- ------------- ------- ---------- 07/01/96 Renaissance Commun Corp Tribune Co $1,094.4 11.6% 20.5% 07/19/96 Rexene Corp Huntsman Corp $ 606.8 75.3% 56.1% 08/05/96 EZ Communications Inc American Radio Systems Corp $ 687.3 45.5% 89.2% 08/12/96 Atlantic Energy (AmeriGas) Delmarva Power & Light $ 951.1 5.3% 3.1% 08/26/96 Career Horizons Inc AccuStaff Inc $1,010.3 34.4% 64.0% 08/28/96 Red Lions Hotels (Red Lion Inn) Doubletree Corp $1,174.1 28.6% 31.4% 09/23/96 Diamond Shamrock Inc Ultramar Corp $ 860.9 -3.9% 5.7% 10/29/96 Carter-Wallace Inc Investor $ 927.8 68.4% 60.0% 11/18/96 Tyco Toys Inc Mattel Inc $ 737.4 73.7% 94.5% 01/07/97 American Medical Response Inc MedTrans Inc (Laidlaw Inc) $1,011.1 21.2% 36.8% 01/15/97 Value Health Inc Columbia/HCA Healthcare Corp $1,132.3 1.2% 0.0% 02/18/97 Chancellor Broadcasting Co Evergreen Media Corp $ 669.4 1.8% 13.4% 02/26/97 Petrolite Corp Baker Hughes Inc $ 710.9 62.7% 78.1% 02/27/97 Production Operators Corp Camco International Inc $ 609.6 22.9% 15.9% 03/25/97 Foodbrands America Inc IBP Inc $ 657.5 47.4% 61.4% 04/07/97 Mesa Inc Parker & Parsley Petroleum Co $ 938.7 -24.3% -27.5% 04/07/97 Pure Atria Corp Rational Software Corp $ 958.4 18.5% 23.8% 04/14/97 APL Ltd Neptune Orient Lines Ltd $ 878.5 55.8% 42.6% 04/14/97 Wyndham Hotel Corp Patriot American Hospitality $ 773.1 48.0% 48.9% 04/15/97 Total Petroleum (North Amer) Ltd Ultramar Diamond Shamrock $ 823.7 -1.8% 0.7% 04/21/97 Goulds Pumps Inc ITT Industries Inc $ 922.1 61.7% 60.9% 04/21/97 National Education Corp Harcourt General Inc $ 776.1 22.6% 40.0% 05/05/97 DecisionOne Holdings Corp DLJ Merchant Bkg Partners II $ 831.7 39.4% 49.6% 05/05/97 Logicon Inc Northrop Grumman Corp $1,027.5 75.7% 102.7% 05/06/97 BBN Corp GTE Corp $ 713.8 26.1% 64.5% 05/08/97 Living Centers of America Inc Apollo Management LP $1,048.2 17.8% 41.5% 05/23/97 Palmer Wireless Inc Price Communications Corp $ 870.4 45.1% 64.7% 05/28/97 CommNet Cellular Inc Blackstone Capital Partners $ 631.2 21.8% 39.8% 05/28/97 Fibreboard Corp Owens Corning $ 631.2 15.8% 49.7% 06/06/97 Telco Communications Group Inc Excel Communications Inc $1,046.5 32.9% 26.4% 06/09/97 Prime Service Inc Atlas Copco North America Inc $1,112.0 28.6% 31.3%
Source: Securities Data Company, as of 09/30/97. Note: Includes non-financial company merger and acquisition transactions between $600 million and $1.2 billion. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 58 PREMIUMS PAID
Premium to Market Value of ------------------ Date Transaction One Day Thirty Day Announced Target Name Acquiror Name (in millions) Prior Prior --------- ----------------------------- ------------------------------ ------------- ------- ---------- 06/20/97 Wheelabrator Technologies Inc Waste Management Inc $ 774.7 15.4% 18.8% 07/07/97 RoTech Medical Corp Integrated Health Services Inc $ 918.9 19.8% 22.2% 07/28/97 Freeport-McMoRan Inc IMC Global Inc $ 790.7 14.4% 5.2% 07/30/97 Amdahl Corp Fujitsu Ltd $ 924.8 5.0% 25.6% 08/07/97 Fisher Scientific Intl Inc Investor Group $1,021.6 -4.7% 6.0% 08/21/97 Boston Technology Inc Comverse Technology Inc $ 873.9 -0.3% 10.4% 09/03/97 Hudson Foods Inc Tyson Foods Inc $ 648.4 27.2% 29.6% 09/05/97 Medic Computer Systems Inc Misys PLC $ 915.8 7.7% 25.0% 09/08/97 CompuServe Inc (H&R Block) WorldCom Inc $1,185.9 1.4% 8.4% 09/11/97 Fieldcrest Cannon Inc Pillowtex Corp $ 768.2 1.5% 31.7% Mean: $ 860.6 27.6% 38.9% Median: $ 822.7 20.9% 34.9% High: $1,187.8 118.5% 118.5% Low: $ 601.3 -24.3% -27.5%
Source: Securities Data Company, as of 09/30/97. Note: Includes non-financial company merger and acquisition transactions between $600 million and $1.2 billion. PROJECT ROYALTY [LOGO] BT Alex. Brown Incorporated 59 Date Stock Price 11/l/94 6 11/2/94 5.75 11/3/94 5.75 11/4/94 5.563 11/7/94 5.625 11/8/94 5.938 11/9/94 6 11/10/94 5.75 11/11/94 5.75 11/14/94 5.938 11/15/94 5.875 11/16/94 5.688 11/17/94 5.719 11/18/94 5.5 11/21/94 5.5 11/22/94 5.625 11/23/94 5.5 11/24/94 5.5 11/25/94 5.375 11/28/94 5.75 11/29/94 6 11/30/94 5.75 12/1/94 5.813 12/2/94 6.75 12/5/94 5.688 12/6/94 5.5 12/7/94 5.531 12/8/94 5.438 12/9/94 5.438 12/12/94 5.375 12/13/94 5.75 12/14/94 5.5 12/15/94 5.75 12/16/94 5.75 12/19/94 5.625 12/20/94 5.75 12/21/94 5.75 12/22/94 6.25 12/23/94 6.625 12/26/94 6.625 12/27/94 6.875 12/28/94 6.875 12/29/94 6.875 12/30/94 6.875 1/2/95 6.875 1/3/95 6.563 1/4/95 6.688 1/5/95 6.75 60 1/6/95 6.625 1/9/95 6.938 1/10/95 6.875 1/11/95 7.125 1/12/95 6.875 1/13/95 6.875 1/16/95 7 1/17/95 6.75 1/18/95 7 1/19/95 6.75 1/20/95 7 1/23/95 6.938 1/24/95 7.313 1/25/95 7.188 1/26/95 6.938 1/27/95 7.125 1/30/95 7.25 1/31/95 7.125 2/1/95 7.125 2/2/95 7 2/3/95 6.875 2/6/95 7 2/7/95 7.063 2/8/95 7.063 2/9/95 7.375 2/10/95 7.25 2/13/95 7.5 2/14/95 7.375 2/15/95 8.25 2/16/95 8.125 2/17/95 7.625 2/20/95 7.625 2/21/95 7.75 2/22/95 7.625 2/23/95 8 2/24/95 7.75 2/27/95 7.75 2/28/95 7.75 3/1/95 7.75 3/2/95 7.375 3/3/95 7.5 3/6/95 7.5 3/7/95 7.5 3/8/95 7.5 3/9/95 7.5 3/10/95 7.5 3/13/95 7.375 3/14/95 7.375 3/15/95 7.375 61 3/16/95 7.625 3/17/96 7.5 3/20/95 7.375 3/21/95 7.375 3/22/95 7.5 3/23/95 7.25 3/24/95 7.25 3/27/95 7.5 3/28/95 8 3/29/95 7.875 3/30/95 7.75 3/31/95 7 4/3/95 7.563 4/4/95 7.75 4/5/95 7.5 4/6/95 7.375 4/7/95 7.5 4/10/95 7.875 4/11/95 8.125 4/12/95 8 4/13/95 8.125 4/14/95 8.125 4/17/95 8.125 4/18/95 7.875 4/19/95 7.75 4/20/96 7.875 4/21/95 7.75 4/24/95 7.75 4/25/95 7.75 4/26/95 7.5 4/27/95 7.5 4/28/95 7.5 5/1/95 7.625 5/2/95 7.5 5/3/95 7.5 5/4/95 7.375 5/5/95 7.625 5/8/95 7.5 5/9/95 7.375 5/10/95 7.375 5/11/95 7.375 5/12/95 7.375 5/15/95 6.75 5/16/95 6.813 5/17/95 7.25 5/18/95 7 5/19/95 6.875 5/22/95 7 5/23/95 7 62 5/24/95 6.875 5/25/95 6.75 5/26/95 7 5/29/95 7 5/30/95 7.125 5/31/95 7 6/1/95 6.875 6/2/95 7 6/5/95 7.125 6/6/95 7.125 6/7/95 7.25 6/8/95 7 6/9/95 6.875 6/12/95 6.875 6/13/95 7 6/14/95 6.876 6/15/95 7.125 6/16/95 6.875 6/19/95 7.25 6/20/95 7 6/21/95 6.75 6/22/95 6.625 6/23/95 7 6/26/95 6.875 6/27/95 7 6/28/95 6.875 6/29/95 7 6/30/95 7.125 7/3/95 7 7/4/95 7 7/5/95 7.25 7/6/95 7.25 7/7/95 7.5 7/10/95 8.125 7/11/95 8 7/12/95 8.25 7/13/95 8.125 7/14/95 8.125 7/17/95 7.875 7/18/95 7.875 7/19/95 7.875 7/20/95 8.313 7/21/95 8.25 7/24/95 8.25 7/25/95 8.375 7/26/95 8.375 7/27/95 8.375 7/28/95 8.625 7/31/95 8.5 63 8/1/95 8.75 8/2/95 9.125 8/3/95 9.125 8/4/95 8.75 8/7/95 9 8/8/95 8.875 8/9/95 9 8/10/95 9 8/11/95 9 8/14/95 9.125 8/15/95 9.125 8/16/95 9.125 8/17/95 9 8/18/95 9.063 8/21/95 9.125 8/22/95 9.063 8/23/95 9.125 8/24/95 9.125 8/25/95 9.25 8/28/95 9 8/29/95 9.25 8/30/95 9 8/31/95 9 9/1/95 9 9/4/95 9 9/5/95 9 9/6/95 9.25 9/7/95 9 9/8/95 9.25 9/11/95 10.25 9/12/95 10.375 9/13/95 10.5 9/14/95 10.875 9/15/95 11.563 9/18/95 11.5 9/19/95 11.375 9/20/95 11.25 9/21/95 11.25 9/22/95 11.375 9/25/95 11.25 9/26/95 11 9/27/95 10.875 9/28/95 11.25 9/29/95 11.625 1/12/95 11.75 10/3/95 11.625 10/4/95 11.75 10/1/95 11.875 10/6/95 11.875 64 10/9/95 11.5 10/10/95 11.375 10/11/95 11.25 10/12/95 11.5 10/13/95 11.875 10/16/95 12.5 10/17/95 13 10/18/95 11.625 10/19/95 11.125 10/20/95 11.25 10/23/95 11.125 10/24/95 11.125 10/25/95 11.25 10/26/95 11.125 10/27/95 11.375 10/30/95 11.125 10/31/95 11.125 11/1/95 11 11/2/95 11.5 11/3/96 11.125 11/6/95 10.625 11/7/95 10.844 11/8/95 10.375 11/9/95 10.125 11/10/95 10.375 11/13/95 10.25 11/14/95 10.125 11/15/95 10 11/16/95 10.25 11/17/96 11 11/20/95 10.875 11/21/95 11.5 11/22/95 11.375 11/23/95 11.375 11/24/95 11.5 11/27/95 11.5 11/28/95 11.375 11/20/95 11.5 11/30/95 11.375 12/1/95 11.188 12/4/95 11.375 12/5/95 11 12/6/95 11.25 12/7/95 11 12/8/95 11.125 12/11/95 11.125 12/12/95 11 12/13/95 11.125 12/14/95 11.313 65 12/15/95 11.25 12/18/95 11.25 12/19/95 11.375 12/20/95 11.75 12/21/95 11.875 12/22/95 11.875 12/25/95 11.875 12/26/95 11.875 12/27/95 11.875 12/28/95 12.125 12/29/95 12 1/1/96 12 1/2/96 12.063 1/3/96 11.875 1/4/96 12 1/5/96 11.875 1/8/96 11.625 1/9/96 12 1/10/96 11.875 1/11/96 12 1/12/96 11.75 1/15/96 12 1/16/96 12 1/17/96 11.75 1/18/96 11.625 1/19/96 11.375 1/22/96 10.625 1/23/96 10.438 1/24/96 10.438 1/25/96 11 1/26/96 11.375 1/29/96 11.375 1/30/96 12 1/31/96 12.375 2/1/96 11.75 2/2/96 12 2/5/96 12.25 2/6/96 12.125 2/7/96 11.875 2/8/96 12 2/9/96 12 2/12/96 12 2/13/96 11.875 2/14/96 11.875 2/15/96 12 2/16/96 12.25 2/19/96 12.25 2/20/96 12 2/21/96 11.875 66 2/22/96 13.188 2/23/96 13.375 2/26/96 13.875 2/27/96 13.75 2/28/96 13.875 2/29/96 13.625 3/1/96 13.125 3/4/96 13 3/5/96 13 3/6/96 13.25 3/7/96 13 3/8/96 12.75 3/11/96 12.5 3/12/96 11.75 3/13/96 12.125 3/14/96 12.063 3/15/96 12.375 3/18/96 13.625 3/19/96 13.875 3/20/96 13.75 3/21/96 13.25 3/22/96 13.375 3/25/96 13.75 3/26/96 13.625 3/27/96 13.625 3/26/96 13.438 3/29/96 13.375 4/1/96 13.25 4/2/96 13.25 4/3/96 13.25 4/4/96 13.125 4/5/96 13.125 4/8/96 13.25 4/9/96 13.125 4/10/96 13.5 4/11/96 13.5 4/12/96 13.625 4/15/96 13.875 4/16/96 14.125 4/17/96 14.375 4/18/96 15.75 4/19/96 16.625 4/22/96 15.625 4/23/96 15 4/24/96 13.625 4/25/96 14.625 4/26/96 14.5 ######## 15.125 ######## 14.75 67 5/1/96 15 5/2/96 15.315 5/3/96 15.25 5/6/96 15.563 5/7/96 15.125 5/8/96 15.125 5/9/96 16.375 5/10/96 15.625 5/13/96 15.875 5/14/96 16.125 5/15/96 16.5 5/16/96 16.625 5/17/96 17.375 5/20/96 17.125 5/21/96 16.188 5/22/96 16.5 5/23/96 16 5/24/96 16 5/27/96 16 5/28/96 17 5/29/96 17.188 5/30/96 17 5/31/96 17 6/3/96 16.875 6/4/96 16.625 6/5/96 16.5 6/6/96 17.25 6/7/96 16.875 6/10/96 16.125 6/11/96 15.875 6/12/96 16 6/13/96 16.375 6/14/96 16.375 6/17/96 16.75 6/18/96 16.25 6/19/96 16 6/20/96 15.5 6/21/96 15.75 6/24/96 16 6/25/96 16.125 6/26/96 16 6/27/96 15.875 6/28/96 15.5 7/1/96 15.625 7/2/96 16.063 1/3/96 16 7/4/96 16 7/5/96 15.75 7/8/96 15.625 68 7/9/96 15.625 7/10/96 15.5 7/11/96 15.5 7/12/96 15.125 7/15/96 14.875 7/16/96 14.625 7/17/96 14.688 7/18/96 14.625 7/19/96 13.5 7/22/96 13.625 7/23/96 13.875 7/24/96 14.75 7/25/96 15.156 7/26/96 14.875 7/29/96 14.375 7/30/96 13.875 7/31/96 14 8/1/96 14.25 8/2/96 14.125 8/5/96 14.438 8/6/96 14.125 8/7/96 14.125 8/8/96 14 8/9/96 14.125 8/12/96 13.875 8/13/96 13.875 8/14/96 13.875 8/15/96 14.25 8/16/96 14.625 8/19/96 15.563 8/20/96 15.375 8/21/96 14.875 8/22/96 14.938 8/23/96 14.938 8/26/96 15 8/27/96 14.875 8/28/96 14.588 8/29/96 14.75 8/30/96 14.875 9/2/96 14.875 9/3/96 14.563 9/4/96 14.875 9/5/96 15 9/6/96 14.625 9/10/96 14.75 9/10/96 14.5 9/11/96 14.875 9/13/96 15 69 9/16/96 14.938 9/17/96 14.5 9/18/96 14.625 9/19/96 14.125 9/20/96 13.563 9/23/96 13.625 9/24/96 14.313 9/25/96 14.375 9/26/96 14.625 9/27/96 14.439 9/30/96 14.438 10/l/96 14.375 10/2/96 14.375 10/3/96 14.75 10/4/96 14.75 10/7/96 15 10/8/96 14.625 10/9/96 14.375 10/10/96 14.25 10/11/96 14.25 10/14/96 14.25 10/15/96 14 10/16/96 14.063 10/17/96 13.875 10/18/96 13.188 10/21/96 12.5 1O/22/96 12.5 10/23/96 12.625 10/24/96 13.5 10/25/96 13.125 10/28/96 10.75 10/29/96 12.188 10/30/96 12.375 10/31/96 13.125 11/1/96 12.75 11/4/96 13.125 11/5/96 12.375 11/6/96 12.5 11/7/96 12.625 11/8/96 12.688 11/11/96 12.625 11/12/96 12.625 11/13/91 12.5 11/14/96 12.875 11/15/96 13.25 1/16/96 13.063 11/19/96 1.125 11/20/96 12.875 11/21/96 12.875 70 11/22/96 12.875 11/25/96 13 11/26/96 13.125 11/27/96 12.5 11/28/96 12.5 11/29/96 12.375 12/2/96 12 12/3/96 12.125 12/4/96 12.25 12/5/96 12 12/6/96 12.375 12/9/96 12.625 12/10/96 12.625 12/11/96 12.625 12/12/96 12.125 12/13/96 12 12/16/96 12 12/17/96 11.875 12/18/96 12 12/19/96 12.125 12/20/96 12.25 12/23/96 12.063 12/24/96 12.25 12/25/96 12.25 12/26/96 12.063 12/27/96 12.125 12/30/96 12.125 12/31/96 12.25 1/1/97 12.25 1/2/97 12.438 1/3/97 12.25 1/6/97 12.375 1/1/97 12.25 1/8/97 12.125 1/9/97 12.25 1/10/97 12.125 1/13/97 12.188 1/14/97 12.125 1/15/97 12.125 1/16/97 12 1/17/97 11.875 1/20/97 11.75 1/21/97 11.75 11/22/97 11.5 11/23/97 11.375 11/24/97 11.375 1/27/97 11.75 1/28/97 11.75 1/29/97 11.75 71 1/30/97 12 1/31/97 12.5 2/3/97 13.25 2/4/97 13.063 2/5/97 13 2/6/97 14.5 2/7/97 15.25 2/10/97 15.25 2/11/97 14.75 2/12/97 1.5 2/13/97 15.125 2/14/97 15 2/17/97 15 2/18/97 14.75 2/19/97 15 2/20/97 14.875 2/21/97 14.5 2/24/97 14.75 2/25/97 14.75 2/26/97 14.5 2/27/97 14.5 2/28/97 14.875 3/13/97 14.875 3/4/97 14.75 3/5/97 14.625 3/6/97 14.5 3/7/97 15 3/10/97 14.875 3/11/97 14.875 3/12/97 14.75 3/13/97 14.5 3/14/97 14.125 3/17/97 14.5 3/18/97 14.25 3/19/97 14.375 3/20/97 14.625 3/21/97 14.5 3/24/97 14.625 3/25/97 14.75 3/26/97 14.375 3/27/97 14.125 3/28/97 14.125 3/31/97 14.125 4/1/97 13.875 4/2/97 13.625 4/3/97 13.625 4/4/97 13.5 4/7/97 13.625 4/8/97 13.93887 72 4/9/97 14.18778 4/10/97 14.9345 4/11/97 14.43668 4/14/97 14.68559 4/15/97 14.68559 4/16/97 14.9345 4/17/97 14.9345 4/18/97 14.56114 4/21/97 14.68559 4/22/97 14.81005 4/23/97 14.43668 4/24/97 14.43668 4/25/97 14.56114 4/28/97 14.68559 4/29/97 14.81005 4/30/97 14.81005 5/1/97 14.56114 5/2/97 14.81005 5/5/97 14.68559 5/6/97 14.81005 5/7/97 14.81005 5/8/97 14.74782 5/9/97 14.68559 5/12/97 15.18341 5/13/97 15.05895 5/14/97 15.30786 5/15/97 15.68123 5/16/97 16.17904 5/19/97 16.5524 5/20/97 16.11682 5/21/97 17.21455 5/22/97 17.21455 5/23/97 16.59084 5/26/97 16.59084 5/27/97 16.84032 5/28/97 17.40167 5/29/97 17.21455 5/30/97 16.46609 6/2/97 16.96507 6/3/97 16.77795 6/4/97 16.71558 6/5/97 16.84032 6/6/97 16.59084 6/9/97 16.96507 6/10/97 17.21455 6/11/97 17.46404 6/12/97 17.58878 6/13/97 17.46404 6/16/97 17.21455 73 6/17/97 17.27693 6/18/97 17.46404 6/19/97 17.71353 6/20/97 18.2125 6/23/97 17.83827 6/24/97 18.2125 6/25/97 17.83827 6/26/97 18.08776 6/27/97 17.96301 6/30/97 17.96301 7/1/97 18.08776 7/2/97 18.02538 7/3/97 17.83827 7/4/97 17.83827 7/7/97 18.08776 7/8/97 17.96301 7/9/91 17.96301 7/10/97 17.96301 7/11/97 18.46199 7/14/97 17.96301 7/15/97 18.33724 7/16/97 18.2125 7/17/97 18.15013 7/18/97 17.71353 7/21/97 17.96301 7/22/97 17.96301 7/23/97 18.46199 7/24/97 18.2125 7/25/97 18.2125 7/28/97 18.2125 7/29/97 18.2125 7/30/97 18.2125 7/31/97 19 8/1/97 19.25 8/4/97 18.875 8/5/97 19.5 8/6/97 19.25 8/7/97 19 8/8/97 19.5 8/11/97 19.375 8/12/97 18.875 8/13/97 18.875 8/14/97 18.875 8/15/97 17.875 8/18/97 18.25 8/19/97 18.5 8/20/97 18.5 8/21/97 19 8/22/97 19.125 74 8/25/97 18.875 8/26/97 18.625 8/27/97 18.875 8/28/97 18.375 8/29/97 16.375 9/1/97 18.375 9/2/97 19 9/3/97 18.75 9/4/97 19 9/5/97 19.0625 9/8/97 19.0625 9/9/97 19 9/10/97 19.25 9/11/97 19.25 9/12/97 19 9/13/97 19 9/14/97 18.88 9/15/97 18.5 9/16/97 18.38 9/17/97 18.13 9/18/97 17.88 9/19/97 17.88 9/22/97 17.625 9/23/97 18 9/24/97 17.875 9/25/97 17.75 9/26/97 17.63 9/30/97 18.625 EX-99.C.1 6 TRANSACTION AGREEMENT 1 ================================================================================ TRANSACTION AGREEMENT Among FREMONT PURCHASER II, INC., RCBA PURCHASER I, L.P. and KINETIC CONCEPTS, INC. Dated as of October 2, 1997 ================================================================================ 2 TABLE OF CONTENTS
PAGE ARTICLE I THE OFFER SECTION 1.01. The Offer....................................................... 2 SECTION 1.02. Company Action.................................................. 3 ARTICLE II PURCHASE AND SALE SECTION 2.01. Purchase and Sale of the Shares................................. 3 SECTION 2.02. Purchase Price.................................................. 4 SECTION 2.03. Closing......................................................... 4 SECTION 2.04. Closing Deliveries by the Company............................... 4 SECTION 2.05. Closing Deliveries by Purchasers................................ 4 ARTICLE III THE MERGER SECTION 3.01. The Merger...................................................... 5 SECTION 3.02. Effective Time; Closing......................................... 5 SECTION 3.03. Effect of the Merger............................................ 6 SECTION 3.04. Articles of Incorporation; By-laws.............................. 6 SECTION 3.05. Directors and Officers.......................................... 6 SECTION 3.06. Conversion of Securities........................................ 6 SECTION 3.07. Employee Stock Options and Other Equity Awards.................. 7 SECTION 3.08. Dissenting Shares............................................... 8 SECTION 3.09. Surrender of Shares; Stock Transfer Books....................... 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 4.01 Organization and Qualification................................... 10 SECTION 4.02 Capitalization................................................... 10 SECTION 4.03 Authorization and Validity of Agreement.......................... 11 SECTION 4.04 Consents and Approvals........................................... 12 SECTION 4.05 No Violation..................................................... 12 SECTION 4.06 SEC Reports; Financial Statements................................ 13 SECTION 4.07 Company Statement; Schedule 13E-3; Schedule 13E-4................ 14 SECTION 4.08 Compliance with Law.............................................. 14 SECTION 4.09 Absence of Certain Changes....................................... 15
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Page SECTION 4.10 No Undisclosed Liabilities....................................... 15 SECTION 4.11 Litigation....................................................... 15 SECTION 4.12 Employee Benefit Matters......................................... 16 SECTION 4.13 Taxes............................................................ 18 SECTION 4.14 Intellectual Property............................................ 19 SECTION 4.15 Other Interests.................................................. 20 SECTION 4.16 Labor Matters.................................................... 20 SECTION 4.17 Brokers and Finders.............................................. 21 SECTION 4.18 Opinions of Financial Advisors................................... 21 SECTION 4.19 Real Property and Leases......................................... 21 SECTION 4.20 Material Contracts............................................... 22 SECTION 4.21 Certain Business Practices....................................... 23 SECTION 4.22 Accounting Treatment............................................. 24 SECTION 4.23 Stock Retention Agreements....................................... 24 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASERS SECTION 5.01 Organization and Qualification................................... 24 SECTION 5.02 Authorization and Validity of Agreement.......................... 25 SECTION 5.03 Consents and Approvals........................................... 25 SECTION 5.04 No Violation..................................................... 25 SECTION 5.05 Offer Documents; Company Statement; Schedule 13E-3; Schedule 13E-4............................................... 26 SECTION 5.06 Financing........................................................ 26 SECTION 5.07 Brokers and Finders.............................................. 27 SECTION 5.08 Operations of Purchasers......................................... 27 ARTICLE VI COVENANTS SECTION 6.01 Conduct of the Business of the Company Pending the Merger........ 27 SECTION 6.02 Access; Confidentiality.......................................... 29 SECTION 6.03 Preparation of Company Statement; Shareholders' Meeting; Further Actions.............................................. 29 SECTION 6.04 Public Announcements............................................. 31 SECTION 6.05 Recapitalization................................................. 31 SECTION 6.06 Acquisition Proposals............................................ 31
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PAGE SECTION 6.07 D&O Indemnification and Insurance................................ 32 SECTION 6.08 Employee Benefits................................................ 33 SECTION 6.09 Fees and Expenses................................................ 34 SECTION 6.10 Debt Financing................................................... 34 SECTION 6.11 Headquarters of the Company...................................... 35 SECTION 6.12 Available Cash................................................... 35 SECTION 6.13 Options.......................................................... 35 ARTICLE VII CONDITIONS SECTION 7.01. Conditions to the Stock Purchase................................ 35 SECTION 7.02. Conditions to the Merger........................................ 37 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination..................................................... 39 SECTION 8.02. Effect of Termination........................................... 40 SECTION 8.03. Fees............................................................ 40 SECTION 8.04. Amendment....................................................... 41 SECTION 8.05. Waiver.......................................................... 41 ARTICLE X GENERAL PROVISIONS SECTION 9.01. Non-Survival of Representations, Warranties and Agreements................................................... 41 SECTION 9.02. Notices......................................................... 41 SECTION 9.03. Certain Definitions............................................. 43 SECTION 9.04. Severability.................................................... 44 SECTION 9.05. Entire Agreement; Assignment.................................... 44 SECTION 9.06. Parties in Interest............................................. 44 SECTION 9.07. Specific Performance............................................ 44 SECTION 9.08. Governing Law................................................... 45 SECTION 9.09. Joint and Several Obligations................................... 45 SECTION 9.10. Headings........................................................ 45 SECTION 9.11. Counterparts.................................................... 45
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PAGE ANNEX A Conditions to the Offer EXHIBIT A Amended and Restated Articles of Incorporation of Kinetic Concepts, Inc. EXHIBIT B Amended and Restated By-Laws of Kinetic Concepts, Inc. EXHIBIT C Agreement Among Shareholders
6 Glossary of Defined Terms
Defined Term Location of Definition - ------------ ---------------------- 1987 Plan...................................................................... Section 3.07(a) 1995 Plan...................................................................... Section 3.07(a) 1997 Plan...................................................................... Section 3.07(a) Acquisition Proposal........................................................... Section 6.07 Action......................................................................... Section 6.08(e) affiliate...................................................................... Section 9.03(a) Agreement...................................................................... Preamble Agreement Among Shareholders................................................... Section 2.04(d) BT Alex. Brown................................................................. Section 1.02(a) Articles of Merger............................................................. Section 3.02 beneficial owner............................................................... Section 9.03(b) B Purchase Price............................................................... Section 2.02(b) B Purchaser.................................................................... Preamble B Shares....................................................................... Section 2.01(b) Board.......................................................................... Preamble business day................................................................... Section 9.03(c) Certificate of Merger.......................................................... Section 3.02 Certificates................................................................... Section 3.09(b) Closing........................................................................ Section 2.03 Closing Date................................................................... Section 2.03 Code........................................................................... Section 4.12(a) Company........................................................................ Preamble Company Benefit Plans.......................................................... Section 4.12(a) Company Disclosure Schedule.................................................... Section 4.01 Company SEC Documents.......................................................... Section 4.06 Company Statement.............................................................. Section 4.07 control........................................................................ Section 9.03(d) Costs.......................................................................... Section 6.08(a) Debt Financing................................................................. Section 5.06 Delaware Law................................................................... Recitals Directors Plan................................................................. Section 3.07(a) Dissenting Shares.............................................................. Section 3.08(a) D&O Insurance.................................................................. Section 6.08(c) Effective Time................................................................. Section 3.02 Environmental Laws............................................................. Section 4.08 Equity Financing............................................................... Section 6.09 EP Date........................................................................ Section 3.07(a) ERISA.......................................................................... Section 4.12(a) ESPP........................................................................... Section 4.12(f)
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Defined Term Location of Definition - ------------ ---------------------- Exchange Act................................................................... Section 3.07(a) Expenses....................................................................... Section 8.03(b) Fee............................................................................ Section 8.03(a) F Purchase Price............................................................... Section 2.02(a) F Purchaser.................................................................... Preamble F Shares....................................................................... Section 2.01(a) Foreign Benefit Plan........................................................... Section 4.12(e) Governmental Entity............................................................ Section 6.03(d) Governmental Order............................................................. Section 4.08 HMO............................................................................ Section 4.12(d) Houlihan Lokey................................................................. Section 1.02(a) HSR Act........................................................................ Section 4.04 Indemnified Parties............................................................ Section 6.08(a) Intellectual Property.......................................................... Section 4.14(d) IRS............................................................................ Section 4.12(a) Knowledge...................................................................... Section 9.03(e) Law............................................................................ Section 4.08 Licensed Intellectual Property................................................. Section 4.14(a) Liens.......................................................................... Section 4.19(b) Material Adverse Effect........................................................ Section 9.03(f) Material Contracts............................................................. Section 4.20(a) Maximum Number................................................................. Recitals Merger......................................................................... Recitals Merger Consideration........................................................... Section 3.06(a) Minimum Condition.............................................................. Section 1.01(a) Notice Date.................................................................... Section 3.07(a) Offer.......................................................................... Recitals Offer Documents................................................................ Section 1.01(c) Offer to Purchase.............................................................. Section 1.01(c) Option Plans................................................................... Section 3.07(a) Options........................................................................ Section 3.07(a) Original Expiration Date....................................................... Section 1.01(b) Owned Intellectual Property.................................................... Section 4.14(b) Paying Agent................................................................... Section 3.10(a) Permits........................................................................ Section 4.08 Permitted Liens................................................................ Section 4.19(b) Per Share Amount............................................................... Recitals Person......................................................................... Section 9.03(g) Preferred Stock................................................................ Section 4.02(a)
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Defined Term Location of Definition - ------------ ---------------------- Purchase Date.................................................................. Section 4.12(f) Purchaser Disclosure Schedule.................................................. Section 5.04 Purchaser Parties.............................................................. Section 6.08(e) Purchasers..................................................................... Preamble Schedule 13E-3................................................................. Section 1.01(c) Schedule 13E-4................................................................. Section 1.01(c) Scheduled Intellectual Property................................................ Section 4.14(a) SEC............................................................................ Section 1.01(c) Securities Act................................................................. Section 4.06(a) Shareholder.................................................................... Recitals Shareholder Support Agreement.................................................. Recitals Shares......................................................................... Recitals Shareholders' Meeting.......................................................... Section 6.03(c) Stock Purchase................................................................. Recitals Stock Retention Agreement...................................................... Section 4.23 subsidiary..................................................................... Section 9.03(h) Surviving Corporation.......................................................... Section 3.01 Tax............................................................................ Section 4.13(a) Texas Law...................................................................... Recitals Transactions................................................................... Section 1.01(c)
9 TRANSACTION AGREEMENT, dated as of October 2, 1997 (this "Agreement"), among FREMONT PURCHASER II, INC., a Delaware corporation ("F Purchaser"), RCBA PURCHASER I, L.P., a Delaware limited partnership ("B Purchaser" and, together with F Purchaser, "Purchasers") and KINETIC CONCEPTS, INC., a Texas corporation (the "Company"). WHEREAS, the Board of Managers or Directors, as the case may be, of each Purchaser and the Company has each determined that it is in the best interests of its members or shareholders, as the case may be, for Purchasers to acquire the Company upon the terms and subject to the conditions set forth herein; and WHEREAS, in furtherance of such acquisition, it is proposed that the Company shall make a cash tender offer (the "Offer") to acquire all of the shares of Common Stock, par value $.001 per share, of the Company (shares of Common Stock of the Company being collectively referred to as "Shares") for $19.25 per Share (such amount, or any greater amount per Share paid pursuant to the Offer, being referred to herein as the "Per Share Amount") net to the seller in cash, upon the terms and subject to the conditions of this Agreement and the Offer; and WHEREAS, the Board of Directors of the Company (the "Board") has unanimously approved the making of the Offer and resolved and agreed to recommend that holders of Shares tender their Shares pursuant to the Offer; and WHEREAS, also in furtherance of such acquisition, the Board of Managers or Directors, as the case may be, of each Purchaser and the Company has each approved the purchase by Purchasers and the sale by the Company (the "Stock Purchase") of 8,083,712 Shares for the Per Share Amount immediately prior to the consummation of the Offer; and WHEREAS, also in furtherance of such acquisition, the Board of Managers or Directors, as the case may be, of each Purchaser and the Company has each approved the merger (the "Merger") of Purchasers with and into the Company in accordance with the General Corporation Law and the Revised Uniform Limited Partnership Act of the State of Delaware ("Delaware Law") and the Texas Business Corporation Act ("Texas Law") following the consummation of the Offer and upon the terms and subject to the conditions set forth herein; and WHEREAS, F Purchaser and B Purchaser have entered into a support agreement with James Leininger (the "Shareholder"), dated as of the date hereof (the "Shareholder Support Agreement"), providing, subject to certain conditions, for (i) the grant by the Shareholder to F Purchaser of an option on up to 2,529,197 Shares at the Per Share Amount, subject to the conditions set forth therein, (ii) the grant by the Shareholder to B Purchaser of an option on up to 1,670,803 Shares at the Per Share Amount, subject to the conditions set forth therein, (iii) the tender of 13,792,211 Shares owned or controlled by the Shareholder pursuant to the Offer and (iv) the voting by the Shareholder of all Shares owned 10 2 or controlled by the Shareholder at the time of the Shareholders' Meeting in favor of the Merger. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Purchasers and the Company hereby agree as follows: ARTICLE I THE OFFER SECTION 1.01. The Offer. (a) Provided that this Agreement shall not have been terminated in accordance with Section 8.01 and none of the events set forth in Annex A hereto shall have occurred or be existing, the Company shall commence the Offer as promptly as reasonably practicable after the date hereof. The obligation of the Company to accept for payment and pay for Shares tendered pursuant to the Offer shall be subject to the condition (the "Minimum Condition") that at least 27,500,000 Shares shall have been validly tendered and not withdrawn prior to the expiration of the Offer and also shall be subject to the satisfaction of the other conditions set forth in Annex A hereto. The Per Share Amount shall, subject to applicable withholding of taxes, be net to the seller in cash, upon the terms and subject to the conditions of the Offer. Subject to the terms and conditions of the Offer (including, without limitation, the Minimum Condition), the Company shall pay, as promptly as practicable after expiration of the Offer, for all Shares validly tendered and not withdrawn. (b) Notwithstanding any other provision contained herein, including, without limitation, Section 1.01(a), the Company shall, at the direction of Purchasers, extend the Offer one or more times for a period not to exceed 10 business days in aggregate. (c) As soon as reasonably practicable on the date of commencement of the Offer, the Company shall file with the Securities and Exchange Commission (the "SEC") an Issuer Tender Offer Statement on Schedule 13E-4 (together with all amendments and supplements thereto, the "Schedule 13E-4") with respect to the Offer, and the Company, the Shareholder and Purchasers shall file with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 (together with all amendments and supplements thereto, the "Schedule 13E-3") with respect to the Offer, the Stock Purchase, the Merger and the other transactions contemplated by this Agreement (collectively, the "Transactions"). The Schedule 13E-4 and the Schedule 13E-3 shall contain or shall incorporate by reference an offer to purchase (the "Offer to Purchase") and forms of the related letter of transmittal, any related summary advertisement and any other documents related to the Offer (the Schedule 13E-4, the Schedule 13E-3, the Offer to Purchase and such other documents, together with all supplements and amendments thereto, being referred to herein collectively as the "Offer Documents"). Each Purchaser and the Company agree to correct promptly any 11 3 information provided by it for use in the Offer Documents which shall have become false or misleading, and Purchasers and the Company further agree to take all steps necessary to cause the Schedule 13E-4 and the Schedule 13E-3 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. SECTION 1.02. Company Action. (a) The Company hereby approves of and agrees to undertake the Offer and represents that (i) the Board, at a meeting duly called and held on October 1, 1997, has unanimously (A) determined that this Agreement and the Transactions are fair to and in the best interests of the holders of Shares, (B) approved and adopted this Agreement and the Merger and (C) recommended that the shareholders of the Company accept the Offer and approve and adopt this Agreement and the Merger, (ii) BT Alex. Brown Incorporated ("BT Alex. Brown") has delivered to the Board an opinion to the effect that, as of the date of this Agreement, the cash consideration to be received in the Offer and the Merger by the holders of Shares (other then B Purchaser and its affiliates and any other holders of Shares who will retain Shares following consummation of the Offer and the Merger) is fair from a financial point of view to such holders and (iii) Houlihan Lokey Howard & Zukin ("Houlihan Lokey") has delivered to the Board and Purchasers an opinion that the Company will be solvent following the purchase of Shares pursuant to the Offer and related matters. The Company agrees to include in the Offer Documents the recommendation of the Board described in the immediately preceding sentence. The Company has been advised by each of its directors and executive officers (other than the Shareholder and as otherwise provided in any Stock Retention Agreement) that they intend either to tender all Shares beneficially owned by them to the Company pursuant to the Offer or to vote such Shares in favor of the approval and adoption by the shareholders of the Company of this Agreement and the Merger. The Company has been advised by the Shareholder that the Shareholder intends to tender 13,792,211 Shares pursuant to the Offer and to vote any Shares then owned or controlled by him in favor of approval and adoption of this Agreement and the Merger. (b) The Company shall take all action as may be necessary to effect the Offer as contemplated by this Agreement, including, without limitation, promptly mailing the Offer Documents to the record holders and beneficial owners of the Shares. ARTICLE II PURCHASE AND SALE SECTION 2.01. Purchase and Sale of the Shares. (a) Upon the terms and subject to the conditions of this Agreement, at the Closing, the Company shall sell to F 12 4 Purchaser, and F Purchaser shall purchase from the Company, 7,179,066 Shares (the "F Shares"). (b) Upon the terms and subject to the conditions of this Agreement, at the Closing, the Company shall sell to B Purchaser, and B Purchaser shall purchase from the Company, 904,646 Shares (the "B Shares"). (c) In the event the Equity Financing is reduced pursuant to Section 5.06, the number of F Shares and B Shares to be purchased at the Closing shall be adjusted accordingly. SECTION 2.02. Purchase Price. (a) The aggregate purchase price for the F Shares shall be the number of F Shares multiplied by the Per Share Amount (the "F Purchase Price"). (b) The aggregate purchase price for the B Shares shall be the number of B Shares multiplied by the Per Share Amount (the "B Purchase Price). SECTION 2.03. Closing. Upon the terms and subject to the conditions of this Agreement, the sale and purchase of the F Shares and the B Shares contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York at 10:00 A.M. New York time on the day the Offer is scheduled to expire, or at such other place or at such other time or on such other date as the Company and Purchasers may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). SECTION 2.04. Closing Deliveries by the Company. At the Closing, the Company shall deliver or cause to be delivered to Purchasers: (a) stock certificates evidencing the F Shares and the B Shares, respectively; (b) a receipt for the F Purchase Price and the B Purchase Price; (c) the certificates and other documents required to be delivered pursuant to Section 7.01(c)(iii); and (d) an executed copy of the Agreement Among Shareholders in the form attached as Exhibit C (the "Agreement Among Shareholders"). SECTION 2.05. Closing Deliveries by Purchasers. (a) At the Closing, F Purchaser shall deliver to the Company: 13 5 (i) the F Purchase Price by wire transfer in immediately available funds as directed in writing by the by the Company at least three business day prior to the Closing; (ii) the certificates and other documents required to be delivered pursuant to Section 7.01(b)(iii); and (iii) an executed copy of the Agreement Among Shareholders. (b) At the Closing, B Purchaser shall deliver to the Company: (i) the B Purchase Price by wire transfer in immediately available funds as directed in writing by the Company at least three business day prior to the Closing; (ii) the certificates and other documents required to be delivered pursuant to Section 7.01(b)(iii); and (iii) an executed copy of the Agreement Among Shareholders. ARTICLE III THE MERGER SECTION 3.01. The Merger. Upon the terms and subject to the conditions set forth in Article VII, and in accordance with Delaware Law and Texas Law, at the Effective Time (as hereinafter defined), each Purchaser shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchasers shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). SECTION 3.02. Effective Time; Closing. As promptly as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware and articles of merger (the "Articles of Merger") with the Secretary of the State of Texas, in such form or forms as is required by, and executed in accordance with the relevant provisions of, Delaware Law and Texas Law, respectively (the date and time of the later of such filings being the "Effective Time"). Prior to such filing, a closing shall be held at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York, 10022, or such other place as the parties shall agree, for the purpose of confirming the satisfaction or waiver, as the case may be, of the conditions set forth in Article VII. 14 6 SECTION 3.03. Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law and Texas Law, including, without limitation, Article 5.06 of Texas Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and each Purchaser shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of the Company and Purchasers shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation. SECTION 3.04. Articles of Incorporation; By-laws. (a) At the Effective Time, the Articles of Incorporation attached hereto as Exhibit A shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation. (b) At the Effective Time, the By-laws attached hereto as Exhibit B shall be the By-laws of the Surviving Corporation until thereafter amended as provided by law and such By-laws. SECTION 3.05. Directors and Officers. The directors of the Company immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and By-laws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. SECTION 3.06. Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of either Purchaser, the Company or the holders of any of the following securities: (a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be cancelled pursuant to Section 3.06(b), any Shares to remain outstanding pursuant to Section 3.06(c) and any Dissenting Shares) shall be cancelled and shall be converted automatically into the right to receive an amount equal to the Per Share Amount in cash (the "Merger Consideration") payable, without interest, to the holder of such Share, upon surrender, in the manner provided in Section 3.08, of the certificate that formerly evidenced such Share; (b) (i) Each Share held in the treasury of the Company and each Share owned by any direct or indirect wholly owned subsidiary of the Company and each Share owned by the Purchasers immediately prior to the Effective Time shall be cancelled without any conversion thereof and no payment or distribution shall be made with respect thereto; 15 7 (ii) Each (A) share of common stock of the F Purchaser outstanding immediately prior to the Effective Time shall be converted and exchanged for a number of validly issued, fully paid and nonassessable shares of Common Stock, par value $.001 per share, of the Surviving Corporation equal to the quotient obtained by dividing the number of F Shares by the number of outstanding shares of common stock of the F Purchaser and (B) limited or general partnership interest of B Purchaser shall be converted and exchanged for a number of validly issued, fully paid and nonassessable shares of common stock, par value $.001 per share, of the Surviving Corporation equal to the quotient obtained by dividing the number of B Shares by the number of partnership interests; and (c) The 6,064,155 of the Shares held by and registered in the name of the Shareholder at the Effective Time, 3,837,890 of the Shares held by and registered in the names of Stinson Capital Partners, L.P., BK Capital Partners IV, L.P., the Carpenters Pension Trust for Southern California, United Brotherhood of Carpenters and Joiners of America Local Unions and Councils Pension Fund, Insurance Company Supported Organizations Pension Plan, Richard C. Blum & Associates, L.P., Richard C. Blum & Associates, Inc., Richard C. Blum, Prism Partners I, L.P., Weintraub Capital Management, Fremont Partners L.P., FP Advisors, L.L.C., Fremont Group, L.L.C., and Fremont Investors Inc. and the aggregate number of Shares owned by senior management pursuant to Stock Retention Agreements, shall not be cancelled as provided above, but shall remain outstanding. SECTION 3.07. Employee Stock Options and Other Equity Awards. (a) Except to the extent payment has been made as provided in Section 6.13 or as may otherwise be agreed by Purchasers and any holder of any outstanding employee or director options to purchase Shares, including any tandem stock appreciation right ("Options"), granted under the Company's 1997 Stock Incentive Plan, (the "1997 Plan"), 1995 Senior Executive Stock Option Plan (the "1995 Plan"), 1988 Directors Stock Option Plan (the "Directors Plan") the 1987 Key Contributor Stock Option Plan (the "1987 Plan") and, together with the 1997 Plan, the 1995 Plan and the Directors Plan, the "Option Plans"), (i) each of such holder's Options under the Option Plans shall become fully exercisable, according to its terms, as of the time provided in the notice from the Company, (ii) each of such holder's Options under the Options Plans shall be exercisable until the last day provided in such notice (the "Notice Date"), which will be prior to the last day of the Offer, (iii) each of such holder's Options may be surrendered prior to the Notice Date for the right to receive cash in an amount determined in accordance with the applicable Option Plan, provided, however, that Options granted under the 1997 Plan may be so surrendered on or prior to the last day in the applicable 90 day Change of Control Exercise Period, as defined in the 1997 Plan (the "EP Date"), and (iv) all Options remaining unexercised that have not been surrendered as of the Effective Time (or, in the case of Options granted under the 1997 Plan, the EP Date) shall be canceled provided, further, that 16 8 with respect to any Person subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company shall use its reasonable efforts to ensure that any such amount shall be paid as soon as practicable after the first date payment can be made without liability to such Person under Section 16(b) of the Exchange Act but in no event shall Purchasers or the Company be required to indemnify such Person for any loss, cost or damages sustained by such Person as a result of Section 16(b) of the Exchange Act. All applicable withholding taxes attributable to payments made hereunder or to distributions contemplated hereby shall be deducted from the amounts payable under this Section 3.07 and all such taxes attributable to the exercise of Options shall be withheld from the proceeds received in respect of the Shares issuable upon such exercise. (b) Except as provided herein or as otherwise agreed to by the parties and to the extent permitted by the Option Plans, the Option Plans shall terminate as of the Effective Time and any rights under any provisions in any other plan, program or arrangement providing for the issuance or grant by the Company of any interest in respect of the capital stock of the Company shall be cancelled as of the Effective Time. SECTION 3.08. Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, Shares that are outstanding immediately prior to the Effective Time and that are held by shareholders who shall not have voted in favor of the Merger or consented thereto in writing and who shall have properly perfected dissenter's rights for such Shares in accordance with Article 5.12 of Texas Law (collectively, the "Dissenting Shares") shall not be converted into or represent the right to receive the Merger Consideration unless and until such shareholders shall have withdrawn or lost such shareholder's dissenter's rights. Such shareholders shall be entitled to receive payment of the appraised value of such Shares held by them in accordance with the provisions of Article 5.12 of Texas Law, except that all Dissenting Shares held by shareholders who shall have withdrawn or lost such dissenter's rights under Article 5.12 of Texas Law shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive the Merger Consideration, without any interest thereon, upon surrender, in the manner provided in Section 3.08, of the certificate or certificates that formerly evidenced such Shares. (b) The Company shall give Purchasers (i) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments served pursuant to Texas Law and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under Texas Law. The Company shall not, except with the prior written consent of each Purchaser (which consent shall not be unreasonably withheld), make any payment with respect to Dissenting Shares or offer to settle or settle any claims or demands with respect to Dissenting Shares. 17 9 SECTION 3.09. Surrender of Shares; Stock Transfer Books. (a) Prior to the Effective Time, Purchasers shall designate a bank or trust company (which bank or trust company shall be reasonably acceptable to the Company) to act as agent (the "Paying Agent") for the holders of Shares in connection with the Merger to receive the funds to which holders of Shares shall become entitled pursuant to Section 3.06(a). Such funds shall be invested by the Paying Agent as directed by the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America or of any agency thereof and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Services, Inc. or Standard & Poor's Corporation, respectively, or in deposit accounts, certificates of deposit or banker's acceptances of, repurchase or reverse repurchase agreements with, or Eurodollar time deposits purchased from, commercial banks with capital, surplus and undivided profits aggregating in excess of $1.0 billion (based on the most recent financial statements of such bank which are then publicly available at the SEC or otherwise). (b) Promptly after the Effective Time, the Surviving Corporation or the Company, as the case may be, shall cause to be mailed to each Person who was, at the Effective Time, a holder of record of Shares entitled to receive the Merger Consideration pursuant to Section 3.06(a), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificates evidencing Shares (the "Certificates") shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates pursuant to such letter of transmittal. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly evidenced by such Certificate, and such Certificate shall then be cancelled. No interest shall accrue or be paid on the Merger Consideration payable upon the surrender of any Certificate for the benefit of the holder of such Certificate. If payment of the Merger Consideration is to be made to a Person other than the Person in whose name the surrendered Certificate is registered on the stock transfer books of the Company, it shall be a condition of payment that the Certificate so surrendered shall be endorsed properly or otherwise be in proper form for transfer and that the Person requesting such payment shall have paid all transfer and other taxes required by reason of the payment of the Merger Consideration to a Person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such taxes either have been paid or are not applicable. (c) At any time following the sixth month after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds which had been made available to the Paying Agent and not disbursed to holders of Shares (including, without limitation, all interest and other income received by the Paying Agent in 18 10 respect of all funds made available to it), and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any Merger Consideration that may be payable upon due surrender of the Certificates held by them. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Share for any Merger Consideration delivered in respect of such Share to a public official pursuant to any abandoned property, escheat or other similar law. (d) At the close of business on the day of the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of Shares on the records of the Company. From and after the Effective Time, the holders of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided herein or by applicable law. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Purchasers as follows: SECTION 4.01 Organization and Qualification. The Company and each of its subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and (c) is in good standing and duly qualified to do business in each jurisdiction in which the transaction of its business makes such qualification necessary, except where the failure to be so organized, existing, qualified and in good standing or to have such power or authority would not have a Material Adverse Effect. True and complete copies of the Articles or Certificates of Incorporation and the by-laws of the Company and each of its subsidiaries have been made available to Purchasers. A true and complete list of all of the Company's subsidiaries, together with the jurisdiction of incorporation of each such subsidiary and the percentage of the outstanding capital stock of each such subsidiary owned by the Company and its subsidiaries, is set forth in Section 4.01 of the Company's disclosure schedule delivered to Purchasers in connection with this Agreement (the "Company Disclosure Schedule"). SECTION 4.02 Capitalization. (a) The authorized capital stock of the Company consists of 100,000,000 Shares and 20,000,000 shares of preferred stock, par value $.001 per share (the "Preferred Stock"). As of the date of this Agreement, (i) 42,636,016 Shares were issued and outstanding and 186,824 Shares were held in treasury, (ii) 3,629,133 19 11 Shares were reserved for issuance pursuant to outstanding Options and 2,672,300 Shares were reserved for issuance in respect of future grants of Options, and (iii) no shares of Preferred Stock were issued and outstanding. All outstanding Shares are validly issued, fully paid and nonassessable and are not subject to preemptive rights. Except as set forth in this Section 4.02(a) or as disclosed in the Company SEC Documents or in Section 4.02(a) of the Company Disclosure Schedule, there are no outstanding subscriptions, options, warrants, calls, rights, commitments or any other agreements to which the Company is a party or by which the Company is bound which obligate the Company to (i) issue, deliver or sell or cause to be issued, delivered or sold any additional Shares or any other capital stock of the Company or any other securities convertible into, or exercisable or exchangeable for, or evidencing the right to subscribe for, any such Shares or (ii) purchase, redeem or otherwise acquire any Shares and any other capital stock of the Company. All Shares subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. There are no outstanding contractual obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Shares or any capital stock of any such subsidiary or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any subsidiary (other than a wholly owned subsidiary of the Company) or any other Person. Each outstanding share of capital stock of each of the Company's subsidiaries is duly authorized, validly issued, fully paid and nonassessable and each such share owned by the Company and its subsidiaries is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Company's or such other subsidiary's voting rights, charges and other encumbrances of any nature whatsoever, except for liens arising by operation of law that are not in the aggregate material. (b) Except as provided in the Company SEC Documents or in Section 4.02(b) of the Company Disclosure Schedule, there are no voting trusts or shareholder agreements to which the Company is a party with respect to the voting of the capital stock of the Company. SECTION 4.03 Authorization and Validity of Agreement. The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the Transactions in accordance with the terms hereof (subject to the approval and adoption of this Agreement and the Merger by the holders of two-thirds of the outstanding Shares, if required by applicable law, and the filing and recordation of appropriate merger documents as required by Delaware Law and Texas Law). The Board has duly authorized the execution, delivery and performance of this Agreement by the Company, and no other corporate action or other corporate proceedings on the part of the Company are necessary to authorize this Agreement or the Transactions (other than the approval and adoption of this Agreement and the Merger by the holders of two-thirds of the outstanding Shares, if required by applicable law). This Agreement has been duly and 20 12 validly executed and delivered by the Company and, assuming this Agreement constitutes the legal, valid and binding obligation of Purchasers, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Board has taken all necessary actions such that the provisions of the Texas Business Combination Law, Articles 13.01 - 13.08 of Texas Law, do not apply to the Transactions. SECTION 4.04 Consents and Approvals. Neither the execution and delivery of this Agreement by the Company nor the performance of this Agreement by the Company and the consummation by the Company of the Transactions will require on the part of the Company or any of its subsidiaries any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) in connection with the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) pursuant to the applicable requirements of the Exchange Act and the SEC's rules and regulations promulgated thereunder and state takeover laws (iii) the filing and recordation of the Certificate of Merger pursuant to Delaware Law and the Articles of Merger pursuant to Texas Law and appropriate documents with the relevant authorities of other states in which the Company is authorized to do business, (iv) as set forth in Section 4.04 of the Company Disclosure Schedule or (v) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not, individually or in the aggregate, have a Material Adverse Effect or restrict or prevent the consummation of the Transactions. SECTION 4.05 No Violation. Except as set forth in Section 4.05 of the Company Disclosure Schedule, assuming the Merger has been duly approved by the holders of two-thirds of the outstanding Shares, if required by applicable law, neither the execution and delivery of this Agreement by the Company nor the performance of this Agreement by the Company and the consummation by the Company of the Transactions will (a) conflict with or violate the Certificate or Articles of Incorporation of the Company or the By-laws of the Company or any of its subsidiaries, (b) result in a violation or breach of, constitute a default (with or without notice or lapse of time, or both) under, give rise to any right of termination, cancellation or acceleration of, or result in the imposition of any lien, charge or other encumbrance on any assets or property of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective assets or properties are bound, except for such violations, breaches and defaults (or rights of termination, cancellation or acceleration or lien or other charge or encumbrance) as to which requisite waivers or consents have been obtained or which would not individually 21 13 or in the aggregate have a Material Adverse Effect or materially restrict or prevent the consummation of the Transactions or (c) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in Section 4.04 and this Section 4.05 are duly and timely obtained or made and the approval of the Merger by the holders of two-thirds of the outstanding Shares has been obtained if required by applicable law, conflict with or violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, any of its subsidiaries or any of their respective assets and properties, except for such violations which would not, individually or in the aggregate, have a Material Adverse Effect or materially restrict or prevent the consummation of the Transactions. SECTION 4.06 SEC Reports; Financial Statements. (a) Except as set forth on Section 4.06 of the Company Disclosure Schedule, since January 1, 1994 the Company has filed with the SEC all forms, reports, schedules, statements and other documents required to be filed by it with the SEC pursuant to the Securities Act of 1933, as amended (the "Securities Act") and the SEC's rules and regulations promulgated thereunder and the Exchange Act and the SEC's rules and regulations promulgated thereunder (any such documents filed prior to the date hereof being collectively, the "Company SEC Documents"). The Company SEC Documents including, without limitation, any financial statements or schedules included therein, at the time filed, or in the case of registration statements on their respective effective dates, (i) complied as to form in all material respects with the applicable requirements of and the SEC's rules and regulations promulgated thereunder and the Exchange Act and the SEC's rules and regulations promulgated thereunder and (ii) did not at the time filed (or, in the case of registration statements, at the time of effectiveness), contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. No subsidiary of the Company is required to file any form, report or other document with the SEC. (b) Each of the consolidated financial statements of the Company (including any related notes thereto) included in the Company SEC Documents (excluding the Company SEC Documents described in Section 4.07) comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the period involved (except as may be indicated in such financial statements or in the notes thereto or, in the case of unaudited financial statements, as permitted by the requirements of Form 10-Q) and present fairly, in all material respects (subject, in the case of the unaudited statements, to normal year-end adjustments which such adjustments in the aggregate would not have a Material Adverse Effect and the absence of footnotes), the financial position of the Company as of the dates thereof and the results of the Company's operations and cash flows for the periods presented therein. 22 14 (c) The Company has heretofore furnished or made available to Purchasers complete and correct copies of all amendments and modifications that have not been filed by the Company with the SEC to all agreements, documents and other instruments that previously had been filed by the Company with the SEC and are currently in effect. SECTION 4.07 Company Statement; Schedule 13E-3; Schedule 13E-4. The proxy statement to be sent to the shareholders of the Company in connection with the Shareholders' Meeting (such proxy statement, as amended or supplemented, being referred to herein as the "Company Statement"), as of the date first mailed to the shareholders of the Company and at the time of the Shareholders' Meeting, the Schedule 13E-3 and the Schedule 13E-4 at the time filed with the SEC will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company Statement, the Schedule 13E-3 and the Schedule 13E-4 will, when filed by the Company with the SEC, comply as to form in all material respects with the applicable provisions of the Exchange Act and the SEC rules and regulations promulgated thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to the statements made in any of the foregoing documents based on written information supplied by or on behalf of either Purchaser or any of their respective affiliates specifically for inclusion therein. SECTION 4.08 Compliance with Law. Except as set forth in the Company SEC Documents or in Section 4.08 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries is in violation of any applicable federal, state, local or foreign statute, rule, regulation, decree, ordinance, code requirement or order of any governmental or regulatory authority or rule of common law, including, without limitation, all federal and state antitrust law (whether statutory or otherwise) (collectively, "Law") applicable to the Company or any of its subsidiaries, or any of the products produced, distributed marketed or sold by the Company or any of its subsidiaries, except for violations which would not have a Material Adverse Effect. Section 4.08 of the Company Disclosure Schedule sets forth a brief description of each order, writ, judgment, injunction, decree, stipulation, determination or award (including, without limitation, recalls, field notifications or seizures) entered by or with any governmental or regulatory authority (each, a "Governmental Order") applicable to the Company and any of its subsidiaries. No such Governmental Order has had or is likely to have a Material Adverse Effect. Without limiting the foregoing, except for matters which would not, individually or in the aggregate, have a Material Adverse Effect and those matters disclosed in the Company SEC Documents or in Section 4.08 of the Company Disclosure Schedule, to the Knowledge of the Company, (a) the business of the Company and each of its subsidiaries is being conducted in compliance with applicable Environmental Laws, (b) the business of the Company and each of its subsidiaries has not, and no other Person has, made, caused or contributed to any material release of any hazardous or toxic waste or substance on, at or under any of the Company's 23 15 or its subsidiaries' properties, and (c) neither the Company nor any of its subsidiaries is subject to any compliance, remediation or settlement agreement from an alleged violation of Environmental Laws. For purposes hereof, "Environmental Laws" shall mean all applicable Laws relating to pollution or protection of human health or the environment, including the Resource Conservation and Recovery Act, the Clean Air Act, the Water Pollution Control Act, the Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act and analogous state Law. The Company and each of its subsidiaries hold all permits, licenses, exemptions, orders and approvals of governmental, administrative, and regulatory authorities, (collectively, "Permits") necessary for the conduct of their respective businesses, including, without limitation, all Permits issued by any governmental, administrative and regulatory authorities that are concerned with the safety, efficacy, reliability or manufacturing of medical products, as now being conducted and the same are in full force and effect, except where the failure to hold Permits, or for such Permits to be in full force and effect, would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.09 Absence of Certain Changes. Except as disclosed in the Company SEC Documents or in Section 4.09 of the Company Disclosure Schedule, since December 31, 1996, the Company and each of its subsidiaries have conducted its businesses only in the ordinary course of business and consistent with past practice and (a) there has not been any Material Adverse Effect and (b) the Company has not taken any of the actions set forth in paragraphs (a) through (i) of Section 6.01. SECTION 4.10 No Undisclosed Liabilities. Except (a) for liabilities incurred in the ordinary course of business and consistent with past practice, (b) liabilities incurred in connection with the Transactions, (c) liabilities which would not, individually or in the aggregate, have a Material Adverse Effect and (d) as disclosed in the Company SEC Documents or as set forth in Section 4.10 of the Company Disclosure Schedule, from December 31, 1996, neither the Company nor any of its subsidiaries has incurred any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) which would be required to be reflected in or reserved against on a consolidated balance sheet, or in the notes thereto, of the Company prepared in accordance with generally accepted accounting principles consistent with past practice. SECTION 4.11 Litigation. Except as disclosed in the Company SEC Documents or in Section 4.11 of the Company Disclosure Schedule and except for regulatory proceedings of which the Company has not yet been notified (except to the extent the Company has Knowledge of any such regulatory proceeding), there are no claims, actions, proceedings or governmental, administrative or regulatory investigations pending, nor has the Company or any of its subsidiaries received notice of any threatened claims, actions, proceedings or governmental, administrative or regulatory investigations, against the Company or any of its subsidiaries by or before any court, arbitrator or administrative or 24 16 governmental or regulatory body, domestic or foreign, which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect or seek to delay or prevent the consummation of the Transactions. None of the Company, its subsidiaries, nor any of their respective assets is subject to any outstanding and unsatisfied order, writ, judgment, injunction, determination, award or decree which would, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.12 Employee Benefit Matters. (a) All employee benefit plans and other benefit arrangements covering employees of the Company and its subsidiaries are listed in Section 4.12 of the Company Disclosure Schedule (the "Company Benefit Plans"). True and complete copies of the Company Benefit Plans have been provided to Purchasers. Except as set forth in Section 4.12(a) of the Company Disclosure Schedule and to the extent applicable, the Company Benefit Plans comply in all material respects with the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"), and any Company Benefit Plan intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service (the "IRS") to be so qualified. Except as set forth in Section 4.12(a) of the Company Disclosure Schedule, no Company Benefit Plan is covered by Title IV of ERISA or Section 412 of the Code. Except as set forth in Section 4.12(a) of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA with respect to any Company Benefit Plan. Each Company Benefit Plan has been maintained and administered in all material respects in compliance with its terms and with all applicable laws including, but not limited to, ERISA and the Code to the extent applicable thereto. Except as set forth in Section 4.12(a) of the Company Disclosure Schedule, to the Knowledge of the Company, there are no pending, nor has the Company or any of its subsidiaries received notice of any threatened, claims against or otherwise involving any of the Company Benefit Plans. No Company Benefit Plan is under audit or investigation by the IRS, the Department of Labor or the Pension Benefit Guaranty Corporation, and to the Knowledge of the Company, no such audit or investigation is pending or threatened. All material contributions required to be made as of the date of this Agreement to the Company Benefit Plans have been made or provided for. Neither the Company nor any entity under "common control" with the Company within the meaning of Section 4001 of ERISA has contributed to, or been required to contribute to, any "multi-employer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA). (b) Except as set forth in Section 4.12(b) of the Company Disclosure Schedule, the consummation of the Transactions will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Company Benefit Plan, trust, or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Company employee, or (ii) result 25 17 in the triggering or imposition of any restrictions or limitations on the right of the Company or either Purchaser to amend or terminate any Company Benefit Plan and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to applicable taxes. No payment or benefit which will or may be made by the Company, any of its subsidiaries, either Purchaser or any of their respective affiliates with respect to any employee of the Company or its subsidiaries will be characterized as an "excess parachute payment," within the meaning of Section 280G(b)(1) of the Code. (c) Except as set forth in Section 4.12(c) of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries (i) maintains or contributes to any Company Benefit Plan which provides, or has any liability to provide, life insurance, medical, severance or other employee welfare benefits to any employee upon his retirement or termination of employment, except as may be required by Section 4980B of the Code; or (ii) has ever represented, promised or contracted (whether in oral or written form) to any employee (either individually or to employees as a group) that such employee(s) would be provided with life insurance, medical, severance or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by Section 4980B of the Code. (d) With respect to each Company Benefit Plan which is an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA, all material claims incurred (including claims incurred but not reported) by employees thereunder for which the Company is, or will become, liable are (i) insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims; (ii) covered under a contract with a health maintenance organization (an "HMO") pursuant to which the HMO bears the liability for such claims, or (iii) reflected as a liability or accrued for in Section 4.12(d) of the Company Disclosure Schedule. (e) Except as set forth in Section 4.12(e) of the Company Disclosure Schedule or except as would not have a Material Adverse Effect, with respect to each Company Benefit Plan that is not subject to United States Law ("Foreign Benefit Plan"): (i) all employer and employee contributions to each Foreign Benefit Plan required by law or by the terms of such Foreign Benefit Plan have been made or, if applicable, accrued in accordance with normal accounting practices; (ii) the fair market value of the assets of each funded Foreign Benefit Plan, the liability of each insurer for any Foreign Benefit Plan, funded through insurance or the book reserve established for any Foreign Benefit Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the Effective Time, with respect to all current and former participants in such plan according to the actuarial assumptions and valuations most recently used to determine employer contributions to such Foreign Benefit Plan and no transaction contemplated by this Agreement shall cause such assets or insurance obligations to be less than such benefit obligations; and (iii) each Foreign Benefit Plan required to be registered 26 18 has been registered and has been maintained in good standing with the appropriate regulatory authorities. (f) The Company shall take such actions as are necessary to cause the Employee Stock Purchase Plan to terminate prior to the termination of the Offer. The Company shall take such actions as are necessary to cause any offer to purchase Shares pursuant to the Company's Employee Stock Purchase Plan (the "ESPP") to expire on or prior to the termination of the Offer. On such date, the Company shall apply the funds credited as of such date under the ESPP within each participant's payroll withholdings to the purchase of whole Shares in accordance with the terms of the ESPP. SECTION 4.13 Taxes. (a) For purposes of this Agreement, "Tax" or "Taxes" means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any governmental or taxing authority including, without limitation, taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs' duties, tariffs, and similar charges. (b) Except as disclosed in the Company SEC Documents or in Section 4.13(b) of the Company Disclosure Schedule, the Company and each of its subsidiaries (i) have filed all federal, state, local and foreign Tax returns required to be filed by the Company or any of its subsidiaries for tax years ended prior to the date of this Agreement, except for those Tax returns the failure of which to file would not, individually or in the aggregate, have a Material Adverse Effect or for which requests for extensions have been timely filed, and all such returns are complete in all material respects, (ii) have paid or accrued all Taxes shown to be due and payable on such returns, (iii) have accrued all such Taxes for such periods subsequent to the periods covered by such returns, (iv) have "open" years for federal income tax returns only as set forth in the Company SEC Documents or in Section 4.13(b) of the Company Disclosure Schedule and (v) have not participated in or cooperated with an international boycott within the meaning of Section 999 of the Code. There are no liens for Taxes on the assets of the Company or any of its subsidiaries, except for liens that would not, individually or in the aggregate, have a Material Adverse Effect, liens for Taxes not yet due and payable, and except as set forth in the Company SEC Documents or in Section 4.13 of the Company Disclosure Schedule, there is no pending, nor has the Company or any of its subsidiaries received notice of any threatened Tax audit, examination, refund litigation or adjustment in controversy which, if determined adversely, would, individually or in the aggregate, have a Material Adverse Effect. Except as set forth 27 19 in Section 4.13(b) of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to any agreement providing for the allocation or sharing of Taxes. SECTION 4.14 Intellectual Property. (a) Section 4.14(a) of the Company Disclosure Schedule sets forth a true and complete list of all Intellectual Property owned by the Company for which registrations have been made or applied for, including all patents, trademarks, copyrights, mask works and other forms of registrable Intellectual Property (the "Scheduled Intellectual Property"). Except as would not individually or in the aggregate have a Material Adverse Effect and except as set forth in Section 4.14(a) of the Company Disclosure Schedule, the Company is the sole and exclusive owner of the Scheduled Intellectual Property, free and clear of any Encumbrance. Except as would not individually or in the aggregate have a Material Adverse Effect and except as set forth in Section 4.14(a) of the Company Disclosure Schedule, the registrations made for the Scheduled Intellectual Property are current, outstanding and valid, and the Company has complied with all requirements to maintain such Intellectual Property in full force and effect. (b) The Scheduled Intellectual Property, together with all other Intellectual Property owned by the Company (collectively, the "Owned Intellectual Property"), constitute all of the Intellectual Property requisite and necessary for the conduct of the businesses of the Company. Except as set forth in Section 4.14(b) of the Company Disclosure Schedule, the Company does not have, nor does it require, any license (other than licenses generally available to the public at reasonable cost) from another in or to any material Intellectual Property that is material to the businesses of the Company. As a result of the Transaction, as of the Effective Date, the Company shall own all right, title and interest in and to all material Intellectual Property requisite and necessary for the conduct of the businesses of the Company. Except as provided on Section 4.14(b) of the Company Disclosure Schedule, the Company has not granted a license to another in or to any of the Owned Intellectual Property. (c) Except as provided on Section 4.14(c) of the Company Disclosure Schedule, to the Knowledge of the Company, no actions or proceedings involving the Company are pending or threatened, (i) which challenge the ownership, validity or enforceability of any of the Owned Intellectual Property, (ii) which seek to restrict the use by the Company of any of the Owned Intellectual Property, or (iii) which allege that the Company infringes or violates the Intellectual Property of another. No pending or threatened action or proceeding, including but not limited to those on Section 4.14(c) of the Company Disclosure Schedule, would have a material effect on the businesses of the Company if decided adversely to the Company. To the Knowledge of the Company, the Company is aware of no infringement or violation of the Owned Intellectual Property by another. (d) For the purpose of this Section 4.14, the Company means the Company and its subsidiaries, and the Intellectual Property means (i) inventions, whether or not 28 20 patentable, whether or not reduced to practice, and whether or not yet made the subject of a pending patent application or applications, (ii) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (iii) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by international treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (iv) trademarks, service marks, trade dress, logos, trade names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the Trademark Offices of the States and Territories of the United States of America, and the Trademark Offices of other nations throughout the world, and all rights therein provided by international treaties or conventions, (v) copyrights (registered or otherwise) and registrations and applications for registration thereof, and all rights therein provided by international treaties or conventions, (vi) computer software, including, without limitation, source code, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, data and documentation, (vii) trade secrets and confidential, technical and business information (including ideas, formulas, compositions, inventions, and conceptions of inventions whether patentable or unpatentable and whether or not reduced to practice), (viii) whether or not confidential, technology (including know-how and show-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (ix) copies and tangible embodiments of all the foregoing, in whatever form or medium, (x) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (xi) all rights to sue or recover and retain damages and costs and attorneys' fees for present and past infringement of any of the foregoing. SECTION 4.15 Other Interests. Except as set forth in Section 4.15 of the Company Disclosure Schedule or in the Company SEC Documents, the Company does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust or entity (other than investments in short-term investment securities). SECTION 4.16 Labor Matters. Except as set forth in Section 4.16 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries is presently, nor has in the past been, a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the 29 21 Knowledge of the Company, threatened against the Company or any of its subsidiaries relating to their respective businesses except for any such proceeding which would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.17 Brokers and Finders. No broker, finder or investment bank has acted directly or indirectly for the Company, nor has the Company incurred any obligation to pay any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby, other than BT Alex. Brown and Houlihan Lokey, the fees and expenses of which shall be borne by the Company. The Company has furnished to Purchasers a complete and correct copy of all agreements between the Company and BT Alex. Brown and Houlihan Lokey pursuant to which such firm would be entitled to any payment relating to the transactions contemplated by this Agreement. SECTION 4.18 Opinions of Financial Advisors. (a) BT Alex. Brown has delivered its opinion, dated the date of this Agreement, to the Board to the effect that, as of such date, the cash consideration to be received in the Offer and the Merger by the holders of Shares (other than B Purchaser and its affiliates and any other holders of Shares who will retain Shares following consummation of the Offer and the Merger) is fair from a financial point of view to such holders and such opinion has not been withdrawn or modified in any material respect prior to consummation of the Offer. (b) Houlihan Lokey has delivered its opinion and report to the Board and Purchasers with respect to solvency and related matters, and such opinion has not been withdrawn or modified. SECTION 4.19 Real Property and Leases. (a) The Company and each of its subsidiaries has sufficient title to all of its properties and assets to conduct its businesses as currently conducted or as contemplated to be conducted, except as would not, individually or in the aggregate, have a Material Adverse Effect. (b) Each parcel of real property owned or leased by the Company or any of its subsidiaries (i) is owned or leased free and clear of all mortgages, pledges, liens, security interests, conditional and installment sale agreements, encumbrances, charges or other claims of third parties of any kind (collectively, "Liens"), other than (A) Liens for current taxes and assessments not yet past due, (B) inchoate mechanics' and materialmen's Liens for construction in progress, (C) workmen's, repairmen's, warehousemen's and carriers' Liens arising in the ordinary course of business of the Company or such subsidiary consistent with past practice, and (D) all matters of record, Liens and other imperfections of title and encumbrances which would not, individually or in the aggregate, have a Material Adverse Effect (collectively, "Permitted Liens"), and (ii) is neither subject to any governmental decree or order to be sold nor is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, has 30 22 any notice been received by the Company stating that any such condemnation, expropriation or taking been proposed. (c) All leases of real property leased for the use or benefit of the Company or any of its subsidiaries to which the Company or any of its subsidiaries is a party requiring rental payments in excess of $100,000 on an annualized basis during the period of the lease, and all amendments and modifications thereto are in full force and effect and have not been modified or amended, and there exists no default under any such lease by the Company or any of its subsidiaries, nor any event which with notice or lapse of time or both would constitute a default thereunder by the Company or any of its subsidiaries, except as would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.20 Material Contracts. (a) Section 4.20(a) of the Company Disclosure Schedule lists each of the following contracts and agreements (including, without limitation, oral arrangements to the extent legally binding) of the Company and each of its subsidiaries (such contracts and agreements, together with all contracts and agreements disclosed in Section 4.14 of the Disclosure Schedule, being "Material Contracts"): (i) each contract, agreement and other arrangement for the purchase of inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to the Company and each of its subsidiaries or otherwise related to the businesses of the Company and each of its subsidiaries under the terms of which the Company or any of its subsidiaries: (A) are likely to pay or otherwise give consideration of more than $3,000,000 in the aggregate during the calendar year ended December 31, 1997 or (B) are likely to pay or otherwise give consideration of more than $10,000,000 in the aggregate over the remaining term of such contract; (ii) each contract, agreement and other arrangement for the sale of inventory or other personal property or for the furnishing of services by the Company or any of its subsidiaries which: (A) is likely to involve consideration of more than $3,000,000 in the aggregate during the calendar year ended December 31, 1997 or (B) is likely to involve consideration of more than $10,000,000 in the aggregate over the remaining term of the contract; (iii) all material broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing, consulting and advertising contracts and agreements to which the Company or any of its subsidiaries is a party; (iv) all management contracts and contracts with independent contractors or consultants (or similar arrangements) to which the Company or any of its subsidiaries 31 23 is a party and which are not cancelable without penalty or further payment in excess of $50,000 and without more than 90 days' notice; (v) all contracts and agreements relating to indebtedness of the Company or any of its subsidiaries or to any direct or indirect guaranty by the Company or any of its subsidiaries of indebtedness of any other Person; (vi) all contracts, agreements, commitments, written understandings or other arrangements with any Governmental Entity, to which the Company or any of its subsidiaries is a party (other than arrangements entered into in the ordinary course of business with hospitals or other medical facilities owned or operated by any such Governmental Entity); (vii) all contracts and agreements that limit or purport to limit the ability of the Company or any of its subsidiaries to compete in any line of business or with any Person or in any geographic area or during any period of time; and (viii) all other contracts and agreements, whether or not made in the ordinary course of business, which are material to the Company and its subsidiaries, taken as a whole, or the conduct of the business of the Company and its subsidiaries, taken as a whole, or the absence of which would, in the aggregate, have a Material Adverse Effect. (b) Except as disclosed in Section 4.20(b) of the Company Disclosure Schedule, each Material Contract: (i) is legal, valid and binding on the Company or its respective subsidiary party thereto and, to the Knowledge of the Company, the other parties thereto, and is in full force and effect and (ii) upon consummation of the transactions contemplated by this Agreement, except to the extent that any consents set forth in Section 4.04 of the Company Disclosure Schedule are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Neither the Company nor any of its subsidiaries is in breach of, or default under, any Material Contract. (c) No other party to any Material Contract is, to the Knowledge of the Company, in material breach thereof or default thereunder. (d) Except as disclosed in Section 4.20(d) of the Company Disclosure Schedule, there is no contract, agreement or other arrangement granting any Person any preferential right to purchase any of the properties or assets of the Company or any of its subsidiaries. SECTION 4.21 Certain Business Practices. Neither the Company nor any of its subsidiaries nor any of their respective directors, officers, agents, representatives or 32 24 employees (in their capacity as directors, officers, agents, representatives or employees) has: (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) directly or indirectly, paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, or other party acting on behalf of or under the auspices of a governmental official or Governmental Entity, in the United States or any other country, which is in any manner related to the business or operations of the Company or any of its subsidiaries, that was illegal under any federal, state or local laws of the United States or any other country having jurisdiction; or (c) made any payment to any customer or supplier of the Company or any of its subsidiaries or any officer, director, partner, employee or agent of any such customer or supplier for the unlawful sharing of fees or to any such customer or supplier or any such officer, director, partner, employee or agent for the unlawful rebating of charges, or engaged in any other unlawful reciprocal practice, or made any other unlawful payment or given any other unlawful consideration to any such customer or supplier or any such officer, director, partner, employee or agent, in respect of the business of the Company and its subsidiaries. SECTION 4.22 Accounting Treatment. The Company has received from Ernst & Young LLP a letter in form and substance reasonably satisfactory to Purchasers that the Transactions will receive recapitalization accounting treatment and such letter has not been withdrawn or modified. SECTION 4.23 Stock Retention Agreements. Certain employees have, on the date hereof, and the Company shall use all reasonable efforts to have certain employees listed in Section 4.23 of the Company Disclosure Schedule enter into agreements pursuant to which such employees will retain stock or options in the Surviving Corporation (each such agreement being a "Stock Retention Agreement"). The Company shall not enter into any Stock Retention Agreement without the prior consent of Purchasers. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASERS Purchasers hereby represent and warrant, jointly and severally, to the Company as follows: SECTION 5.01 Organization and Qualification. Each Purchaser is (a) duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and (c) is in good standing and duly qualified to do business in each jurisdiction in which the transaction of its business makes such qualification necessary, except where the failure to be so organized, 33 25 existing, qualified and in good standing or to have such power or authority would not materially restrict or prevent the consummation of the Transaction. SECTION 5.02 Authorization and Validity of Agreement. Each Purchaser has the requisite power and authority to execute and deliver this Agreement and to consummate the Transactions in accordance with the terms hereof. The Board of Managers of each Purchaser has duly authorized the execution, delivery and performance of this Agreement by such Purchaser, and no other action or other proceedings on the part of either Purchaser is necessary to authorize this Agreement or the Transactions. This Agreement has been duly and validly executed and delivered by each Purchaser and, assuming this Agreement constitutes the legal, valid and binding obligation of the Company, constitutes the legal, valid and binding obligation of each Purchaser, enforceable against such Purchaser in accordance with its terms, except as enforcement thereof may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 5.03 Consents and Approvals. Neither the execution and delivery of this Agreement by Purchasers nor the performance of this Agreement by Purchasers or the consummation by Purchasers of the Transactions will require on the part of either Purchaser or any of its respective affiliates any consent, approval, authorization or permit of, or filing with, or notification to, any governmental or regulatory authority, except (a) in connection with the applicable requirements of the HSR Act, (b) pursuant to the applicable requirements of the Exchange Act and the SEC's rules and regulations promulgated thereunder and state takeover laws, (c) the filing and recordation of the Certificate of Merger pursuant to Delaware Law and the Articles of Merger pursuant to Texas Law, (d) as set forth in Section 5.03 of Purchasers' disclosure schedule delivered to the Company in connection with this Agreement (the "Purchaser Disclosure Schedule") or (e) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not materially restrict or prevent the consummation of the Transactions. SECTION 5.04 No Violation. Except as set forth in Section 5.04 of the Purchaser Disclosure Schedule, neither the execution and delivery of this Agreement by Purchasers nor the performance of this Agreement by Purchasers or the consummation by Purchasers of the Transactions will (a) conflict with or violate the organizational documents of either Purchaser, (b) result in a violation or breach of, constitute a default (with or without notice or lapse of time, or both) under, give rise to any right of termination, cancellation or acceleration of, or result in the imposition of any lien, charge or other encumbrance on any assets or property of either of Purchasers pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which either of Purchasers is a party or by which either of Purchasers or any of their respective assets or properties are bound, except for such 34 26 violations, breaches and defaults (or rights of termination, cancellation or acceleration or lien or other charge or encumbrance) as to which consents have been obtained or which would not individually or in the aggregate materially restrict or prevent the consummation of the transactions contemplated hereby or (c) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in Section 5.03 and this Section 5.04 are duly and timely obtained or made, conflict with or violate any order, writ, injunction, decree, statute, rule or regulation applicable to either Purchaser, except for such violations which would not restrict prevent the consummation of the Transactions. SECTION 5.05 Offer Documents; Company Statement; Schedule 13E-3; Schedule 13E-4. No information supplied by or on behalf of Purchasers specifically for inclusion in the Company Statement, Schedule 13E-3 or Schedule 13E-4 will, at the respective times filed with the SEC or other governmental entity, or at any time thereafter when the information included therein is required to be updated pursuant to applicable law, or, in the case of the Company Statement, at the date mailed to the Company's shareholders and at the time of the Shareholders' Meeting, contain any untrue statement of a material act or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Schedule 13E-3 will, when filed by Purchasers with the SEC or other governmental entity, comply as to form in all material respects with the provisions of the Exchange Act and the SEC's rules and regulations promulgated thereunder. SECTION 5.06 Financing. Purchasers have provided the Company with complete and correct copies of (a) a commitment letter dated the date hereof from Bank of America National Trust and Savings Association pursuant to which it has committed, subject to the terms and conditions set forth therein, to provide a senior credit facility in an aggregate amount of $300,000,000 and a tender facility in an aggregate amount of $130,000,000 to finance the Transactions and (b) a letter dated the date hereof from BT Alex. Brown pursuant to which it has indicated that it is highly confident of its ability to underwrite in the public markets, subordinated notes in an aggregate amount of $200,000,000 to finance the Transactions. The financing to be provided pursuant to the foregoing arrangements is hereinafter referred to as the "Debt Financing". As of the date hereof, the commitment letter and the highly confident letter relating to the Debt Financing referred to above have not been withdrawn. At the Closing, F Purchaser will have available $17,414,435.50 and B Purchaser will have available $138,197,020.50 for purposes of consummating the Closing (the "Equity Financing"), reduced by an amount equal to the sum of (i) the number of shares purchased by B Purchaser between the date hereof and the expiration of the Offer multiplied by the Per Share Amount, (ii) the number of Shares retained by management pursuant to Stock Retention Agreements entered into after the date hereof multiplied by the Per Share Amount and (iii) the number of Options retained by management pursuant to Stock Retention Agreements entered into after the date hereof multiplied by the excess of the Per Share Amount over the exercise price of such Options. 35 27 SECTION 5.07 Brokers and Finders. No broker, finder or investment bank has acted directly or indirectly for either Purchaser, nor has either Purchaser incurred any obligation to pay any brokerage, finder's or other fee or commission in connection with the Transactions. SECTION 5.08 Operations of Purchasers. Purchasers have been formed solely for the purpose of engaging in the Transactions and prior to the Closing Date will have engaged in no other business activities. ARTICLE VI COVENANTS SECTION 6.01 Conduct of the Business of the Company Pending the Merger. From the date hereof until the Effective Time, the Company shall conduct the business of the Company and each of its subsidiaries in all material respects only in the ordinary course consistent with past practice, shall use all reasonable efforts to preserve intact the business organization of the Company and keep available the services of its present key officers and employees (provided, however, that to satisfy the foregoing obligation, the Company shall not be required to make any payments or enter into or amend any contractual arrangements or understandings, except in the ordinary course of business consistent with past practice) and shall use all reasonable efforts to preserve the current relationships of the Company and each of its subsidiaries with customers and suppliers with which the Company or such subsidiary has significant business relations and, except as otherwise required by applicable law or as set forth in Section 6.01 of the Company Disclosure Schedule, the Company shall not, without the prior consent of Purchasers (which consent shall not be unreasonably withheld): (a) amend its Articles of Incorporation or By-Laws; (b) declare, set aside or pay any dividend or other distribution or payment in cash, stock or property in respect of its capital stock (other than a quarterly cash dividend of $.0375 per Share for the third quarter of fiscal year 1997), and not reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (c) issue, grant, sell, dispose of, encumber or pledge or agree to or authorize the issuance, grant, sale, disposition, encumbrance of or pledge of any shares of, or rights of any kind to acquire any shares of, the capital stock of any class of or any other ownership interest in the Company or any of its subsidiaries (other than pursuant to the Transactions); 36 28 (d) acquire, sell, transfer, lease or encumber any material assets except in the ordinary course of business and consistent with past practice; (e) adopt a plan of complete or partial liquidation or adopt resolutions providing for the complete or partial liquidation, dissolution, consolidation, merger, restructuring or recapitalization of the Company or any of its subsidiaries; (f) grant any severance or termination pay to, or enter into any employment agreement with, any executive officer or director of the Company, other than in the ordinary course of business and consistent with past practice; (g) except in the ordinary course of business, increase the compensation payable or to become payable to its officers or employees, enter into any contract or other binding commitment in respect of any such increase (other than pursuant to a Company Benefit Plan or policy or agreement existing as of the date hereof) to, or enter into any severance agreement with any director, executive officer or other employee of the Company or establish, adopt, enter into, make any new grants or awards under or amend, any Company Benefit Plan, except as required by applicable law, to maintain tax-qualified status or as may be required by any Company Benefit Plan as of the date hereof; (h) settle or compromise any material claims or litigation or, except in the ordinary course of business and consistent with past practice, modify, amend or terminate any Material Contracts or waive, release or assign any material rights or claims, or make any payment, direct or indirect, of any material liability of the Company before the same becomes due and payable in accordance with its terms; (i) take any action, other than in the ordinary course of business and consistent with past practice with respect to accounting policies or procedures (including tax accounting policies and procedures); except as may be required by law or generally accepted accounting principles; (j) make any Tax election or permit any material insurance policy naming it as a beneficiary or a loss payable payee to be cancelled or terminated without notice to Purchasers, except in the ordinary course of business and consistent with past practice; (k) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or any division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of 37 29 any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business and consistent with past practice; or (iv) authorize any single capital expenditure which is in excess of $2,000,000 or capital expenditures which are, in the aggregate, in excess of $9,000,000 for the Company and its subsidiaries taken as a whole; or (l) authorize or enter into an agreement to do any of the foregoing. SECTION 6.02 Access; Confidentiality. (a) From the date of this Agreement until the Effective Time, upon reasonable prior notice to the Company, the Company shall give Purchasers and their authorized representatives, and Persons providing or committing to provide Purchasers with financing for the Transactions and their representatives, reasonable access to its officers, properties, books and records and shall furnish Purchasers and each of their authorized representatives with such financial and operating data and other information concerning the business and properties of the Company as Purchasers from time to time may reasonably request. (b) Purchasers will hold and will cause their respective affiliates, agents and other representatives to keep all documents and information concerning the Company furnished to Purchasers or their respective representatives in connection with the Transactions confidential in accordance with a confidentiality agreement dated March 10, 1997, between the Company and Fremont Group L.L.C. and a confidentiality agreement dated March 11, 1997 between the Company and Richard C. Blum & Associates, L.P., which confidentiality agreements shall remain in full force and effect until the termination of this Agreement or otherwise in accordance with its terms. SECTION 6.03 Preparation of Company Statement; Shareholders' Meeting; Further Actions. (a) The Company shall file the Offer Documents and, if required by law, the Company Statement with the SEC. Each Purchaser shall cooperate with the Company in connection with the preparation of the Offer Documents and the Company Statement including, but not limited to, furnishing to the Company any and all information regarding such Purchaser and any of its affiliates as may be required to be disclosed therein. The Company shall use its commercially reasonable efforts to cause the Offer Documents and the Company Statement to be mailed to the Company's shareholders as promptly as practicable after the date hereof in the case of the Offer Documents or after the consummation of the Offer in the case of the Company Statement. (b) The Company shall as promptly as practicable notify Purchasers of the receipt of any comments from the SEC. All filings by the Company with the SEC and all mailings to the Company's shareholders in connection with the Transactions, including the 38 30 Offer Documents and the Company Statement, shall be subject to the prior review, comment and approval of Purchasers (such approval not to be unreasonably withheld or delayed). (c) If required by applicable law in order to consummate the Merger, the Company, acting through the Board, shall, in accordance with applicable law and the Company's Articles of Incorporation and By-laws, (i) duly call, give notice of, convene and hold an annual or special meeting of its shareholders as soon as practicable following consummation of the Offer for the purpose of considering and taking action on this Agreement and the Merger (the "Shareholders' Meeting") and (ii) subject to its fiduciary duties under applicable law as advised in writing by outside counsel, (A) include in the Company Statement the unanimous recommendation of the Board that the shareholders of the Company approve and adopt this Agreement and the Merger and (B) use its best efforts to obtain such approval and adoption. At the Shareholders' Meeting, Purchasers shall cause all Shares then owned by them and their subsidiaries to be voted in favor of the approval and adoption of this Agreement and the Merger. (d) Subject to the terms and conditions of this Agreement and applicable law, each of the parties shall act in good faith and use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the Transactions as soon as practicable, including such actions or things as any other party may reasonably request in order to cause any of the conditions to such other party's obligation to consummate the Transactions to be fully satisfied. Without limiting the foregoing, the parties shall (and shall cause their respective subsidiaries, and use commercially reasonable efforts to cause their respective affiliates, directors, officers, employees, agents, attorneys, accountants and representatives, to) consult and fully cooperate with and provide assistance to each other in (i) obtaining all necessary consents, approvals, waivers, licenses, permits, authorizations, registrations, qualifications, or other permission or action by, and giving all necessary notices to and making all necessary filings with and applications and submissions to any court, administrative agency or commission or other governmental authority, or instrumentality, domestic or foreign (collectively, "Governmental Entity") or other Person or entity as soon as reasonably practicable after filing; (ii) make promptly its respective filings, and thereafter make any other required submissions, under, seeking early termination of any waiting period under, the HSR Act; (iii) providing all such information concerning such party, its subsidiaries and its officers, directors, partners and affiliates and making all applications and filings as may be necessary or reasonably requested in connection with any of the foregoing; (iv) consummating and making effective the transactions contemplated hereby; and (v) in the event and to the extent required, amending this Agreement so that this Agreement and the Offer and the Merger comply with Delaware Law and Texas Law. Prior to making any application to or filing with any Governmental Entity or other Person or entity in connection with this Agreement (other than filing under the HSR Act), each party shall provide the other party with drafts thereof and afford the other party a reasonable opportunity 39 31 to comment on such drafts. If at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their commercially reasonable efforts to take all such action. SECTION 6.04 Public Announcements. The Company and Purchasers will obtain the consent of one another prior to issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereby and shall not issue any such press release or make any public statement prior to obtaining such consent, except as may be required by applicable law or pursuant to the rules and regulations of the NASDAQ National Market SECTION 6.05 Recapitalization. The Company shall cooperate with any reasonable requests of Purchasers or the SEC related to the reporting of the Transactions as a recapitalization for financial reporting purposes including, without limitation, to assist Purchasers and their affiliates with any presentation to the SEC with regard to such reporting and to include appropriate disclosure with regard to such reporting in all filings with the SEC and mailings to the shareholders of the Company made in connection with the Offer or the Merger. In furtherance of the foregoing, the Company shall provide to Purchasers for the prior review of Purchasers' advisors any description of Transactions which is meant to be disseminated. SECTION 6.06 Acquisition Proposals. Neither the Company nor any of its subsidiaries shall, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any recapitalization, business combination or similar transaction with the Company or any of its subsidiaries (any communication with respect to the foregoing being an "Acquisition Proposal") or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing; provided, however, that, at any time prior to the purchase of Shares by the Company pursuant to the Offer, the Company may furnish information to, and negotiate or otherwise engage in discussions with, any party who delivers a written Acquisition Proposal which was not solicited or encouraged after the date of this Agreement if the Board determines in good faith by a majority vote (i) after consultation with and receipt of advice from its outside legal counsel, that failing to take such action is reasonably determined to constitute a breach of the fiduciary duties of the Board under applicable Law, (ii) after consultation with and receipt of advice from a nationally recognized investment banking firm, that such proposal is more favorable to the Company's Shareholders from a financial point of view than the Transactions (including any adjustment to the terms and conditions proposed by 40 32 Purchasers in response to such Acquisition Proposal), (iii) that sufficient commitments have been obtained with respect to such Acquisition Proposal that the Board reasonably expects a transaction pursuant to such Acquisition Proposal could be consummated and (iv) that such Acquisition Proposal is not subject to any regulatory approvals that could reasonably be expected to prevent consummation. The Company will immediately cease all existing activities, discussions and negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. From and after the execution of this Agreement, the Company shall immediately advise Purchasers in writing of the receipt, directly or indirectly, of any inquiries, discussions, negotiations, or proposals relating to an Acquisition Proposal (including the specific terms thereof and the identity of the other party or parties involved) and furnish to Purchasers within 48 hours of such receipt an accurate description of all material terms (including any changes or adjustments to such terms as a result of negotiations or otherwise) of any such written proposal in addition to any information provided to any third party relating thereto. In addition, the Company shall immediately advise Purchasers, in writing, if the Board shall make any determination as to any Acquisition Proposal as contemplated by the proviso to the first sentence of this Section 6.06. Notwithstanding the foregoing, the Company shall be permitted to take such actions as may be required to comply with Rule 14e-2 of the Exchange Act. SECTION 6.07 D&O Indemnification and Insurance. (a) From the Effective Time through the sixth anniversary of the date on which the Effective Time occurs, Purchasers shall cause the Surviving Corporation to indemnify and hold harmless each present and former officer, director, employee or agent of the Company, including, without limitation, each Person controlling any of the foregoing Persons (the "Indemnified Parties"), against all claims, losses, liabilities, damages, judgments, fines, fees, costs or expenses, including, without limitation, attorneys' fees and disbursements (collectively, "Costs"), incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time (including, without limitation, this Agreement and the transactions and actions contemplated hereby and giving effect to the consummation of such transactions and actions), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under the Articles of Incorporation or By-Laws of the Company or indemnification agreements in effect on the date hereof, including provisions relating to advancement of expenses incurred in the defense of any claim, action, suit, proceeding or investigation. Without limiting the foregoing, in the event that any claim, action, suit, proceeding or investigation is brought against an Indemnified Party (whether arising before or after the Effective Time), the Indemnified Party may retain counsel satisfactory to such Indemnified Party and Purchasers shall, or shall cause the Surviving Corporation to, advance the fees and expenses of such counsel for the Indemnified Party in accordance with the Articles of Incorporation or By-Laws of the Company in effect on the date of this Agreement. 41 33 (b) For a period of six years from the Effective Time, Purchasers shall, or shall cause the Surviving Corporation to, keep in effect provisions in its Articles of Incorporation and By-Laws of the Company providing for exculpation of director and officer liability and its indemnification of the Indemnified Parties to the fullest extent permitted under Texas Law, which provisions shall not be amended except as required by applicable law or except to make changes permitted by law that would enlarge the Indemnified Parties' right to indemnification. (c) Purchasers shall cause the Surviving Corporation to maintain, at no expense to the beneficiaries, directors' and officers' liability insurance ("D&O Insurance") for the Indemnified Parties with respect to matters occurring at or prior to the Effective Time, issued by a carrier or carriers assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher, providing at least the same coverage as the D&O Insurance currently maintained by the Company and containing terms and conditions which are not materially less favorable to the beneficiaries, for a period of at least six years from the Effective Time; provided, however, that in no event shall the Surviving Corporation be required to expend pursuant to this Section 6.07(c) more than an amount per year equal to 200% of current annual premiums paid by the Company for such insurance (which premiums the Company represents to be $134,480 per year in aggregate). In the event any claim is made against present or former directors, officers or employees of the Company that is covered or potentially covered by insurance, neither the Surviving Corporation nor Purchasers shall do anything that would forfeit, jeopardize, restrict or limit the insurance coverage available for that claim until the final disposition thereof. (d) Notwithstanding anything herein to the contrary, if any claim, action, suit, proceeding or investigation (whether arising before, at or after the Effective Time) is made against any Indemnified Party, on or prior to the sixth anniversary of the Effective Time, the provisions of this Section 6.07 shall continue in effect until the final disposition of such claim, action, suit, proceeding or investigation. (e) In the event that the Surviving Corporation or Purchasers or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 6.07, proper provision shall be made so that the successors and assigns of the Surviving Corporation or Purchasers shall succeed to the obligations set forth in this Section 6.08 and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made. SECTION 6.08 Employee Benefits. (a) From and after the Effective Time, Purchasers and the Surviving Corporation and their respective affiliates will honor in 42 34 accordance with their terms all existing employment, severance, consulting and salary continuation agreements between the Company and any current or former officer, director, employee or consultant of the Company. (b) In the event that the Surviving Corporation or Purchasers or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 6.08, proper provision shall be made so that the successors and assigns of the Surviving Corporation or Purchasers shall succeed to the obligations set forth in this Section 6.08 and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made. SECTION 6.09 Fees and Expenses. (a) In the event the Merger is consummated, all costs and expenses incurred by each party hereto in connection with this Agreement and the Transactions (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) and transaction fees of $5,119,000 to F Purchaser and $3,381,000 to B Purchaser shall be paid by the Company or the Company shall promptly reimburse such party, as the case may be. (b) In the event the Fee is paid by the Company to Purchasers pursuant to Section 8.03 the Company shall promptly reimburse Purchasers for all costs and expenses incurred by Purchasers in connection with this Agreement and the Transactions (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) in an amount not to exceed $2,000,000. (c) In all events other than those expressly described in Section 6.09(a) and (b), all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) shall be borne by the party which incurs such cost or expense, provided that all costs and expenses related to the preparation, printing, filing and mailing (as applicable) of the Offer Documents, the Company Statement and all SEC and other regulatory filing fees incurred in connection with the Company Statement shall be borne equally by the Company, on the one hand, and Purchasers, on the other hand. SECTION 6.10 Debt Financing. Purchasers shall use their reasonable best efforts to obtain Debt Financing or other alternative financing on substantially comparable or more favorable terms. The Company shall use its reasonable best efforts to cooperate with Purchasers in obtaining the Debt Financing, including, without limitation, by participating in roadshows and meeting with, and providing information to, potential sources of financing identified by Purchasers. 43 35 SECTION 6.11 Headquarters of the Company. Purchasers shall use their reasonable efforts to ensure that the headquarters of the Company shall be situated in San Antonio, Texas until the third anniversary of the date of this Agreement. SECTION 6.12 Available Cash. As of the Closing, the assets of the Company shall include $33,000,000 in cash of which $23,000,000 will be in immediately available cash held by the Company or any of its direct or indirect subsidiaries incorporated in the United States in an account at a commercial bank located in the United States and available for use in consummating the Offer as adjusted to reflect any amounts paid by the Company pursuant to any agreement entered into by the Company to purchase the assets of RIK Medical, L.L.C. and RIK Medical East, L.L.C. net of any cash included in such assets. SECTION 6.13 Options. To the extent that any holders of Options elect to surrender such Options for payment in accordance with Section 3.07, the parties agree that proceeds of the Debt and Financing and the Equity Financing shall be used to make such payments to the holders of Options who so elect. ARTICLE VII CONDITIONS SECTION 7.01. Conditions to the Stock Purchase. (a) The respective obligations of each party to effect the Stock Purchase shall be subject to the satisfaction at or prior to the Closing Date of the following condition: (i) No Order. No United States or state governmental authority or other agency or commission or United States or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the acquisition of Shares by Purchasers or any affiliate of any of them illegal or otherwise restricting, preventing or prohibiting consummation of the Transactions. (ii) Offer. The conditions to the Offer set forth in Annex A shall have been satisfied and the Company shall simultaneously with the Closing purchase all Shares validly tendered and not withdrawn pursuant to the Offer. (b) The obligation of the Company to effect the Stock Purchase is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by the Company: 44 36 (i) Accuracy of Representations and Warranties. All representations and warranties made by Purchasers herein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for changes permitted or contemplated by this Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time. (ii) Compliance with Covenants. Each Purchaser shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in this Agreement to be performed or complied with by it prior to or on the Closing Date. (iii) Officer's Certificates. The Company shall have received such certificates of each Purchaser, dated as of the Closing Date, signed by an executive officer of such Purchaser to evidence satisfaction of the conditions set forth in this Article VII (insofar as it relates to Purchasers) as may be reasonably requested by the Company. (c) The obligation of Purchasers to effect the Stock Purchase is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by Purchasers: (i) Accuracy of Representations and Warranties. All representations and warranties made by the Company herein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for changes permitted or contemplated by this Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time. (ii) Compliance with Covenants. The Company shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in this Agreement to be performed or complied with by it prior to or on the Closing Date. 45 37 (iii) Officer's Certificates. Each Purchaser shall have received such certificates of the Company, dated as of the Closing Date, signed by an executive officer of the Company to evidence satisfaction of the conditions set forth in this Article VII (insofar as it relates to the Company) as may be reasonably requested by the Company. (iv) Directors Resignations. All Directors of the Company shall have tendered their resignations effective as of the Closing and shall have been replaced by nominees acceptable to Purchasers. SECTION 7.02. Conditions to the Merger. (a) The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (i) Shareholder Approval. This Agreement and the transactions contemplated hereby shall have been approved and adopted by the affirmative vote of the shareholders of the Company to the extent required by Texas Law and the Articles of Incorporation of the Company; (ii) No Order. No United States or state governmental authority or other agency or commission or United States or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the acquisition of Shares by Purchasers or any affiliate of any of them illegal or otherwise restricting, preventing or prohibiting consummation of the Transactions; and (iii) Stock Purchase. Purchasers shall have purchased, respectively, the F Shares and the B Shares pursuant to the Stock Purchase. (b) The obligation of the Company to effect the Merger is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by the Company: (i) Accuracy of Representations and Warranties. All representations and warranties made by Purchasers herein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) at the Effective Time, with the same force and effect as though such representations and warranties had been made on and as of the Effective Time, except for changes permitted or contemplated by this Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except 46 38 for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time. (ii) Compliance with Covenants. Each Purchaser shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in this Agreement to be performed or complied with by it prior to or as of the Effective Time. (iii) Officer's Certificates. The Company shall have received such certificates of Purchasers, dated as of the Effective Time, signed by an executive officer of each Purchaser to evidence satisfaction of the conditions set forth in this Article VII (insofar as it relates to Purchasers) as may be reasonably requested by the Company. (c) The obligation of Purchasers to effect the Merger is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by Purchasers: (i) Accuracy of Representations and Warranties. All representations and warranties made by the Company herein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) as of the Effective Time, with the same force and effect as though such representations and warranties had been made on and as of the Effective Time, except for changes permitted or contemplated by this Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time. (ii) Compliance with Covenants. The Company shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in this Agreement to be performed or complied with by it prior to or as of the Effective Time. (iii) Officer's Certificates. Each Purchaser shall have received such certificates of the Company, dated as of the Effective Time, signed by an executive officer of the Company to evidence satisfaction of the conditions set forth in this Article VII (insofar as it relates to the Company) as may be reasonably requested by the Company. ARTICLE VIII 47 39 TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination. This Agreement may be terminated and the Transactions may be abandoned at any time prior to the Effective Time, as the case may be, notwithstanding any requisite approval and adoption of this Agreement and the transactions contemplated hereby by the shareholders of the Company: (a) By mutual written consent duly authorized by the Board of Directors or Managers of each Purchaser and the Company; or (b) By either Purchaser or the Company if (i) the Closing shall not have occurred by January 31, 1998 or (ii) the Effective Time shall not have occurred on or before May 31, 1998; provided, however, that the right to terminate this Agreement under this Section 8.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing or the Effective Time, as the case may be, to occur on or before such dates or (ii) any court of competent jurisdiction in the United States or other United States governmental authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable; or (c) By either Purchaser if (i) due to an occurrence or circumstance that would result in a failure to satisfy any condition set forth in Annex A hereto, the Company shall have (A) failed to commence the Offer within 10 business days following the date of this Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 60 days following the commencement of the Offer, unless such failure to pay for Shares shall have been caused by or resulted from the failure of Purchasers to perform in any material respect any material covenant or agreement of either of them contained in this Agreement or the material breach by Purchasers of any material representation or warranty of either of them contained in this Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchasers its approval or recommendation of the Offer, this Agreement, the Transactions or shall have recommended another transaction pursuant to any Acquisition Proposal, or shall have resolved to do any of the foregoing; or (d) By the Company, upon approval of the Board, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any of the conditions set forth in Annex A hereto, the Company shall have (A) failed to commence the Offer within 10 business days following the date of this Agreement, 48 40 (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 60 days following the commencement of the Offer, unless such failure to pay for Shares shall have been caused by or resulted from the failure of the Company to perform in any material respect any material covenant or agreement of it contained in this Agreement or the material breach by the Company of any material representation or warranty of it contained in this Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board shall have withdrawn or modified in a manner adverse to Purchasers its approval or recommendation of the Offer, this Agreement or the Transactions in order to approve the execution by the Company of a definitive agreement concerning a transaction pursuant to an Acquisition Proposal. SECTION 8.02. Effect of Termination. In the event of the termination of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void, and there shall be no liability on the part of any party hereto, except (i) as set forth in Sections 6.02(b), 8.03 and 9.01 and (ii) nothing herein shall relieve any party from liability for any breach hereof. SECTION 8.03. Fees. Notwithstanding the provisions of Section 6.10, in the event that (a) any Person shall have commenced, publicly proposed or communicated to the Company a proposal that is publicly disclosed for a tender or exchange offer for 20% or more (or which, assuming the maximum amount of securities which could be purchased, would result in any Person beneficially owning 20% or more) of the then outstanding Shares or otherwise for the direct or indirect acquisition of the Company or all or substantially all of its assets for per Share consideration having a value greater than the Per Share Amount and (w) the Offer shall have remained open for at least 20 business days, (x) the Minimum Condition shall not have been satisfied, (y) this Agreement shall have been terminated pursuant to Section 8.01 and (z) within 12 months of any such termination a transaction such as the transaction contemplated by this Section 8.03(a) shall have been consummated or definitive documentation shall have been entered into with respect thereto; or (b) this Agreement is terminated pursuant to Section 8.01(c)(ii) or 8.01(d)(ii); then, in any such event, the Company shall pay Purchasers (i) prior to such consummation or entering into of definitive documentation in the case of paragraph (a) or (ii) prior to such withdrawal or modification in the case of termination pursuant to paragraph (b), a fee of $30 million (the "Fee"). 49 41 SECTION 8.04. Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after the approval and adoption of this Agreement and the transactions contemplated hereby by the shareholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.05. Waiver. At any time prior to the Effective Time, any party hereto may (i) extend the time for the performance of any obligation or other act of any other party hereto, (ii) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE X GENERAL PROVISIONS SECTION 9.01. Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.01, as the case may be, except that the agreements set forth in Article III and Sections 6.08 and 6.09 shall survive the Effective Time indefinitely and those set forth in Sections 6.02(b) and 8.03 shall survive termination indefinitely. SECTION 9.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 9.02): 50 42 if to F Purchaser: Fremont Purchasers II, Inc. 50 F Street, Suite 3700 San Francisco, California 94105-1895 Facsimile No: (415) 284-8191 Attention: General Counsel with a copy to: Shearman & Sterling 599 Lexington Avenue New York, New York 10022 Facsimile No: (212) 848-7179 Attention: David W. Heleniak, Esq. if to B Purchaser: RCBA Purchaser I, L.P. 909 Montgomery Street, Suite 400 San Francisco, California 94133-4625 Facsimile No.: (415) 434-3130 Attention: Murray Indick, Esq., General Counsel with a copy to: Wilmer Cutler & Pickering 2445 M Street, NW Washington, DC 20037 Facsimile No.: (202) 663-6363 Attention: Michael Klein, Esq. if to the Company: Kinetic Concepts, Inc. 8023 Vantage Drive San Antonio, Texas 78230-4726 Facsimile No.: (210) 255-6993 Attention: Dennis E. Noll, Esq., General Counsel 51 43 with a copy to: Cox & Smith 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205-1521 Facsimile No.: (210) 226-8395 Attention: Stephen Seidel, Esq. SECTION 9.03. Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" of a specified Person means a Person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified Person; (b) "beneficial owner" with respect to any Shares means a Person who shall be deemed to be the beneficial owner of such Shares (i) which such Person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or indirectly, (ii) which such Person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other Persons with whom such Person or any of its affiliates or associates or Person with whom such Person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Shares; (c) "business day" means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized to close in the City of New York; (d) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise; (e) "Knowledge" means the actual knowledge, after due investigation, of the officers of the Company with a title of vice president or higher; 52 44 (f) "Material Adverse Effect" means any change or effect or any event or circumstance which is, or is reasonably likely to be, materially adverse to the assets, liabilities, business, financial condition or results of operations of the Company and its subsidiaries taken as a whole; (g) "Person" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government; and (h) "subsidiary" or "subsidiaries" of the Company, the Surviving Corporation, either of Purchasers or any other person means an affiliate controlled by such person, directly or indirectly, through one or more intermediaries. SECTION 9.04. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the fullest extent possible. SECTION 9.05. Entire Agreement; Assignment. This Agreement and the Shareholder Support Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Purchasers may assign all or any of their rights and obligations hereunder to any affiliate or affiliates of either of Purchasers provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 9.06. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than Section 6.07 (which is intended to be for the benefit of the persons covered thereby and may be enforced by such persons). SECTION 9.07. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not 53 45 performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. SECTION 9.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed in that State. All actions and proceeding arising out of or relating to this Agreement shall be heard and determined in any Delaware state or federal court. THE COMPANY AND PURCHASERS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVER ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR PURCHASERS. SECTION 9.09. Joint and Several Obligations. The obligations of Purchasers under this Agreement shall be joint and several except that neither Purchaser shall have any obligation or liability with respect to the portion of the Equity Financing to be provided by the other Purchaser in accordance with Section 5.06. SECTION 9.10. Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.11. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 54 46 IN WITNESS WHEREOF, Purchasers and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. FREMONT PURCHASER II, INC. By /s/ R. S. Kopf -------------------------------- Title: RCBA PURCHASER I, L.P. By /s/ N. Colin Lind -------------------------------- Title: Managing Director KINETIC CONCEPTS, INC. By /s/ Raymond R. Hannigan -------------------------------- Title: President and Chief Executive Officer 55 ANNEX A Conditions to the Offer Notwithstanding any other provision of the Offer, the Company shall not be required to accept for payment or pay for any Shares tendered pursuant to the Offer, if (v) the Minimum Condition shall not have been satisfied, (w) any applicable waiting period under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer, (x) the Debt Financing shall not have been obtained, (y) the Closing shall not have occurred or (z) at any time on or after the date of this Agreement, and prior to the acceptance for payment of Shares, any of the following conditions shall exist: (a) there shall be instituted or be pending any action or proceeding before any court or governmental, administrative or regulatory authority or agency, domestic or foreign, in each case that has a reasonable likelihood of success notwithstanding the reasonable efforts of the Company and Purchasers to dismiss or otherwise terminate such action or proceeding, (i) challenging or seeking to make illegal, materially delay or otherwise directly or indirectly restrain or prohibit or make materially more costly the making of the Offer, the acceptance for payment of, or payment for, any Shares by the Company, Purchasers or any affiliate of either of Purchasers, or the consummation of any other Transaction, or seeking to obtain material damages in connection with any Transaction; (ii) seeking to prohibit or limit materially the ownership or operation by the Company, Purchasers or any of their affiliates of all or any material portion of the business or assets of the Company, Purchasers or any of their affiliates, or to compel the Company, Purchasers or any of their affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company, Purchasers or any of their affiliates, as a result of the Transactions; (iii) seeking to impose or confirm limitations on the ability of Purchasers or any of their affiliates to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Purchaser pursuant to the Stock Purchase or the Shareholder Support Agreement or otherwise on all matters properly presented to the Company's shareholders, including, without limitation, the approval and adoption of this Agreement and the transactions contemplated hereby; or (iv) seeking to require divestiture by Purchasers or any of their affiliates; (b) there shall have been any action taken, or any statute, rule, regulation, legislation, interpretation, judgment, order or injunction enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Purchasers, the Company or any of their affiliates or (ii) any Transaction, by any legislative body, 56 A-2 court, government or governmental, administrative or regulatory authority or agency, domestic or foreign, other than the routine application of the waiting period provisions of the HSR Act to the Offer, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; (c) there shall have occurred any change, condition, event or development that has a Material Adverse Effect on the Company; (d) there shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on any national securities exchange, the NASDAQ National Market, or the over-the-counter market in the United States, (ii) any decline, measured from the date hereof, in the Standard & Poor's 500 Index by an amount in excess of 15%, (iii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iv) any limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, on, or other event that, in the reasonable judgment of Purchasers, might affect, the extension of credit by banks or other lending institutions, (v) a commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States or (vi) in the case of any of the foregoing existing on the date hereof, a material acceleration or worsening thereof; (e) (i) it shall have been publicly disclosed or Purchasers shall have otherwise learned that beneficial ownership (determined for the purposes of this paragraph as set forth in Rule 13d-3 of the Exchange Act) of 20% or more of the then outstanding Shares has been acquired by any person, other than Purchasers or any of either of their affiliates or (ii) (A) the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchasers the approval or recommendation of the Offer or the Transactions, or approved or recommended any takeover proposal or any other acquisition of Shares other than pursuant to the Transactions or (B) the Board or any committee thereof shall have resolved to do any of the foregoing; (f) the Merger Agreement shall have been terminated in accordance with its terms; (g) Purchasers and the Company shall have agreed that the Company shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder; or 57 A-3 (h) The Company shall not have received Houlihan Lokey's written opinion, which opinion shall not have been withdrawn, addressed to the Board and the Purchasers with respect to solvency and related matters in form and substance reasonably satisfactory to the Board and Purchasers. The parties acknowledge that the Conditions to the Offer set forth above in this Annex A are for the benefit of the Purchasers and the Company and that the Company shall not assert failure of, or waive, any such condition without the prior written consent of each Purchaser (which consent shall not be unreasonably withheld). 58 EXHIBIT A RESTATED ARTICLES OF INCORPORATION (WITH AMENDMENTS) OF KINETIC CONCEPTS, INC. ARTICLE ONE Kinetic Concepts, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act ("TBCA"), hereby adopts restated articles of incorporation that accurately copy the articles of incorporation and all amendments thereto that are in effect to date and as further amended by such restated articles of incorporation as hereinafter set forth and that contain no other change in any provisions thereof. ARTICLE TWO The articles of incorporation of the corporation are amended by the restated articles of incorporation as follows: Article Three of the Articles of Incorporation is amended by the restated articles of incorporation of the corporation to read as follows: "ARTICLE THREE The purpose for which the Corporation is organized is to transact any or all lawful business for which corporations may be organized under the Texas Business Corporation Act; provided, however, that the corporation shall not transact any business in this state that is prohibited by Article 2.01-B of the Texas Business Corporation Act." Article Four of the Articles of Incorporation is amended by the restated articles of incorporation of the corporation to read as follows: "ARTICLE FOUR The total number of shares of all classes of stock that the Corporation is authorized to issue is [one hundred fifty million (150,000,000) shares], all of which shall be shares of Common Stock, par value $.001 per share." Article Six has been redesignated Article Ten and amended by the restated articles of incorporation of the corporation to read as follows: 59 2 "ARTICLE TEN The street address of the registered office of the Corporation is [ ], and the name of the registered agent of the Corporation at such address is [ ]." Article Seven has been redesignated as paragraph (2) of Article Eight and amended by the restated articles of incorporation of the corporation to read as follows: "(2) To the extent permitted by the Texas Business Corporation Act as it now exists and as it may hereafter be amended, a Director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for an act or omission in the Director's capacity as a director, except for liability for (a) a breach of the Director's duty of loyalty to the Corporation or its shareholders, (b) an act or omission not in good faith that constitutes a breach of duty of the Director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the Director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the Director's office, or (d) an act or omission for which the liability for the Director is expressly provided for by statute." Article Eight has been redesignated Article Nine and amended by the restated articles of incorporation of the corporation to read as follows: "ARTICLE NINE The current board of directors of the Corporation [at the time of filing] [at the time of execution] of these Amended and Restated Articles of Incorporation consists of eight (8) directors. The names and address of the persons who are acting [at the time of filing] [at the time of execution] of these Amended and Restated Articles of Incorporation in the capacity of directors until the selection of their successors are: NAME ADDRESS [ ] [ ] [ ] [ ] [ ] [ ] 60 3 [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]" Article Nine has been redesignated Article Six and amended by the restated articles of incorporation of the corporation to read as follows: "ARTICLE SIX No shareholder or other holder of securities of the Corporation shall have any preemptive right to acquire additional, unissued or treasury shares of the Corporation, or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares, except as provided by any agreement between the Corporation and its shareholders." Articles Ten and Eleven have been deleted in their entirety by the amendments effected by the restated articles of incorporation of the corporation . The Articles of Incorporation are further amended by the restated articles of incorporation of the corporation by adding new Article Seven and paragraph (1) to Article Eight to read as follows: "ARTICLE SEVEN (1) With respect to any matter for which, but for this provision, the affirmative vote of the holders of two-thirds of the shares entitled to vote is required by the Act, the act of the shareholders on that matter shall be the affirmative vote of a majority of the shares entitled to vote on that matter rather than the affirmative vote otherwise required by the Act. With respect to any matter for which, but for this provision, the affirmative vote of the holders of two-thirds of the shares of any class or series is required by the Act, the act of the shareholders on that matter shall be the affirmative vote of a majority of the shares of that class or series rather than the affirmative vote of the holders of shares of that class or series otherwise required by the Act. (2) Any action required by the Texas Business Corporation Act to be taken at any annual or special meeting of shareholders, or any action which 61 4 may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken shall be signed by the holder or holders of all shares entitled to vote on the action were present and voted. ARTICLE EIGHT (1) Elections of directors of the Corporation need not be by written ballot, except and to the extent provided in the By-laws of the Corporation." The Articles of Incorporation are further amended by the restated articles of incorporation of the corporation by adding new Articles Eleven and Twelve to read as follows: "ARTICLE ELEVEN (1) The Corporation reserves the right to amend, alter, change or repeal any provision of these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights conferred on shareholders in these Articles of Incorporation are subject to this reservation. (2) The By-laws of the Corporation may be amended, repealed or adopted by the affirmative vote of the holders of a majority of shares then entitled to vote on such action. The Board of Directors shall not have the power to amend, repeal or adopt any By-law of the Corporation. 62 5 ARTICLE TWELVE The Corporation shall indemnify its directors to the fullest extent provided by the Texas Business Corporation act, as amended." ARTICLE THREE Each such amendment made by the restated articles of incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act and such restated articles of incorporation and each such amendment made by the restated articles of incorporation were duly adopted by the shareholders of the corporation on the ___ day of ________, 199_. ARTICLE FOUR The number of shares outstanding was ________, and the number of shares entitled to vote on the restated articles of incorporation as so amended was ________. All of the shareholders have signed a written consent to the adoption of such restated articles of incorporation as so amended pursuant to Article 9.10(A) of the TBCA and any written notice required by Article 9.10(A) of the TBCA has been given. ARTICLE FIVE The articles of incorporation and all amendments and supplements thereto are hereby superseded by the following restated articles of incorporation which accurately copy the entire text thereof and as amended as above set forth: "AMENDED AND RESTATED ARTICLES OF INCORPORATION OF KINETIC CONCEPTS, INC. ARTICLE ONE The name of the corporation (which is hereinafter called the "Corporation") is Kinetic Concepts, Inc. ARTICLE TWO The period of duration of the Corporation is perpetual. 63 6 ARTICLE THREE The purpose for which the Corporation is organized is to transact any or all lawful business for which corporations may be organized under the Texas Business Corporation Act; provided, however, that the corporation shall not transact any business in this state that is prohibited by Article 2.01-B of the Texas Business Corporation Act. ARTICLE FOUR The total number of shares of all classes of stock that the Corporation is authorized to issue is [one hundred fifty million (150,000,000) shares], all of which shall be shares of Common Stock, par value $.001 per share. ARTICLE FIVE The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of at least One Thousand Dollars ($1,000.00), consisting of money, labor done or property actually received. ARTICLE SIX No shareholder or other holder of securities of the Corporation shall have any preemptive right to acquire additional, unissued or treasury shares of the Corporation, or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares, except as provided by any agreement between the Corporation and its shareholders. ARTICLE SEVEN (1) With respect to any matter for which, but for this provision, the affirmative vote of the holders of two-thirds of the shares entitled to vote is required by the Act, the act of the shareholders on that matter shall be the affirmative vote of a majority of the shares entitled to vote on that matter rather than the affirmative vote otherwise required by the Act. With respect to any matter for which, but for this provision, the affirmative vote of the holders of two-thirds of the shares of any class or series is required by the Act, the act of the shareholders on that matter shall be the affirmative vote of a majority of the shares of that class or series rather than the affirmative vote of the holders of shares of that class or series otherwise required by the Act. (2) Any action required by the Texas Business Corporation Act to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so 64 7 taken shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. ARTICLE EIGHT (1) Elections of directors of the Corporation need not be by written ballot, except and to the extent provided in the By-laws of the Corporation. (2) To the extent permitted by the Texas Business Corporation Act as it now exists and as it may hereafter be amended, a Director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for an act or omission in the Director's capacity as a director, except for liability for (a) a breach of the Director's duty of loyalty to the Corporation or its shareholders, (b) an act or omission not in good faith that constitutes a breach of duty of the Director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law, (c) a transaction from which the Director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the Director's office, or (d) an act or omission for which the liability for the Director is expressly provided for by statute. [Any repeal or modification of all or part of this article Eight by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.] ARTICLE NINE The current board of directors of the Corporation [at the time of filing] [at the time of execution] of these Amended and Restated Articles of Incorporation consists of eight (8) directors. The names and address of the persons who are acting [at the time of filing] [at the time of execution] of these Amended and Restated Articles of Incorporation in the capacity of directors until the selection of their successors are: NAME ADDRESS [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] 65 8 [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] ARTICLE TEN The street address of the registered office of the Corporation is [ ], and the name of the registered agent of the Corporation at such address is [ ]. ARTICLE ELEVEN (1) The Corporation reserves the right to amend, alter, change or repeal any provision of these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights conferred on shareholders in these Articles of Incorporation are subject to this reservation. (2) The By-laws of the Corporation may be amended, repealed or adopted by the affirmative vote of the holders of a majority of shares then entitled to vote on such action. The Board of Directors shall not have the power to amend, repeal or adopt any By-law of the Corporation. ARTICLE TWELVE The Corporation shall indemnify its directors to the fullest extent provided by the Texas Business Corporation act, as amended. -------------------------- Name: Title:" 66 EXHIBIT B AMENDED AND RESTATED BY-LAWS OF KINETIC CONCEPTS, INC. ARTICLE I OFFICES Section 1. Principal Office. The principal office of the Corporation shall be in the City of San Antonio, Texas. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II SHAREHOLDERS Section 1. Time and Place of Meeting. All meetings of the shareholders shall be held at such time and at such place within or without the State of Texas as shall be determined by the Board of Directors. Section 2. Annual Meetings. The annual meeting of shareholders of the Corporation for the election of directors of the Corporation, and for the transaction of such other business as may properly come before such meeting, shall be held at such place, date and time as shall be fixed by the Board and designated in the notice or waiver of notice of such annual meeting. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the President or the Board of Directors, and shall be called by the President or Secretary at the request in writing of the holders of not less than fifty percent (50%) of all the shares issued, outstanding and entitled to vote at the meeting. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 4. Notice. Written or printed notice stating the place, day and hour of any shareholders' meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be 67 2 delivered when deposited in the United States mail, postage prepaid, to the shareholder at his address as it appears on the stock transfer books of the Corporation. Section 5. Record Date. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such record date to be not less than ten (10) nor more than sixty (60) days prior to such meeting, or the Board of Directors may close the stock transfer books for such purpose for a period of not less than ten (10) nor more than sixty (60) days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date. Section 6. List of Shareholders. The officer or agent of the Corporation having charge of the share transfer records for shares of the Corporation shall make, at least ten (10) days before each meeting of the shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of voting shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any such shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer records shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meetings of shareholders. Section 7. Quorum. Except as otherwise provided by law or the Articles of Incorporation, the holders of a majority of the issued and outstanding shares and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by the Texas Business Corporation Act (herein called the "Act"). If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Once a quorum is constituted, the shareholders present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of shareholders as to leave less than a quorum. Section 8. Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the shares present or represented by proxy at such meeting and 68 3 entitled to vote shall be the act of the shareholders, unless the vote of a different number is required by the Act, the Articles of Incorporation or these By-Laws. Section 9. Proxy. Each shareholder shall at every meeting of the shareholders be entitled to one vote in person or by proxy for each share having voting power held by such shareholder. Every proxy must be executed in writing by the shareholder or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 10. Action by Written Consent. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of shareholders. Section 11. Meetings by Conference Telephone. Shareholders may participate in and hold meetings of shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transactions of any business on the ground that the meeting is not lawfully called or convened. ARTICLE III DIRECTORS Section 1. Numbers of Directors. The Corporation shall have no less than one and no more than ten directors as may be provided from time to time by a resolution of the Board of Directors or by a vote of the holders of a majority of shares then entitled to vote in the election of Directors, but no decrease shall have the effect of reducing the term of any incumbent Director. Directors shall be elected at the annual meeting of the shareholders, except as provided in Section 2 of this Article, and each director shall hold office until his successor is elected and qualified. Directors need not be shareholders of the Corporation or residents of the State of Texas. Except as otherwise provided by any agreement between the Corporation and its shareholders, any or all of the Directors may be removed, with or without cause, by the shareholders, at any time, by a vote of the holders of a majority of the shares then entitled to vote in the election of Directors, provided that notice of the meeting states that one of the purposes of the meeting is the removal of a director or directors. 69 4 Section 2. Vacancies. Except as otherwise provided by any agreement between the Corporation and its shareholders, the affirmative vote of the holders of a majority of the shares then entitled to vote in the election of Directors may fill any vacancy occurring in the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by a vote of the holders of a majority of the shares then entitled to vote in the election of Directors at an annual meeting or at a special meeting of shareholders called for that purpose. Except as otherwise provided by any agreement between the Corporation and its shareholders, at any annual meeting of shareholders, or any special meaning called for such purpose, any director may be removed from office, with or without cause, though his term may not have expired. Section 3. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all powers of the Corporation and do all such lawful acts and things as are not by the Act, the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. Section 4. Place of Meetings. The directors of the Corporation may hold their meetings, both regular and special, either within or without the State of Texas. Section 5. Annual Meetings. The first meeting of each newly elected Board of Directors shall be held without further notice immediately following the annual meeting of the shareholders, and at the same place, unless by unanimous consent of the directors then elected and serving such time or place shall be changed. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the President on two days' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of any two directors. Section 8. Quorum. At all meetings of the Board of Directors, the presence of a majority of the number of directors fixed by Section 1 of this Article shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Act, the Articles of Incorporation or these By-Laws. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. 70 5 Section 9. Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate an Executive Committee, to consist of two or more directors, one of whom shall be designated as chairman, who shall preside at all meetings of such Committee. To the extent provided in the resolution of the Board of Directors, the Executive Committee shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the Corporation, except where action of the Board of Directors is required by the Act or by the Articles of Incorporation, and shall have the power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Any member of the Executive Committee may be removed, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. If any vacancy or vacancies occur in the Executive Committee, such vacancy or vacancies shall be filled by the affirmative vote of a majority of the whole Board of Directors. Section 10. Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate other committees, each committee to consist of two or more directors, which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Board of Directors and shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. Section 11. Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors; provided that nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Members of the Executive Committee may, by resolution of the Board of Directors, be allowed like compensation for attending Executive Committee meetings. Section 12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee designated by the Board of Directors may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all the members of the Board of Directors or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 13. Meetings by Conference Telephone. Members of the Board of Directors or members of any committee designated by the Board of Directors may participate in and hold a meeting of such Board or committee by means of conference telephone or simi- 71 6 lar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transactions of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV NOTICES Section 1. Form of Notice. Whenever under the provisions of the Act, the Articles or Incorporation or these By-Laws, notice is required to be given to any director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, by mail, postage prepaid, addressed to such director or shareholder at such address as appears on the books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same be thus deposited, postage prepaid, in the United States mail as aforesaid. Section 2. Waiver. Whenever any notice is required to be given to any director or shareholder of the Corporation, under the provisions of the Act, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be deemed equivalent to the giving of such notice. ARTICLE V OFFICERS Section 1. In General. The officers of the Corporation shall be elected by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors may also, if it chooses to do so, elect a Chairman of the Board, additional Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers, all of whom shall also be officers. Two or more offices may be held by the same person. Section 2. Election. The Board of Directors at its first meeting after such annual meeting of the shareholders shall elect a President and, if it so chooses, may elect a Chairman of the Board, both of whom shall be members of the Board, but the other officers need not be members of the Board. The Board of Directors may appoint such other officers and agents as it shall deem necessary and may determine the salaries of all officers and agents from time to time. The officers shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed, for or without cause, at any time by a majority vote of the whole Board. Election or appointment of an officer or agent shall not of itself create contract rights. 72 7 Section 3. Chairman. The Chairman of the Board of Directors, if there be a Chairman, shall preside at all meetings of the shareholders and the Board of Directors and shall have such other powers as may from time to time be assigned by the Board of Directors. Section 4. President. The President shall preside at all meetings of the shareholders and the Board of Directors, if a Chairman of the Board has not been elected, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all contracts requiring a seal and shall also execute mortgages, conveyances or other legal instruments in the name of and on behalf of the Corporation, but this provision shall not prohibit the delegation of such powers by the Board of Directors to some other officer, agent or attorney-in-fact of the Corporation. Section 5. Vice Presidents. The Vice President or, if there be more than one, the Vice Presidents in the order of their seniority or in any other order determined by the Board of Directors, shall, in the absence or disability of the Senior Vice President, perform the duties and exercise the powers of the Senior Vice President, and shall generally assist the President and Senior Vice Presidents and perform such other duties as the Board of Directors shall prescribe. Section 6. Secretary. The Secretary shall attend all sessions of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for any other committees of the Board when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation. Section 7. Assistant Secretaries. Any Assistant Secretary shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as may be prescribed by the Board of Directors or the President. Section 8. Treasurer. The Treasurer shall have the custody of all corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements of the Corporation, and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and directors at the regular meetings of the Board or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation, 73 8 and shall perform such other duties as may be prescribed by the Board of Directors or the President. Section 9. Assistant Treasurers. Any Assistant Treasurer shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as may be prescribed by the Board of Directors or the President. ARTICLE VI CERTIFICATES OF REPRESENTING SHARES Section 1. Form of Certificates. The Corporation shall deliver certificates representing shares to which shareholders are entitled. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number, class of shares, and the par value of the shares or a statement that the shares are without par value. They shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof if the Corporation shall then have a seal. If any certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation or an employee of the Corporation, the signatures of the Corporation's officers may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation or its agents, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed the certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. Section 2. Lost Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing the issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of the lost or destroyed, certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. 74 9 Section 3. Transfer of Shares. Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney and, upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders. The Corporation shall be entitled to recognize the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the outstanding shares of the Corporation, subject to the provisions of the Act and of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Dividends may be declared and paid in cash, in property, or in shares of the Corporation, provided that all such declarations and payments of dividends shall be in strict compliance with all applicable laws and the Articles of Incorporation. The Board of Directors may fix in advance a record date for the purposes of determining shareholders entitled to receive payment of any dividend, such record date to be not more than sixty (60) days prior to the payment of such dividend, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than fifty (60) days prior to the payment date of such dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such dividend shall be the record date. Section 2. Reserves. There may be created by resolution of the Board of Directors out of the earned surplus of the Corporation such reserve or reserves as the Board of Directors from time to time, in its discretion, deems proper to provide for contingencies or to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board shall deem beneficial to the Corporation, and the Board may modify or abolish any reserve in the same manner in which it was created. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 75 10 Section 4. Annual Statement. The Board of Directors shall present at each annual meeting and when called for by vote of the shareholders at any special meeting of the shareholders, a full and clear statement of the business and condition of the Corporation. Section 5. Disallowed Payments. Any payments made to an officer of the Corporation such as a salary, commission, bonus, interest, or rent, or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer to the Corporation to the full extent of such disallowance. It shall be the duty of the Directors, as a Board, to enforce payment by the officer, subject to the determination of the Directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the Corporation has been recovered. ARTICLE VIII INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. As utilized in this Article, the following terms shall have the meanings indicated: (a) The term "corporation" includes any domestic or foreign predecessor entity of the corporation in a merger, consolidation or other action in which the liabilities of the predecessor are transferred to the corporation by operation of law and in any other transaction in which the corporation assumes the liabilities of the predecessor, but does not specifically exclude liabilities that are the subject matter of this Article. (b) The term "director" means any person who is or was a director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (c) The term "expenses" include court costs and attorneys' fees. (d) The term "official capacity" means: (i) when used with respect to a director, the office of director in the corporation, and (ii) when used with respect to a person other than a director, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation, but (iii) in both (i) and (ii) above does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. 76 11 (e) The term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding. Section 2. The corporation shall indemnify a person who was, is or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director only if it is determined, in accordance with Section 6 of this Article that the person (a) conducted himself or herself in good faith; (b) reasonably believed: (1) in the case of conduct in the official capacity as a director of the corporation, that the conduct was in the corporation's best interests, and (ii) in all other cases, that the conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Section 3. A director shall not be indemnified by the corporation as provided in Section 2 of this Article for obligations resulting from a proceeding (a) in which the director is found liable on the basis that a personal benefit was improperly received by the director, whether or not the benefit resulted from an action taken in the person's official capacity, or (b) in which the person is found liable to the corporation, except to the extent permitted in Section 5 of this Article. Section 4. The termination of a proceeding by judgment, order, settlement or conviction or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements set forth in Section 2 of this Article. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Section 5. A person may be indemnified by the corporation as provided in Section 2 of this Article against judgements, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the corporation or is found liable on the basis that a personal benefit was improperly received by the person, the indemnification (a) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding, and (b) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of the person's duty to the corporation. Section 6. A determination of indemnification under Section 2 of this Article shall be made (a) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated 77 12 to act in the matter by a majority vote of all directors, consisting solely of two (2) or more directors who at the time of the vote are not named defendants or respondents in the proceeding (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 6, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding. Section 7. Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by special legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made in the manner specified by subsection (c) of Section 6 of this Article for the selection of special legal counsel. A provision contained in the articles of incorporation, the bylaw, a resolution of shareholders or directors, or an agreement that makes mandatory the indemnification described in Section 2 of this Article shall be deemed to constitute authorization of indemnification in the manner required herein, even though such provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible. Section 8. The corporation shall indemnify a director against reasonable expenses incurred by the director in connection with a proceeding in which the director is a named defendant or respondent because the person is or was a director if the director has been wholly successful, on the merits or otherwise, in the defense of the proceeding. Section 9. If upon application of a director, a court of competent jurisdiction determines, after giving any notice the court considers necessary, that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director has met the requirements set forth in Section 2 of this Article or has been found liable in the circumstances described in Section 3 of this Article, the corporation shall indemnify the director to such further extent as the court shall determine; but if the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding. Section 10. Reasonable expenses incurred by a director who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation in advance of the final disposition of the proceeding and without the defemination specified in Section 6 of this Article or the authorization or determination specified in Section 7 of this Article, after the corporation receives a written affirmation by the director of a good faith belief that the standard of conduct necessary for indemnification under this Article has been met and a written undertaking by or on behalf of 78 13 the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by Section 5 of this Article. A provision contained in the articles of incorporation, these bylaws, a resolution of the shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted under this Section shall be deemed to constitute authorization of that payment or reimbursement. Section 11. The written undertaking required by Section 10 of this Article shall be an unlimited general obligation of the director, but need not be secured. It may be accepted without reference to financial ability to make repayment. Section 12. Notwithstanding any other provision of this Article, the corporation may pay or reimburse expenses incurred by a director in connection with an appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent. in the proceeding. Section 13. An officer of the corporation shall be indemnified by the corporation as and to the same extent provided by Sections 7, 8 and 9 of this Article for a director and is entitled to seek indemnification under those sections to the same extent as a director. The corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent that it may indemnify and advance expenses to directors under this Article. Section 14. The corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the corporation but who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the same extent that it may indemnify and advance expenses to directors under this Article. Section 15. The corporation may indemnify and advance expenses to an officer, employee, agent or person identified in Section 14 of this Article and who is not a director to such further extent, consistent with law, as may be provided by the articles of incorporation, these bylaws, general or specific action of the board of directors or contract or as permitted or required by common law. Section 16. The corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of 79 14 another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in such a capacity or arising out of the status as such a person, whether or not the corporation would have the power to indemnify such person against that liability under this Article. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. Without limiting the power of the corporation to procure or maintain any kind of insurance or other arrangement, the corporation may, for the benefit of persons indemnified by the corporation (a) create a trust fund, (b) establish any form of self-insurance, (c) secure its indemnity obligations by grant of a security interest or other lien on the assets of the corporation, or (d) establish a letter of credit, guaranty or surety arrangement. The insurance or other arrangement may be procured, maintained or established within the corporation or with any insurer or other person deemed appropriate by the board of directors, regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the corporation. In the absence of fraud, the judgment of the board of directors as to the terms and conditions of the insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement. Section 17. Any indemnification of or advance of expenses to a director in accordance with this Article shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next meeting of shareholders or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve (12) month period immediately following the date of the indemnification or advance. Section 18. For purposes of this Article, the corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by the director of the director's duties to the corporation also imposes duties on, or otherwise involves services by, the director to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law shall be deemed to be fines. Action taken or omitted by the director with respect to an employee benefit plan in the performance of the director's duties or for a purpose reasonably believed by the director to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. 80 15 ARTICLE IX BY-LAWS Section 1. Amendments. These By-Laws may be altered, amended or repealed and new By-Laws may be adopted by the shareholders in accordance with the Articles of Incorporation. Section 2. When By-Laws Silent. It is expressly recognized that when the By-Laws are silent as to the manner of performing any corporate function, the provisions of the Act shall control. 81 CERTIFICATE I, [ ], do hereby certify that I am duly elected and acting Secretary of [ ] (the "Company") and that the above and foregoing Amended and Restated By-Laws were adopted as the By-Laws of the Company by Consent Action of the Board of Directors of the Company dated [ ], 1997. ____________________________________ [ ] 82 EXHIBIT C AGREEMENT AMONG SHAREHOLDERS This agreement (the "Agreement") dated this _____ day of _________ 1997 concerns the respective obligations and relationship of those identified below as shareholders of Kinetic Concepts, Inc. SECTION 1. Definitions. The following terms shall have the following meanings for the purposes of this Agreement: 1.01 "Affiliate" means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries or by agreement, controls, is controlled by, or is under common control with such Person, and, with respect to any natural person, any member of his or her immediate family or a trust for the benefit of any such Person. 1.02 "Closing Time" means the time of the closing of the redemption of the Common Stock by KCI. 1.03 "Common Stock" means the common stock, par value $0.001 per share, of KCI. 1.04 "Dr. Leininger" means Dr. James R. Leininger, the founder of KCI and its Chairman since 1976. 1.05 "Fremont" means Fremont Partners, L.P. and/or its Affiliates listed on Schedule 1.05. 1.06 "Fremont/KCI Group" means those Persons listed on Schedule 1.06 to which additions may be made after the Closing Time only to reflect transfers by Fremont to Fremont Affiliates who invest within six (6) months of the Closing Time. 1.07 "KCI" means Kinetic Concepts, Inc. 1.08 "KCI Percentage" means, for each of the Shareholders, the percentage of all outstanding fully diluted Common Stock owned by that Shareholder from time to time. Schedule 1.08 reflects the KCI Percentage of each Shareholder as of the date of this Agreement. 1.09 "Person" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, pension fund, governmental authority, or other entity. 1.10 "Public Offering" means a consummated public offering of a number of shares equal to at least twenty percent (20%) of the then issued and outstanding Common Stock that is underwritten on a firm commitment basis by a nationally-recognized investment banking firm. 83 1.11 "RCBA" means Richard C. Blum & Associates, L.P. and/or its Affiliates listed on Schedule 1.11. 1.12 "RCBA/KCI Group" means those Persons listed on Schedule 1.12, to which additions may be made after the Closing Time only to reflect transfers by RCBA to RCBA Affiliates who invest within six (6) months of the Closing Time. 1.13 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 1.14 "Shareholder" means any Person that is, as of the date of this Agreement, or becomes, at any subsequent time, a party to this Agreement. The Shareholders as of the date of this Agreement are Fremont, RCBA, Dr. Leininger, the Fremont/KCI Group, and the RCBA/KCI Group. 1.15 Terms and Usage Generally. The definitions in this Section 1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine, and neuter forms. All references herein to Sections and Schedules shall be deemed to be references to Sections of and Schedules to this Agreement unless the context shall otherwise require. All Exhibits and Schedules attached hereto shall be deemed incorporated herein as if set forth in full herein. The words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation." The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to a Person are also to its permitted successors and permitted assigns. SECTION 2. Transfer of Shares. 2.01 Restrictions on Transfer of Shares. Each of Fremont and RCBA agree for themselves and for the respective Fremont/KCI Group and RCBA/KCI Group, and Dr. Leininger agrees for himself, that immediately after the Closing Time, the KCI Percentages held by them will be that set forth in Schedule 1.08, and that until six (6) months after the Common Stock shall have been the subject of a Public Offering pursuant to the Securities Act, no shares of Common Stock or of equity interests in the entities comprising the controlling interests in the Persons comprising the Fremont/KCI Group or the RCBA/KCI Group may be sold, transferred, pledged, or hypothecated, directly or indirectly (a "Transfer"), except as set forth in Section 2.02 hereof. Any attempted Transfer that is not permitted by this Section 2 shall be deemed a violation and breach of this Agreement that may be treated as null and void by the Shareholders and by KCI. Any shares of Common Stock or of equity interests in the entities comprising the controlling interests in the Persons comprising the Fremont/KCI Group or the RCBA/KCI Group that are the subject of a Transfer permitted by this Section 2 shall remain subject to this Section 2. As a condition precedent to the effectiveness of any Transfer to any person or entity that is not a party to this Agreement, such transferee, for good and recognizable consideration, shall agree in writing to become a party to this Agreement and to be bound by its terms and provisions. 2 84 2.02 Permitted Transfers. Notwithstanding the foregoing, the following Transfers will be permitted so long as the transferee, for good and recognizable consideration, agrees in writing to become a party to this Agreement and to be bound by its terms and provisions and so long as the Transfer complies with the registration provisions (or exemptions therefrom) of all applicable federal and state securities laws: (a) Transfers by gift or the laws of descent and distribution to any Affiliate of the transferor. (b) Sales by Fremont or any member of the Fremont/KCI Group to any other member of the Fremont/KCI Group. (c) Sales by RCBA or any member of the RCBA/KCI Group to any other member of the RCBA/KCI Group. (d) Sales between Fremont or any member of the Fremont/KCI Group on the one hand and RCBA or any member of the RCBA/KCI Group on the other hand, or vice versa, so long as the seller has first offered the securities on the same price and terms, for at least thirty (30) days, to the member of its own Group. (e) Sales by Dr. Leininger of up to 10.5% of KCI's then outstanding Common Stock. 2.03 Tag-Along Rights. If, at any time after the restrictions of Section 2.01 expire, a Shareholder proposes to sell Common Stock for value (the "Transferor") to any Person (other than a transferee in a Transfer permitted by Section 2.02) in one transaction or a series of related transactions, then such Transferor shall offer (the "Participation Offer") to include in the proposed sale a number of shares of Common Stock designated by any of the other Shareholders not to exceed, in respect of any such Shareholder, the number of shares equal to the product of (i) the aggregate number of shares to be sold to the proposed transferee and (ii) the Shareholder's respective KCI Percentage; provided that if the consideration to be received includes any securities, only Shareholders that are Accredited Investors (as defined below) shall be entitled to include their shares in such sale (but, in such case, each Shareholder shall be entitled to include in such sale a number of its shares, without duplication, equal to the number of shares held by its Affiliates that are excluded from sale by the operation of this proviso). The Transferor shall give written notice to each Shareholder of the Participation Offer (the "Transferor's Notice") at least twenty (20) days prior to the proposed sale. The Transferor's Notice shall specify the proposed transferee, the number of shares to be sold to such transferee, the amount and type of consideration to be received therefor, and the place and date on which the sale is to be consummated. Each Shareholder that wishes to include shares of Common Stock in the proposed sale in accordance with the terms of this Section 2.03 shall so notify the Transferor not more than ten (10) days after the date of the Transferor's Notice. The Participation Offer shall be conditioned upon the Transferor's sale of shares pursuant to the transactions contemplated in the Transferor's Notice with the transferee named therein. If any Shareholder accepts the 3 85 Participation Offer, the Transferor shall reduce to the extent necessary the number of shares it otherwise would have sold in the proposed sale so as to permit other Shareholders that have accepted the Participation Offer to sell the number of shares that they are entitled to sell under this Section 2.03, and the Transferor and such other Shareholder or Shareholders shall sell the number of shares specified in the Participation Offer to the proposed transferee in accordance with the terms of such sale set forth in the Transferor's Notice. For purposes of this Section 2.03, "Accredited Investor" shall have the meaning set forth for such term in Regulation D. Notwithstanding the foregoing, a Shareholder shall have the right to include shares of Common Stock in the Transferor's sale under this Section 2.03 only if such Shareholder holds, on the date he receives the Transferor's Notice, at least ten percent (10%) of the issued and outstanding shares of Common Stock. 2.04 Drag-Along Rights. (a) Notwithstanding any other provision in this Section 2, if, at any time after the restrictions of Section 2.01 expire, Fremont, RCBA, the Fremont/KCI Group, and the RCBA/KCI Group (collectively, the "Seller") propose to sell all (but not less than all) of the Common Stock they then hold to a third party or parties in which the Seller does not own, have any right to acquire, or propose to own or acquire, any interest (a "Third Party") pursuant to a Bona Fide Offer (as defined below), then the Seller shall have the right, subject to the provisions of this Section 2.04, to require Dr. Leininger (the "Co-Seller"), to include in such sale (a "Required Sale") all of the Common Stock held by the Co-Seller by delivering notice (the "Required Sale Notice") to the Co-Seller. (b) The Required Sale Notice shall set forth: (i) the date of such notice (the "Notice Date"), (ii) the name and address of the Third Party, (iii) the proposed amount of consideration to be paid per share for the Sale Shares, and the terms and conditions of payment offered by the Third Party in reasonable detail, together with written proposals or agreements, if any, with respect thereto, (iv) the aggregate number of Sale Shares, (v) confirmation that the Seller is selling one hundred percent (100%) of the aggregate number of shares of Common Shares then held by it to a Third Party, and (vi) the proposed date of the Required Sale (the "Required Sale Date"), which shall be not less than twenty (20) nor more than one hundred eighty (180) days after the date of the Notice Date. (c) The Co-Seller shall cooperate in good faith with the Seller in connection with consummating the Required Sale (including, without limitation, the giving of consents and the voting of any Common Stock held by the Co-Seller to approve such Required Sale). On the Required Sale Date, the Co-Seller shall deliver, free and clear of all liens, claims, or encumbrances, a certificate or certificates and/or other instrument or instruments for all of its Common Stock, duly endorsed and in proper form for transfer, with the signature guaranteed, to such Third Party in the manner and at the address indicated in the Required Sale Notice and the Seller shall cause the Co-Seller's share of the purchase price to be paid to the Co-Seller. (d) "Bona Fide Offer" shall mean an offer (whether in the form of a purchase of shares, merger, recapitalization, business combination, or otherwise) for Common Stock. 4 86 (e) In the event of any Required Sale, if the Co-Seller holds options to purchase Common Stock, he must exercise or cancel all such stock options prior to or simultaneously with the consummation of the Required Sale. Any shares of Common Stock for which options are exercised must be included in the Required Sale. (f) Notwithstanding the foregoing, the Co-Seller shall not be required to sell his shares of Common Stock under this Section 2.04 if, on the date he receives the Required Sale Notice, he holds less than ten percent (10%) of the issued and outstanding shares of Common Stock. SECTION 3. Governance and Voting. 3.01 The Shareholders agree that each shall take such steps as are required to assure that after the Closing Time, and continuing until such time as the Common Stock shall have been the subject of a Public Offering registered under the Securities Act, the Board of Directors of KCI shall have at least eight (8) members, two (2) of whom shall be persons designated by Fremont, two (2) of whom shall be persons designated by RCBA, one (1) of whom shall be Dr. Leininger (so long as he shall own at least fifteen percent (15%) of the outstanding equity of KCI), one (1) of whom shall be Raymond R. Hannigan (provided, however, that if Raymond R. Hannigan for any reason ceases to serve KCI as its chief executive officer, then the successor chief executive officer shall be elected to serve as director in Mr. Hannigan's place), and two (2) or more of whom shall be independent outside directors, who shall not be affiliated with Fremont or RCBA and who shall be designated by the unanimous vote of the Nominating Committee of the Board of Directors of KCI, which shall comprise Dr. Leininger, one (1) director designated by Fremont, and one (1) director designated by RCBA. 3.02 Each of Fremont, RCBA and Dr. Leininger agrees that none of them shall charge any management, monitoring, consulting or similar fees to KCI or their Affiliates without the prior consent of the other two (which consent shall not be unreasonably withheld). In the event Fremont or RCBA charge any such fees to KCI or its Affiliates (i) the fees shall be of a type and amount customary between financial buyers and companies that have been the subject of a leveraged buyout and (ii) Dr. Leininger shall participate in such fees to the extent equitable in consideration for any management, monitoring or consulting services that he has provided to KCI or its Affiliates. SECTION 4. Preemptive Rights. 4.01 Grant of Preemptive Rights. KCI will not issue or sell any capital stock without first complying with this Section 4. KCI hereby grants to each of the Shareholders the preemptive right to purchase up to that Shareholder's Pro Rata Share (as defined below) of any capital stock that KCI may, from time to time, propose to sell or issue. For purposes of this Section 4, a Shareholder's "Pro Rata Share" shall mean the percentage of all outstanding fully diluted capital stock of KCI owned by that Shareholder from time to time. 5 87 4.02 Suspension of Preemptive Rights. The preemptive rights granted in Section 4.01 shall be suspended with respect to Dr. Leininger if, at the time of the proposed issuance and sale of capital stock, the exercise of such right would result in Fremont, RCBA, the Fremont/KCI Group, and the RCBA/KCI Group collectively holding less than a majority of the issued and outstanding shares of Common Stock after giving effect to such issuance and sale. 4.03 Notice to Shareholders. If KCI proposes to issue or sell any capital stock, KCI shall provide each Shareholder with written notice of KCI's intention (the "Notice of Issuance"). The Notice of Issuance shall describe the type of capital stock to be issued or sold and the price and other terms upon which KCI proposes to issue or to sell such capital stock. 4.04 Exercise of Preemptive Rights. Each Shareholder may exercise its preemptive right under this Section 4, in whole or in part, by giving written notice of its election to participate in the offering within twenty (20) days after receipt of the Notice of Issuance. If a Shareholder fails fully to exercise such preemptive right within such twenty (20) day period, KCI shall have sixty (60) days in which the sell the capital stock described in the Notice of Issuance that the Shareholder did not agree to purchase. In the event that KCI does not sell such capital stock within such sixty (60) day period, KCI thereafter will not issue or sell such capital stock without again complying with this Section 4. 4.05 Exceptions. Notwithstanding the foregoing, the preemptive rights granted in Section 4.01 will not apply to (i) any issuance of capital stock as a dividend or stock split in respect of outstanding capital stock or (ii) any issuance of capital stock in an underwritten public offering. SECTION 5. Registration Rights. 5.01 Demand Registration. (a) At any time after the fifth anniversary of this Agreement, if there has not been a Public Offering by such date, each of the Shareholders may make one (1) written request to KCI for registration of at least thirty-three percent (33%) of the shares of Common Stock then held by such Shareholder under Form S-3 (or such other appropriate or successor form if Form S-3 is not available) and in accordance with the provisions of Rule 415 promulgated under the Securities Act (a "Demand Registration"). In addition to that right to request a Demand Registration, each Shareholder shall have the right to request an additional Demand Registration of at least thirty-three percent (33%) of the shares of Common Stock then held by such Shareholder at any time after one (1) year, but before three (3) years, following the completion of a Public Offering. (b) A registration will not count as a Demand Registration unless the Shareholder is able to register and sell at least seventy-five percent (75%) of the shares requested to be included in such registration; provided, however, that if the Shareholder is able to register and sell less than such stated percentage, the Shareholder shall be entitled to invoke this provision to request a subsequent Demand Registration on only one additional occasion. 6 88 (c) KCI may include in any Demand Registration any of its securities to be registered for offering and sale on behalf of KCI. (d) If a Demand Registration is an underwritten registration and the managing underwriters advise KCI in writing that, in their opinion, the number of securities in such offering exceeds the number that can be sold in an orderly manner within a price range acceptable to the Shareholder and to KCI, then the number of such shares that the managing underwriters believe that may be sold in such offering shall be allocated first to the Shareholder's shares for inclusion in the registration statement, second to the shares of any Piggyback Shareholder (as defined in Section 5.02(a)), then to the KCI shares. (e) If a Demand Registration is an underwritten offering, the investment bankers and managers for the offering will be selected by the Shareholder, subject to the approval of KCI, which will not be unreasonably withheld. (f) KCI shall pay the expenses described in Section 5.06 for any registration pursuant to this Section 5.01. 5.02 Piggyback Registration Rights. (a) If at any time KCI shall determine to proceed with the preparation and filing of a registration statement (other than a registration statement on Form S-4, Form S-8, or other limited purpose form) under the Securities Act in connection with KCI's or another securityholder's proposed offer and sale of Common Stock or equity securities convertible into Common Stock, KCI will give written notice of its determination to the Shareholders at least twenty (20) days prior to filing the registration statement. Upon the written request from a Shareholder given within ten (10) days after receipt of any such notice from KCI, KCI will include the number of shares requested by the Shareholder in such registration statement ("Piggyback Registration"). Notwithstanding anything in this Agreement to the contrary, if a Shareholder (a "Piggyback Shareholder") makes a request for Piggyback Registration in a registration statement filed pursuant to another Shareholder's request for a Demand Registration under Section 5.01, and the Piggyback Shareholder is able to register and sell at least seventy-five percent (75%) of the shares requested to be included in the registration, such request shall be deemed to satisfy the Piggyback Shareholder's right to request a Demand Registration under Section 5.01. (b) If a Piggyback Registration is an underwritten primary registration on behalf of KCI and the managing underwriters advise KCI in writing that, in their opinion, the number of total securities to be registered in such offering exceeds the number that can be sold in an orderly manner within a price range acceptable to KCI, then the number of securities that the managing underwriter believes may be sold in such offering shall be allocated first to the shares being offered by KCI for inclusion in the registration statement, then to the shares of Shareholders submitted for registration, pro rata among the Shareholders in accordance with the number of shares they then hold. 7 89 (c) If a Piggyback Registration is an underwritten secondary registration on behalf of the shareholders of KCI's securities and the managing underwriters advise KCI in writing that, in their opinion, the number of total securities to be registered in such offering exceeds the number that can be sold in an orderly manner within a price range acceptable to the shareholders initially requesting such registration, KCI will include in such registration the securities being requested to be included therein by the holders initially requesting such registration and the shares of the Shareholders that requested Piggyback Registration, pro rata among the holders of such securities on the basis of the number of shares owned by each such shareholder. (d) KCI shall pay the expenses described in Section 5.06 for registration statements filed pursuant to this Section 5.02. 5.03 Registration Procedures. Whenever a Shareholder has requested that KCI, pursuant to the provisions of Section 5.01 or Section 5.02, effect the registration of Common Stock under the Securities Act, KCI will: (a) as soon as reasonably practicable, prepare and file with the SEC a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities (the "Effective Period"); (b) as soon as reasonably practicable, prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for the Effective Period as may be reasonably necessary to effect the sale of such securities; (c) furnish to the Shareholder and to the underwriters for the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus, and such other documents as the Shareholder and such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the Common Stock covered by such registration statement under such state securities or blue sky laws of such jurisdictions as the Shareholder may reasonably request in writing within ten (10) days following the original filing of such registration statement, except that KCI shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or subject itself to taxation in a jurisdiction where it had not previously been subject to taxation or take any other action that would subject KCI to service of process in a lawsuit other than one arising out of the registration of the Common Stock; (e) cause all such registered shares of Common Stock to be listed on an exchange or NASDAQ by filing a subsequent listing application; 8 90 (f) notify the Shareholder, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (g) notify the Shareholder promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; (h) prepare and promptly file with the SEC and promptly notify the Shareholder of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at any time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; and (i) advise the Shareholder, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 5.04 Underwriting. A Shareholder may not participate in any registration hereunder unless such Shareholder (a) agrees to sell its shares of Common Stock on the basis provided in the underwriting arrangements, if any, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents reasonably required under the terms of such underwriting arrangements, if any, and these registration rights. 5.05 Holdback Agreements. Each Shareholder agrees not to effect any public sale or distribution of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, including a sale pursuant to Rule 144 under the Securities Act, during the fourteen (14) days prior to, and during a period of up to one hundred eighty (180) days beginning on and following the effective date of any registration statement filed by KCI pursuant to this Section 5 (except as part of such registration), if and to the extent reasonably requested by the managing underwriter of the offering. 5.06 Expenses. With respect to any registration requested pursuant to Section 5.01 hereof and with respect to an inclusion of a Shareholder's shares of Common Stock in a registration statement pursuant to Section 5.02 hereof, all fees, costs, and expenses of such registration, inclusion, and public offering, including, without limitation, all registration, filing, and listing fees, printing expenses, fees and disbursements of legal counsel and accountants for KCI, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and 9 91 qualified, shall be borne by KCI; provided, however, that each Shareholder shall bear its own attorney fees and the underwriting commissions and registration fees with respect to the sale of its shares of Common Stock. 5.07 Indemnification. (a) KCI will indemnify and hold harmless each Shareholder and any underwriter (as defined in the Securities Act) for a Shareholder and each person, if any, who controls such Shareholder or underwriter within the meaning of the Securities Act, from and against and will reimburse the Shareholder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost, and expense to which the Shareholder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs, or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein, or any amendment or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that KCI will not be liable in any such case to the extent that any such loss, damage, liability, cost, or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing by a Shareholder, such underwriter, or such controlling person specifically for use in the preparation thereof. KCI will not be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld. (b) Each Shareholder will indemnify and hold harmless KCI, its directors and officers, any controlling person, and any underwriter thereof from and against, and will reimburse KCI, its directors and officers, any controlling person, and any underwriter thereof with respect to, any and all loss, damage, liability, cost, or expense to which KCI or any controlling person and/or any underwriter thereof may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs, or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein, or any amendment or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in conformity with information furnished in writing by or on behalf of the Shareholder specifically for use in the preparation thereof. A Shareholder will not be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section 5.07 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, 10 92 if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than hereunder, except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend against or compromise such claim. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any action include both the indemnified party and the indemnifying party and there are legal defenses available to the indemnified party and/or other indemnified parties that are different from or in addition to those available to the indemnifying party or if there is a conflict of interest that would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to an indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. (d) If for any reason the foregoing indemnification is unavailable or is insufficient to hold harmless an indemnified party, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with the statement or omission that resulted in the losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. SECTION 6. Liabilities and Indemnification. 6.01 Unless otherwise expressly assumed in writing by Fremont, the Fremont/KCI Group, RCBA, the RCBA/KCI Group, or Dr. Leininger: (a) none of them shall be liable to any third parties for any actions, commitments, or debts of any other as a shareholder of KCI; and 11 93 (b) each of them shall take all reasonable steps to negotiate and preclude exposing any of the other of them to any such liability to any third party. 6.02 To the extent any of Fremont, the Fremont/KCI Group, RCBA, the RCBA/KCI Group, or Dr. Leininger is presented with a demand or made party to an adjudication by a third party asserting their potential liability as a shareholder of KCI for any acts or omissions by any other party or parties to this Agreement, they shall notify the other party or parties in writing promptly, and upon the receipt of such notice the notified party or parties will assume the responsibility for the defense, resolution, and/or satisfaction of the claim and in all respects indemnify the party that is faced with such a claim to the full extent of that party's costs and ultimate liabilities, if any. SECTION 7. Miscellaneous. 7.01 Notices. Except as otherwise expressly provided in this Agreement, all notices, requests, and other communications to any party hereunder shall be in writing (including a facsimile or similar writing) and shall be given to such party at the address or facsimile number specified for such party on Schedule 7.01 hereto or as such party shall hereafter specify for that purpose by notice to the other parties. Each such notice, request, or other communication shall be effective (i) if given by facsimile, at the time such facsimile is transmitted and the appropriate confirmation is received (or, if such time is not during a business day, at the beginning of the next such business day), (ii) if given by mail, three business days (or, if to an address outside the United States, seven calendar days) after such communication is deposited in the mails with first-class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified pursuant to this Section 7.01. 7.02 No Third Party Beneficiaries. This Agreement is not intended to confer any rights or remedies hereunder upon, and shall not be enforceable by, any Person other than the parties hereto. 7.03 Waiver. No failure by any party to insist upon the strict performance of any covenant, agreement, term, or condition of this Agreement or to exercise any right or remedy consequent upon a breach of such or any other covenant, agreement, term, or condition shall operate as a waiver of such or any other covenant, agreement, term, or condition of this Agreement. Any Person by notice given in accordance with Section 7.01 may, but shall not be under any obligation to, waive any of its rights or conditions to its obligations hereunder, or any duty, obligation, or covenant of any other Person. No waiver shall affect or alter the remainder of this Agreement, but each and every covenant, agreement, term, and condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach. The rights and remedies provided by this Agreement are cumulative, and the exercise of any one right or remedy by any party shall not preclude or waive its right to exercise any or all other rights or remedies. 12 94 7.04 Integration. This Agreement constitutes the entire agreement among the parties hereto and thereto pertaining to the subject matter hereof and thereof and supersedes all prior agreements and understandings of the parties in connection herewith and therewith, and no covenant, representation, or condition not expressed in this Agreement, the confidentiality agreements between Fremont, RCBA, and KCI, or any other such agreement shall affect, or be effective to interpret, change, or restrict, the express provisions of this Agreement. 7.05 Dispute Resolution. Any controversy, claim or dispute between Dr. Leininger and any other party to this Agreement, arising out of or relating to this Agreement or any breach thereof, including any dispute concerning the scope of this Section 7.05, shall be resolved exclusively in a California court of law in a proceeding conducted without a jury, each party hereto expressly waiving their right to a trial by jury. 7.06 Headings. The titles of the Sections of this Agreement are for convenience only and shall not be interpreted to limit or amplify the provisions of this Agreement. 7.07 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument, which may be sufficiently evidenced by one counterpart. 7.08 Severability. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing of future law, such invalidity shall not impair the operation of or affect those portions of this Agreement that are valid. 7.09 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the conflicts of law principles thereof. 7.10 Non-Assignability. All of the rights and obligations of the parties to this Agreement are intended to be exercisable and fulfilled by the parties themselves, as presently constituted. None of those rights or obligations may be assigned, assumed, or transferred without the written informed consent of the counterparties. 13 95 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as of the day and year first above written. Fremont Partners, L.P. Richard C. Blum & Associates, L.P. By Fremont Advisers, L.L.C., By Richard C. Blum & Associates, Inc., its General Partner its General Partner By:_________________________ By_____________________________________ Name: Name: Title: Title: Kinetic Concepts, Inc. By:_________________________ _____________________________________ Name: Dr. James R. Leininger Title: [Fremont/KCI Group and RCBA/KCI Group members' signatures lines.] 14 EX-99.C.2 7 SHAREHOLDER SUPPORT AGREEMENT 1 SHAREHOLDER SUPPORT AGREEMENT SHAREHOLDER SUPPORT AGREEMENT, dated as of October 2, 1997 (this "Agreement"), among FREMONT PURCHASER II, INC., a Delaware corporation ("F Purchaser"), RCBA PURCHASER I, L.P., a Delaware limited partnership ("B Purchaser"; and together with F Purchaser, "Purchasers"; each individually, a "Purchaser") and JAMES R. LEININGER, M.D., a citizen of the United States (the "Shareholder"). WHEREAS, as of the date hereof Shareholder owns or controls 19,856,366 shares of Common Stock, par value $.001 per share ("Company Common Stock"), of Kinetic Concepts, Inc., a Texas corporation (the "Company ") (all such Company Common Stock and any shares of Company Common Stock of which ownership (either beneficially or of record) or control is hereafter acquired by the Shareholder prior to the termination of this Agreement being referred to herein as the "Shares"); WHEREAS, Purchasers and the Company propose to enter into a Transaction Agreement, dated as of even date herewith (as the same may be amended from time to time, the "Transaction Agreement"), which provides, upon the terms and subject to the conditions thereof, for (i) the Company to make a cash tender offer (the "Offer") to acquire all of the issued and outstanding shares of Company Common Stock for $19.25 per share, net to the seller in cash, upon and subject to the conditions of the Transaction Agreement and the Offer, (ii) the purchase by Purchasers and the sale by the Company (the "Stock Purchase") of 8,083,712 shares of Company Common Stock (subject to adjustment in accordance with Section 2.0 and Section 5.06 of the Transaction Agreement) immediately prior to the consummation of the Offer and (iii) the merger of each of Purchasers with and into the Company (the "Merger"); and WHEREAS, as a condition to the willingness of Purchasers to enter into the Transaction Agreement, Purchasers have requested that the Shareholder agree, and, in order to induce Purchasers to enter into the Transaction Agreement, the Shareholder has agreed, subject to the terms and conditions hereof, (i) to grant to the Purchasers an option to purchase from the Shareholder 4,200,000 Shares, (ii) to tender 13,792,211 Shares pursuant to the Offer and (iii) vote all Shares he then owns or controls at the time of the Stockholders' Meeting in favor of the Merger; NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants set forth herein and in the Transaction Agreement, the parties hereto agree as follows: 2 2 ARTICLE I THE OPTIONS SECTION 1.01. Grant of Options. (a) The Shareholder hereby grants to F Purchaser an irrevocable option (the "F Option") to purchase 2,529,197 Shares at a price per Share equal to $19.25 (the "Purchase Price"). (b) The Shareholder hereby grants to B Purchaser an irrevocable option (the "B Option"; and together with the F Option, the "Options"; and each individually, an "Option") to purchase 1,670,803 Shares at a price per Share equal to the Purchase Price. (c) The Options shall expire if not exercised prior to the earlier of (i) the close of business on the 180th day following termination of the Transaction Agreement pursuant to Section 8.01(c)(ii) or 8.01(d)(ii) thereof and (ii) the consummation of the Offer. SECTION 1.02. Exercise of Options. Provided that (a) to the extent necessary, any applicable waiting periods (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the rules and regulations promulgated thereunder (the "HSR Act") with respect to the exercise of an option shall have expired or been terminated and (b) no preliminary or permanent injunction or other order, decree or ruling issued by any court or governmental or regulatory authority, domestic or foreign, of competent jurisdiction prohibiting the exercise of the Options or the delivery of Shares shall be in effect, either Purchaser may exercise its Option at any time following termination of the Transaction Agreement pursuant to Section 8.01(c)(ii) or 8.01(d)(ii) thereof until the expiration of such Option. In the event that either Purchaser wishes to exercise its Option, such Purchaser shall give written notice (the date of such notice being herein called the "Notice Date"), to the Shareholder specifying a place and date (not later than ten Business Days (as defined below) and not earlier than three Business Days following the Notice Date) for closing such purchase (the "Closing"). For the purpose of this Agreement, the term "Business Day" shall mean a Saturday, a Sunday or a day on which banks are not required or authorized by law or executive order to be closed in the City of New York. SECTION 1.03. Payment for Delivery of Certificates. At the Closing, (a) The Purchaser exercising its Option shall pay the aggregate Purchase Price for the shares being purchased from the Shareholder by wire transfer in immediately available funds of the total amount of the Purchase Price for such Shares to an account designated by the Shareholder by written notice to such Purchaser, and (b) the Shareholder shall deliver to such Purchaser a certificate or certificates evidencing such Shares, and the Shareholder agrees that such Shares shall be transferred free and clear of all liens. All such certificates shall be duly endorsed in blank, or with appropriate stock powers, duly executed in blank, attached 3 3 thereto, in proper form for transfer, with the signature of the Shareholder thereon guaranteed, and with all applicable taxes paid or provided for. ARTICLE II TENDER OF SHARES SECTION 2.01. Tender of Shares. The Shareholder hereby undertakes to validly tender or cause to be validly tendered (i) 10,000,000 Shares pursuant to the Offer by the third Business Day following commencement of the Offer and (ii) an additional 3,792,211 Shares pursuant to the Offer by the tenth Business Day following the commencement of the Offer, and thereafter not to withdraw from the Offer any such Shares prior to the expiration or termination of the Offer; provided, however, in the event the number of Shares to be purchased in the Stock Purchase is reduced in accordance with Section 2.01 and Section 5.06 of the Transaction Agreement the number of Shares so tendered shall be adjusted so that the portion of the Shares to be retained by the Shareholder after consummation of the Merger shall remain at 33.53%. ARTICLE III TRANSFER AND VOTING OF SHARES SECTION 3.01. Transfer of Shares. Except as otherwise provided herein, the Shareholder shall not (a) sell, pledge or otherwise dispose of any of his Shares, (b) deposit his Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Shares or grant any proxy with respect thereto or (c) enter into any contract, option or other arrangement or undertaking with respect to the direct or indirect acquisition or sale, assignment, transfer or other disposition of any Shares; provided, however, that the Shareholder shall have the right to transfer Shares by gift or the laws of descent to any person or entity directly or indirectly controlled by the Shareholder. SECTION 3.02. Voting of Shares; Further Assurances. (a) The Shareholder, by this Agreement, with respect to those Shares that he owns of record, does hereby constitute and appoint Purchasers, or any nominee of Purchasers, with full power of substitution, as his true and lawful attorney and proxy, for and in its name, place and stead, to vote each of such Shares as his proxy, at every annual, special or adjourned meeting of the stockholders of the Company (including the right to sign his name (as stockholder) to any consent, certificate or other document relating to the Company that may be permitted or required by applicable law) (i) in favor of the adoption of the Transaction Agreement and approval of the Merger and the other transactions contemplated by the Transaction Agreement, (ii) against any transaction pursuant to an Acquisition Proposal (as defined below) or any other action or agreement that would result in a breach of any covenant, 4 4 representation or warranty or any other obligation or agreement of the Company under the Transaction Agreement or which could result in any of the conditions to the Company's obligations under the Transaction Agreement not being fulfilled, and (iii) in favor of any other matter relating to consummation of the transactions contemplated by the Transaction Agreement. The Shareholder further agrees to cause a minimum of 6,064,155 Shares and all Shares owned by him beneficially to be voted in accordance with the foregoing. The Shareholder acknowledges receipt and review of a copy of the Transaction Agreement. (b) If either Purchaser shall exercise its Option in accordance with the terms of this Agreement, and without additional consideration, the Shareholder shall execute and deliver further transfers, assignments, endorsements, consents and other instruments as such Purchaser may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and the Transaction Agreement, including the transfer of any and all of the Shareholder's Shares to such Purchaser and the release of any and all liens, claims and encumbrances covering such Shares. (c) The Shareholder shall perform such further acts and execute such further documents and instruments as may reasonably be required to vest in Purchaser the power to carry out the provisions of this Agreement. (d) The Shareholder shall take all such other actions as such other actions as shall be reasonably requested by Purchasers in order to assist in, and shall cooperate with Purchasers in connection with, the consummation of the transactions contemplated by the Transaction Agreement, including (i) participating in meetings with shareholders of the Company and financing sources, (ii) soliciting proxies and (iii) providing information concerning the Company to third parties. (e) The obligations of the Shareholder pursuant to this Article III shall terminate upon the earlier of (i) the date of termination of the Transaction Agreement in the case of termination for any reason and (ii) the consummation of the Merger. ARTICLE IV REPRESENTATIONS AND WARRANTIES; COVENANTS OF THE SHAREHOLDER The Shareholder hereby represents and warrants and covenants to Purchasers as follows: SECTION 4.01. Power; Binding Agreement. The Shareholder has the legal capacity, power and authority to enter into and perform all of the Shareholder's obligations under this agreement. This Agreement has been duly executed and delivered by the 5 5 Shareholder and, assuming its due authorization, execution and delivery by Purchasers, constitutes a legal, valid and binding obligation of the Shareholder, enforceable against the Shareholder in accordance with its terms. SECTION 4.02. No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by the Shareholder does not, and the performance of this Agreement by the Shareholder will not, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Shareholder. There is no beneficiary or holder of a voting trust certificate or other interest of any trust of which the Shareholder is a trustee whose consent is required for the execution and delivery of this Agreement or the consummation by the Shareholder of the transactions contemplated by this Agreement. (b) The execution and delivery of this Agreement by the Shareholder does not, and the performance of this Agreement by the Shareholder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, except (i) for applicable requirements, if any, of the Exchange Act and the HSR Act and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or materially delay the performance by the Shareholder of its obligations under this Agreement. SECTION 4.03. Title to Shares. The Shareholder has full right, power and authority to sell, transfer and deliver, or cause to be transferred or delivered 19,856,366 Shares pursuant to this Agreement. Upon delivery of such Shares and payment of the Purchase Price therefor as contemplated herein, each Purchaser will receive good and valid title to such Shares, free and clear of any pledge, lien, security interest, charge, claim, equity, option, proxy, voting restriction or encumbrance of any kind. SECTION 4.04 Acquisition Proposals. Until the earlier of (i) the consummation of the Merger and (ii) 180 days after the termination of the Transaction Agreement in case of termination pursuant to Section 8.01(c)(ii) or 8.01(d)(ii) thereof, or on the date of termination in the case of termination for any other reason, the Shareholder shall not, directly or indirectly, through any representative, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person or entity relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any recapitalization, business combination or similar transaction with the Company or any of its subsidiaries (any communication with respect to the foregoing being an "Acquisition Proposal") or participate in any negotiations regarding, or furnish to any other person or entity any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing. The Shareholder will immediately cease all existing activities, 6 6 discussions and negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. From and after the execution of this Agreement, the Shareholder shall immediately advise Purchasers in writing of the receipt, directly or indirectly, of any inquiries, discussions, negotiations, or proposals relating to an Acquisition Proposal that the Shareholder receives in his capacity as a shareholder of the Company (including the specific terms thereof and the identity of the other party or parties involved) and furnish to Purchasers within 48 hours of such receipt an accurate description of all material terms (including any changes or adjustments to such terms as a result of negotiations or otherwise) of any such written proposal in addition to any information provided to any third party relating thereto. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASERS Purchasers hereby represent and warrant to the Shareholder as follows: SECTION 5.01. Due Organization; Binding Agreement. Each of Purchasers is duly organized and validly existing under the laws of the State of Delaware. Each of Purchasers has all necessary corporate or partnership power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by each of Purchasers have been duly authorized by all necessary corporate or partnership action on the part of each of Purchasers. This Agreement has been duly executed and delivered by each of Purchasers and, assuming its due authorization, execution and delivery by the Shareholder, constitutes a legal, valid and binding obligation of each of Purchasers, enforceable against Purchasers in accordance with its terms. SECTION 5.02. No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by each of Purchasers does not, and the performance of this Agreement by each of Purchasers will not, (i) conflict with or violate the organizational documents of either of Purchasers, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to either of Purchasers or by which either of Purchasers or any of its properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the property or assets of either of Purchasers pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which either of Purchasers is a party or by which it or any of its properties is bound or affected, except for any such breaches, defaults or other occurrences that would not prevent or materially delay the performance by either of Purchasers of its obligations under this Agreement. 7 7 (b) The execution and delivery of this Agreement by each of Purchasers does not, and the performance of this Agreement by each of Purchasers will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, except (i) for applicable requirements, if any, of the Exchange Act and the HSR Act and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by either of Purchasers of its obligations under this Agreement. SECTION 5.03. Investment Intent. The purchase of Shares from the Shareholder pursuant to this Agreement is for the account of Purchasers for the purpose of investment and not with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. ARTICLE VI GENERAL PROVISIONS SECTION 6.01. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address as shall be specified by notice given in accordance with this Section 6.01): (a) if to F Purchaser: Fremont Purchaser II, Inc. 50 F Street, Suite 3700 San Francisco, California 94105-1895 Facsimile No: (415) 284-8191 Attention: General Counsel 8 8 with a copy to: Shearman & Sterling 599 Lexington Avenue New York, New York 10022 Facsimile No: (212) 848-7179 Attention: David W. Heleniak, Esq. (b) if to B Purchaser: RCBA Purchaser I, L.P. 909 Montgomery Street, Suite 400 San Francisco, California 94133-4625 Facsimile No.: (415) 434-3130 Attention: Murray Indick, Esq., General Counsel with a copy to: Wilmer Cutler & Pickering 2445 M Street, NW Washington, DC 20037 Facsimile No.: (202) 663-6363 Attention: Michael Klein, Esq. (c) If to Shareholder to: James Leininger, M.D. c/o Mission Center Management 8122 Datapoint Drive Suite 900 San Antonio, Texas 78232 Facsimile No.: (210) 255-6993 Attention: Tim Lyles with a copy to: Hughes & Luce 1717 Main Street, Suite 2800 Dallas, Texas 75201 Facsimile No.: (214) 939-6100 Attention: Ken Hawari, Esq. 9 9 SECTION 6.02. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 6.03. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. SECTION 6.04. Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof. SECTION 6.05. Assignment. This Agreement shall not be assigned by operation-of law or otherwise. SECTION 6.06. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, except that this Agreement shall not be amended without the prior written consent of the Company. SECTION 6.07. Specific Performance. The parties hereto agree that irreparable would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. SECTION 6.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed in that State. All actions and proceeding arising out of or relating to this Agreement shall be heard and determined in any Delaware state or federal court. THE COMPANY AND PURCHASERS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY COURSE OF CONDUCT, 10 10 COURSE OF DEALING, STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR PURCHASERS. SECTION 6.09. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FREMONT PURCHASER II, INC. By: /s/ R. S. Kopf ------------------------ Name: R. S. Kopf Title: General Counsel and Secretary RCBA PURCHASER I, L.P. By: /s/ N. Colin Lind ------------------------ Name: N. Colin Lind Title: Managing Director /s/ James R. Leininger, M.D. --------------------------- JAMES R. LEININGER, M.D. Acknowledged for purposes of Section 6.06 only: KINETIC CONCEPTS, INC. By: /s/ Raymond R. Hannigan ----------------------------- Name: Raymond R. Hannigan Title: President and Chief Executive Officer EX-99.C.3 8 AGREEMENT AMONG BIDDERS 1 AGREEMENT AMONG BIDDERS This Agreement Among Bidders (the "Agreement") dated as of October 2, 1997 concerns the respective obligations and relationship of those identified below as participants in certain transactions relating to Kinetic Concepts, Inc. SECTION 1. Definitions. The following terms shall have the following meanings for the purposes of this Agreement: 1.01. "Affiliate" means with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries or by agreement, controls, is controlled by or is under common control with such Person. 1.02. "Bidder Commitments" means $229,490,838.50, representing the amounts (whether in cash or contribution of securities of KCI) Fremont and RCBA have committed to contribute to fund the KCI Transactions. The Fremont Bidder Commitment and the RCBA Bidder Commitment are separately defined below. 1.03. "Closing Time" means the time of funding the Bidder Commitments. 1.04. "Fremont" means Fremont Partners, L.P. 1.05. "Fremont Bidder Commitment" means $138,197,020.50, adjusted as necessary and appropriate pursuant to Section 3.04(a). 1.06. "Fremont/KCI Group" means any Affiliate of Fremont or any investor who invests in any such Affiliate within six months of the Closing Time. 1.07. "KCI" means Kinetic Concepts, Inc. 1.08. "KCI Percentages" means the ratio of each party's Bidder Commitment in relation to their combined commitments, adjusted as necessary and appropriate pursuant to Section 3.04(a). 1.09. "KCI Transactions" means those series of transactions contemplated by the Transaction Agreement dated the date hereof among Fremont, RCBA and KCI. 1.10. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, pension fund, governmental authority or other entity. 1.11. "RCBA" means Richard C. Blum & Associates, L.P. 1.12. "RCBA Bidder Commitment" means $91,293,818.00, adjusted as necessary and appropriate pursuant to Section 3.04(a). 1 2 1.13. "RCBA/KCI Group" means RCBA Purchaser I, L.P., a Delaware limited partnership (or any successor thereto), RCBA, Richard C. Blum & Associates, Inc., The Southern California Carpenters Pension Fund, The United Brotherhood of Carpenters and Joiners Pension Fund, Insurance Company Supported Organizations Pension Plan, Stinson Capital Partners, L.P., Stinson Capital Partners II, L.P., BK Capital Partners IV, L.P., Prism Partners I. L.P., The Common Fund, and any Affiliate of RCBA or any investor who invests in any such Affiliate or any entity listed herein within six months of the Closing Time. 1.14. Terms and Usage Generally. The definitions in this Section 1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Sections and Schedules shall be deemed to be references to Sections of and Schedules to, this Agreement unless the context shall otherwise require. All Schedules attached hereto shall be deemed incorporated herein as if set forth in full herein. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to a Person are also to its permitted successors and permitted assigns. SECTION 2. The KCI Transactions. 2.01. Fremont and RCBA agree to cooperate with one another to accomplish in accordance with the timetable reflected therein the KCI Transactions. 2.02 Fremont and RCBA agree to make all decisions regarding their pursuit and execution of the KCI Transactions jointly, by consensus among them, without regard to percentage of interest or other factors. 2.03 Until the Closing Time: a. All reasonably necessary books of account and other financial records of expenses paid and incurred by Fremont and RCBA in pursuit of the KCI Transactions from the inception of their joint activities shall be created and maintained by each of them for themselves and their respective groups. b. The originals of all other documents germane to the KCI Transactions shall be maintained by Fremont, and copies shall be provided regularly to RCBA as it may reasonably request. c. Fremont shall provide the foregoing services at its cost, and to the extent Fremont is not reimbursed by KCI, RCBA shall reimburse Fremont for its pro rata portion of such costs at such periodic intervals as Fremont reasonably may request. 2 3 d. Each of Fremont and RCBA otherwise shall be responsible for their own costs, and will be reimbursed by KCI at or reasonably soon after the Closing Time for their costs and for pro rata shares of such joint out of pocket costs incurred and paid that have been associated with their joint pursuit of the KCI Transactions. Their prorata shares shall be the relationship between their KCI Percentages. 2.04. In the event the parties hereto fail to complete the KCI Transactions because their bid is topped, they will divide between themselves in accordance with their respective KCI Percentages, the sum of (a) all consideration received on any KCI options held by them and their respective KCI Groups; and (b) all breakup fees and expenses paid to them by KCI. However, in consideration for the parties' respective rights and obligations under the KCI Transactions (including without limitation Fremont's guaranty), the RCBA/KCI Group's portion shall be reduced, and the Fremont/KCI Group's portion shall be increased, by an amount equal to 5.4% of the aggregate over bid amount (adjusted as necessary and appropriate pursuant to Section 3.04(a)), wherein the aggregate over bid amount is calculated as the product of (i) the amount that the price per share of the topping bid exceeds $19.25, and (ii) KCI's total shares outstanding. SECTION 3. Funding. 3.01 Until the Closing Time, each of Fremont and RCBA will contribute the amounts required to fulfill their respective shares of the Bidders Commitments and such other incidental funds for expenses as are reasonably required to pursue the KCI Transactions in proportion to their respective commitments. To the extent that either such party advances more than its proportionate share during any month, the other party shall within five business days of the close of that month true-up accounts, including interest at the rate paid by the party which has a favorable balance, so that each party has borne all of its proportionate share, but no more. 3.02 Each of Fremont and RCBA is responsible for raising or contributing through the Fremont/KCI Group and the RCBA/KCI Group, respectively, the amounts of equity required to consummate the KCI Transactions, as of the date of this Agreement. 3.03 [Intentionally Omitted] 3.04. To the extent either of Fremont/KCI Group or RCBA/KCI Group defaults by failing timely to provide all of its respective share of the equity commitments set forth above: a. If the default involves less than $15 million, the non-defaulting party may elect to provide that share, in which event it will, in consideration thereof, acquire that additional interest in KCI and be entitled to 125% of the transaction fees on that additional interest that would have been received by the defaulting party had it not defaulted; provided that the defaulting party will have the right to cure any such default prior to the closing of the tender contemplated as part of the KCI Transactions in which event it can recoup from the non-defaulting party its additional interest in KCI but not the transaction fees 3 4 pertaining thereto. In the event of a default of an amount greater than $15 million, there is no understanding; the parties will attempt to resolve all issues at that time. b. Notwithstanding the foregoing rights of the non-defaulting party, it shall in all events be entitled to be held harmless and be fully indemnified by the defaulting party from any liability to any and all third parties, and any reasonable related expenses resulting from such default. SECTION 4. Liabilities and Indemnification. 4.01. It being understood as between Fremont and RCBA that they or their affiliates may be assuming joint and several liability to KCI for some or all of the KCI Transactions, Fremont and RCBA hereby agree that to the extent one of them or their Affiliates breaches the Transaction Agreement, the breaching party will indemnify and hold harmless the party not responsible for the breach from any such liability and reasonably related expenses resulting from the assertion of liability. 4.02. Except as set forth above and as otherwise expressly assumed in writing by Fremont, the Fremont/KCI Group, RCBA or the RCBA/KCI Group: a. none of them shall be liable to any third parties for any actions, commitments or debts of any other; and b. each of them shall take all reasonable steps to negate and preclude exposing any of the other of them to any liability to any third party. 4.03. To the extent any of Fremont, the Fremont/KCI Group, RCBA or the RCBA/KCI Group is presented with a demand or made party to an adjudication by a third party asserting their potential liability for the actions, commitments or debts of the other respecting KCI, they shall notify that other party in writing promptly, and upon the receipt of such notice the notified party will assume the responsibility for the defense, resolution and/or satisfaction of the claim and in all respects indemnify the party whose is faced with such a claim to the full extent of that party's costs and ultimate liabilities, if any. SECTION 5. Miscellaneous. 5.01. Notices. Except as otherwise expressly provided in this Agreement, all notices, requests and other communications to any party hereunder shall be in writing (including a facsimile or similar writing) and shall be given to such party at the address or facsimile number specified for such party on Schedule 5.01 hereto or as such party shall hereafter specify for the purpose by notice to the other parties. Each such notice, request or other communication shall be effective (i) if given by facsimile, at the time such facsimile is transmitted and the appropriate confirmation is received (or, if such time is not during a Business Day, at the beginning of the next such Business Day), (ii) if given by mail, three Business Days (or, if to an address outside 4 5 the United States, seven calendar days) after such communication is deposited in the mails with first-class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified pursuant to this Section 5.01. 5.02. No Third Party Beneficiaries. This Agreement is not intended to confer any rights or remedies hereunder upon, and shall not be enforceable by, any Person other than the parties hereto. 5.03. Waiver. No failure by any party to insist upon the strict performance of any covenant, agreement, term or condition of this Agreement or to exercise any right or remedy consequent upon a breach of such or any other covenant, agreement, term or condition shall operate as a waiver of such or any other covenant, agreement, term or condition of this Agreement. Any Person by notice given in accordance with Section 5.01 may, but shall not be under any obligation to, waive any of its rights or conditions to its obligations hereunder, or any duty, obligation or covenant of any other Person. No waiver shall affect or alter the remainder of this Agreement but each and every covenant, agreement, term and condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach. The rights and remedies provided by this Agreement are cumulative and the exercise of any one right or remedy by any party shall not preclude or waive its right to exercise any or all other rights or remedies. 5.04. Dispute Resolution. Subject to the aforesaid provisions of this Agreement providing for remedies, any controversy, claim or dispute arising out of or relating to this Agreement or any breach hereof, including any dispute concerning the scope of this Section 5.04, shall be resolved exclusively in a California court of law, acting in a proceeding conducted without a jury, each party hereto expressly waiving its right to trial by jury. 5.05. Integration. This Agreement constitutes the entire agreement among the parties hereto and thereto pertaining to the subject matter hereof and thereof and supersede all prior Agreements and understandings of the parties in connection herewith and therewith, and no covenant, representation or condition not expressed in this Agreement, the confidentiality Agreements between Fremont, RCBA and KCI or any other such agreement shall affect, or be effective to interpret, change or restrict, the express provisions of this Agreement. 5.06. Headings. The titles of the Sections of this Agreement are for convenience only and shall not be interpreted to limit or amplify the provisions of this Agreement. 5.07. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument, which may be sufficiently evidenced by one counterpart. 5.08. Severability. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid and contrary to 5 6 any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid. 5.09. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the conflicts of law principles thereof. 5.10. Non-Assignability. All of the rights and obligations of the parties to this Agreement are intended to be exercisable and fulfilled by the parties themselves, as presently constituted. None of those rights or obligations may be assigned, assumed or transferred without the written informed consent of the counterparty. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as of the day and year first above written. Fremont Partners, L.P. Richard C. Blum & Associates, L.P. By FP Advisers, L.L.C., By Richard C. Blum & Associates, its General Partner Inc., its General Partner By /s/ G.H. Lamphere By /s/ Murray A. Indick ___________________________ ___________________________ Name: G.H. Lamphere Name: Murray A. Indick Title: Member Title: Managing Director and General Counsel 6 EX-99.C.4 9 KINETIC CONCEPTS, INC. MANAGEMENT EQUITY PLAN 1 KINETIC CONCEPTS, INC. MANAGEMENT EQUITY PLAN 1. Purpose. The Kinetic Concepts, Inc. Management Equity Plan (the "Plan") is intended to provide an incentive to certain officers and key employees of Kinetic Concepts, Inc., a Texas corporation (the "Company"), and its Subsidiaries (as defined in Section 2) to remain in the employ of the Company and its Subsidiaries and to increase their interest in the success of the Company. The Plan provides an opportunity for participants to obtain a proprietary interest in the Company through the grant, offering or exchange of shares (the "Management Shares") of common stock, no par value, of the Company ("Common Stock") and the grant or exchange of nonqualified stock options (the "Nonqualified Stock Options"or the "Options"), to purchase shares of Common Stock. Management Shares and Options are sometimes referred to herein as "Awards". 2. Definitions. For purposes of the Plan, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" or "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Agreement" means an agreement between the Company and an officer or key employee of the Company or any of its Subsidiaries providing for (i) the grant or sale to such officer or key employee of Management Shares or (ii) the grant to such officer or key employee of Options and signed by F Purchaser and B Purchaser to indicate such parties agreement to be bound by Sections 16 and 17 of the Plan. "Applicable Management Share Value" as of any date of determination means the Applicable Value, provided, however, that if the Company is not a Public Company and such date falls prior to the fifth anniversary of the Effective Date, the Applicable Management Share Value shall not exceed the lesser of the Fair Market Value of such Management Share or $19.25 plus 7% compounded annually on each anniversary of the Tender Date. "Applicable Option Share Value" as of any date of determination means the Applicable Value, provided, however, that if the Company is not a Public Company, such date falls prior to the fifth anniversary of the Effective Date and the Option Share was obtained through the exercise of an Exchange Option, the Applicable Option Share Value shall not exceed the lesser of (A) the Fair Market Value or (B) the sum of (1) 2 2 $19.25 less the exercise price of such underlying Exchange Option (the "Spread") plus 7% of the Spread compounded annually on each anniversary of the Tender Date and (2) the exercise price of such Option plus 7% of the exercise price compounded annually on each anniversary of the date of exercise. "Applicable Option Value" as of any date of determination means the Applicable Value, provided, however, that if the Company is not a Public Company, such date falls prior to the fifth anniversary of the Effective Date and the Option to be valued is an Exchange Option, the Applicable Value shall not exceed the lesser of (A) the Fair Market Value of the shares of Common Stock underlying such Exchange Option less the exercise price of such Exchange Option or (B) the Spread plus 7% of the Spread compounded annually on each anniversary of the Tender Date. "Applicable Value" as of any date of determination means (i) if the Company is a Public Company, Public Value and (ii) if the Company is not a Public Company Fair Market Value. "B Purchaser" means RCBA PURCHASER I, L.P. "Beneficial owner" or "beneficially own" has the meaning given such term in Rule 13d-3 under the 1934 Act. "Beneficiary" or "Beneficiaries" means the person(s) designated by a Participant or his Permitted Transferee in writing to the Company to receive payments pursuant to the Plan upon the death of a Participant or his Permitted Transferee. If no Beneficiary is so designated or if no Beneficiary is living at the time a payment is due pursuant to the Plan, payments shall be made to the estate of the Participant or Permitted Transferee. The Participant or Permitted Transferee, as the case may be, shall have the right to change the designated Beneficiaries from time to time by written instrument filed with the Committee in accordance with such rules as may be specified by the Committee. "Board of Directors" means the Board of Directors of the Company. "Call Right" means the right of the Company, exercisable in accordance with Section 10(a) following termination of a Participant's employment, (i) to purchase, and to cause a Participant or his Permitted Transferee to sell, Management Shares and Option Shares beneficially owned by such Participant or his Permitted Transferee and (ii) to cause a Participant to surrender for cancellation, in consideration of the payment 3 3 provided for in Section 10(a), unexercised Vested Options granted to such Participant pursuant to the Plan. "Cause" means, with respect to any Participant, (a) "cause" as defined in an employment agreement applicable to the Participant, or (b) in the case of a Participant who does not have an employment agreement that defines "cause": (i) any act or omission that constitutes a material breach by the Participant of any of his obligations under his employment agreement (if any) with the Company or any of its Subsidiaries, the applicable Agreement or any other material agreement with the Company or any of its Subsidiaries relating to the Participants employment with the Company after a written demand from a representative of the Company for substantial performance is delivered to him; (ii) the willful and continued failure or refusal of the Participant substantially to perform the material duties required of him as an employee of the Company or any of its Subsidiaries after a written demand from a representative of the Company for substantial performance is delivered to him; (iii) any willful material violation by the Participant of any federal or state law or regulation applicable to the business of the Company or any of its Subsidiaries or Affiliates, or the Participant's conviction of a felony, or any willful perpetration by the Participant of a common law fraud; or (iv) any other willful misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its Subsidiaries or Affiliates. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Committee" has the meaning assigned to such term in Section 3. "Date of Grant" means the date of grant of an Award as set forth in the applicable Agreement. "Exchange Option" means an Option that was originally granted under a Company plan other than the Plan and that was exchanged for an Option to purchase shares of Common Stock under the Plan. "Effective Date" has the meaning assigned to such term in Section 19. "Eligible Persons" means officers and key employees of the Company and its Subsidiaries. 4 4 "Encumbrance" means any lien, security interest, pledge, claim, option, right of first refusal, marital right or other encumbrance with respect to any share of Common Stock or any Option. "Fair Market Value" means the value of a share of Common Stock as determined in good faith by the Board of Directors or, under the circumstances described in Section 11, as determined in a written report to the Company by an independent appraisal or investment banking firm selected by the Board of Directors. For purposes of the definition of "Fair Market Value", the value to be determined by the Board of Directors or such appraisal or investment banking firm shall be the price per share at which a share of Common Stock would trade on a national securities exchange, NASDAQ or a similar market, assuming full liquidity and the absence of any "takeover" or "change in control" premium. "F Purchaser" means FREMONT PURCHASER II, INC. "IPO" means a Public Offering that results in more than 20% of the outstanding Common Stock being traded on a national securities exchange, NASDAQ or a similar market. "Involuntary Transfer" means a transfer of a Participant's Management Shares or Option Shares by operation of law including, without limitation, as a result of (i) a sale or other disposition by a trustee or debtor in possession appointed or retained in a bankruptcy case, (ii) a sale at any creditors' or judicial sale or (iii) a transfer arising out of a divorce or separation proceeding. "Legended Certificate" means a certificate evidencing a number of shares of Common Stock issued in connection with an Award and imprinted with a legend to indicate that (i) such shares are subject to the restrictions on transfer set forth in the Plan and the applicable Agreement and (ii) if the offer and sale of such shares have not been registered under the 1933 Act, such shares may be sold only pursuant to a registration statement under the 1933 Act or an exemption from registration under the 1933 Act that the Company has determined is available for such sale. "NASDAQ" means the National Association of Securities Dealers' Automated Quotation System. "New Option" means an Option to that was originally granted under this Plan and was not the result of an exchange for an option to purchase shares of Common Stock granted under a Company option plan other than the Plan. 5 5 "1933 Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Option Price" means, with respect to any Option, the exercise price per share of Common Stock, as determined by the Committee in its sole discretion and as set forth in the applicable Agreement. "Option Shares" means the shares of Common Stock acquired by a Participant upon exercise of an Option. "outstanding", with respect to any share of Common Stock, means, as of any date of determination, all shares that have been issued on or prior to such date, other than shares repurchased or otherwise reacquired by the Company or any Affiliate thereof, on or prior to such date. "Participant" means any Eligible Person who has been granted an Award. "Permanent Disability", with respect to any Participant who is an employee of the Company or any of its Subsidiaries, shall be defined in the same manner as such term or a similar term is defined in an employment agreement applicable to the Participant or, in the case of a Participant who does not have an employment agreement that defines such term or a similar term, means that the Participant is unable to perform substantially all his duties as an employee of the Company or any of its Subsidiaries by reason of illness or incapacity for a period of more than six consecutive months, or six months in the aggregate during any 12-month period, established by medical evidence reasonably satisfactory to the Company. "Permitted Transferee" means (A) with respect to outstanding shares of Common Stock held by any Participant, (i) the trustee or trustees of a trust revocable solely by such Participant, (ii) such Participant's guardian or conservator, (iii) any Person to whom such shares are transferred by will or the laws of descent and distribution, or (iv) any Person with respect to which the Board of Directors shall have adopted a resolution stating that the Board of Directors has no objection if a transfer of shares is made to such Person, and (B) with respect to Options, any Person (other than the Company) to whom an Option has been transferred in accordance with Section 8(a)(v). 6 6 "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, an estate or other entity or organization, including a government or any department or agency thereof, or any group deemed to be a "person" under Section 14(d)(2) of the 1934 Act. "Prime Rate" means the rate which Bank of America announces from time to time at its principal office as its prime lending rate for domestic commercial loans, the Prime Rate to change when and as such prime lending rate changes. The Company shall be deemed to be a "Public Company" after it completes a Public Offering and the Company's Common Stock is traded on a national securities exchange or quoted on an automated quotation system. "Public Offering" means an underwritten public offering of equity securities of the Company pursuant to an effective registration statement under the 1933 Act. The "Public Value" of a share of Common Stock on a given date shall be the average closing price of a share of Common Stock on such national securities exchange on which such shares are traded or, in the event that the Common Stock is not listed for trading on a national securities exchange but is quoted on an automated quotation system, the average closing bid price per share of the Common Stock on such automated quotation system (the "Average Closing Price"), in either case for the 30-day period ending on such date. The Average Closing Price of a share of Common Stock shall be determined by dividing (i) by (ii), where (i) shall equal the sum of the closing prices for the Common Stock on each day that the Common Stock was traded and a closing price was reported on such national securities exchange or such automated quotation system, as the case may be, during the 30-day period, and (ii) shall equal the number of days on which the Common Stock was traded and a closing price was reported on such national securities exchange or such automated quotation system, as the case may be, during the 30-day period. "Registrable Securities" means all shares of Common Stock held by Stockholders, and any common stock which may be issued or distributed in respect thereof, by way of any recapitalization. "Registration Expenses" means all out-of-pocket expenses incident to the Company's performance of or compliance with Sections 14, 15 and 16, including, without limitation, all registration and filing fees (including filing fees with respect to the National Association of Securities Dealers, Inc.), all fees and expenses of complying with state securities or "blue sky" laws (including reasonable fees and disbursements of underwriters' counsel in connection with the preparation of any "blue 7 7 sky" memorandum or survey), all printing expenses, all listing fees, all registrars' and transfer agents' fees, the fees and disbursements of counsel for the Company and of its independent public accountants, including, without limitation, the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of one outside counsel retained by the holders of Registrable Securities being registered (which counsel shall be satisfactory to the holders of a majority of the Registrable Securities being registered), but excluding underwriting discounts and commissions and applicable transfer taxes, if any, which shall be borne by the sellers of the Registrable Securities being registered in all cases. "Retirement", with respect to any Participant who is an employee of the Company or any of its Subsidiaries, means resignation or termination of employment after attainment of an age required for payment of an immediate pension pursuant to the terms of any qualified retirement plan maintained by the Company or any of its Subsidiaries in which the Participant participates; provided, however, that no resignation or termination prior to a Participant's sixty-fifth birthday shall be deemed a Retirement unless the Committee so determines in its sole discretion. "Sale by Fremont/RCBA" means a sale of Common Stock that is not a Public Offering by either F Purchaser or B Purchaser that results in F Purchaser and B Purchaser together holding less than sixty-nine percent of the shares of Common Stock initially held by F Purchaser and B Purchaser on the Effective Date, as such number may be adjusted to reflect stock splits, reverse stock splits, stock dividends, acquisitions and the exercise of Options. "Sale of Assets" means a sale (in one transaction or a series of transactions) by the Company of all or substantially all its business or assets (or both) to a third party that is not an Affiliate of the Company. "Sale of Stock" means a sale (in one transaction or in a series of transactions) by the Company's stockholders of at least two-thirds of the outstanding Common Stock to a Third Party, including any merger with a Public Company following the consummation of which two-thirds or more of the voting securities of the surviving entity (which is a Public Company) in such merger are held by Third Parities. "Subsidiary" means any corporation if 50% or more of the total combined voting power of all classes of stock is owned, either directly or indirectly, by the Company or another Subsidiary. 8 8 "Tender Date" means the last day of the Offer, as such term is defined in the transaction agreement between F Purchaser, B Purchaser and the Company. "Third Party" means, with respect to any Participant, any Person, other than any Affiliate of (a) such Participant, (b) the Company and its Subsidiaries or (c) F Purchaser or B Purchaser. "Valuation Date" means December 31 and June 30, or such other date that the Committee may from time to time select. "Vested Options" means, as of any date, Options which by their terms are exercisable on such date. 3. Administration of the Plan. (a) Members of the Committee. The Plan shall be administered, and Awards shall be granted hereunder, by a committee (the "Committee") of the Board of Directors comprised of at least three directors selected by the Board of Directors to administer the Plan. The composition of the Committee may, in the discretion of the Board of Directors, be adjusted to the extent required in order for the Company to rely on the exemptive relief provided under Rule 16b-3, as it may be amended from time to time, promulgated pursuant to Section 16 of the 1934 Act. (b) Authority of the Committee. The Committee shall adopt such rules as it may deem appropriate in order to carry out the purpose of the Plan. All questions of interpretation, administration and application of the Plan shall be determined in good faith by a majority of the members of the Committee then in office, except that the Committee may authorize any one or more of its members, or any officer of the Company, to execute and deliver documents on behalf of the Committee. The determination of such majority shall be final and binding in all matters relating to the Plan. 4. Number of Shares Issued in Connection with Awards. The maximum aggregate number of shares of Common Stock that may be issued in connection with Awards granted under the Plan (together with any shares of Common Stock issued in connection with Management Shares and Options) is 6.5% of the initial shares of Common Stock outstanding as of the Effective Date, subject to adjustment as provided in Section 13. To the fullest extent permitted under Section 422 of the Code, if any Management Shares are forfeited or are repurchased by the Company, or if any Option expires or is surrendered without being exercised in full, such Management Shares or shares of Common Stock as to which such Option has not been exercised, as the case may be, may again be available for issuance in connection with future grants or offerings of Awards. 9 9 5. Eligible Persons. Awards may be granted or offered only to Eligible Persons. The Chief Executive Officer of the Company (the "CEO") will recommend for approval by the Board of Directors the individual Participants to whom Awards may be granted from among such class of Eligible Persons and to determine the number and form of Awards to be granted to each Participant. 6. Agreement. The terms and conditions of each grant or sale of Awards shall be embodied in an Agreement in a form approved by the Committee, which shall contain terms and conditions not inconsistent with the Plan and which shall incorporate the Plan by reference. Each Agreement shall: (a) state the date on which the Award was granted or sold, and (i) in the case of Options, set forth the number of Options being granted to the Participant and the applicable Option Price or Option Prices, and (ii) in the case of Management Shares, set forth the number of Management Shares being granted or offered to the Participant and, if applicable, the purchase price or other consideration for such Management Shares; (b) set forth the vesting schedule; (c) be signed by the recipient of the Award and a person designated by the Committee; and (d) be delivered to the recipient of the Award. 7. Restrictions on Transfer. No Management Share, Option or Option Share may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of to any third party other than the Company except as provided in the Plan or Award Agreement or to a Permitted Transferee. Each Permitted Transferee (other than the Company), by will, by the laws of descent and distribution or otherwise, of any Management Shares, Options or Option Shares shall, as a condition to the transfer thereof to such Permitted Transferee, execute an agreement pursuant to which it shall become a party to the Agreement applicable to the transferor. Each Permitted Transferee will succeed to the rights held under the Plan by the transferring Participant, to the extent that such rights are not limited in the Plan or the relevant Agreement. 8. Options. (a) Terms of Options Generally. Options may be granted to any Eligible Person. Each Option shall entitle the Participant to whom such Option was granted to purchase, upon payment of the relevant Option Price, one share of Common Stock. Payment of the Option Price shall be made in cash, or, in the sole discretion of the Committee and to the extent provided in the applicable Agreement, in shares of Common Stock already owned by the Participant, in other property acceptable to the Committee or in any combination of cash, shares of Common Stock or such other property. Options granted under the Plan shall comply with the following terms and conditions: (i) Option Price. Each Agreement relating to an Option shall specify the relevant Option Price. 10 10 (ii) Vesting. (A) Vesting Schedule. The vesting schedule of each Option shall be set forth in the applicable Agreement. (B) Acceleration of Vesting. In the event of a termination of a Participant's employment with the Company and its Subsidiaries by reason of death or Permanent Disability or Retirement, all Options granted to such Participant shall vest on the date of such termination. All Options shall immediately vest upon (i) completion of a Sale of Stock within three years from the Effective Date and (ii) completion of a Sale of Assets within three years from the Effective Date. Fifty percent of all unvested Options, proportionately per unvested installment per Participant, shall immediately vest upon (i) completion of an IPO within three years from the Effective Date or (ii) completion of a Sale by Fremont/RCBA within three years from the Effective Date. (iii) Duration of Options. Each Option shall be effective for such term as shall be determined by the Committee and set forth in the applicable Agreement; provided, however, that the term of any New Option shall not exceed 7 years from the Date of Grant. (iv) Exercise Following Termination of Employment. Upon termination of a Participant's employment with the Company and its Subsidiaries for any reason, the Participant (or, in the case of the Participant's death, his Beneficiary) may exercise any Vested Option, subject to Section 8(b), at any time until the earlier of (A) 30 days (180 days upon a termination of employment or status due to death or Permanent Disability) following the date of such termination of employment or status (or, if a Vested Option may not be exercised on the date of such termination of employment or status because the conditions to exercise set forth in Section 8(b) are not satisfied, 30 days (180 days upon a termination of employment or status due to death or Permanent Disability) following the date on which the Company notifies the Participant that such conditions have been satisfied and that the Option may be exercised), and (B) exercise by the Company of its Call Right under Section 10(a), but in no event after the expiration of the Option under the provisions of clause (iii) above; provided, however, that the applicable Agreement may, subject to clause (iii) above, provide for a longer post-termination exercise period. Upon the expiration of such period or exercise of such Call Right, any such Vested Option not theretofore exercised shall be canceled, and the shares of Common Stock that had been subject thereto shall again be available for 11 11 grants of further Awards under the Plan to the fullest extent permitted under Section 422 of the Code. (v) Certain Restrictions. Options granted hereunder shall not be transferable by the Participant otherwise than to a Permitted Transferee. A Participant may transfer Exchange Options to a charity or charitable foundation (collectively, a "Charity"), subject to the approval of the Board of Directors, provided however, that the Exchange Options transferred shall represent more that than 4,000 Option Shares, as such number may be adjusted to reflect stock splits, reverse stock splits, stock dividends, and acquisitions. Upon completion of an IPO, Option Shares may be freely transferred as permitted by applicable laws and regulations. (vi) Stockholder Rights. A Participant shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until a certificate or certificates evidencing such shares shall have been issued to such Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. (vii) Dividends and Distributions. Any shares of Common Stock or other securities of the Company received by the Participant as a result of a stock dividend or other distribution in respect of Option Shares shall be subject to the same restrictions as such Option Shares. (viii) Additional Terms and Conditions. Each Option granted hereunder, and any shares of Common Stock issued in connection with such Option, shall be subject to such additional terms and conditions not inconsistent with the Plan which are prescribed by the Committee and set forth in the applicable Agreement. (b) Limitation on Exercise. An Option shall not be exercisable unless the offer and sale of the shares of Common Stock subject to the Option have been registered under the 1933 Act and qualified under applicable state "blue sky" laws, or the Company has determined that an exemption from registration under the 1933 Act and from qualification under such state "blue sky" laws is available. (c) Issuance of Certificate. As soon as practicable following the exercise of any Options, a Legended Certificate evidencing the number of Option Shares issued in connection with such exercise shall be issued in the name of the Participant. 12 12 (d) Unvested Options. Upon termination of a Participant's employment with the Company and its Subsidiaries, all Options granted to such Participant which have not theretofore vested (and which do not vest by reason of such termination of employment or status) shall terminate and be canceled without any payment therefor. 9. Management Shares. (a) Terms of Management Shares Generally. Management Shares may be granted or offered for sale to any Eligible Person. If Management Shares are offered for sale hereunder, the purchase price shall be payable in cash, or, in the sole discretion of the Committee and to the extent provided in the applicable Agreement, in shares of Common Stock already owned by the Participant, in other property acceptable to the Committee or in any combination of cash, shares of Common Stock or such other property. The Management Shares granted or offered for sale under the Plan shall comply with the following terms and conditions: (i) Purchase Price; Offering Period. Management Shares may be granted for no consideration or offered for sale at a purchase price determined by the Committee in its sole discretion at the time of offering and set forth in the applicable Agreement. Any offer to sell Management Shares hereunder shall expire no later than 60 days following the date of such offer to an Eligible Person. (ii) Stockholder Rights. A Participant shall have all rights of a stockholder as to the Management Shares, including the right to receive dividends and the right to vote in accordance with the Company's Certificate of Incorporation, subject to the restrictions set forth in the Plan and the applicable Agreement. (iii) Dividends and Distributions. Any shares of Common Stock or other securities of the Company received by a Participant as a result of a stock distribution to holders of Management Shares or as a stock dividend on Management Shares shall be subject to the same restrictions as such Management Shares and all references to Management Shares hereunder shall be deemed to include such shares of Common Stock or other securities. (iv) Additional Terms and Conditions. Each Management Share granted or offered for sale hereunder shall be subject to such additional terms and conditions not inconsistent with the Plan which are prescribed by the Committee and set forth in the applicable Agreement. (v) Restrictions on Transfers. No Participant shall be permitted to transfer any Management Shares other than as expressly permitted by this Plan or the relevant 13 13 Agreement. Upon the completion of an IPO, Management Shares may be freely transferred in accordance with all applicable laws and regulations. (b) Issuance of Certificate. At the time of grant or sale of Management Shares to a Participant, a Legended Certificate evidencing the appropriate number of shares of Common Stock granted or sold to the Participant as Management Shares shall be issued in the name of the Participant. 10. Termination of Employment or Status; Involuntary Transfers. (a) Company Call Right. (i) Exercise of Call Right. Unless the Committee in its sole discretion determines otherwise and so sets forth in the applicable Agreement, if prior to the completion of an IPO the employment of a Participant with the Company and its Subsidiaries terminates for any reason, or an Involuntary Transfer occurs, the Company shall have a Call Right, exercisable for a period of 60 days after the date of such termination or Involuntary Transfer, with respect to all of the Management Shares, Vested Options and Option Shares beneficially owned by such Participant and his Permitted Transferees. The Company may exercise such Call Right by giving written notice thereof to the Participant or his Permitted Transferee, as the case may be, prior to the expiration of such 60-day period. The Company's Call Right shall become null and void subsequent to the completion of an IPO. (ii) Purchase Price. With respect to any exercise of a Call Right under this Section 10(a), (A) the purchase price per Management Share to be paid by the Company at the closing provided for in Section 10(c) shall be the Applicable Management Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status or Involuntary Transfer, (B) the purchase price per Option Share to be paid by the Company at the closing provided for in Section 10(c) shall be the Applicable Option Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status or Involuntary Transfer and (C) the consideration to be paid by the Company in respect of Vested Options surrendered for cancellation at the closing provided for in Section 10(c) shall be the Applicable Option Share Value determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or Involuntary Transfer. The Company will give notice of the purchase price to be paid per Management Share or Option Share within a reasonable time from the date of determination of such price. 14 14 (b) Participant Put Right. (i) Exercise of Put Right. To the extent provided in the applicable Agreement and subject to Section 10(b)(iii), if prior to the completion of an IPO the employment of a Participant with the Company and its Subsidiaries terminates for any reason, the Participant (or, in the case of the Participant's death, his Beneficiary) shall have a Put Right, exercisable for a period of 60 days after the date of such termination, with respect to all of the Management Shares, Vested Options and Option Shares beneficially owned by such Participant and his Permitted Transferees. The Participant may exercise such Put Right by giving written notice thereof to the Company prior to the expiration of such 60-day period. The Participants' Put Rights shall be null and void subsequent to the completion of an IPO. (ii) Purchase Price. The Put Right purchase price per Management Share to be paid by the Company at the closing provided for in Section 10(c) shall be the Applicable Management Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status. The Put Right purchase price per Option Share to be paid by the Company at the closing provided for in Section 10(c) shall be the Applicable Option Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status. The consideration to be paid by the Company in respect of Vested Options surrendered for cancellation at the closing provided for in Section 10(c) shall be Applicable Option Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment. The Company will give notice of the consideration to be paid per Management Share or Option Share within a reasonable time from the date of determination of such amount. (iii) Anything in this Plan to the contrary notwithstanding, if, at any time, the Board of Directors shall determine, subject to the written opinion of the Appraiser (as hereinafter defined) referred to below, the Company is not financially capable of making some or all of the aggregate payments to be made thereafter pursuant to the exercise of Put Rights (the "Put Right Payments"), the Company shall have the right to defer such Put Right Payments but only on the terms hereinafter provided in this Section 10(b)(iii). In the event that the Board of Directors shall have made such determination with respect to the Company's financial capability, the Board of Directors shall, if so requested in writing by at least two Participants within 10 business days of the date that notice of such determination has been given (the "Request Period"), promptly retain an appraisal or investment banking firm, to be selected by the CEO and reasonably satisfactory to the Board of Directors (the "Appraiser"), to render 15 15 a written opinion as to whether the Company has the financial capability to make any of, or any portion of, such Put Right Payments at such time as it would otherwise be required to make such Put Right Payments. If the Board of Directors' determination, or the Appraiser's written opinion, if so required, indicates that, at the time a Put Right Payment would otherwise be required to be made to a Participant, the Company would not have the financial capability to make any of the Put Right Payments that would otherwise then be required to be made, or shall have the financial capability to make only a portion of such Put Right Payments, then payments with respect to such Put Right Payments shall be made on the following basis: As of the first day following a determination by the Appraiser of lack of financial capability in respect of which Put Right Payments are required to be made or, if no request for an Appraiser's appraisal is made, on the day following the last day of the Request Period (each such date being hereinafter called a "Payout Date"), all unpaid amounts payable with respect to Put Rights exercised prior to such a date, shall be aggregated (the "Aggregate Payable Amount"), and the amount payable to each Participant shall be determined by multiplying the full amount owing to such Participant as of such date by a fraction, the numerator of which shall be the amount that the Company, as indicated by the Board of Directors' determination or the Appraiser's written opinion, shall then be financially capable of paying (which may be zero if, as indicated by the Board of Directors' determination or the Appraiser's written opinion, the Company is not financially capable of making any of the Put Right Payments then otherwise required to be made) and the denominator of which shall be the Aggregate Payable Amount. Elections to exercise Put Rights (or portions thereof) not satisfied pursuant to such pro rata payment shall be deemed revoked, and the remaining Awards (or portions thereof) with respect thereto shall thereafter be subject to the provisions of the Plan as if a Put Right election had not been made, provided, however that such Options will not be canceled pursuant to Section 8(a)(iv) or as a result of the expiration of such Options' term pursuant to Section 8(a)(iii). In acting pursuant to this Section 8, the Appraiser shall be entitled to the rights and immunities of an arbitrator. (c) Election and Delivery Procedures. (i) The closing of any exercise of any Call Right or Put Right pursuant to Section 10(a) or 10(b) shall take place at the offices of the Company, or such other place as may be mutually agreed, not less than 15 nor more than 30 days after the Valuation Date coincident with or following the relevant termination of employment. The exact date and time of closing shall be specified by the party exercising such Call Right or Put Right. (ii) At such closing (the "Closing"), the Participant (or, following the Participant's death, the Participant's Beneficiary or Beneficiaries) shall deliver 16 16 certificates for the shares of Common Stock to be sold to the Company duly endorsed, or accompanied by written instruments of transfer in form reasonably satisfactory to the Company duly executed, by such transferor, free and clear of any Encumbrances, and shall consent to the cancellation of the Vested Options to be surrendered, which Vested Options shall also be free and clear of any Encumbrances. The Company shall pay the applicable purchase price for shares of Common Stock and consideration for surrendered Vested Options in cash; provided, however, that such payment may be deferred under the circumstances, and to the extent, provided for in Section 12. 11. Appraisal. If, in connection with the determination of the Fair Market Value used to calculate the purchase price for shares of Common Stock and Vested Options upon the exercise of any Call Right or Put Right under Section 10(a) or 10(b), a Participant reasonably believes that the Board of Directors' determination of Fair Market Value (if applicable) is not reasonable, then such Participant may challenge the Board of Directors' determination of such Fair Market Value by giving written notice to the Board of Directors no later than 15 business days after receipt of notice of the purchase price per share which the Company intends to pay with respect to such shares of Common Stock and Vested Options. In such event, the Company shall engage at its own expense an appraisal or investment banking firm that is independent of the Company and its Subsidiaries and Affiliates and is knowledgeable in the valuation of companies engaged in a business similar to the business in which the Company is engaged to determine the Fair Market Value of the Common Stock for purposes of determining the purchase price; provided, however, that if such a determination has been made by such an appraisal or investment banking firm less than six months prior to the date as of which the Fair Market Value of the Common Stock is to be determined, the Company shall not be required to engage any such firm and shall instead rely on such earlier valuation; provided further, however, that the Company shall not rely on such earlier valuation if it determines in good faith that such earlier valuation no longer reflects Fair Market Value. Any such appraisal or investment banking firm engaged by the Company shall be selected by the Board of Directors and shall be reasonably satisfactory to such Participant. Such independent appraisal or investment banking firm's determination of Fair Market Value shall be conclusive and binding on the parties. Anything in this Section 11 to the contrary notwithstanding, if such an independent appraisal or investment banking firm is appointed, no payment shall be made in respect of the Participant's shares of Common Stock or Vested Options pending the determination of Fair Market Value by such firm, and payment of the purchase price shall instead be made no later than the tenth business day following receipt by the Company of the report of such firm establishing Fair Market Value. If the Fair Market Value so determined by the independent banking firm exceeds the Fair Market Value as determined by the Board of Directors by more than 10%, the costs of such firm shall be for the account of the Company; in all other cases, the costs of such firm shall be borne by the Participant, and the Company shall have the right to withhold such costs from any payment it 17 17 makes in respect of its repurchase of shares of Common Stock or Vested Options from the Participant. 12. Legal Limitations. Anything in the Plan or any Agreement to the contrary notwithstanding, to the extent that the limitations or restrictions applicable to the Company or any Subsidiary under the laws of their respective jurisdictions of incorporation, the restrictions or limitations contained in the Certificate of Incorporation or By-laws of the Company or any Subsidiary or any other applicable law, rule or regulation or under the terms of any indebtedness for borrowed money of the Company or any Subsidiary prohibit the Company from making any payment required under the Plan or any applicable Agreement with respect to a share of Common Stock or Vested Option, then the Company shall not be obligated to make such payment at such time, and shall have the right to defer such payment until the Board of Directors reasonably determines that such limitations and restrictions no longer restrict the Company from making such deferred payment. Any amounts the payment of which is so deferred shall bear interest, compounded annually and calculated at a rate equal to the Prime Rate, and shall be paid (with interest) promptly after, and to the extent that, the Board of Directors determines that the limitations and restrictions referred to in the first sentence of this Section 12 no longer restrict such payment. Notwithstanding a deferral of payment in accordance with this Section 12 for shares of Common Stock or Vested Options in respect of which a Call Right or Put Right shall have been exercised, the closing of any exercise of such Call Right or Put Right shall take place as provided in Section 10(c) and the right of a Participant and his Permitted Transferees in respect of the shares of Common Stock and Vested Options subject to such Call Right or Put Right (other than the right to receive payment of amounts deferred in accordance with this Section 12) shall terminate as of such closing. 13. Effect of Certain Corporate Changes and Changes in Control. (a) Dilution and Other Adjustments. In the event of a stock dividend or split, the Committee shall make the following adjustments as are necessary or advisable (the form of which shall be determined by the Committee in its sole discretion) to provide each Participant with a benefit equivalent to that which he would have been entitled to had such event not occurred: (i) adjust the number of Awards granted to each Participant and the number of Awards that may be granted generally pursuant to the Plan, (ii) adjust the Option Price of any Options, and (iii) make any other adjustments, or take such action, as the Committee, in its discretion, deems appropriate. Such adjustments shall be conclusive and binding for all purposes. In the event of a change in the Common Stock which is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued shares of Common Stock, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. 18 18 (b) Effect of Reorganization. In the event that (i) the Company is merged or consolidated with another corporation, (ii) all or substantially all the assets of the Company are acquired by another corporation, person or entity, (iii) the Company is reorganized, dissolved or liquidated (each such event in (i), (ii) or (iii) being hereinafter referred to as a "Reorganization Event") or (iv) the Board of Directors shall propose that the Company enter into a Reorganization Event, then the Committee shall make upon consummation of such Reorganization Event any or all of the adjustments described in Section 13(a) as are necessary or advisable in the sole discretion of the Committee to provide the Participant with a benefit equivalent to that which he would have been entitled to had such event not occurred. 14. Incidental Registration. (a) Registration Process. If the Company at any time proposes to register any shares of Common Stock under the 1933 Act for sale in a Public Offering in the United States, whether or not for its own account, on a form and in a manner that would permit registration of Registrable Securities under the 1933 Act for Sale in such Public Offering, it will each such time give prompt written notice to all Participants holding Registrable Securities (including Option Stock issuable upon exercise of any Vested Options held by the Participants after giving effect to the accelerated vesting, if any, that would result as a consequence of such Public Offering) of its intention to do so, specifying the form and manner and the other relevant facts involved in such proposed registration (including, without limitation, the identity of the managing underwriter). Upon the written request of any such holder of Registrable Securities delivered to the Company within 30 days after such notice shall have been given to such holder (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration under the Securities Act, as expeditiously as is reasonable, of all Registrable Securities that the Company has been so requested to register by the holders of Registrable Securities, to the extent requisite to permit the Sale of the Registrable Securities to be so registered in such Public Offering; provided, however, that: (i) if, at any time after giving such written notice of its intention to register any of such shares of Common Stock proposed to be registered by the Company and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such shares of Common Stock, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities that has requested to register Registrable Securities and thereupon the Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith to the extent provided in Section 14(b)); 19 19 (ii) if the managing underwriter of such Public Offering shall advise the Company that, in its judgment, the number of shares of Common Stock proposed to be included in such Public Offering should be limited because the inclusion of Registrable Securities is likely to adversely impact the purchase price obtained for the shares of Common Stock proposed to be included in such Public Offering, then the Company will promptly advise each such holder of Registrable Securities thereof and may require, by written notice to each such holder accompanying such advice, that, to the extent necessary to meet such limitation, all holders of Registrable Securities proposing to sell shares of Common Stock in such Public Offering shall share pro rata in the number of shares of Common Stock to be excluded from such offering, such sharing to be based on the respective numbers of Registrable Securities as to which registration has been requested by such holders and that the distribution of such Registrable Securities as are so excluded be deferred (in case of a deferral as to a portion of such Registrable Securities, such portion to be allocated among such holders in proportion to the respective numbers of shares of Common Stock so requested to be registered by such holders) until the completion of the distribution of such shares of Common Stock and any other securities by such underwriters; and (iii) the Company shall not be obligated to effect any registration of Registrable Securities under this Section 14 that is incidental to the registration of any of its shares of Common Stock or other securities in connection with any merger, acquisition, exchange offer, dividend reinvestment plan or stock option or other employee benefit plan. (b) Registration Expenses. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities effected by it pursuant to this Section 14. 15. Right to Participate in Certain Dispositions. (a) Right to Participate. (i) So long as F Purchaser and B Purchaser together (for purposes of this Section 15 the "Founding Stockholders") shall own at least 40% of the outstanding shares of Common Stock, neither Founding Stockholder shall in any transaction or series of related transactions, directly or indirectly, sell or otherwise dispose of for value any shares of Common Stock held by it to any Third Party or Third Parties, unless the terms and conditions of such sale or other disposition shall include an offer to include, at the option of each of the Participants, in such sale or other disposition to the Third Party or Third Parties, the Pro Rata Portion (as hereinafter defined) of the shares of Common Stock, including Management Shares and Option Shares then owned (or issuable upon the exercise of any options owned) by each such Participant. For purposes of this Section 15, "Pro Rata Portion" means, with respect to each Participant, a number equal to the product of (a) the total 20 20 number of shares of Common Stock then owned (or issuable upon the exercise of any Vested Options held after giving effect to the accelerated vesting, if any, that would result as a consequence of such sale or disposition) by such Participant, times (b) a fraction, the numerator of which shall be the total number of shares of Common Stock proposed to be sold by the Prospective Sellers (as such term is defined in Section 15(a)(ii)), and the denominator of which shall be the total number of shares of Common Stock owned (or issuable upon the exercise of any Vested Options held after giving effect to the accelerated vesting, if any, that would result as a consequence of such sale or disposition) by the Prospective Sellers (including such shares of Common Stock so proposed to be sold). (ii) If, so long as the Founding Stockholders shall own at least 40% of the outstanding shares of Common Stock, either Founding Stockholder receives from a Third Party or Third Parties a bona fide offer or offers to purchase or otherwise acquire (for purposes of this Section 15, an "Offer") any shares of Common Stock held by such Founding Stockholder (for purposes of this Section 15, the "Offered Shares"), and such Founding Stockholder intends to pursue a sale of such shares of Common Stock to such Third Party or Third Parties, such Founding Stockholder (for purposes of this Section 15, the "Prospective Seller") shall provide written notice (for purposes of this Section 15, the "Offer Notice") of such Offer to each of the Participants not later than the tenth business day prior to the consummation of the sale or other disposition contemplated by the Offer. The Offer Notice shall identify the Offered Shares, the price offered for such Offered Shares, all other material terms and conditions of the Offer and, in the case of an Offer in which the consideration payable for shares of Common Stock consists in whole or in part of such other consideration as the Company may reasonably determine, such other consideration. The Participants shall have the right and option, for a period of 10 business days after the date the Offer Notice is given to such Participants (for purposes of this Section 15, the "Notice Period"), to notify the Prospective Seller of such Participant's interest in selling or otherwise disposing of up to the Pro Rata Portion of such Participant's shares of Common Stock pursuant to the Offer). Each Participant desiring to exercise such option shall, prior to the expiration of the Notice Period, provide the Prospective Seller with written notice (specifying the number of shares of Common Stock as to which such Participant has an interest in selling or otherwise disposing of pursuant to the Offer) (for purposes of this Section 15, a "Notice of Interest") and, deliver to the Prospective Seller (A) the certificate or certificates evidencing the shares of Common Stock to be sold or otherwise disposed of pursuant to such Offer by such Participant duly endorsed in blank or accompanied by written instruments of transfer in form satisfactory to the Prospective Seller executed by such Participant, (B) an instrument of assignment reasonably satisfactory to the Prospective Seller assigning, as of the consummation of the sale or other disposition to the Third Party or Third Parties, all such Participant's rights hereunder with respect to the shares of Common Stock to be sold or otherwise disposed of, and (C) a special irrevocable power-of-attorney authorizing the Prospective Seller to sell or otherwise dispose of such shares of Common Stock pursuant to the terms of the Offer and to take all such actions as shall be 21 21 necessary or appropriate in order to consummate such sale or other disposition. Delivery of such certificate or certificates evidencing the shares of Common Stock to be sold, the instrument of assignment and the special irrevocable power-of-attorney authorizing the Prospective Seller to sell or otherwise dispose of such shares of Common Stock shall constitute an irrevocable election by such Participant to authorize and permit the Prospective Seller to sell such shares of Common Stock pursuant to the Offer. Each Participant that shall have delivered a Notice of Interest as provided in this Section 15(a)(ii) shall deliver the documents described in clauses (A) and (B) of the second preceding sentence at the closing of the sale of the Offered Shares. (iii) Promptly after the consummation of the sale or other disposition of the shares of Common Stock of the Prospective Seller and the Participants to the Third Party or Third Parties pursuant to the Offer, the Prospective Seller shall remit to each of the Participants the total sales price of the shares of Common Stock of such Participants sold or otherwise disposed of pursuant thereto. (iv) If at the end of the Notice Period any Participant shall not have given a Notice of Interest (and delivered all other required documents) with respect to some or all of the Pro Rata Portion of such Participant's shares of Common Stock, such Participant will be deemed to have waived all its rights under this Section 15 with respect to the sale or other disposition pursuant to the Offer of the portion of the Pro Rata Portion of the shares of Common Stock owned by such Participant with respect to which a Notice of Interest shall not have been given. If, at the end of the 120-day period following the giving of the Offer Notice, the Prospective Seller has not completed the sale of all the Offered Shares and the shares of Common Stock with respect to which Participants shall have given Notices of Interest pursuant to this Section 15, the Prospective Seller shall return to such Participants all certificates evidencing the unsold shares of Common Stock that such Participants delivered for sale or other disposition pursuant to this Section 15 and such Participants' related instruments of assignment and powers-of-attorney. (v) Except as expressly provided in this Section 15, the Prospective Seller shall have no obligation to any Participant with respect to the sale or other disposition of any shares of Common Stock owned by such Participant in connection with this Section 15. Anything herein to the contrary notwithstanding and irrespective of whether any Notice of Interest shall have been given, the Prospective Seller shall have no obligation to any Participant to sell or otherwise dispose of any Offered Shares pursuant to this Section 15 or as a result of any decision by the Prospective Seller not to accept or consummate any Offer or sale or other disposition with respect to the Offered Shares (it being understood that any and all such decisions shall be made by the Prospective Seller in its sole discretion). No Participant shall be entitled to sell or otherwise dispose of shares of Common Stock directly or to any Third Party pursuant to an Offer (it being understood that all such sales and other 22 22 dispositions shall be made only on the terms and pursuant to the procedures set forth in this Section 15). (b) Anything in this Section 15 to the contrary notwithstanding, (i) the provisions of Section 15 will not be applicable to any sale of shares of Common Stock pursuant to a Public Offering, (ii) in the event that either Prospective Seller shall exercise the option referred to in Section 16 to require each of the Participants to participate in the sale of shares of Common Stock referred to therein, the Participants shall thereafter have no right pursuant to this Section 15 to participate in any such sale and (iii) all rights to participate conveyed by this Section 15 will become null and void upon an IPO. Nothing in this Section 15 shall affect any of the obligations of the Founding Stockholders under any other provision of this Plan. 16. Right to Compel Participation in Certain Sales. (a) Compelled Participation. If either Founding Stockholder shall, individually or jointly, in any transaction or series of related transactions, directly or indirectly, (for purposes of this Section 16, collectively, the "Prospective Sellers") propose to sell to a Third Party or Third Parties for cash, cash equivalents or marketable securities all shares of Common Stock held by them (for purposes of this Section 16, the "Controlling Shares") to a Third Party or Third Parties (for purposes of this Section 16, an "Offer") and as a result of such sale such Third Party or Third Parties and all Affiliates of such Third Party or Third Parties would own a number of shares of Common Stock that constitutes a majority of the shares of Common Stock then outstanding, the Prospective Sellers may, at their option, require each of the Participants to sell all shares of Common Stock owned or held by such Participant to the Third Party or Third Parties, for the same consideration per share of Common Stock and otherwise on the same terms and conditions upon which the Prospective Sellers sell their shares of Common Stock. (b) Compelled Sales Procedure. (i) the Prospective Sellers shall provide a written notice (for purposes of this Section 16, the "Offer Notice") of such Offer to each of the Participants no later than the tenth business day prior to the consummation of the sale contemplated by the Offer. The Offer Notice shall contain written notice on the exercise of the Prospective Sellers' rights pursuant to Section 16, setting forth the consideration per share of Common Stock to be paid by the Third Party or Third Parties and the other material terms and conditions of Offer. Within 10 business days following the date the Offer Notice is given, each of the Participants shall deliver to the Prospective Sellers (A) the certificate or certificates evidencing all the shares of Common Stock owned or held by such Participant duly endorsed in blank or accompanied by written instruments of transfer in form satisfactory to the Prospective Sellers executed by such Participant, and (B) a special irrevocable power-of-attorney authorizing the Prospective Sellers to sell such shares of Common Stock pursuant to 23 23 the terms of the Offer and to take all such action as shall be necessary or appropriate in order to consummate such sale, provided, however, that if such delivery is not permitted by applicable law, such Participant shall deliver an unconditional agreement to deliver such shares of Common Stock pursuant to this Section 16(b) at the closing for such Offer against delivery to such Participant of the consideration therefor. (ii) Promptly after the consummation of the sale of shares of Common Stock of the Prospective Sellers and the Participants to the Third Party or Third Parties pursuant to the Offer, the Prospective Sellers shall remit to each of the Participants the total sales price of the shares of Common Stock of such Participant sold pursuant thereto. (iii) If, at the end of the 120-day period following the giving of the Offer Notice, the Prospective Sellers have not completed the sale of all the Controlling Shares and the shares of Common Stock delivered to the Prospective Sellers pursuant to Section 16(b)(i), the Prospective Sellers shall return to each of the Participants all certificates evidencing unsold shares of Common Stock that such Participant delivered for sale pursuant to this Section 16 and such Participant's related powers-of-attorney. (iv) Except as expressly provided in this Section 16, the Prospective Sellers shall have no obligation to any Participant with respect to the sale or other disposition of any shares of Common Stock owned by such Participant in connection with this Section 16. Anything herein to the contrary notwithstanding, the Prospective Sellers shall have no obligation to any Participant to sell or otherwise dispose of any Controlling Shares pursuant to this Section 16 or as a result of any decision by the Prospective Sellers not to accept or consummate any Offer or sale with respect to the Controlling Shares (it being understood that any and all such decisions shall be made by the Prospective Sellers in their sole discretion). No Participant shall be entitled to sell shares of Common Stock directly to any Third Party pursuant to an Offer (it being understood that all such sales and other dispositions shall be made only on the terms and pursuant to the procedures set forth in this Section 16). Nothing in this Section 16 shall affect any of the obligations of either of the Founding Stockholders under any other provisions of this Plan. (c) Anything in this Section 16 to the contrary notwithstanding, (i) the provisions of this Section 16 will not be applicable to any sale of shares of Common Stock pursuant to a Public Offering and (ii) all rights to compel sales under this Section 16 shall become null and void upon an IPO. 17. Miscellaneous. (a) No Rights to Grants or Continued Employment or Engagement. No Participant shall have any claim or right to receive grants of Awards under the Plan. Neither 24 24 the Plan nor any action taken or omitted to be taken hereunder shall be deemed to create or confer on any Participant any right to be retained in the employ of the Company or any Subsidiary or other Affiliate thereof, or to interfere with or to limit in any way the right of the Company or any Subsidiary or other Affiliate thereof to terminate the employment or engagement of such Participant at any time. (b) Right of Company to Assign Rights and Delegate Duties. The Company shall have the right to assign any of its rights and delegate any of its duties hereunder to any of its Affiliates, provided, however, that such assignment shall not release the Company from any duty hereunder which remains unfulfilled by such an assignee. (c) Tax Withholding. The Company and its Subsidiaries shall have the right to require any individual entitled to receive shares of Common Stock pursuant to an Award to remit to the Company, prior to the delivery of any certificates evidencing such shares, any amount sufficient to satisfy any federal, state or local tax withholding requirements. Prior to the Company's determination of such withholding liability, such individual may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold shares of Common Stock that would otherwise be received by such individual. Such election may be denied by the Committee in its discretion, or may be made subject to certain conditions specified by the Committee, including, without limitation, conditions intended to avoid the imposition of liability against the individual under Section 16(b) of the 1934 Act. The Company and its Subsidiaries shall also have the right to deduct from all cash payments made pursuant to the Plan or any applicable Agreement any federal, state or local taxes required to be withheld with respect to such payment. (d) No Restriction on Right of Company to Effect Corporate Changes. The Plan shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (e) 1934 Act. Notwithstanding anything contained in the Plan or any Agreement to the contrary, if the consummation of any transaction under the Plan would result in the possible imposition of liability on a Participant pursuant to Section 16(b) of the 1934 Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to 25 25 defer such transaction to the extent necessary to avoid such liability, but in no event for a period in excess of 180 days. (f) Registration of Plan. On the date, or as soon as practicable after, the Company becomes a Public Company, the Company shall file a form S-8 with respect to the Plan. 18. Amendment. The Board of Directors may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part. No termination or amendment of the Plan may, without the consent of the Participant to whom any Awards. 19. Effective Date. The Plan shall be effective as of the Effective Time of the Merger (the "Effective Date"), as such terms are defined in the transaction agreement between F Purchaser, B Purchaser and the Company. 20. Termination of the Plan. The Plan shall continue until terminated by the Board of Directors pursuant to Section 18, and no further Awards shall be made hereunder after the date of such termination. 21. Headings. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan. 22. Governing Law. The Plan and all rights hereunder shall be governed by and construed in accordance with the laws of the State of Delaware without reference to rules relating to conflicts of law. 26 26 FREMONT PURCHASER II, INC. and RCBA PURCHASER I, L.P. acknowledge the Plan and agree to be bound by Section 10 thereof. By:/s/ R. S. Kopf By:/s/ N. Colin Lind ___________________________ _______________________ FREMONT PURCHASER II, INC. RCBA PURCHASER I, L.P. Name: Name: N. Colin Lind Title: Title: Managing Director EX-99.C.5 10 FORM OF STOCK RETENTION AGREEMENT 1 FORM OF AWARD AGREEMENT MANAGEMENT EQUITY AGREEMENT, dated as of [ ], 1997, between KINETIC CONCEPTS, INC., a Texas corporation (the "Company"), and the other party signatory hereto (the "Participant"). [WHEREAS, the Participant has agreed to retain certain shares of Common Stock of the Company ("Common Stock") and make such shares subject to this Agreement and the Plan (as defined below) (the "Old Management Shares"); and] WHEREAS, the Participant has agreed to exchange options (the "Old Options") to purchase shares of Common Stock under the Company's pre-existing equity based compensation plans for nonqualified stock options (the "Exchange Options" or the "Options") to purchase shares of Common Stock; and WHEREAS, in connection with the foregoing, the Company's Management Equity Plan (the "Plan") will govern the terms and conditions of the [Old Management Shares and the New Management Shares (collectively, the "Management Shares")] and the Options; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto agree as follows: 1. Definitions; Incorporation of Plan Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan, a copy of which is attached hereto. This Agreement, the [Management Shares and the] Options shall be subject to the Plan, the terms of which are hereby incorporated herein by reference, and in the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern. 2. Surrender and Grant of Options. Subject to the terms and conditions contained herein and in the Plan, the Participant has surrendered to the Company certain of the Old Options in exchange for an equal number of Exchange Options as specified at the foot of the signature page hereof, at the Option Prices so listed. The Options are not intended to qualify as Incentive Stock Options under Section 422 of the Code. Each such Option shall entitle the Participant to purchase, upon payment of the Option Price, one share of Common Stock. The shares of Common Stock issuable upon exercise of the Options are from time to time referred to herein as the "Option Shares". For purposes of the Plan and this Agreement, the Date of Grant shall be as specified at the foot of this Agreement. The Options shall be exercisable as hereinafter provided. 3. Terms and Conditions of Options. The Options evidenced hereby are subject to the following terms and conditions in addition to the terms of the Plan: 2 2 (a) Vesting. The Exchange Options shall be fully vested as of the Date of Grant. (b) Option Period. The Exchange Options shall not be exercisable following the tenth anniversary of the date of grant of the Old Options for which such Exchange Options were exchanged (the "Old Date of Grant"), which shall be listed at the foot of this Agreement next to the relevant Option Price. The Options shall be subject to earlier termination as provided herein. Upon termination of the Participant's employment with the Company and its Subsidiaries for any reason, the Options, to the extent then vested, may be exercised in accordance with Section 8(a)(iv) of the Plan. The Options shall be exercisable during the Participant's lifetime only by the Participant. Upon termination of the Participant's employment with the Company and its Subsidiaries for any reason, all Options which have not theretofore vested (and which do not vest by reason of Section 8(a)(ii)(B) of the Plan) shall terminate and be canceled without any payment therefor. (c) Notice of Exercise. Subject to Sections 3(d), 3(f) and 8(b) hereof, the Participant may exercise any or all of the Options (to the extent vested and not forfeited) by giving written notice to the Committee. The date of exercise of an Option shall be the later of (i) the date on which the Committee receives such written notice or (ii) the date on which the conditions provided in Sections 3(d), 3(f) and 8(b) hereof are satisfied. (d) Payment. Prior to the issuance of a Legended Certificate pursuant to Section 3(g) hereof evidencing Option Shares, the Participant shall have paid to the Company the Option Price of all Option Shares purchased pursuant to exercise of such Options in cash or, with the consent of the Committee (which consent shall be granted in the sole discretion of the Committee), in shares of Common Stock already owned by the Participant (valued at their Applicable Value) or in any combination of cash or shares of Common Stock. (e) Stockholder Rights. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of the Options until a certificate or certificates evidencing such shares shall have been issued to the Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. (f) Limitation on Exercise. The Options shall not be exercisable unless the offer and sale of the shares of Common Stock subject thereto have been registered under the 1933 Act and qualified under applicable state "blue sky" laws, or the Company has determined that an exemption from registration under the 1933 Act and from qualification under such state "blue sky" laws is available. The Company may require, as a condition 3 3 to exercise of an Option, that the Participant make certain representations and warranties as to the Participant's investment intent with respect to the Option Shares. (g) Delivery of Certificate. As soon as practicable following the exercise of any Options, a Legended Certificate evidencing the appropriate number of shares of Common Stock issued in connection with such exercise shall be issued in the name of the Participant. (h) Dividends and Distributions. Any shares of Common Stock or other securities of the Company received by the Participant as a result of a stock dividend or other distribution in respect of Option Shares shall be subject to the same restrictions as such Option Shares, and all references to Option Shares hereunder shall be deemed to include such shares of Common Stock or other securities. [4. Retention and Purchase of Management Shares. Subject to the terms and conditions contained herein and in the Plan, the Participant has agreed to retain and make subject to the terms of this Agreement and the Plan the number of Old Management Shares indicated at the foot of this Agreement. For purposes of the Plan and this Agreement, the Date of Grant shall be as specified at the foot of this Agreement. 5. Terms of Management Shares. The Management Shares evidenced hereby are subject to the following terms and conditions in addition to the terms of the Plan: (a) Delivery of Certificate. On the Date of Grant the Participant shall surrender any existing certificates evidencing the Old Management Shares to the Company and the Company shall deliver to the Participant a Legended Certificate evidencing such Shares. (b) Vesting. The Management Shares shall be fully vested as of the Date of Grant. (c) Stockholder Rights. The Participant shall have all rights of a stockholder as to the Management Shares, including the right to receive dividends and the right to vote in accordance with the Company's Certificate of Incorporation, subject to the restrictions set forth in the Plan and this Agreement. (d) Dividends and Distributions. Any shares of Common Stock or other securities of the Company received by the Participant as a result of a stock distribution to holders of Management Shares or as a stock dividend on Management Shares shall be subject to the same restrictions as such Management Shares, and all references to Management Shares hereunder shall be deemed to include such shares of Common Stock or other securities.] 4 4 6. Representations and Warranties. (a) The Participant has been advised that the [Management Shares], Options and Option Shares have not been registered under the 1933 Act and, therefore, cannot be resold unless they are registered or unless an exemption from registration is available. The Participant is acquiring the [Management Shares,] Options and Option Shares for his own account, for investment and not with a view to, or for resale in connection with, the distribution thereof, and the Participant has no present intention of selling, assigning, transferring, distributing or otherwise disposing of, or causing the sale, assignment, transfer, distribution or other disposition of, any thereof. In making the foregoing representation, the Participant is aware that he must bear the economic risk of an investment in the [Management Shares,] Options or Options Shares for an indefinite period of time since, in the view of the Commission, the statutory basis for exemption from registration under the 1933 Act would not be present if such representation meant merely that the Participant's current intention is to hold these securities only for the long-term capital gains period of the Code, or for a deferred sale, or for any fixed period in the future. (b) The Participant has been given the opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of the [Management Shares,] Options and Option Shares to be transferred hereunder and other related matters. The Participant represents and warrants that he has been furnished with and has carefully read the Plan and this Agreement, and that the Company has made available to the Participant or his agents all documents and information requested by him or on his behalf in connection with his investment in the [Management Shares,] Options and Option Shares and that he understands and has evaluated the merits and risks of an investment in the [Management Shares,] Options and Option Shares. In evaluating the suitability of an investment in such [Management Shares,] Options and Option Shares, the Participant has not relied upon any other representations or other information (whether oral or written) made by or on behalf of the Company other than as contemplated by the two preceding sentences. (c) The Participant is aware of and familiar with the restrictions imposed on the transfer of any [Management Shares,] Options and Option Shares, including, without limitation, the restrictions contained in this Agreement and the Plan. (d) The Participant represents that this Agreement has been duly executed and delivered by the Participant and constitutes a legal, valid and binding agreement of the Participant, enforceable against the Participant in accordance with its terms. 7. Participant's Waiver. The Participant hereby waives any and all rights he may have had with respect to the Old Options. 5 5 8. Miscellaneous. (a) No Rights to Grants or Continued Employment. The Participant shall not have any claim or right to receive grants of Awards under the Plan. Neither the Plan or this Agreement nor any action taken or omitted to be taken hereunder or thereunder shall be deemed to create or confer on the Participant any right to be retained in the employ of the Company or any Subsidiary or other Affiliate thereof, or to interfere with or to limit in any way the right of the Company or any Subsidiary or other Affiliate thereof to terminate the employment of the Participant at any time. (b) Tax Withholding. The Company and its Subsidiaries shall have the right, prior to the delivery of any certificates evidencing shares of Common Stock to be issued pursuant to this Agreement, to require the Participant to remit to the Company any amount sufficient to satisfy any federal, state or local tax withholding requirements. Prior to the Company's determination of such withholding liability, the Participant may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold shares of Common Stock that would otherwise be received by the Participant. Such election may be denied by the Committee in its discretion, or may be made subject to certain conditions specified by the Committee, including, without limitation, conditions intended to avoid the imposition of liability against the Participant under Section 16(b) of the 1934 Act. The Company and its Subsidiaries shall also have the right to deduct from all cash payments made pursuant to or in connection with any Award any federal, state or local taxes required to be withheld with respect to such payments. (c) No Restriction on Right of Company to Effect Corporate Changes. Neither the Plan nor this Agreement shall affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (d) 1934 Act. Notwithstanding anything contained in the Plan or this Agreement to the contrary, if the consummation of any transaction under the Plan or this Agreement would result in the possible imposition of liability to the Participant pursuant to Section 16(b) of the 1934 Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction to the extent necessary to avoid such liability, but in no event for a period in excess of 180 days. 6 6 (e) Restrictions on Transfer. Options [and Management Shares] shall not be transferrable except as specifically provided in the Plan or this Agreement. 9. Survival; Assignment, (a) All agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the issuance to the Participant of the [Management Shares,] the Options and any Option Shares and, notwithstanding any investigation heretofore or hereafter made by the Participant or the Company or on the Participant's or the Company's behalf, shall continue in full force and effect. Without the prior written consent of the Company, the Participant may not assign any of his rights hereunder except as permitted by the Plan or by will or the laws of descent and distribution. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the heirs and permitted successors and assigns of such party; and all agreements herein by or on behalf of the Company, or by or on behalf of the Participant, shall bind and inure to the benefit of the heirs and permitted successors and assigns of such parties hereto. (b) The Company shall have the right to assign any of its rights and to delegate any of its duties under this Agreement to any of its Affiliates , provided, however, that such assignment shall not release the Company from any duty hereunder which remains unfulfilled by such an assignee. 10. Notices. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or sent by certified or registered mail, return receipt requested, postage prepaid, addressed, if to the Participant, to his attention at the mailing address set forth at the foot of this Agreement (or to such other address as the Participant shall have specified to the Company in writing) and, if to the Company, to the General Counsel of the Company. All such notices shall be conclusively deemed to be received and shall be effective, if sent by hand delivery, upon receipt, or if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. 11. Waiver. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 12. Entire Agreement; Governing Law. This Agreement and the other related agreements expressly referred to herein set forth the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. The headings of sections and subsections herein are included solely for 7 7 convenience of reference and shall not affect the meaning of any of the provisions of this Agreement. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. 8 8 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Participant has executed this Agreement, both as of the day and year first above written. KINETIC CONCEPTS, INC. By:______________________________ Name: Title: PARTICIPANT _________________________________ Name: Address: [Number of Old Management Shares:]
NUMBER OF OPTION EXCHANGE OPTIONS PRICE OLD DATE OF GRANT
EX-99.C.6 11 MANAGEMENT EQUITY AGREEMENT 1 MANAGEMENT EQUITY AGREEMENT, dated as of October 2, 1997, between KINETIC CONCEPTS, INC., a Texas corporation (the "Company"), and the other party signatory hereto (the "Participant"). WHEREAS, the Participant has agreed to exchange options (the "Old Options") to purchase shares of Common Stock of the Company ("Common Stock") under the Company's pre-existing equity based compensation plans for nonqualified stock options (the "Exchange Options" or the "Options") to purchase shares of Common Stock; and WHEREAS, in connection with the foregoing, the Company's Management Equity Plan (the "Plan") will govern the terms and conditions of the Options; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto agree as follows: 1. Definitions; Incorporation of Plan Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan, a copy of which is attached hereto. This Agreement and the Options shall be subject to the Plan, the terms of which are hereby incorporated herein by reference, and in the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern. 2. Surrender and Grant of Options. Subject to the terms and conditions contained herein and in the Plan, (i) the Participant has surrendered to the Company certain of the Old Options in exchange for an equal number of Exchange Options as specified at the foot of the signature page hereof, at the Option Prices so listed. The Options are not intended to qualify as Incentive Stock Options under Section 422 of the Code. Each such Option shall entitle the Participant to purchase, upon payment of the Option Price, one share of Common Stock. The shares of Common Stock issuable upon exercise of the Options are from time to time referred to herein as the "Option Shares". For purposes of the Plan and this Agreement, the Date of Grant shall be as specified at the foot of this Agreement. The Options shall be exercisable as hereinafter provided. 3. Terms and Conditions of Options. The Options evidenced hereby are subject to the following terms and conditions in addition to the terms of the Plan: (a) Vesting. The Exchange Options shall be fully vested as of the Date of Grant. (b) Option Period. The Exchange Options shall not be exercisable following the tenth anniversary of the date of grant of the Old Options for which such Exchange Options were exchanged (the "Old Date of Grant"), which shall be listed at the foot of this Agreement next to the relevant Option Price. The Options shall be subject to earlier 2 2 termination as provided herein. Upon termination of the Participant's employment with the Company and its Subsidiaries for any reason, the Options, to the extent then vested, may be exercised in accordance with Section 8(a)(iv) of the Plan. The Options shall be exercisable during the Participant's lifetime only by the Participant. Upon termination of the Participant's employment with the Company and its Subsidiaries for any reason, all Options which have not theretofore vested (and which do not vest by reason of Section 8(a)(ii)(B)of the Plan) shall terminate and be canceled without any payment therefor. (c) Notice of Exercise. Subject to Sections 3(d), 3(f) and 7(b) hereof, the Participant may exercise any or all of the Options (to the extent vested and not forfeited) by giving written notice to the Committee. The date of exercise of an Option shall be the later of (i) the date on which the Committee receives such written notice or (ii) the date on which the conditions provided in Sections 3(d), 3(f) and 7(b) hereof are satisfied. (d) Payment. Prior to the issuance of a Legended Certificate pursuant to Section 3(g) hereof evidencing Option Shares, the Participant shall have paid to the Company the Option Price of all Option Shares purchased pursuant to exercise of such Options in cash or, with the consent of the Committee (which consent shall be granted in the sole discretion of the Committee), in shares of Common Stock already owned by the Participant (valued at their Applicable Value) or in any combination of cash or shares of Common Stock. (e) Stockholder Rights. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of the Options until a certificate or certificates evidencing such shares shall have been issued to the Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. (f) Limitation on Exercise. The Options shall not be exercisable unless the offer and sale of the shares of Common Stock subject thereto have been registered under the 1933 Act and qualified under applicable state "blue sky" laws, or the Company has determined that an exemption from registration under the 1933 Act and from qualification under such state "blue sky" laws is available. The Company may require, as a condition to exercise of an Option, that the Participant make certain representations and warranties as to the Participant's investment intent with respect to the Option Shares. (g) Delivery of Certificate. As soon as practicable following the exercise of any Options, a Legended Certificate evidencing the appropriate number of shares of Common Stock issued in connection with such exercise shall be issued in the name of the Participant. 3 3 (h) Dividends and Distributions. Any shares of Common Stock or other securities of the Company received by the Participant as a result of a stock dividend or other distribution in respect of Option Shares shall be subject to the same restrictions as such Option Shares, and all references to Option Shares hereunder shall be deemed to include such shares of Common Stock or other securities. 4. Termination of Employment Provisions. Upon the Participant's termination of employment for any reason on or following the second anniversary of the Effective Date, the following provisions of this Section 6 shall apply instead of Section 10 of the Plan. (a) Company Call Right. (i) Exercise of Call Right. If prior to the completion of an IPO the employment of the Participant with the Company and its Subsidiaries terminates for any reason, or an Involuntary Transfer occurs, the Company shall have a Call Right, exercisable for a period of 60 days after the date of such termination or Involuntary Transfer, with respect to all of the Option Shares beneficially owned by such Participant and his Permitted Transferees. The Company may exercise such Call Right by giving written notice thereof to the Participant or his Permitted Transferee, as the case may be, prior to the expiration of such 60-day period. The Company's Call Right shall become null and void subsequent to the completion of an IPO. (ii) Purchase Price. With respect to any exercise of a Call Right under this Section 4(a), the purchase price per Option Share to be paid by the Company at the closing provided for in Section 8(c) shall be the Applicable Option Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status or Involuntary Transfer (the "Termination Amount") less 20% of such Termination Amount (the "Remaining Amount"). (b) Participant Put Right. (i) Exercise of Put Right. If prior to the completion of an IPO the employment of the Participant with the Company and its Subsidiaries terminates for any reason, the Participant (or, in the case of the Participant's death, his Beneficiary) shall have a Put Right, exercisable for a period of 60 days after the date of such termination, with respect to all of the Option Shares beneficially owned by such Participant and his Permitted Transferees. The Participant may exercise such Put Right by giving written notice thereof to the Company prior to the expiration of such 60-day period. The Participants' Put Rights shall be null and void subsequent to the completion of an IPO. 4 4 (ii) Purchase Price. The Put Right purchase price per Option Share to be paid by the Company at the closing provided for in this Section 4 shall be the Applicable Option Share Value, determined as of the first Valuation Date coincident with or following the date of termination of the Participant's employment or status (the "Termination Amount") less 20% of such Termination Amount (the "Remaining Amount"). (iii) Payment Limitations. Anything in this Plan to the contrary notwithstanding, if, at any time, the Board of Directors shall determine, subject to the written opinion of the Appraiser (as hereinafter defined) referred to below, the Company is not financially capable of making some or all of the aggregate payments to be made thereafter pursuant to the exercise of Put Rights (the "Put Right Payments"), the Company shall have the right to defer such Put Right Payments but only on the terms hereinafter provided in this Section 4. In the event that the Board of Directors shall have made such determination with respect to the Company's financial capability, the Board of Directors shall, if so requested in writing by at least two Participants within 10 business days of the date that notice of such determination is given (the "Request Period"), promptly retain an appraisal or investment banking firm, to be selected by one of the independent Directors and reasonably satisfactory to the Board of Directors (the "Appraiser"), to render a written opinion as to whether the Company has the financial capability to make any of, or any portion of, such Put Right Payments at such time as it would otherwise be required to make such Put Right Payments. If the Board's determination, or the Appraiser's written opinion, if so required, indicates that, at the time a Put Right Payment would otherwise be required to be made to a Participant, the Company would not have the financial capability to make any of the Put Right Payments that would otherwise then be required to be made, or shall have the financial capability to make only a portion of such Put Right Payments, then payments with respect to such Put Right Payments shall be made on the following basis: As of the first day following a determination by the Appraiser of lack of financial capability in respect of which Put Right Payments are required to be made or, if no request for an Appraiser's appraisal is made, on the day following the last day of the Request Period (each such date being hereinafter called a "Payout Date"), all unpaid amounts payable with respect to Put Rights exercised prior to such a date, aggregated (the "Aggregate Payable Amount"), shall be, and the amount payable to each Participant shall be determined by multiplying the full amount owing to such Participant as of such date by a fraction, the numerator of which shall be the amount that the Company, as indicated by the Board of Directors' determination or the Appraiser's written opinion, shall then be financially capable of paying (which may be zero if, as indicated by the Board of Directors' determination or the Appraiser's written opinion, the Company is not financially capable of making any of the Put Right Payments then otherwise required to be made) and the denominator of which shall be the Aggregate Payable Amount. Elections to exercise Put Rights (or portions thereof) not satisfied pursuant to such pro rata payment shall be deemed revoked, 5 5 and the remaining Awards (or portions thereof) with respect thereto shall thereafter be subject to the provisions of the Plan as if a Put Right election had not been made, provided, however, that such Options will not be canceled pursuant to Section 8(a)(iv) of the Plan as a result of the expiration of such Options' term pursuant to Section 8(a)(iii) of the Plan. In acting pursuant to this Section 4, the Appraiser shall be entitled to the rights and immunities of an arbitrator. (c) Election and Delivery Procedures. (i) The closing of any exercise of any Call Right or Put Right pursuant to this Section 4 shall take place at the offices of the Company, or such other place as may be mutually agreed, not less than 15 nor more than 30 days after the Valuation Date coincident with or following the relevant termination of employment. The exact date and time of closing shall be specified by the party exercising such Call Right or Put Right. (ii) At such closing (the "Closing"), the Participant (or, following the Participant's death, the Participant's Beneficiary or Beneficiaries) shall deliver certificates for the shares of Common Stock to be sold to the Company duly endorsed, or accompanied by written instruments of transfer in form reasonably satisfactory to the Company duly executed, by such transferor, free and clear of any Encumbrances. The Company shall pay the Termination Amount less the Remaining Amount for shares of Common Stock; provided, however, that such payment may be deferred under the circumstances, and to the extent, provided for in Section 12 of the Plan. (d) Holdback Payment. Upon the fifth anniversary of the Effective Date or, if earlier, upon the occurrence of an IPO, Sale of Stock or Sale of Assets, the Company shall promptly pay the Participant an amount in cash equal to the following: (i) if the Applicable Management Share Value or the Applicable Option Share Value as of such date (the "Liquidity Value") is equal to or greater than the Applicable Management Share Value or the Applicable Option Share Value, respectively, as of the Valuation Date coincident with or immediately following the Participant's termination of employment (the "Termination Value"), then the Company shall promptly pay the Participant an amount in cash equal to the Remaining Amount multiplied by a fraction, the numerator of which is the Liquidity Value and the denominator of which is the Termination Value (the "Liquidity Event Fraction"); and (ii) if the Liquidity Value is less than the Termination Value, then the Company shall promptly pay the Participant an amount in cash equal to the excess, if any, of the Remaining Amount over an amount equal to the Termination Amount multiplied by the Liquidity Event Fraction. 6 6 (e) Vesting of Options. If following a termination of employment as described in this Section 4, the Participant has not become a consultant to the Company on terms acceptable to the Company or a Director of the Company, his Options will be subject to the provisions in Sections 8 and 10 of the Plan. If, prior to or immediately following a termination of employment as described in this Section 4 the Participant becomes a Director of the Company or a consultant to the Company on terms acceptable to the Company, such position or status shall be considered employment with the Company for the purposes of the treatment of the Participant's Options under the Plan; any termination of such position or status shall be considered a termination of employment for the purposes of the treatment of the Participant's Options under the Plan. 5. Representations and Warranties. (a) The Participant has been advised that the Options and Option Shares have not been registered under the 1933 Act and, therefore, cannot be resold unless they are registered or unless an exemption from registration is available. The Participant is acquiring the Options and Option Shares for his own account, for investment and not with a view to, or for resale in connection with, the distribution thereof, and the Participant has no present intention of selling, assigning, transferring, distributing or otherwise disposing of, or causing the sale, assignment, transfer, distribution or other disposition of, any thereof. In making the foregoing representation, the Participant is aware that he must bear the economic risk of an investment in the Options and Option Shares for an indefinite period of time since, in the view of the Commission, the statutory basis for exemption from registration under the 1933 Act would not be present if such representation meant merely that the Participant's current intention is to hold these securities only for the long-term capital gains period of the Code, or for a deferred sale, or for any fixed period in the future. (b) The Participant has been given the opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of the Options and Option Shares to be transferred hereunder and other related matters. The Participant represents and warrants that he has been furnished with and has carefully read the Plan and this Agreement, and that the Company has made available to the Participant or his agents all documents and information requested by him or on his behalf in connection with his investment in the Options and Option Shares and that he understands and has evaluated the merits and risks of an investment in the Options and Option Shares. In evaluating the suitability of an investment in such Option Shares, the Participant has not relied upon any other representations or other information (whether oral or written) made by or on behalf of the Company other than as contemplated by the two preceding sentences. (c) The Participant is aware of and familiar with the restrictions imposed on the transfer of any Management Shares, including, without limitation, the restrictions contained in this Agreement and the Plan. 7 7 (d) The Participant represents that this Agreement has been duly executed and delivered by the Participant and constitutes a legal, valid and binding agreement of the Participant, enforceable against the Participant in accordance with its terms. 6. Participant's Waiver. The Participant hereby waives any and all rights he may have had with respect to the Old Options. 7. Miscellaneous. (a) No Rights to Grants or Continued Employment. The Participant shall not have any claim or right to receive grants of Awards under the Plan. Neither the Plan or this Agreement nor any action taken or omitted to be taken hereunder or thereunder shall be deemed to create or confer on the Participant any right to be retained in the employ of the Company or any Subsidiary or other Affiliate thereof, or to interfere with or to limit in any way the right of the Company or any Subsidiary or other Affiliate thereof to terminate the employment of the Participant at any time. (b) Tax Withholding. The Company and its Subsidiaries shall have the right, prior to the delivery of any certificates evidencing shares of Common Stock to be issued pursuant to this Agreement, to require the Participant to remit to the Company any amount sufficient to satisfy any federal, state or local tax withholding requirements. Prior to the Company's determination of such withholding liability, the Participant may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold shares of Common Stock that would otherwise be received by the Participant. Such election may be denied by the Committee in its discretion, or may be made subject to certain conditions specified by the Committee, including, without limitation, conditions intended to avoid the imposition of liability against the Participant under Section 16(b) of the 1934 Act. The Company and its Subsidiaries shall also have the right to deduct from all cash payments made pursuant to or in connection with any Award any federal, state or local taxes required to be withheld with respect to such payments. (c) No Restriction on Right of Company to Effect Corporate Changes. Neither the Plan nor this Agreement shall affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 8 8 (d) 1934 Act. Notwithstanding anything contained in the Plan or this Agreement to the contrary, if the consummation of any transaction under the Plan or this Agreement would result in the possible imposition of liability to the Participant pursuant to Section 16(b) of the 1934 Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction to the extent necessary to avoid such liability, but in no event for a period in excess of 180 days. (e) Restrictions on Transfer. Options shall not be transferrable except as specifically provided in the Plan or this Agreement. 8. Survival; Assignment, (a) All agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the issuance to the Participant of the Options and any Option Shares and, notwithstanding any investigation heretofore or hereafter made by the Participant or the Company or on the Participant's or the Company's behalf, shall continue in full force and effect. Without the prior written consent of the Company, the Participant may not assign any of his rights hereunder except as permitted by the Plan or by will or the laws of descent and distribution. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the heirs and permitted successors and assigns of such party; and all agreements herein by or on behalf of the Company, or by or on behalf of the Participant, shall bind and inure to the benefit of the heirs and permitted successors and assigns of such parties hereto. (b) The Company shall have the right to assign any of its rights and to delegate any of its duties under this Agreement to any of its Affiliates, provided, however, that such assignment shall not release the Company from any duty herunder which remains unfulfilled by such an assignee. 9. Notices. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or sent by certified or registered mail, return receipt requested, postage prepaid, addressed, if to the Participant, to his attention at the mailing address set forth at the foot of this Agreement (or to such other address as the Participant shall have specified to the Company in writing) and, if to the Company, to the General Counsel of the Company. All such notices shall be conclusively deemed to be received and shall be effective, if sent by hand delivery, upon receipt, or if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. 10. Waiver. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 9 9 11. Entire Agreement; Governing Law. This Agreement and the other related agreements expressly referred to herein set forth the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of this Agreement. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. 10 10 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Participant has executed this Agreement, both as of the day and year first above written. KINETIC CONCEPTS, INC. By: /s/ Dennis E. Noll ----------------------------- Name: Dennis E. Noll Title: Senior Vice President PARTICIPANT /s/ Raymond R. Hannigan ----------------------------- Name: Raymond R. Hannigan Address: 8023 Vantage Drive San Antonio, TX 78230
NUMBER OF OPTION EXCHANGE OPTIONS PRICE OLD DATE OF GRANT 164,000 4.50 11/14/94 12,000 6.75 05/15/95 12,000 15.13 05/13/97 12,000 16.50 05/15/96
EX-99.C.7 12 GUARANTEE 1 GUARANTEE THIS GUARANTEE AGREEMENT (this "Guarantee") is dated as of October 2, 1997 and is given by Fremont Partners, L.P., a Delaware limited partnership (the "Guarantor"), in favor of Kinetic Concepts, Inc., a Texas corporation ("KCI"). WHEREAS, the Guarantor is providing this Guarantee in order to induce KCI to enter into a Transaction Agreement (the "Transaction Agreement"), dated as of the date hereof, among Fremont Purchaser II, Inc., a Delaware corporation and wholly owned indirect subsidiary of the Guarantor (the "Obligor"), RCBA Purchaser I, L.P., a Delaware limited partnership and wholly owned subsidiary of Richard C. Blum and Associates, L.L.P., and KCI; and WHEREAS, the Guarantor has agreed to execute this Guarantee. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor, intending to be legally bound, hereby agrees, for the benefit and in favor of KCI as follows: SECTION 1. Guarantee. (a) The Guarantor hereby unconditionally and irrevocably guarantees the punctual payment and performance of the obligations of Obligor under the Transaction Agreement (without regard to Section 9.09 thereof) in an amount up to but not exceeding $138,197,020.50 million with respect to the obligations of Obligor under Section 2.01, 2.02, 2.05 and 5.06 of the Transaction Agreement and in an amount up to but not exceeding $30,000,000 with respect to all other obligations of Obligor under the Transaction Agreement (such obligations being the "Guaranteed Obligation"). (b) In the event that KCI is seeking payment from the Guarantor on the Guaranteed Obligation pursuant to this Section 1, KCI shall promptly cause written notice of the demand of such payment to be provided to the Guarantor in accordance with Section 5 hereof. Such written notice shall set forth in reasonable detail the Guaranteed Obligation and the amount of payment. SECTION 2. Construction of Guarantee. (a) Guarantor guarantees that the Guaranteed Obligation shall be paid or performed, as the case may be, strictly in accordance with the terms of the Transaction Agreement. The obligations of the Guarantor under this Guarantee are independent of the Guaranteed Obligation or any other obligations of any other person under the Transaction Agreement and a separate action or actions may be brought and prosecuted against the Guarantor to enforce this Guarantee in respect of the payment of the Guaranteed Obligation. This guarantee is a guarantee of payment, not collection, and the liability of the Guarantor under this Guarantee shall be unconditional and absolute, irrespective of, and the Guarantor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (i) any lack of validity or enforceability of the Transaction Agreement or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all of the Guaranteed Obligation or any other obligations of any other person under the Transaction Agreement, or any other amendment or waiver of or any consent to departure from the Transaction Agreement, including, without limitation, any increase in any obligation of the Obligor under the Transaction Agreement; 2 2 (iii) any change, restructuring or termination of the corporate structure or existence of the Obligor or any of its subsidiaries; (iv) any requirement that, at any time, any action be taken by any person against Obligor or any other person; (v) any right to be subrogated to the rights of KCI hereunder or thereunder unless and until all of the Guaranteed Obligation and all other amounts payable under this Guarantee shall have been paid in full; (vi) any right arising from the stay for any reason of any of the obligations of Obligor hereunder or of Obligor or any successor or assign of Obligor thereunder; and/or (vii) any other defense of a surety or guarantor. This Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Guaranteed Obligation is rescinded or must otherwise be returned by KCI or any other person upon the insolvency, bankruptcy or reorganization of the Obligor or any other person or otherwise, all as though such payment had not been made. (b) Notwithstanding any other provision of this Guarantee, KCI and the Guarantor agree that the Guarantor is entitled to the benefit of, and may assert as a defense to payment and performance of this Guarantee, any defense available to the Obligor to the enforcement of the Obligor's obligation under the terms of the Transaction Agreement. (c) The Guarantor hereby waives (i) promptness, diligence, notice of acceptance and any other notice (other than that required by Section 1(b) hereof) with respect to the Guaranteed Obligation and this Guarantee and (ii) any act or omission of either party that would otherwise constitute a legal or equitable discharge of the obligations set forth in this Guarantee. SECTION 3. Continuing Guarantee. This Guarantee is a continuing guaranty and shall (i) remain in full force and effect until Obligor shall have performed in full the Guaranteed Obligation, (ii) be binding upon the Guarantor and its successors and assigns and (iii) inure to the benefit of and be enforceable by KCI and its successors and assigns. SECTION 4. Representations and Warranties of Guarantor. Guarantor hereby represents, warrants and covenants to KCI as follows: (a) Guarantor is a limited partnership duly organized and validly existing under the laws of the State of Delaware. Guarantor has the necessary power and authority to own and operate its properties and assets and to carry on its business as currently conducted. (b) Guarantor has all requisite legal power and authority to enter into this Guarantee. The Guarantor has all requisite legal power and authority to carry out and perform its obligations under the terms of this Guarantee. The Guarantee constitutes the valid and binding obligation of Guarantor, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or other laws or equitable principles relating to or affecting creditors' rights generally. 3 3 (c) All partnership action on the part of Guarantor and its general partner and limited partners necessary to authorize the execution, delivery and performance of this Guarantee has been taken. (d) Guarantor has funds available to it sufficient to purchase, or cause the purchase of, the F Shares in accordance with the terms of the Transaction Agreement. SECTION 5. Amendments, etc. No amendment or waiver of any provision of this Guarantee, and no consent to any departure by the Guarantor herefrom, shall in any event be effective unless the same shall be in writing and signed by KCI and the Guarantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purchase for which given. SECTION 6. Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Guarantee shall be duly given when delivered in writing or by telecopy: If to the Guarantor or Obligor: Fremont Partners, L.P. 50 Fremont Street, Suite 3700 San Francisco, California 94105-1895 Telecopy: (415) 284-8191 Attention: General Counsel with a copy to: Shearman & Sterling 599 Lexington Avenue New York, New York 10022 Telecopy: (212) 848-7179 Attention: David W. Heleniak, Esq. If to KCI: The Company 8023 Vantage Drive San Antonio, Texas 78230-4726 Telecopy: (210) 255-6331 Attention: Dennis E. Noll, Esq. with a copy to: Cox & Smith 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205 Telecopy: (212) 554-5257 Attention: Stephen D. Seidel, Esq. SECTION 7. No Waiver; Remedies. No failure on the part of KCI to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of 4 4 any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8. Expenses. The Guarantor agrees that it will upon demand pay to KCI the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that KCI may incur in connection with the exercise or enforcement of any of the rights of KCI hereunder as a result of the failure by the Guarantor to perform or observe any of the provisions hereof. SECTION 9. Severability. If any term or other provision of this Guarantee is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Guarantee shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Guarantee so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions be consummated as originally contemplated to the fullest extent possible. SECTION 10. Entire Agreement; Assignment. This Guarantee constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Guarantee shall not be assigned by operation of law or otherwise, except that the Guarantor may assign all or any of its rights and obligations hereunder to any affiliate or affiliates of the Guarantor provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 11. Parties in Interest. This Guarantee shall be binding upon and inure solely to the benefit of KCI, and nothing in this Guarantee, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Guarantee. SECTION 12. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Guarantee was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. SECTION 13. Governing Law. This Guarantee shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed in that State. All actions and proceeding arising out of or relating to this Guarantee shall be heard and determined in any Delaware state or federal court. THE COMPANY AND PURCHASERS KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVER ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS GUARANTEE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (VERBAL OR WRITTEN) OR ACTION OF THE COMPANY OR PURCHASERS. 5 5 SECTION 14. Headings. The descriptive headings contained in this Guarantee are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Guarantee. IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be duly executed and delivered as of the date first above written. FREMONT PARTNERS, L.P. By /s/ R.S. Kopf --------------------------------- Name: R.S. Kopf Title: EX-99.D.1 13 OFFER TO PURCHASE 1 OFFER TO PURCHASE FOR CASH BY KINETIC CONCEPTS, INC. ALL OUTSTANDING SHARES OF ITS COMMON STOCK AT $19.25 NET PER SHARE ------------------ THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. ------------------ KINETIC CONCEPTS, INC., A TEXAS CORPORATION (THE "COMPANY"), IS OFFERING TO PURCHASE ALL OUTSTANDING SHARES OF ITS COMMON STOCK, $.001 PAR VALUE PER SHARE ("SHARES"), FOR $19.25 PER SHARE, NET TO SELLER IN CASH (SUCH AMOUNT, OR ANY GREATER AMOUNT PER SHARE PAID PURSUANT TO THE OFFER, BEING REFERRED TO HEREIN AS THE "PER SHARE AMOUNT"), UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THIS OFFER TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL (WHICH TOGETHER CONSTITUTE THE "OFFER"). ------------------ THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST 27,500,000 SHARES (THE "MINIMUM CONDITION") AND THE COMPANY'S OBTAINING THE DEBT FINANCING (AS DEFINED HEREIN). SEE "THE TENDER OFFER -- SECTION 11. CERTAIN CONDITIONS TO THE OFFER". ------------------ THE BOARD OF DIRECTORS (THE "BOARD") AND THE DISINTERESTED DIRECTORS (AS DEFINED HEREIN) OF THE COMPANY HAVE EACH UNANIMOUSLY DETERMINED, AFTER GIVING CAREFUL CONSIDERATION TO A NUMBER OF FACTORS, THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AND HAVE EACH UNANIMOUSLY APPROVED THE TRANSACTION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY INCLUDING THE OFFER AT THE PER SHARE AMOUNT, THE STOCK PURCHASE (AS DEFINED HEREIN) AND THE MERGER (AS DEFINED HEREIN). THE BOARD AND THE DISINTERESTED DIRECTORS RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THIS OFFER TO PURCHASE. ------------------ BT Alex. Brown Incorporated has delivered to the Board its written opinion, dated October 1, 1997, to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Per Share Amount and the Merger Consideration (as defined herein) to be received in the Offer and the Merger by the holders of Shares (other than Continuing Shareholders (as defined herein)) was fair from a financial point of view to such holders. IMPORTANT ANY SHAREHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH SHAREHOLDER'S SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND MAIL OR DELIVER IT TOGETHER WITH THE CERTIFICATE(S) EVIDENCING TENDERED SHARES, AND ANY OTHER REQUIRED DOCUMENTS, TO BOSTON EQUISERVE, L.P. (THE "DEPOSITARY") (AT THE DEPOSITARY'S ADDRESS SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE) OR TENDER SUCH SHARES PURSUANT TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN "THE TENDER OFFER -- SECTION 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES" OR (2) REQUEST SUCH SHAREHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH SHAREHOLDER. The Shares are listed and traded on the Nasdaq National Market ("Nasdaq"). On October 2, 1997, the last full day of trading prior to the announcement of the Offer, the closing sale price of the Shares on Nasdaq was $18.625 per Share. On October 7, 1997, the last full trading day prior to the commencement of the Offer, the closing sale price of the Shares on Nasdaq was $19.000 per Share. Shareholders are urged to obtain a current market quotation for the Shares. Any shareholder who desires to tender Shares and whose certificates evidencing such Shares are not immediately available, or who cannot comply with the procedure for book-entry transfer on a timely basis, may tender such Shares by following the procedure for guaranteed delivery set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares". Questions or requests for assistance may be directed to Georgeson & Company Inc. (the "Information Agent") or BT Alex. Brown Incorporated (in such capacity, the "Dealer Manager") at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL . ------------------ The Dealer Manager for the Offer is: [LOGO BT ALEX. BROWN] OCTOBER 8, 1997 2 TABLE OF CONTENTS
PAGE ------ INTRODUCTION......................................................................... 2 SPECIAL FACTORS...................................................................... 5 Background of the Transactions..................................................... 5 Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions.................................................................... 9 Opinion of BT Alex. Brown Incorporated............................................. 11 Purposes and Reasons of the Company for the Transactions........................... 14 Purposes and Reasons of Purchasers and Dr. James Leininger for the Transactions.... 15 Position of Purchasers and Dr. James Leininger Regarding Fairness of the Transactions.................................................................... 15 Interests of Certain Persons in the Transactions................................... 15 Cautionary Statement Concerning Forward-Looking Statements......................... 17 Company Financial Projections...................................................... 17 Plans for the Company After the Transactions; Certain Effects of the Transactions.................................................................... 19 Rights of the Shareholders in the Transactions..................................... 19 The Transaction Agreement, the Support Agreement and the Agreement Among Bidders... 20 Related Party Transactions......................................................... 29 Beneficial Ownership of Common Stock............................................... 30 Transactions and Arrangements Concerning the Shares................................ 32 THE TENDER OFFER..................................................................... 33 1. Terms of the Offer; Expiration Date............................................ 33 2. Acceptance for Payment and Payment for Shares.................................. 35 3. Procedures for Accepting the Offer and Tendering Shares........................ 36 4. Withdrawal Rights.............................................................. 38 5. Certain U.S. Federal Income Tax Consequences................................... 38 6. Price Range of Shares; Dividends............................................... 39 7. Certain Information Concerning the Company..................................... 39 8. Financing of the Transactions.................................................. 41 9. Dividends and Distributions.................................................... 43 10. Effect of the Transactions on the Market for the Shares; Exchange Act Registration.................................................................... 43 11. Certain Conditions to the Offer................................................ 44 12. Certain Legal Matters and Regulatory Approvals................................. 45 13. Fees and Expenses.............................................................. 47 14. Certain Information Concerning Purchasers...................................... 48 15. Recapitalization Accounting.................................................... 49 16. Miscellaneous.................................................................. 49 SCHEDULE I. Directors and Executive Officers of the Company.......................... I-1 SCHEDULE II. Opinion of BT Alex. Brown Incorporated.................................. II-1 SCHEDULE III. Articles 5.11 through 5.13 of the Texas Business Corporation Act....... III-1 SCHEDULE IV. Audited Financial Statements (and Related Notes) for the Company for the Years Ended December 31, 1995 and December 31, 1996................................ IV-1 SCHEDULE V. Unaudited Financial Statements (and Related Notes) for the Company for the Three-Month and Six-Month Periods Ended June 30, 1997 and 1996................. V-1
3 To the Holders of Common Stock of Kinetic Concepts, Inc.: INTRODUCTION Kinetic Concepts, Inc., a Texas corporation (the "Company"), hereby offers to purchase all outstanding shares of its common stock, $.001 par value per share ("Shares"), at a price of $19.25 per Share, net to seller in cash (such amount, or any greater amount per Share paid pursuant to the Offer, being referred to herein as the "Per Share Amount"), upon the terms and subject to the conditions set forth in the Offer. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by the Company pursuant to the Offer. The Company will pay all charges and expenses of BT Alex. Brown Incorporated ("BT Alex. Brown"), which is acting as the dealer manager for the Offer (in such capacity, the "Dealer Manager"), Boston EquiServe, L.P. (the "Depositary") and Georgeson & Company Inc. (the "Information Agent") incurred in connection with the Offer. See "THE TENDER OFFER -- Section 13. Fees and Expenses". The Shares are currently listed and traded on the Nasdaq National Market ("Nasdaq") under the symbol "KNCI". On May 28, 1997, the last full day of trading prior to the announcement by the Company that it was exploring strategic options and alternatives for increasing shareholder value, the closing sale price of the Shares on Nasdaq was $17.438 per Share. On October 2, 1997, the last full day of trading prior to the announcement of the Offer, the closing sale price of the Shares on Nasdaq was $18.625 per Share. On October 7, 1997, the last full trading day prior to the commencement of the Offer, the closing sale price of the Shares on Nasdaq was $19.000 per Share. Shareholders are urged to obtain a current market quotation for the Shares. The consummation of the Transactions (as defined herein) would result in: (i) the delisting of the Shares from Nasdaq, (ii) the Shares becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act (as defined herein), (iii) a change in the composition of the present board of directors and executive officers of the Company and (iv) a change in the capitalization of the Company. The purpose of the Transactions is (i) to enable Purchasers to obtain, in the aggregate, majority ownership in the Company and (ii) to provide the Company's shareholders with liquidity for their Shares by enabling them to sell their Shares at a fair price and at a premium over recent market prices more quickly than through alternative transaction structures that had been considered. See "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends" and "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions". The Company, Fremont Purchaser II, Inc. ("F Purchaser"), a Delaware corporation and a subsidiary of Fremont Acquisition Company II, L.L.C., RCBA Purchaser I, L.P. ("B Purchaser" and, together with F Purchaser, "Purchasers"), a Delaware limited partnership and an affiliate of Richard C. Blum & Associates, L.P., entered into a Transaction Agreement dated as of October 2, 1997 (the "Transaction Agreement"). Pursuant to the Transaction Agreement, Purchasers agreed to purchase 8,083,712 newly-issued Shares (the "Stock Purchase") at a per Share price equal to the Per Share Amount immediately prior to the consummation of the Offer. The Stock Purchase will provide the Company with a portion of the funds needed to consummate the Offer and the Merger (as defined herein) and it is anticipated that the remainder of the funds needed to consummate the Offer and the Merger and to pay all related fees and expenses will be obtained by the Company through a combination of (i) borrowings under a $530,000,000 senior secured credit facility and (ii) the proceeds from the sale of subordinated notes in the aggregate amount of $200,000,000 to be issued by the Company (collectively, the "Debt Financing"). See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" and "THE TENDER OFFER -- Section 8. Financing of the Offer and the Merger". The Offer is being made pursuant to the Transaction Agreement which provides that, among other things, as soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Transaction Agreement, in accordance with the requirements of the General Corporation Law of the State of Delaware and the Revised Uniform Limited Partnership Act of the State of 2 4 Delaware (together, "Delaware Law") and the Texas Business Corporation Act ("Texas Law"), Purchasers will be merged with and into the Company (the "Merger" and, together with the Offer and the Stock Purchase, the "Transactions"), with the Company as the surviving corporation of the Merger (the "Surviving Corporation"). At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time, other than Shares owned by Richard C. Blum & Associates, L.P. and certain affiliated parties (collectively, "RCBA"), Purchasers, James R. Leininger, M.D. ("Dr. James Leininger") and Peter A. Leininger, M.D. ("Dr. Peter Leininger") (collectively, "Continuing Shareholders") (see "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders"), shall be cancelled and shall be converted automatically into the right to receive $19.25 in cash, or any higher price that may be paid per Share pursuant to the Offer, without interest (the "Merger Consideration"), subject to dissenters' rights. Shares held in the treasury of the Company, each Share owned by any wholly-owned subsidiary of the Company and Shares owned by Purchasers will be cancelled. The Transaction Agreement is more fully described in "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders". NO DISSENTERS' RIGHTS ARE AVAILABLE IN CONNECTION WITH THE OFFER. See "SPECIAL FACTORS -- Rights of the Shareholders in the Transactions". Shareholders who fully comply with the statutory dissenters' procedures set forth in Texas Law, the relevant portions of which are attached to this Offer to Purchase as SCHEDULE III, will be entitled to receive, in connection with the Merger, cash for the fair value of their Shares as determined pursuant to the procedures prescribed by Texas Law. THE BOARD OF DIRECTORS (THE "BOARD") AND THE DISINTERESTED DIRECTORS (AS DEFINED HEREIN) OF THE COMPANY HAVE EACH UNANIMOUSLY DETERMINED, AFTER GIVING CAREFUL CONSIDERATION TO A NUMBER OF FACTORS, THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AND HAVE EACH UNANIMOUSLY APPROVED THE TRANSACTION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY INCLUDING THE OFFER AT THE PER SHARE AMOUNT, THE STOCK PURCHASE AND THE MERGER. THE BOARD AND THE DISINTERESTED DIRECTORS RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THIS OFFER TO PURCHASE. BT Alex. Brown has delivered to the Board its written opinion, dated October 1, 1997, to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Per Share Amount and the Merger Consideration to be received in the Offer and the Merger by the holders of Shares (other than Continuing Shareholders) was fair from a financial point of view to such holders. See "SPECIAL FACTORS -- Opinion of BT Alex. Brown Incorporated" for further information concerning the opinion of BT Alex. Brown and SCHEDULE II attached hereto. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST 27,500,000 SHARES (THE "MINIMUM CONDITION") AND THE COMPANY'S OBTAINING THE DEBT FINANCING. SEE "THE TENDER OFFER -- SECTION 11. CERTAIN CONDITIONS TO THE OFFER". F Purchaser and B Purchaser have entered into a Shareholder Support Agreement with Dr. James Leininger, dated as of the date of the Transaction Agreement (the "Support Agreement"), providing, subject to certain conditions, for (i) the grant by Dr. James Leininger to F Purchaser of an irrevocable option to purchase up to 2,529,197 Shares at $19.25 per Share, subject to the conditions set forth therein, (ii) the grant by Dr. James Leininger to B Purchaser of an irrevocable option to purchase up to 1,670,803 Shares at $19.25 per Share, subject to the conditions set forth therein, (iii) the tender of 13,792,211 Shares owned or controlled by Dr. James Leininger pursuant to the Offer and (iv) the voting by Dr. James Leininger of all Shares owned or controlled by him at the time of the Shareholders' Meeting (as defined herein) in favor of the Merger. See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders". 3 5 The receipt of cash for Shares pursuant to the Offer or in the Merger will be a taxable transaction for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and may also be a taxable transaction under applicable state, local or foreign tax laws. See "THE TENDER OFFER -- Section 5. Certain U.S. Federal Income Tax Considerations". The consummation of the Merger is subject to the satisfaction or waiver of certain conditions including the approval and adoption of the Transaction Agreement by the requisite vote of the shareholders of the Company. See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders". Under the Company's articles of incorporation (the "Articles of Incorporation") and Texas Law, the affirmative vote of the holders of two-thirds of the outstanding Shares is required to approve the Transaction Agreement and the Merger. If the Offer is consummated, the Purchasers and Dr. James Leininger will be able to effect the Merger without the affirmative vote of any other shareholder. Following the consummation of the Transactions, Fremont Partners L.P. and certain affiliated parties (collectively, "Fremont"), RCBA, Dr. James Leininger and Dr. Peter Leininger would own 7,179,066, 4,742,536, 6,064,155 and 100,000 Shares, respectively representing 39.7%, 26.2%, 33.5% and 0.6% of the Shares outstanding following such consummation. There would be no other shareholders at such time but certain members of management would retain, and be guaranteed, additional options to purchase Shares as described below. As of October 2, 1997, there were 42,636,016 Shares issued and outstanding and 186,824 Shares held in the treasury of the Company. Employee and director stock options ("Employee Options") exercisable for 3,627,733 Shares were outstanding pursuant to the Company's stock option plans and direct grants as of October 2, 1997, of which 1,561,977 were vested as of such date. As of October 2, 1997, there were approximately 364 holders of record of the issued and outstanding Shares (see "SPECIAL FACTORS -- Background of the Transactions"). As of October 2, 1997, the Company's directors and executive officers (other than Dr. James Leininger) as a group beneficially owned 4,277,291 Shares, or 9.8% of the Shares, which includes 1,128,615 Shares issuable upon exercise of Employee Options and 340,000 Shares which Raymond R. Hannigan, the Company's President and Chief Executive Officer, has the right to acquire upon the exercise of a stock option granted to him by Dr. James Leininger (the "Hannigan Option"), but excludes Shares owned by the Company's employee stock ownership plan. Certain members of the Company's management have entered or may enter into stock retention agreements (collectively, "Stock Retention Agreements"), which Stock Retention Agreements entered into to date provide that such individuals will retain, in the aggregate, 100,000 Shares and options to purchase 821,550 Shares upon consummation of the Transactions. The Company has been informed by its directors and executive officers (other than Dr. James Leininger and as otherwise provided in any Stock Retention Agreement) that they intend either to tender all Shares beneficially owned by them to the Company pursuant to the Offer or to vote such Shares in favor of the approval by the shareholders of the Company of the Transaction Agreement and the Merger. Dr. James Leininger owns or controls 21,413,396 Shares, or 50.2% of the Shares, and he will tender 13,792,211 Shares pursuant to the Offer and will vote his remaining Shares in favor of approval and adoption by the shareholders of the Company of the Transaction Agreement and the Merger. This Offer to Purchase and the accompanying documents contain information required to be disclosed by the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), including financial information regarding the Company, a description of the terms, conditions and background of the Offer, and the procedures for tendering Shares for purchase. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 4 6 SPECIAL FACTORS BACKGROUND OF THE TRANSACTIONS On January 24, 1996, the Company completed a secondary public offering of Shares pursuant to which Dr. James Leininger, certain other individuals and certain entities affiliated with Dr. James Leininger sold approximately 8,800,000 Shares to the public at a price of $10.25 per Share. RCBA acquired 1,500,000 Shares in the secondary offering. During 1996, RCBA continued to accumulate Shares. From time to time during 1996 and early 1997, RCBA and the Company had various discussions concerning the Company's financial and operating results which discussions were similar in nature and scope to numerous other discussions the Company's senior management routinely had with other institutional investors, industry analysts and potential investors. On February 20, 1996, representatives of Fremont met with the Company for the purpose of introducing Fremont to the Company and seeking a greater understanding of the Company and its operations. In March 1996, the Company entered into a confidentiality agreement with Fremont, and there were various discussions between Fremont and the Company over the next year concerning the Company's business and its financial and operating results. In early February 1997, Fremont requested another meeting with the Company. As a result, on February 11, 1997, Robert Jaunich and James T. Farrell, each a Managing Director of Fremont, met with Raymond R. Hannigan, the Company's President and Chief Executive Officer ("Mr. Hannigan"), and Bianca A. Rhodes ("Ms. Rhodes"), who at that time was the Company's Chief Financial Officer. At that meeting, Messrs. Jaunich and Farrell informed Mr. Hannigan and Ms. Rhodes of Fremont's heightened interest in the Company and desire to meet with other members of the Company's senior management and indicated that Fremont, at some point in the future, might have an interest in acquiring a significant position in the Company. Discussions continued in March 1997 and, as a result, the Company entered into a new confidentiality agreement with Fremont on March 10, 1997 which included a standstill provision that restricted Fremont from trading in or acquiring any of the Company's Shares for a period of two years without the Company's consent. The Company also entered into a confidentiality agreement with RCBA on March 11, 1997 which did not contain a standstill provision. It also became apparent that discussions would need to be expanded to include not just management but the Chairman and principal shareholder of the Company. On March 24, 1997, representatives of RCBA and Fremont met with Dr. James Leininger, Mr. Hannigan and Ms. Rhodes. During the course of the meeting, the Fremont and RCBA representatives inquired as to whether the Company would be receptive to an offer to acquire the Company's outstanding Shares. The RCBA and Fremont representatives indicated that RCBA and Fremont were acting separately, and each said that it was not in a position to make a formal offer until such time as it had independently conducted a due diligence review. In this regard, the Company agreed, for a 30-day period, to provide each of RCBA and Fremont with the opportunity to conduct such a review. Prior to beginning the due diligence review, representatives of RCBA indicated that it believed, on a preliminary basis and based on various existing market factors, that an offer to acquire the Company's Shares by a third party financial buyer in the $17.50 to $18.50 range was possible. The two entities thereafter commenced independent due diligence reviews of the Company. The Company's management had for some time believed that the Shares were undervalued in the public market and that a transaction such as that preliminarily discussed with RCBA and Fremont could provide an opportunity to maximize shareholder value. During the 30-day due diligence periods, the Company further considered the fairness to the Company's shareholders of a transaction in the $17.50 to $18.50 per Share range. After informal discussions with several investment banking firms and its legal counsel, the Company concluded that it would be appropriate, in considering a sale of the Company, for the Company to conduct a process pursuant to which it could adequately evaluate the price range reflected in the discussions with RCBA, as well as to determine if there were other alternatives to be considered for maximizing shareholder value. In late April 1997, Dr. James Leininger informed Mr. Jaunich of Fremont that the Company intended to solicit other third party indications of interest after expiration of the 30-day due diligence period. Dr. James Leininger and Dr. Peter Leininger also met with Richard Blum, Chairman of RCBA, and N. Colin 5 7 Lind, Managing Director of RCBA in late April 1997 and informed them of the Company's position that a transaction in the $17.50 to $18.50 per Share range would be inadequate. After the Company's senior management interviewed several investment banking firms, the Board of Directors of the Company met on May 13, 1997, to consider the engagement of an investment banking firm to facilitate a process pursuant to which the Company would examine its strategic alternatives, and subsequently, the Board approved the engagement of BT Alex. Brown. Representatives of BT Alex. Brown were present at the Board meeting and discussed the scope and mechanics of a solicitation process with the Board. On May 29, 1997, the Company publicly announced that it had retained BT Alex. Brown to assist the Company in exploring strategic options and alternatives for increasing shareholder value. Between June 1, 1997 and July 10, 1997, approximately 38 parties (16 of which were strategic buyers) were contacted to solicit indications of interest in the Company. Of these parties, 30 parties requested, and received, materials containing publicly available information relating to the Company. Confidential financial projections prepared by the Company's management were subsequently provided to 17 parties, including RCBA and Fremont, who expressed a continuing interest in pursuing discussions with the Company and who entered into a confidentiality agreement with the Company. Interested parties were requested to submit indications of interest concerning the Company by July 10, 1997. On July 8, 1997, representatives of Fremont and RCBA met, in light of the approaching July 10, 1997 deadline, to discuss their respective views and interests in the Company. At this meeting, it was determined that RCBA and Fremont had similar views as to the prospects of the Company as well as what they believed to be the appropriate valuation of the Company. The outcome of this meeting was that, in light of their similar views, both RCBA and Fremont would consider forming a group for purposes of making an offer to acquire the Company. RCBA and Fremont agreed on July 10, 1997 to submit a joint preliminary indication of interest to acquire the Company. Indications of interest from nine parties, all of which were financial buyers, including a joint proposal from RCBA and Fremont were received on July 10, 1997. Such proposals reflected prices ranging from $17 to $22 per Share, with RCBA and Fremont submitting an offer indicating a price range of $18.50 to $22 per Share. Based on the levels of interest indicated, seven parties, specifically, AEA Investors, Investcorp International, Inc., Forstmann Little & Co., Kohlberg Kravis Roberts & Co., Apollo Management, American Industrial Partners, and RCBA and Fremont, were subsequently selected to attend due diligence meetings with senior management of the Company and to perform additional due diligence reviews of the Company in order to prepare final offers. On July 22, 1997, the Board held a meeting at which the Board was updated with respect to the status of the solicitation process. At such meeting, BT Alex. Brown reviewed with the Board proposals that had been received and provided background information on each prospective acquiror and informed the Board that the Company had determined to invite the above seven parties for full day meetings with senior management. Interested parties were notified that final offers concerning a potential transaction with the Company would be due on September 8, 1997. During the last week of July 1997 and the month of August 1997, each of the seven parties met with the Company's senior management and received access to extensive due diligence materials concerning the Company. By September 8, 1997, the Company had received two offers, the other interested parties having declined to submit offers. One potential acquiror was Health Care Capital Partners, a consultant previously retained by AEA Investors to assist it in connection with its due diligence review of the Company. Health Care Capital Partners made an offer for its own account, indicating an interest in pursuing a transaction that would be structured as a partial recapitalization of the Company involving an equity investment by the potential acquiror for 25% to 35% of the Company's capital stock and the borrowing by the Company of approximately $400 million. This offer contemplated that existing shareholders of the Company would receive at least $10 in cash per Share and retain an equity interest and that the Company would remain a public company. Such offer did not contain any financing commitments and was ultimately rejected by the Company. A joint offer also was received from RCBA and Fremont pursuant to which RCBA and Fremont would acquire control of the Company in a leveraged transaction structured to be treated as a recapitalization for accounting purposes in which RCBA and Fremont would purchase 90% of the Company's outstanding Shares for $19.25 per Share in 6 8 cash. The effect of the consummation of such transaction was that the Company would continue as a public company with the Company's existing shareholders owning 10% of the surviving corporation of the merger. The proposal also contemplated that management would have an ongoing equity investment in the Company. RCBA and Fremont's proposal indicated that they had received acceptable financing proposals which, when combined with existing equity sources, would allow successful consummation of the proposed transaction in a timely manner. RCBA and Fremont stated in their offer that they reserved the right to withdraw their offer if it was not accepted by the close of business on September 12, 1997. On September 9, 1997, the Board held a telephonic meeting at which the Board was updated with respect to the proposals that had been received. The Board instructed management and BT Alex. Brown to pursue RCBA and Fremont's offer and to attempt to improve the terms of the offer. During the remainder of that week, numerous discussions were held between representatives of RCBA and Fremont and the Company concerning, among other things, the structure and price of the proposed transaction. The Company's representatives attempted to obtain a higher price per Share and indicated to RCBA and Fremont the interest of the Company in structuring the transaction as a tender offer so that the Company's shareholders could receive liquidity for their Shares as soon as possible. The Company was further concerned that the structure originally proposed by RCBA and Fremont would have left the Company with a small number of publicly held Shares for which the Company believed there would be little or no market and would also cause the Company to continue to bear the additional expenses associated with continuing to have public shareholders. On September 12, 1997 RCBA and Fremont's representatives restated their position to the Company that there would be no concessions as to price but did indicate that RCBA and Fremont would be willing to consider alternative transaction structures, including a tender offer. After consultation with BT Alex. Brown, the Company determined to seek to structure, in the form of a tender offer, an alternative transaction. Late in the afternoon of September 12, 1997, Purchasers' representatives had several conversations with the Company's advisors regarding alternative structures. The Company, after discussions with Dr. James Leininger about his willingness to retain an equity position in the recapitalized Company and receipt of his affirmative indication that he would be willing to retain an equity position of 30% to 35%, proposed to RCBA and Fremont that they restructure their offer to provide for a tender of any and all outstanding Shares of the Company. RCBA and Fremont indicated that they would be interested in pursuing such a transaction, but that they would continue to require a commitment from senior management of the Company to either retain Shares or options for Shares following consummation of the proposed transaction. On September 13, 1997, the parties preliminarily agreed, subject to negotiation of satisfactory agreements and approval by the Company's Board, to a leveraged transaction structured to be treated as a recapitalization for accounting purposes pursuant to which Dr. James Leininger would retain a 30% to 35% interest in the Company, RCBA would retain its Shares in the Company, and the remaining outstanding Shares of the Company would be acquired through a cash tender offer commenced by the Company at a purchase price of $19.25 per Share. Concurrently with the consummation of the tender offer, affiliates of RCBA and Fremont also would purchase an aggregate of 8,083,712 Shares at a purchase price of $19.25 per Share in cash from the Company. RCBA and Fremont informed the Company that further negotiations with respect to a transaction would be conditioned on RCBA and Fremont and the Company proceeding on an exclusive basis through September 26, 1997. On September 13, 1997, the outside members of the Board were individually contacted by members of the Company's senior management and were updated as to the status of negotiations with RCBA and Fremont, including the fact that RCBA and Fremont had required that the Company enter into exclusive negotiations. Each outside director approved the Company's proceeding on such basis and, on September 14, 1997, the Company executed an agreement with RCBA and Fremont in which the Company committed to negotiate exclusively with RCBA and Fremont until September 26, 1997, and to a liquidated damages provision in the amount of $24 million if the Company violated the terms of such agreement. This agreement was subsequently extended until October 3, 1997. RCBA and Fremont and the Company subsequently directed their respective advisors to commence the negotiation and preparation of a definitive agreement for the proposed transaction. Commencing on 7 9 September 15, 1997, and continuing through October 2, 1997, representatives of the Company and RCBA and Fremont and their respective legal advisors negotiated the terms of a definitive agreement including, among other things, (i) the terms and conditions of the tender offer (including a modification to allow for the tender of any and all Shares rather than a maximum number of Shares) and the Merger, (ii) a limited guaranty by Fremont of the obligations of F Purchaser under the agreement, (iii) that the number of Shares owned by Dr. James Leininger which would be subject to options to be granted by Dr. James Leininger to RCBA and Fremont would be 4,200,000 Shares and the circumstances under which Dr. James Leininger was required to vote his Shares in favor of the Merger, (iv) the scope of the representations and warranties of the Company, (v) the circumstances under which the Board could terminate the agreement, (vi) the amount of the proposed breakup fee, which was agreed to be $30 million, together with an expense reimbursement limitation of $2 million to be paid by the Company and the circumstances in which the breakup fee would be paid and (vii) the amount of expenses payable by the Company in the event of termination of the transaction. It was also ultimately agreed that Dr. James Leininger would retain Shares comprising approximately 33.5% of the outstanding Shares following the consummation of the transaction, that Dr. Peter Leininger would retain 100,000 Shares, and that certain members of senior management would retain Shares and/or options to acquire Shares in the Company following consummation of the transaction. See "INTRODUCTION." On September 19, 1997, a telephonic meeting of the Board was held and the status of the pending negotiations was reviewed by the Board. At that time, the outside members of the Board were given a separate opportunity to review the proposed transaction with the Company's outside counsel and BT Alex. Brown. Two outside members of the Board who were unable to attend the telephonic Board meeting on September 19, 1997 were updated on September 20, 1997 as to the prior day's meeting. On September 24, 1997, the Board held a meeting at which the Company's outside counsel and representatives of BT Alex. Brown reviewed for the Board the structure and terms of the proposed transaction. During the course of this meeting, the Company's outside counsel reviewed with the Board the reasons and need for an opinion relating to solvency and related valuation matters and it was determined that Houlihan Lokey Howard & Zukin ("Houlihan Lokey") be retained to render such an opinion. In addition, the Company's outside counsel reviewed with the Board its legal and fiduciary duties with respect to the transaction and BT Alex. Brown reviewed with the Board the valuation methodologies to be utilized by BT Alex. Brown in connection with its financial analysis of the proposed transaction. The Board held a telephonic meeting on October 1, 1997 for the purpose of reviewing and considering the proposed transaction. After reviewing the terms of the proposed transaction, the related documentation and certain legal considerations with the Company's outside counsel, the Company's management made a presentation to the Board with respect to the valuation of the Company's assets and certain issues which had been raised by the Board during the previous Board meeting. At the October 1, 1997, meeting, Houlihan Lokey reported to the Board its preliminary views with respect to the solvency of the Company and certain related valuation matters after the consummation of the proposed transaction and delivered its negative assurance letter confirming these preliminary views. The senior management of the Company also reported that it had undertaken a review and analysis of the Company's assets and that, in their opinion, a fair valuation of the assets would permit the Company to consummate the proposed transactions. BT Alex. Brown then reviewed with the Board the financial analyses performed by BT Alex. Brown in connection with its evaluation of the proposed transaction and rendered to the Board an oral opinion (which opinion was subsequently confirmed by delivery of a written opinion dated October 1, 1997) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Per Share Amount was fair from a financial point of view to the holders of Shares (other than Continuing Shareholders). Following the presentations described above at the October 1, 1997 meeting Dr. James Leininger, Mr. Hannigan and Dr. Peter Leininger who were considered to be interested directors were excused from the meeting. Thereafter, following full discussion, the directors of the Company other than Dr. James Leininger, Mr. Hannigan and Dr. Peter Leininger (the "Disinterested Directors"), unanimously determined, after giving careful consideration to a number of factors, that each of the Transactions were fair to, and in the best interests of, the Company and its shareholders, and unanimously approved the Transactions. Dr. James 8 10 Leininger, Mr. Hannigan and Dr. Peter Leininger then rejoined the meeting, and the full Board unanimously ratified and approved the vote previously taken. On October 2, 1997, the Company entered into the Transaction Agreement with Purchasers and publicly announced the proposed Transactions prior to the opening of the market on October 3, 1997, and Purchasers and Dr. James Leininger entered into the Support Agreement. RECOMMENDATION OF THE DISINTERESTED DIRECTORS AND THE BOARD; FAIRNESS OF THE TRANSACTIONS Recommendation of the Disinterested Directors and the Board On October 1, 1997, the Disinterested Directors unanimously voted to approve the Transactions and determined that each of the Transactions was fair to, and in the best interests of the Company and its shareholders, and the Board, by a unanimous vote, ratified the vote previously taken by the Disinterested Directors. See "SPECIAL FACTORS -- Interests of Certain Persons in the Transactions." The Disinterested Directors and the Board considered a number of factors including, without limitation, the following: (i) the premium represented by the Per Share Amount in relation to the historical per share market value of the Shares prior to the announcement on May 29, 1997 that the Board was exploring strategic alternatives to maximize shareholder value. In that regard, the Board noted that the closing market prices on April 29, 1997, the date approximately one month prior to the announcement that the Company was exploring strategic options and alternatives for increasing shareholder value, and October 1, 1997, the day of the Board's meeting approving the Transactions and the date two days before the announcement of the Transactions, were $14.875 and $18.625, respectively. The Board also noted that the average market value of the Shares for the 12-month period ended October 2, 1997 was $15.28 per Share and for the year ended December 31, 1996 was $13.865 per share and that the Per Share Amount represented a 26.0% premium over the average market value for the 12-month period ended October 2, 1997 and a 38.8% premium over the 1996 average market value. See "THE TENDER OFFER -- Section 6. Price Range of Shares; Dividends"; (ii) that the Company had issued a press release on May 29, 1997 announcing that it had retained BT Alex. Brown to assist the Company in exploring strategic alternatives to maximize shareholder value, that the Company then engaged in a thorough process for soliciting offers and that none of the prospective purchasers that had been contacted or expressed an interest in acquiring the Company had proposed a transaction with a price equal to or in excess of the Per Share Amount. See "SPECIAL FACTORS -- Background of the Transactions"; (iii) the opinion of BT Alex. Brown rendered to the Board on October 1, 1997 to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Per Share Amount and the Merger Consideration to be received in the Offer and the Merger by the holders of Shares (other than Continuing Shareholders) was fair from a financial point of view to such holders and the financial analyses presented to the Board and the Disinterested Directors in connection therewith. See "SPECIAL FACTORS -- Opinion of BT Alex. Brown Incorporated"; (iv) the financial condition and historical and projected earnings for the Company; (v) the nature of the Company's business and the industry in which the Company operates, including information received by the Board regarding trends in the Company's industry and various uncertainties associated with current and potential future industry consolidation, reimbursement, regulatory and market conditions; (vi) that the Offer would permit a substantial number of shareholders to realize a premium for their Shares in the near future as compared to (a) an alternative offer the terms of which were unclear, difficult to quantify and subject to a variety of conditions such as financing and continued due diligence and (b) the belief of the Board that absent the existence of a possible transaction involving the Company, the Shares could well trade at prices significantly below the Per Share Amount; 9 11 (vii) the effect of the termination fee provisions in the Transaction Agreement and the extent to which such provisions might increase the cost of any alternative offers should they materialize. See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders"; (viii) the requirement that shareholders tender sufficient Shares to meet the Minimum Condition (which was considered in light of the Support Agreement). See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders"; (ix) the nature and sources of the equity being funded by the Purchasers and the financing contemplated in connection with the Transactions, the institutions providing such financing commitments and the conditions to the obligations of such institutions to fund such commitments; (x) the oral report to the Board, to be confirmed in writing prior to the consummation of the Offer, of Houlihan Lokey as to the solvency of the Company following the consummation of the Transactions and certain related matters; and (xi) the effect of protracted negotiations and due diligence investigations with prospective purchasers on the management and employees of the Company. In view of the wide variety of factors considered in connection with their evaluation of the Transaction Agreement and the Merger, the Disinterested Directors and the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching their determination. The Disinterested Directors and the Board, however, gave significant weight to the factors specified in clauses (i) through (vi), inclusive, above. The Disinterested Directors carefully reviewed the interests of Dr. James Leininger, Dr. Peter Leininger, Mr. Hannigan and certain members of the Company's senior management in the Transactions, and do not believe that their determination to recommend the Offer to the shareholders of the Company was influenced by such interests. The Disinterested Directors and the Board recognized that, upon consummation of the Offer, the approval of the shareholders of the Company other than Dr. Leininger and Purchasers will not be required to approve the Merger and that Dr. James Leininger would enter into the Support Agreement, which provides that he must vote the Shares he owns following the closing of the Offering in favor of the Merger and pursuant to which he granted an option on certain of his Shares (the "Option"). The Disinterested Directors and the Board also recognized that it was still possible, under the terms of the Transaction Agreement and the Support Agreement, for a third party to make an offer and obtain more than a majority of the Shares (assuming the acquisition by a third party of approximately 62% of the Shares not owned by RCBA and not subject to the Option) if a third party purchaser were willing to make an offer which was more attractive to the Company's shareholders than the Offer after taking into account the payment of the Fee (as defined herein). The Disinterested Directors and the Board acknowledged that the Transactions would eliminate the opportunity for the shareholders, other than Dr. James Leininger, Dr. Peter Leininger, RCBA and certain members of management, to participate in the future growth of the Company, but they also further recognized that it would limit such shareholders' exposure to the risk of any future decreases in the value of the Company. Because the terms of the Transaction Agreement and the price to be paid to the shareholders were determined through arms length negotiations among the Company, Purchasers, and their respective advisors, and for the reasons set forth above, it was the opinion of the Disinterested Directors that the Offer and the Merger were fair to, and in the best interests of, the shareholders. The Board and the Disinterested Directors determined that it was not necessary to appoint a committee of independent directors or an unaffiliated representative to act solely on behalf of the unaffiliated shareholders of the Company for the purpose of negotiating the terms of the Transaction Agreement. In making such determination, the Board and the Disinterested Directors carefully considered the fact that proposals to acquire the Company were solicited on behalf of the Company without regard to whether management would retain an equity interest in the Surviving Corporation, and noted that the Disinterested Directors are not employed by the Company and will have no financial interest in the Company following consummation of the Merger. All of the Directors, including the Disinterested Directors, voted to approve the Transactions. 10 12 In connection with its deliberations, the Board did not consider, and did not request that BT Alex. Brown evaluate, the Company's liquidation value. The Board did not view the Company's liquidation value to be a relevant measure of valuation, given that the Per Share Amount significantly exceeded the book value per Share of the Company on June 30, 1997, and it was the Board's view that the Company is far more valuable as a going concern than its net book value per share of $5.26 as of June 30, 1997. However, there can be no assurance that the liquidation value would not produce a higher valuation of the Company than its value as a going concern. To the Company's knowledge after reasonable inquiry, each of the Company's executive officers and directors (other than Dr. James Leininger and as otherwise provided in any Stock Retention Agreement) presently intends either to tender all Shares beneficially owned by him to the Company pursuant to the Offer or to vote in favor of the Merger at a duly called shareholders' meeting, and, to the Company's knowledge after reasonable inquiry, no executive officer, director or affiliate of the Company has made a recommendation in support of or opposed to the Merger. Pursuant to the Stock Retention Agreements, certain members of management will retain Employee Options to purchase 821,550 Shares. OPINION OF BT ALEX. BROWN INCORPORATED The Company engaged Alex. Brown & Sons Incorporated (following the merger of Alex. Brown & Sons Incorporated with BT Securities Corporation, "BT Alex. Brown") to act as its exclusive financial advisor in connection with the Offer and the Merger. On October 1, 1997, at a meeting of the Board held to evaluate the proposed Offer and Merger, BT Alex. Brown rendered to the Board an oral opinion (which opinion was subsequently confirmed by delivery of a written opinion dated October 1, 1997) to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the Per Share Amount and the Merger Consideration to be received in the Offer and the Merger by the holders of Shares (other than Continuing Shareholders) was fair from a financial point of view to such holders. No limitations were imposed by the Board upon BT Alex. Brown with respect to the investigations made or the procedures followed by it in rendering its opinion. The full text of the written opinion of BT Alex. Brown dated October 1, 1997, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as SCHEDULE II hereto and is incorporated herein by reference. BT ALEX. BROWN'S OPINION IS DIRECTED TO THE BOARD, ADDRESSES ONLY THE FAIRNESS OF THE PER SHARE AMOUNT TO BE RECEIVED IN THE OFFER AND THE MERGER BY THE HOLDERS OF SHARES (OTHER THAN CONTINUING SHAREHOLDERS) FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER OR NOT SUCH SHAREHOLDER SHOULD TENDER SHARES IN THE OFFER. The summary of the opinion of BT Alex. Brown set forth herein is qualified in its entirety by reference to the full text of such opinion. In connection with its opinion, BT Alex. Brown reviewed and analyzed certain publicly available financial information and other information concerning the Company and certain internal analyses and other information furnished to BT Alex. Brown by the Company. BT Alex. Brown also held discussions with members of senior management of the Company and representatives of Purchasers regarding the business and prospects of the Company. In addition, BT Alex. Brown (i) reviewed the reported prices and trading activity for the Shares, (ii) compared certain financial and stock market information for the Company with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which BT Alex. Brown deemed comparable in whole or in part, (iv) reviewed the terms of the Transaction Agreement as furnished to BT Alex. Brown in draft form and (v) performed such other studies and analyses and considered such other factors as BT Alex. Brown deemed appropriate. As described in its opinion, BT Alex. Brown assumed and relied upon, without independent verification, the accuracy, completeness and fairness of the information furnished to or otherwise reviewed by or discussed with BT Alex. Brown for purposes of its opinion. With respect to the information relating to the prospects of the Company, BT Alex. Brown assumed that such information reflected the best currently available judgments and estimates of the management of the Company as to the likely future financial performance of the 11 13 Company. BT Alex. Brown also assumed that the Merger would be treated as a recapitalization for financial reporting purposes and that the final terms of the Transaction Agreement as reviewed by BT Alex. Brown in draft form would not vary materially from the draft reviewed by BT Alex. Brown. BT Alex. Brown did not make nor was it provided with an independent evaluation or appraisal of the assets or liabilities of the Company. In connection with its engagement to provide financial advisory services to the Board concerning strategic alternatives, BT Alex. Brown was requested to solicit, and did solicit, interest from third parties with respect to the acquisition of the Company. In arriving at its opinion, BT Alex. Brown considered the nature, scope and results of such solicitation. BT Alex. Brown's opinion was based on market, economic and other conditions as they existed and could be evaluated as of the date of its opinion. Although BT Alex. Brown evaluated the Per Share Amount from a financial point of view, the type and amount of consideration payable in the Offer and the Merger was determined through negotiation between the Company and Purchasers. The following is a summary of the material analyses and factors considered by BT Alex. Brown in connection with its opinion to the Board dated October 1, 1997: Analysis of Selected Public Company Trading and Financial Information. BT Alex. Brown compared certain financial and stock market information for the Company with similar information for seven selected publicly held companies in the healthcare industry: Becton, Dickinson & Company, C.R. Bard, Inc., Hillenbrand Industries, Inc., Invacare Corporation, STERIS Corporation, Stryker Corporation and Sunrise Medical, Inc. (collectively, the "Selected Companies"). BT Alex. Brown calculated market values relative to each company's earnings per share ("EPS") for the latest 12 months and calendar years 1997 and 1998, and adjusted market values (equity market value, plus debt, less cash and equivalents) relative to each company's revenues, earnings before interest, taxes, depreciation and amortization ("EBITDA") and earnings before interest and taxes ("EBIT") for the latest 12 months. All multiples were based on closing stock prices on September 30, 1997. EPS estimates for the Selected Companies were based on analysts' estimates as reported by I/B/E/S, a market research database, and EPS estimates for the Company were based both on analysts' estimates as reported by I/B/E/S and internal estimates of the management of the Company. This analysis indicated multiples for the Selected Companies of latest 12 months and estimated calendar 1997 and 1998 EPS of 16.6x to 41.0x (with a mean of 24.0x), 16.8x to 33.9x (with a mean of 22.3x) and 14.4x to 28.2x (with a mean of 18.6x), respectively, and latest 12 months revenues, EBITDA and EBIT of 0.8x to 4.4x (with a mean of 2.1x), 8.1x to 21.9x (with a mean of 12.0x) and 10.3x to 27.4x (with a mean of 16.0x), respectively. These multiples compare with implied multiples for the Company based on the Per Share Amount of latest 12 months and estimated calendar 1997 and 1998 EPS of 22.0x (based on latest 12 months EPS), 20.5x (based on calendar 1997 EPS estimates as reported by I/B/E/S), 18.2x (based on calendar 1998 EPS estimates as reported by I/B/E/S), 15.2x (based on calendar 1998 EPS estimates of the management of the Company) and 17.6x (based on calendar 1998 EPS estimates of the management of the Company, as adjusted based on discussions with potential acquirors), respectively, and latest 12 months revenues, EBITDA and EBIT of 2.8x, 9.9x and 13.3x, respectively. Analysis of Selected Merger and Acquisition Transactions. BT Alex. Brown reviewed the purchase price and implied transaction multiples paid in 12 selected merger and acquisition transactions in the healthcare industry, consisting of (acquiror/target): (i) eight transactions involving strategic buyers: Nellcor Puritan Bennett, Inc./Acquetron Medical, Inc., Advanced Medical, Inc./Ivac Medical Systems, Inc., STERIS Corporation/Amsco International, Inc., Getinge Industrier/Arjo AB, Thermo Electron Corporation/Bird Medical Technologies, Inc., Nellcor, Inc./Puritan-Bennett Corporation, Tyco International Ltd./Kendall International, Inc. and Marquette Electronics, Inc./Corometrics Medical Systems, Inc. (the "Strategic Buyer Transactions") and (ii) four transactions involving financial buyers: Thomas H. Lee Company/Fisher Scientific International, Inc., Apollo Management, L.P./Living Centers of America, Inc., Forstmann Little & Co./Community Health Systems, Inc. and Warburg, Pincus Ventures L.P./Transition Systems, Inc. (the "Financial Buyer Transactions" and, together with the Strategic Buyer Transactions, the "Selected Merger and Acquisition Transactions"). All multiples were based on publicly available information at the time of announcement of such transaction. This analysis indicated multiples of latest 12 months and one-year forward EPS and latest 12 months revenues, EBITDA and EBIT in the Strategic Buyer Transactions of 19.0x to 47.6x (with a mean of 28.4x), 19.5x to 25.8x (with a mean of 21.6x), 0.9x to 2.0x (with a mean of 1.5x), 8.8x to 12 14 13.4x (with a mean of 11.2x) and 11.3x to 21.4x (with a mean of 15.5x), respectively, and latest 12 months net income, revenues, EBITDA, free cash flow and EBIT in the Financial Buyer Transactions of 19.4x to 28.8x (with a mean of 24.1x), 0.7x to 4.3x (with a mean of 2.0x), 8.6x to 10.9x (with a mean of 10.0x), 15.9x to 16.4x (with a mean of 16.2x) and 12.2x to 16.2x (with a mean of 13.7x), respectively. These multiples compare with implied multiples for the Company based on the Per Share Amount of latest 12 months EPS, revenues, EBITDA, free cash flow and EBIT of 22.0x, 2.8x, 9.9x, 15.2x and 13.3x, respectively. BT Alex. Brown also compared the premiums paid in the Selected Merger and Acquisition Transactions with the premium payable in the Offer and Merger. The premiums paid in the Selected Merger and Acquisition Transactions, based on the target company's closing stock price 30 days prior, and one day prior, to public announcement of such transaction were 15.5% to 89.5% (with a mean of 53.8% and a median of 50.6%) and 13.8% to 44.1% (with a mean of 31.8% and a median of 38.9%), respectively, in the Strategic Buyer Transactions, and 10.9% to 18.9% (with a mean of 14.3% and a median of 12.1%) and 0.2% to 19.9% (with a mean of 10.0% and a median of 5.0%), respectively, in the case of the Financial Buyer Transactions. The premium payable in the Offer and the Merger based on the closing stock price of the Shares 30 days prior, and one day prior, to the Board meeting held on October 1, 1997 to evaluate the proposed Offer and Merger was 4.8% and 3.4%, respectively. The premium payable in the Offer and the Merger based on the unaffected closing stock price of the Shares on April 29, 1997 (one month prior to the Company's public announcement that it had retained BT Alex. Brown to assist the Company in exploring strategic alternatives) was 30%. Discounted Cash Flow Analysis. BT Alex. Brown performed a discounted cash flow analysis of the Company to estimate the present value of the stand-alone, unlevered, after-tax free cash flows that the Company could generate over the years 1997 through 2001, based both on internal estimates of the management of the Company ("Case I") and adjustments to such internal estimates based on discussions with potential acquirors which assumed lower compound annual revenue growth rates and EBITDA margins for the Company ("Case II"). The stand-alone discounted cash flow analysis of the Company was determined by (i) adding (x) the present value at September 30, 1997 of projected free cash flows over the five-year period 1997 through 2001, and (y) the present value at September 30, 1997 of the estimated terminal value of the Company in year 2001 and (ii) subtracting the current net debt of the Company at September 30, 1997. The range of estimated terminal values for the Company at the end of the five-year period was calculated by applying terminal value multiples ranging from 8.0x to 10.0x to the projected 2001 EBITDA of the Company, representing the estimated value of the Company beyond the year 2001. The cash flows and terminal values of the Company were discounted to present value using discount rates ranging from 18% to 22% for Case I and 14% to 18% for Case II. This analysis yielded an equity reference range for the Company of approximately $22.21 to $29.86 per Share (based on Case I) and $17.33 to $23.21 per Share (based on Case II), as compared to the Per Share Amount. Certain Other Factors. In connection with its opinion, BT Alex. Brown also reviewed and considered, among other things, (i) the indications of interest of third parties other than the Purchasers, (ii) the historical and pro forma financial profile of the Company, (iii) the historical trading volumes and market prices for the Shares, and movements in the Shares relative to the S&P 500 Index, the Nasdaq Composite and the common stock of the Selected Companies, (iv) analysts' reports, including growth rate estimates, with respect to the Company, and (v) the ownership profile of the Company. The summary set forth above does not purport to be a complete description of the opinion of BT Alex. Brown to the Board or the financial analyses performed and factors considered by BT Alex. Brown in connection with its opinion. A copy of BT Alex. Brown's written presentation to the Board with respect to its opinion has been filed as an exhibit to the Schedule 13E-3 and will be available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested shareholder of the Company or representative of such shareholder who has been designated in writing and may be inspected, copied and obtained by mail, from the Commission. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. BT Alex. Brown believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses, without considering 13 15 all analyses, or selecting portions of the above summary, without considering all factors and analyses, could create a misleading or incomplete view of the processes underlying such analyses and opinion. In performing its analyses, BT Alex. Brown made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. No company, transaction or business used in such analyses as a comparison is identical to the Company or the proposed Offer or Merger, nor is an evaluation of the results of such analyses entirely mathematical; rather, such analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions being analyzed. The estimates contained in such analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. BT Alex. Brown's opinion and financial analyses were only one of many factors considered by the Board in its evaluation of the proposed Offer and Merger and should not be viewed as determinative of the views of the Board or management with respect to the Offer or the Merger or the consideration payable in the Offer and the Merger. BT Alex. Brown is a nationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. The Company selected BT Alex. Brown to serve as its financial advisor based on BT Alex. Brown's reputation, expertise and familiarity with the Company. BT Alex. Brown also is acting as Dealer Manager for the Offer. BT Alex. Brown previously acted as a co-managing underwriter in connection with public offerings of the Shares and, with the consent of the Board, will be acting as a joint co-lead managing underwriter, initial purchaser or placement agent of the proposed offering of the Notes (as defined herein), for which services BT Alex. Brown has received and will receive customary compensation. Affiliates of BT Alex. Brown also will be participating, with the consent of the Board, as documentation agent, syndication agent and lender in the senior secured credit facility and as a lender under the bridge facility, if any, for the financing of the Transactions, for which services such affiliates will receive customary compensation. See "THE TENDER OFFER -- Financing of the Transactions". BT Alex. Brown maintains a market in the Shares and regularly publishes research reports regarding the health care industry and the businesses and securities of the Company and other publicly owned companies in the health care industry. In the ordinary course of business, BT Alex. Brown may actively trade the securities of the Company for its own account and the accounts of its customers and, accordingly, may at any time hold a long or short position in securities of the Company. Pursuant to the terms of BT Alex. Brown's engagement, the Company has agreed to pay BT Alex. Brown upon consummation of the Offer an aggregate financial advisory fee equal to 0.60% of the total consideration (including liabilities assumed) payable in the Offer and the Merger for its services as financial advisor and Dealer Manager. In addition, the Company has agreed to reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown and certain related parties against certain liabilities, including certain liabilities under the federal securities laws, relating to, or arising out of, its engagement. PURPOSES AND REASONS OF THE COMPANY FOR THE TRANSACTIONS The purpose of the Offer is to provide the Company's shareholders with liquidity for their Shares by enabling them to sell their Shares at a fair price and at a premium over recent market prices. Management believes that, even as a public stock, primarily because of the large percentage of Shares held in a few large blocks, there is a limited market for the Shares, especially for the sale of large blocks of Shares. The limited supply of Shares traded in the public market provides little opportunity for a shareholder to realize the true value of such shareholder's investment in the Company. The Offer is intended to afford shareholders the opportunity to sell their Shares in light of the current relative illiquidity and lack of public float of the Shares. 14 16 Following consummation of the Transactions, the Shares would no longer be traded on Nasdaq and registration of the Shares would be terminated under the Exchange Act. The acquisition of the Shares has been structured as a cash tender offer followed by a cash merger in order to (i) effect a prompt and orderly transfer of ownership of the Company from the public shareholders to Purchasers and (ii) provide shareholders with cash for all of their Shares more quickly than through alternative transaction structures that had been considered by the Board. PURPOSES AND REASONS OF PURCHASERS AND DR. JAMES LEININGER FOR THE TRANSACTIONS Purchasers. Purchasers' purpose for engaging in the Transactions is to enable Purchasers to obtain, in the aggregate, a majority ownership interest in the Company, thereby becoming entitled to all benefits that result from such ownership. Such benefits include management and investment discretion with regard to the future conduct of the business of the Company, the benefits of the profits generated by operations and any increase in the Company's value. Similarly, Purchasers will also bear the risk of any decrease in the value of the Company. Dr. James Leininger. Dr. James Leininger's purpose for engaging in the Transactions is to be able to obtain the Per Share Amount with respect to a material portion of his holdings of the Shares while also maintaining an ownership position in the Company. Upon the consummation of the Transactions, Fremont, RCBA and Dr. James Leininger will own approximately 39.7, 26.2 and 33.5% of the Shares, respectively. POSITION OF PURCHASERS AND DR. JAMES LEININGER REGARDING FAIRNESS OF THE TRANSACTIONS Purchasers. Purchasers have considered the analysis of and the factors examined by the Board (described in detail in "SPECIAL FACTORS -- Recommendation of the Board and the Disinterested Directors; Fairness of the Transactions") and believe that these analyses and factors, in particular factors (i) through (vi) of that section, provide a reasonable basis for them to believe, as they do, that the Transactions are fair to the shareholders of the Company. This belief should not, however, be construed as a recommendation by them to the Company's shareholders to tender their Shares or vote to approve the Transaction Agreement and the Merger. Dr. James Leininger. Dr. James Leininger has considered the analyses of and the factors examined by the Board (described in detail in "SPECIAL FACTORS -- Recommendation of the Board and the Disinterested Directors; Fairness of the Transactions") and believes that these analyses and factors, in particular factors (i) through (vi) of that section, provide a reasonable basis for him to believe, as he does, that the Transactions are fair to the shareholders of the Company. This belief should not, however, be construed as a recommendation by him to the Company's shareholders to tender their Shares or vote to approve the Transaction Agreement and the Merger. INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS RCBA. RCBA owns 4,040,250 Shares, or 9.0% of the Shares. RCBA will receive $3,895,430 for the 202,360 Shares it is tendering pursuant to the Offer and will retain the remaining 3,837,890 Shares owned by it. Dr. James Leininger. Shareholders should be aware that Dr. James Leininger has certain interests that present actual or potential conflicts of interest in connection with the Offer and the Merger. As a result of Dr. James Leininger's currently owning or controlling approximately 50.2% of the issued and outstanding Shares and his position as Chairman of the Board of Directors of the Company, Dr. James Leininger can exert significant influence over the Company. Dr. James Leininger and certain other parties will receive approximately $265,500,000 for the sale of the 13,792,211 Shares that he has agreed to tender in the Offer pursuant to the Support Agreement. Additionally, Dr. James Leininger will retain a 33.5% interest in the Company following consummation of the Transactions. 15 17 Directors and Officers. Shareholders should be aware in considering their decision to participate in the Offer that each of the members of the Board has, to some degree, interests which may present such directors with an actual or potential conflict of interest in connection with the Offer. The directors and executive officers of the Company (other than Dr. James Leininger) will receive an aggregate of approximately $37,650,000 for their Shares and Employee Options in the Transactions. As of October 2, 1997, the directors and executive officers as a group beneficially owned 24,043,062 Shares, or 54.9% of the Shares, which includes Shares issuable upon exercise of Employee Options and the Hannigan Option but excludes Shares owned by the Company's employee stock ownership plan. The Company has been informed by its directors and executive officers (other than Dr. James Leininger and as otherwise provided in any Stock Retention Agreement) that they intend either to tender all of the Shares beneficially owned by them to the Company pursuant to the Offer or to vote such Shares in favor of the approval and adoption by the shareholders of the Company of the Transaction Agreement and the Merger. There would be no other shareholders upon consummation of the Transactions, but certain members of management would retain, and be guaranteed, additional options to purchase Shares. See "INTRODUCTION" and "SPECIAL FACTORS -- Plans for the Company after the Transactions; Certain Effects of the Transactions". The Company has adopted a "stay" bonus and a "sale" bonus for certain executive officers of the Company. The "stay" bonus includes a payment equal to a percentage (up to 100%) of the officer's base pay and an early payment of the officer's annual bonus, on a pro rata basis, in an amount equal to the greater of such 100% of such officer's target bonus or the bonus due based on the Company's performance year-to-date. The "sale" bonus was based on the Per Share Amount and the officer's anticipated participation in the sale process. Pursuant to the terms of these bonus plans, the executive officers of the Company named below would receive the bonus amounts set forth opposite their names upon consummation of the Offer.
BONUS NAME POSITION AMOUNT(1) - ------------------------------ ------------------------------------------ ------------- Raymond R. Hannigan........... President and Chief Executive Officer $ 122,865(2) Peter A. Leininger, M.D....... Executive Vice President 129,252 Dennis E. Noll................ Senior Vice President, General Counsel and Secretary 302,962 Frank DiLazzaro............... President, KCI International, Inc. 307,303 Christopher M. Fashek......... President, KCI Therapeutic Services, Inc. 338,235 Larry P. Baker................ Vice President, Corporate 240,955 Michael J. Burke.............. Vice President, Manufacturing 290,044 Richard C. Vogel.............. Vice President and General Manager, KCI New Technologies, Inc. 261,008 Michael C. Wells.............. Vice President and General Manager, KCI Home Care 243,455 Martin J. Landon.............. Vice President, Accounting and Corporate Controller 217,754 George P. Peace............... Vice President, Information Systems 146,251 Scott S. Brooks............... Vice President, National Accounts 185,353 John H. Vrzalik............... Vice President, Engineering 187,439
- --------------- (1) The Bonus Amount assumes that the Offer will close on November 5, 1997 and that executive officers will receive 100% of their target bonus. (2) The Bonus Amount for Mr. Hannigan does not include the amount of his "sale bonus" which may be up to $340,000 and will be determined by the Board after the closing of the Offer. 16 18 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Certain matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward-looking statements include the projections set forth below (collectively, the "Projections"). Such information has been included in this Offer to Purchase for the limited purpose of giving the Company's shareholders access to financial projections made by the Company's management in connection with the Transactions and the Debt Financing. Such information was prepared by the Company's management for internal use and not with a view to publication. The Projections were based on assumptions concerning the Company's products and business prospects in 1997 through 2002, including the assumption that the Company would continue to operate under the same ownership structure as then existed. The Projections were also based on other revenue and operating assumptions. Information of this type is based on estimates and assumptions that are inherently subject to significant economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the Company's control. Accordingly, there can be no assurance that the projected results would be realized or that actual results would not be significantly higher or lower than those set forth above. In addition, the Projections were not prepared with a view to public disclosure or compliance with the published guidelines of the Securities and Exchange Commission (the "Commission"), or the guidelines established by the American Institute of Certified Public Accountants regarding projections and forecasts and are included in this Offer to Purchase only because such information was made available to Purchasers by the Company. Neither Purchasers' nor the Company's independent accountants have examined, compiled or applied any agreed upon procedures to this information and, accordingly, assume no responsibility for this information. Neither the Company nor any other party assumes any responsibility for the accuracy or validity of the Projections. COMPANY FINANCIAL PROJECTIONS The Company does not, as a matter of course, make public forecasts or projections as to future revenues, earnings or other financial statement data. However, in the course of discussions with potential acquirors, including Purchasers, and in connection with the solicitation of a transaction or transactions such as the Transactions and the Debt Financing, the Company prepared various projections of its anticipated future operating performance for the five calendar years ending December 31, 2001. Such projections were prepared assuming that the Transactions had not occurred, that the Company's existing ownership structure was maintained throughout such period and that there were 44,000,000 average shares outstanding in each of such years. Absent such assumptions, the Company's projected operating performance would be materially different. See "SPECIAL FACTORS -- Cautionary Statement Concerning Forward-Looking Statements". June Projections. In June 1997, the Company's management delivered certain projections of the Company's anticipated future operating performance for the five calendar years ending December 31, 2001, to each of Fremont and RCBA. The 1997 base year used in such projections was based on the Company's 1997 budget, as approved by the Board, adjusted for known or pending acquisitions. The revenue growth assumptions used in such projections were developed for each of the Company's market segments, which growth assumptions were based on projected (i) expansion of the Company's product lines, (ii) expansion of domestic and international distribution networks and (iii) development of and focus on higher-margin 17 19 products. The profit projections reflect operating efficiencies anticipated to result from improved systems and processes. The June projections are summarized below: PROJECTED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDING DEC. 31, ---------------------------------------------------- 1997E 1998E 1999E 2000E 2001E -------- -------- -------- -------- -------- Total Revenue....................... $311,902 $361,398 $425,568 $492,982 $548,517 Gross Profit........................ 130,667 157,203 187,611 224,949 254,967 Earnings Before Income Taxes........ 69,678 88,815 119,223 156,561 186,579 Pre-Tax Income...................... 73,000 93,461 125,959 166,285 198,156 -------- -------- -------- -------- -------- Net Income.......................... $ 43,645 $ 55,922 $ 75,421 $ 99,616 $118,739 ======== ======== ======== ======== ======== Fully Diluted EPS................... $ 0.99 $ 1.27 $ 1.71 $ 2.26 $ 2.70 ======== ======== ======== ======== ======== Average Shares Outstanding.......... 44,000 44,000 44,000 44,000 44,000 ======== ======== ======== ======== ========
October Projections. In October 1997, the Company's management prepared certain projections of the Company's anticipated future operating performance for the five calendar years ending December 31, 2001, for use in connection with the Debt Financing. The 1997 base year used in such projections was established using management's updated forecast of operating results for the fiscal year ending December 31, 1997, as adjusted for the Company's recent acquisition of RIK Medical, L.L.C. and also incorporates the projected effects of certain operating synergies and cost reductions relating thereto. In addition, the data reflect the effects of revised forecasts for new product introductions based on management's most recent design and manufacturing estimates. The October projections are summarized below: PROJECTED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDING DECEMBER 31, ---------------------------------------------------- 1997E 1998E 1999E 2000E 2001E -------- -------- -------- -------- -------- Total Revenue....................... 318,768 355,842 405,055 459,324 508,554 Gross Profit........................ 131,797 149,896 172,799 199,867 222,475 Earnings Before Income Taxes........ 70,675 80,969 95,296 117,599 134,477 Pre-Tax Income...................... 73,174 84,209 100,886 126,016 144,565 Net Income.......................... $ 43,750 $ 50,370 $ 60,377 $ 75,455 $ 86,584 ======== ======== ======== ======== ======== Fully Diluted EPS................... $ 0.99 $ 1.14 $ 1.37 $ 1.71 $ 1.97 ======== ======== ======== ======== ======== Average Shares Outstanding.......... 44,000 44,000 44,000 44,000 44,000 ======== ======== ======== ======== ========
18 20 PLANS FOR THE COMPANY AFTER THE TRANSACTIONS; CERTAIN EFFECTS OF THE TRANSACTIONS Pursuant to the Transaction Agreement, upon completion of the Offer, the Company and each of Purchasers intend to effect the Merger in accordance with the Transaction Agreement. See "SPECIAL FACTORS -- The Transaction Agreement, the Support Agreement and the Agreement Among Bidders". Except as otherwise described in this Offer to Purchase, the Company has no current plans or proposals which relate to or would result in: (a) other than the Transactions, an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving the Company; (b) a sale or transfer of a material amount of assets of the Company; (c) any change in the management of the Company or any change in any material term of the employment contract of any executive officer; or (d) any other material change in the Company's corporate structure or business. Nevertheless, Fremont, RCBA and Dr. James Leininger may initiate a review of the Company and its assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes, if any, would be desirable following the Merger in order best to organize the activities of the Company. Fremont, RCBA and Dr. James Leininger expressly reserve the right to make any changes that they deem necessary or appropriate in light of their review or in light of future developments. Successful consummation of the Transactions will enable Fremont, RCBA and Dr. James Leininger to obtain or maintain, as appropriate, ownership of approximately 39.7%, 26.2% and 33.5% of the Shares, respectively, thereby becoming entitled to all benefits that result from such ownership. Such benefits include management and investment direction with regard to the future conduct of the business of the Company, the benefits of the profits generated by operations and any increase in the Company's value. Similarly, Fremont, RCBA and Dr. James Leininger will also bear the risk of any losses generated by operations and any decrease in the value of the Company. Upon consummation of the Transactions, the Company will become a privately held corporation. Accordingly, shareholders will not have the opportunity to participate in the earnings and growth of the Company after the consummation of the Transactions and will not have any right to vote on corporate matters. Similarly, shareholders will not face the risk of losses generated by the Company's operations or any decrease in the value of the Company after the consummation of the Transactions. FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS, THE SHARES WILL NO LONGER BE QUOTED ON NASDAQ. In addition, the registration of the Shares under the Exchange Act will be terminated. Accordingly, following the consummation of the Transactions there will be no publicly-traded Shares outstanding. See "THE TENDER OFFER -- Section 10. Effect of the Transactions on the Market for the Shares; Exchange Act Registration". It is expected that, if Shares are not accepted for payment by the Company pursuant to the Offer and the Transactions are not consummated, the Company's current management, under the general direction of the Board, will continue to manage the Company as an ongoing business. RIGHTS OF THE SHAREHOLDERS IN THE TRANSACTIONS NO DISSENTERS' RIGHTS ARE AVAILABLE IN CONNECTION WITH THE OFFER. HOWEVER, PERSONS WHO CONTINUE TO HOLD SHARES FOLLOWING COMPLETION OF THE OFFER WILL HAVE THE RIGHT TO DISSENT TO THE MERGER IN ACCORDANCE WITH ARTICLES 5.11 THROUGH 5.13 OF TEXAS LAW IN LIEU OF RECEIVING THE CONSIDERATION PROPOSED UNDER THE TRANSACTION AGREEMENT. IF THE STATUTORY PROCEDURES ARE COMPLIED WITH AND THE MERGER IS CONSUMMATED, DISSENTING HOLDERS WOULD BE ENTITLED TO RECEIVE CASH EQUAL TO A JUDICIAL DETERMINATION OF THE "FAIR VALUE" OF THE SHARES AS DETERMINED BY APPRAISAL. SEE "SCHEDULE III. ARTICLES 5.11 THROUGH 5.13 OF THE TEXAS BUSINESS CORPORATION ACT". SUCH "FAIR VALUE" IS DETERMINED AS OF THE DAY IMMEDIATELY PRECEDING THE SHAREHOLDERS' MEETING AT WHICH THE MERGER IS APPROVED (EXCLUDING ANY APPRECIATION OR DEPRECIATION IN ANTICIPATION OF THE MERGER). IN ADDITION, DISSENTING SHAREHOLDERS MAY BE ENTITLED TO RECEIVE PAYMENT OF INTEREST BEGINNING 91 DAYS FROM THE DATE OF CONSUMMATION OF THE MERGER TO THE DATE OF SUCH JUDICIAL DETERMINATION ON THE AMOUNT DETERMINED TO BE THE FAIR VALUE OF THEIR SHARES. ANY SUCH JUDICIAL DETERMINATION OF THE FAIR VALUE OF THE SHARES COULD BE BASED UPON CONSIDERATIONS OTHER THAN OR IN ADDITION TO THE PER SHARE AMOUNT, THE MERGER CONSIDERATION AND THE MARKET VALUE OF THE SHARES, INCLUDING ASSET VALUES, THE 19 21 INVESTMENT VALUE OF THE SHARES AND ANY OTHER VALUATION CONSIDERATIONS GENERALLY ACCEPTED IN THE INVESTMENT COMMUNITY. THE VALUE SO DETERMINED FOR DISSENTING SHARES COULD BE MORE OR LESS THAN THE PER SHARE AMOUNT OR THE MERGER CONSIDERATION, AND PAYMENT OF SUCH CONSIDERATION WOULD TAKE PLACE SUBSEQUENT TO PAYMENT PURSUANT TO THE OFFER OR THE MERGER. Texas Law provides that, in the absence of fraud in the transaction, the statutory dissenters' rights remedy provided under Texas Law to a shareholder objecting to the Merger is the exclusive remedy for the recovery of the value of such shareholder's Shares or for money damages to such shareholder with respect to the Merger. If the Company complies with the requirements of Article 5.12 of Texas Law, any shareholder who fails to comply with the requirements of that Article shall not be entitled to bring suit for the recovery of the value of his Shares or for money damages to the shareholder with respect to the Merger. The statutory procedures regarding the exercise of dissenters' rights will be included in the proxy statement sent to holders of Shares for the shareholders' meeting to be held to approve the Merger. Holders of Shares who seek to assert their dissenters' rights must follow the statutory procedures precisely. Failure to follow any of the statutory procedures may result in a termination or waiver of such rights. THE TRANSACTION AGREEMENT, THE SUPPORT AGREEMENT AND THE AGREEMENT AMONG BIDDERS The Transaction Agreement. The following is a summary of the Transaction Agreement, a copy of which is filed as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Such summary is qualified in its entirety by reference to the Transaction Agreement. The Offer. The Transaction Agreement provides for the commencement of the Offer as promptly as reasonably practicable after the date thereof. The obligation of the Company to accept for payment and pay for Shares tendered pursuant to the Offer is subject to the Minimum Condition and is also subject to the satisfaction of certain other conditions described in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer" hereof. The Per Share Amount shall, subject to applicable withholding of taxes, be net to the seller in cash, upon the terms and subject to the conditions of the Offer. Subject to the terms and conditions of the Offer (including, without limitation, the Minimum Condition), the Company shall pay, as promptly as practicable after expiration of the Offer, for all Shares validly tendered and not withdrawn. The Company shall, if Purchasers so direct, extend the Offer one or more times for a period not to exceed 10 business days in the aggregate. The Stock Purchase. Pursuant to the Transaction Agreement, F Purchaser will purchase from the Company 7,179,066 Shares (the "F Shares") at a per Share price equal to the Per Share Amount and B Purchaser will purchase from the Company 904,646 Shares (the "B Shares") at a per Share price equal to the Per Share Amount. Pursuant to the Transaction Agreement and subject to the conditions set forth therein the Stock Purchase shall take place at a closing (the "Closing") on the day the Offer is scheduled to expire, or at such other place or at such other time or on such other date as the Company and Purchasers may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). The Transaction Agreement provides that the respective obligations of each party to effect the Stock Purchase are subject to the satisfaction at or prior to the Closing Date of the following conditions: (i) no United States or state governmental authority or other agency or commission or United States or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the acquisition of Shares by Purchasers or any affiliate of any of them illegal or otherwise restricting, preventing or prohibiting consummation of the Transactions and (ii) the conditions to the Offer shall have been satisfied and the Company shall simultaneously with the Closing purchase all Shares validly tendered and not withdrawn pursuant to the Offer. 20 22 The Transaction Agreement provides that the obligation of the Company to effect the Stock Purchase is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by the Company: all representations and warranties made by Purchasers in the Transaction Agreement shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect (as defined therein) which shall be correct in all respects) on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for changes permitted or contemplated by the Transaction Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time; each Purchaser shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in the Transaction Agreement to be performed or complied with by it prior to or on the Closing Date; and the Company shall have received such certificates of each Purchaser, dated as of the Closing Date, signed by an executive officer of such Purchaser to evidence satisfaction of the conditions set forth in the Transaction Agreement (insofar as it relates to Purchasers) as may be reasonably requested by the Company. The Transaction Agreement provides that the obligation of Purchasers to effect the Stock Purchase is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by Purchasers: all representations and warranties made by the Company in the Transaction Agreement shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) on the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for changes permitted or contemplated by the Transaction Agreement and except for representations and warranties that are made as of a specified date or time, which shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) only as of such specific date or time; the Company shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in the Transaction Agreement to be performed or complied with by it prior to or on the Closing Date; each Purchaser shall have received such certificates of the Company, dated as of the Closing Date, signed by an executive officer of the Company to evidence satisfaction of the conditions set forth in the Transaction Agreement (insofar as it relates to the Company) as may be reasonably requested by the Company; and all directors of the Company shall have tendered their resignations effective as of the Closing and shall have been replaced by nominees acceptable to Purchasers. The Merger. The Transaction Agreement provides that, upon the terms and subject to the conditions set forth therein, and in accordance with Texas Law and Delaware Law, at the Effective Time each Purchaser shall be merged with and into the Company. As a result of the Merger, the separate existence of each Purchaser shall cease and the Company shall continue as the Surviving Corporation of the Merger. At the Effective Time, by virtue of the Merger: (a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be cancelled pursuant to Section (b) below, any Shares to remain outstanding pursuant to Section (c) below and any Dissenting Shares (as defined therein)) shall be cancelled and shall be converted automatically into the right to receive the Merger Consideration; (b) (i) Each Share held in the treasury of the Company and each Share owned by any direct or indirect wholly owned subsidiary of the Company and each Share owned by Purchasers immediately prior to the Effective Time shall be cancelled without any conversion thereof and no payment or distribution shall be made with respect thereto; (ii) Each (A) share of common stock of F Purchaser outstanding immediately prior to the Effective Time shall be converted and exchanged for a number of validly issued, fully paid and nonassessable shares of common stock, par value $.001 per share, of the Surviving Corporation equal to the quotient obtained by dividing the number of F Shares by the number of outstanding shares of common stock of the F Purchaser and (B) limited or general partnership interest of B Purchaser shall be 21 23 converted and exchanged for a number of validly issued, fully paid and non assessable shares of common stock, par value $.001 per share, of the Surviving Corporation equal to the quotient obtained by dividing the number of B Shares by the number of outstanding partnership interests; and (c) The 6,064,155 Shares held by and registered in the name of Dr. James Leininger at the Effective Time, 3,837,890 Shares held by and registered in the names of Stinson Capital Partners, L.P., BK Capital Partners IV, L.P., the Carpenters Pension Trust for Southern California, United Brotherhood of Carpenters and Joiners of America Local Unions and Councils Pension Fund, Insurance Company Supported Organizations Pension Plan, Richard C. Blum & Associates, L.P., Richard C. Blum & Associates, Inc., Richard C. Blum, Prism Partners I, L.P., Weintraub Capital Management, Fremont Partners L.P., FP Advisors, L.L.C., Fremont Group, L.L.C., and Fremont Investors Inc. and the 100,000 Shares held by Dr. Peter Leininger shareholders who have entered into Stock Retention Agreements shall not be cancelled and shall remain outstanding (all such Shares described in paragraphs (a) and (b) and this paragraph (c) not converted into the right to receive the Merger Consideration are collectively referred to as "Excluded Shares"). Directors and Officers. The Transaction Agreement provides that the directors of the Company immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and By-laws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. Articles of Incorporation and By-laws. The Transaction Agreement provides that the Articles of Incorporation and By-laws attached as exhibits to the Transaction Agreement shall be, at the Effective Time, the Articles of Incorporation and By-laws of the Surviving Corporation. Employee Stock Options. The Transaction Agreement provides that, except as may otherwise be agreed by Purchasers and any holder of any outstanding Employee Options to purchase Shares, including any tandem stock appreciation right (collectively, "Old Options"), granted under the Company's 1997 Stock Incentive Plan (the "1997 Plan"), 1995 Senior Executive Stock Option Plan (the "1995 Plan"), 1988 Directors Stock Option Plan (the "Directors Plan" and, together with the 1997 Plan, the 1995 Plan and the Directors Plan, the "Option Plans"), (i) each of such holder's Old Options under the Option Plans shall become fully exercisable, according to its terms, (ii) each of such holder's Old Options under the Option Plans shall be exercisable until the last day provided in such notice (the "Notice Date"), (iii) each of such holder's Old Options may be surrendered prior to the Notice Date for the right to receive cash in the amount of such Old Option's exercise price, as provided in the applicable Option Plan; provided, however, that Old Options granted under the 1997 Plan may be so surrendered on or prior to the last day in the applicable 90 day period (the "EP Date"), and (iv) all Old Options remaining unexercised that have not been surrendered as of the Effective Time (or, in the case of Old Options granted under the 1997 Plan, the EP Date) shall be canceled for the right to receive, as soon as practicable following the Effective Time (or in the case of Old Options granted under the 1997 Plan the later of the Effective Time or the EP Date), an amount in cash equal to the product of (x) the excess of the Merger Consideration over the exercise price per Share of such Option times (y) the number of Shares subject to such Option. All applicable withholding taxes attributable to payments made under the Transaction Agreement or to distributions contemplated thereby shall be deducted from the amounts payable thereunder and all such taxes attributable to the exercise of Options shall be withheld from the proceeds received in respect of the Shares issuable upon such exercise. Agreements of the Company and Purchasers. Pursuant to the Transaction Agreement, if required by applicable law in order to consummate the Merger, the Company, acting through the Board, shall, in accordance with applicable law and the Company's Articles of Incorporation and By-laws, (i) duly call, give notice of, convene and hold an annual or special meeting of its shareholders as soon as practicable following consummation of the Offer for the purpose of considering and taking action on the Transaction Agreement and the Merger (the "Shareholders' Meeting") and (ii) subject to its fiduciary duties under applicable law as advised in writing by outside counsel, (A) include in the Company Statement (as defined below) the unanimous recommendation of the Board that the shareholders of the Company approve and adopt the 22 24 Transaction Agreement and the Merger and (B) use its best efforts to obtain such approval and adoption. At the Shareholders' Meeting, Purchasers shall cause all Shares then owned by them and their subsidiaries to be voted in favor of the approval and adoption of the Transaction Agreement and the Merger. The Transaction Agreement provides that the Company shall file the Offer Documents (as defined below) and, if required by law, the proxy statement to be sent to shareholders in connection with the shareholders' meeting of (the "Company Statement") with the SEC. Each Purchaser shall cooperate with the Company in connection with the preparation of the Schedule 13E-4, the Schedule 13E-3, the Offer to Purchase and other documents related to the Offer (the "Offer Documents") and the Company Statement including, but not limited to, furnishing to the Company any and all information regarding such Purchaser and any of its affiliates as may be required to be disclosed therein. The Company shall use its commercially reasonable efforts to cause the Offer Documents and the Company Statement to be mailed to the Company's shareholders as promptly as practicable after the date of the Transaction Agreement in the case of the Offer Documents or after the consummation of the Offer in the case of the Company Statement. The Transaction Agreement provides that from the date thereof until the Effective Time, the Company shall conduct the business of the Company and each of its subsidiaries in all material respects only in the ordinary course consistent with past practice, shall use all reasonable efforts to preserve intact the business organization of the Company and keep available the services of its present key officers and employees, provided, however, that to satisfy the foregoing obligation, the Company shall not be required to make any payments or enter into or amend any contractual arrangements or understandings (except in the ordinary course of business consistent with past practice) and shall use all reasonable efforts to preserve the current relationships of the Company and each of its subsidiaries with customers and suppliers with which the Company or such subsidiary has significant business relations. Debt Financing. The Transaction Agreement provides that Purchasers shall use their reasonable best efforts to obtain Debt Financing or other alternative financing on substantially comparable or more favorable terms. The Company shall use its reasonable best efforts to cooperate with Purchasers in obtaining the Debt Financing, including, without limitation, by participating in roadshows and meeting with, and providing information to, potential sources of financing identified by Purchasers. Acquisition Proposals. Under the Transaction Agreement, neither the Company nor any of its subsidiaries shall, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any recapitalization, business combination or similar transaction with the Company or any of its subsidiaries (any communication with respect to the foregoing being an "Acquisition Proposal") or participate in any negotiations regarding, or furnish to any other person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing; provided, however, that, at any time prior to the purchase of Shares by the Company pursuant to the Offer, the Company may furnish information to, and negotiate or otherwise engage in discussions with, any party who delivers a written Acquisition Proposal which was not solicited or encouraged after the date of the Transaction Agreement if the Board determines in good faith by a majority vote (i) after consultation with and receipt of advice from its outside legal counsel, that failing to take such action is reasonably determined to constitute a breach of the fiduciary duties of the Board under applicable law, (ii) after consultation with and receipt of advice from a nationally recognized investment banking firm, that such proposal is more favorable to the Company's shareholders from a financial point of view than the Transactions (including any adjustment to the terms and conditions proposed by Purchasers in response to such Acquisition Proposal), (iii) that sufficient commitments have been obtained with respect to such Acquisition Proposal that the Board reasonably expects a transaction pursuant to such Acquisition Proposal could be consummated and (iv) that such Acquisition Proposal is not subject to any regulatory approvals that could reasonably be expected to prevent consummation. D&O Indemnification and Insurance. The Transaction Agreement provides that from the Effective Time through the sixth anniversary of the date on which the Effective Time occurs, Purchasers shall cause the 23 25 Surviving Corporation to indemnify and hold harmless each present and former officer, director, employee or agent of the Company, including, without limitation, each Person controlling any of the foregoing Persons (the "Indemnified Parties"), against all claims, losses, liabilities, damages, judgments, fines, fees, costs or expenses, including, without limitation, attorneys' fees and disbursements (collectively, "Costs"), incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time (including, without limitation, the Transaction Agreement and the transactions and actions contemplated thereby and giving effect to the consummation of such transactions and actions), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under the Articles of Incorporation or By-laws of the Company or indemnification agreements in effect on the date hereof, including provisions relating to advancement of expenses incurred in the defense of any claim, action, suit, proceeding or investigation. Without limiting the foregoing, in the event that any claim, action, suit, proceeding or investigation is brought against an Indemnified Party (whether arising before or after the Effective Time), the Indemnified Party may retain counsel satisfactory to such Indemnified Party and Purchasers shall, or shall cause the Surviving Corporation to, advance the fees and expenses of such counsel for the Indemnified Party in accordance with the Articles of Incorporation or By-laws of the Company in effect on the date of the Transaction Agreement. For a period of six years from the Effective Time, Purchasers shall, or shall cause the Surviving Corporation to, keep in effect provisions in its Articles of Incorporation and By-laws of the Company providing for exculpation of director and officer liability and its indemnification of the Indemnified Parties to the fullest extent permitted under Texas Law, which provisions shall not be amended except as required by applicable law or except to make changes permitted by law that would enlarge the Indemnified Parties' right to indemnification. Purchasers shall cause the Surviving Corporation to maintain, at no expense to the beneficiaries, directors' and officers' liability insurance ("D&O Insurance") for the Indemnified Parties with respect to matters occurring at or prior to the Effective Time, issued by a carrier or carriers assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher, providing at least the same coverage as the D&O Insurance currently maintained by the Company and containing terms and conditions which are not materially less favorable to the beneficiaries, for a period of at least six years from the Effective Time; provided, however, that in no event shall the Surviving Corporation be required to expend pursuant to the Transaction Agreement more than an amount per year equal to 200% of current annual premiums paid by the Company for such insurance. In the event that the Surviving Corporation or Purchasers or any of their respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary to effectuate the purposes set forth above, proper provision shall be made so that the successors and assigns of the Surviving Corporation or Purchasers shall succeed to the obligations set forth above. Further Actions. Pursuant to the terms of the Transaction Agreement and subject to the conditions thereof and subject to applicable law, each of the parties thereto shall act in good faith and use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the Transactions as soon as practicable, including such actions or things as any other party may reasonably request in order to cause any of the conditions to such other party's obligation to consummate the Transactions to be fully satisfied. If at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of the Transaction Agreement, the proper officers and directors of each party to the Transaction Agreement shall use their commercially reasonable efforts to take all such action. Representations and Warranties. The Transaction Agreement contains various customary representations and warranties of the parties thereto, including representations by the Company, F Purchaser and B Purchaser as to the enforceability of the Transaction Agreement and by the Company as to compliance with law, corporate status and capitalization and the accuracy of financial statements and filings with the Commission. 24 26 Conditions to the Merger. Under the Transaction Agreement, the respective obligations of each party to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: the Transaction Agreement and the transactions contemplated thereby shall have been approved and adopted by the affirmative vote of the shareholders of the Company to the extent required by Texas Law and the Articles of Incorporation of the Company; no United States or state governmental authority or other agency or commission or United States or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the acquisition of Shares by Purchasers or any affiliate of any of them illegal or otherwise restricting, preventing or prohibiting consummation of the Transactions; and Purchasers shall have purchased, respectively, the F Shares and the B Shares pursuant to the Stock Purchase. Under the Transaction Agreement, the obligation of the Company to effect the Merger is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by the Company: all representations and warranties made by Purchasers therein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) at the Effective Time, with the same force and effect as though such representations and warranties had been made on and as of the Effective Time; each Purchaser shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in the Transaction Agreement to be performed or complied with by it prior to or as of the Effective Time; and the Company shall have received such certificates of Purchasers, dated as of the Effective Time, signed by an executive officer of each Purchaser to evidence satisfaction of the conditions to the Merger set forth in the Transaction Agreement. Under the Transaction Agreement, the obligation of Purchasers to effect the Merger is also subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions, unless waived by Purchasers: all representations and warranties made by the Company herein shall be true and correct in all material respects (except for representations qualified by materiality or Material Adverse Effect which shall be correct in all respects) as of the Effective Time, with the same force and effect as though such representations and warranties had been made on and as of the Effective Time; the Company shall have performed in all material respects all obligations and agreements, and complied in all material respects with covenants, contained in the Transaction Agreement to be performed or complied with by it prior to or as of the Effective Time; and each Purchaser shall have received such certificates of the Company, dated as of the Effective Time, signed by an executive officer of the Company to evidence satisfaction of the conditions to the Merger set forth in the Transaction Agreement. Termination. The Transaction Agreement may be terminated and the Transactions may be abandoned at any time prior to the Effective Time, as the case may be, notwithstanding any requisite approval and adoption of the Transaction Agreement and the transactions contemplated hereby by the shareholders of the Company: (a) By mutual written consent duly authorized by the Board of Directors or Managers of each Purchaser and the Company; or (b) By either Purchaser or the Company if (i) the Closing shall not have occurred by January 31, 1998 or (ii) the Effective Time shall not have occurred on or before May 31, 1998; provided, however, that the right to terminate the Transaction Agreement shall not be available pursuant to this provision to any party whose failure to fulfill any obligation under the Transaction Agreement has been the cause of, or resulted in, the failure of the Closing or the Effective Time, as the case may be, to occur on or before such dates or (ii) any court of competent jurisdiction in the United States or other United States governmental authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable; or (c) By either Purchaser if (i) due to an occurrence or circumstance that would result in a failure to satisfy any condition set forth in "THE TENDER OFFER -- Section 11. Certain Conditions to the 25 27 Offer", the Company shall have (A) failed to commence the Offer within 10 business days following the date of the Transaction Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 60 days following the commencement of the Offer, unless such failure to pay for Shares shall have been caused by or resulted from the failure of Purchasers to perform in any material respect any material covenant or agreement of either of them contained in the Transaction Agreement or the material breach by Purchasers of any material representation or warranty of either of them contained in the Transaction Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchasers its approval or recommendation of the Offer, the Transaction Agreement, the Transactions or shall have recommended another transaction pursuant to any Acquisition Proposal, or shall have resolved to do any of the foregoing; or (d) By the Company, upon approval of the Board, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any of the conditions set forth in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer", the Company shall have (A) failed to commence the Offer within 10 business days following the date of the Transaction Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 60 days following the commencement of the Offer, unless such failure to pay for Shares shall have been caused by or resulted from the failure of the Company to perform in any material respect any material covenant or agreement of it contained in the Transaction Agreement or the material breach by the Company of any material representation or warranty of it contained in the Transaction Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board shall have withdrawn or modified in a manner adverse to Purchasers its approval or recommendation of the Offer, the Transaction Agreement or the Transactions in order to approve the execution by the Company of a definitive agreement concerning a transaction pursuant to an Acquisition Proposal. Fee. In the event that (a) any Person shall have commenced, publicly proposed or communicated to the Company a proposal that is publicly disclosed for a tender or exchange offer for 20% or more (or which, assuming the maximum amount of securities which could be purchased, would result in any Person beneficially owning 20% or more) of the then outstanding Shares or otherwise for the direct or indirect acquisition of the Company or all or substantially all of its assets for per Share consideration having a value greater than the Per Share Amount and (w) the Offer shall have remained open for at least 20 business days, (x) the Minimum Condition shall not have been satisfied, (y) the Transaction Agreement shall have been terminated pursuant to the provisions of the Transaction Agreement and (z) within 12 months of any such termination a transaction such as the transaction contemplated by this paragraph (a) shall have been consummated or definitive documentation shall have been entered into with respect thereto; or (b) the Transaction Agreement is terminated pursuant to Section (c)(ii) or (d)(ii) of the Termination section above; then, in any such event, the Company shall pay Purchasers (i) prior to such consummation or entering into of definitive documentation in the case of paragraph (a) or (ii) prior to such withdrawal or modification in the case of termination pursuant to paragraph (b), a fee of $30 million (the "Fee"). Expenses. In the event the Merger is consummated, all costs and expenses incurred by each party to the Transaction Agreement in connection with the Transaction Agreement and the Transactions (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) and transaction fees of $5,119,000 to F Purchaser and $3,381,000 to B Purchaser shall be paid by the Company or the Company shall promptly reimburse such party, as the case may be. In the event the Fee is paid by the Company to Purchasers to the Transaction Agreement, the Company shall promptly reimburse Purchasers for all costs and expenses incurred by Purchasers in connection with the Transaction Agreement and the Transactions (including, without limitation, fees and disbursements of counsel, financial advisors and accountants) in an amount not to exceed $2,000,000. In all other events, all costs and expenses incurred in connection with the Transaction Agreement and the transactions contemplated thereby (including, without limitation, fees and 26 28 disbursements of counsel, financial advisors and accountants) shall be borne by the party which incurs such cost or expense, provided that all costs and expenses related to the preparation, printing, filing and mailing (as applicable) of the Offer Documents, the Company Statement and all SEC and other regulatory filing fees incurred in connection with the Company Statement shall be borne equally by the Company, on the one hand, and Purchasers, on the other hand. Amendment and Waiver. The Transaction Agreement may be amended by the parties thereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after the approval and adoption of the Transaction Agreement and the transactions contemplated thereby by the shareholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. At any time prior to the Effective Time, any party to the Transaction Agreement may (i) extend the time for the performance of any obligation or other act of any other party hereto, (ii) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any agreement or condition contained therein. Joint and Several Obligations. The Transaction Agreement provides that the obligations of Purchasers thereunder are joint and several. Guarantee. Fremont has provided the Company with a guarantee of the obligations of F Purchaser under the Transaction Agreement, subject to certain limitations. A copy of the Guarantee is filed as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Agreement Among Shareholders. The following is a summary of the Agreement Among Shareholders, the form of which is attached as an exhibit to the the Transaction Agreement, which is filed as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Such summary is qualified in its entirety by reference to the Agreement Among Shareholders Agreement. Fremont, RCBA and Dr. James Leininger have agreed to enter into an agreement upon the consummation of the Offer (the "Agreement Among Shareholders") governing the respective obligations and relationship of each party as shareholders of the Company. The Agreement Among Shareholders provides that until six months after a public offering of Shares, Fremont, RCBA and Dr. James Leininger will not sell, transfer, pledge or hypothecate any shares of the Company then held by them, subject to certain exceptions. In particular, Dr. James Leininger is permitted to make any transfers of up to 10.5% of the Company's then outstanding Common Stock. The Agreement Among Shareholders provides that (i) if any of Fremont, RCBA or Dr. James Leininger wishes to sell shares, then such party shall offer to include in the proposed sale certain Shares designated by any of the other parties and (ii) if Fremont and RCBA propose to sell all (but not less than all) of the Shares they own, then Fremont and RCBA may require Dr. James Leininger to include in such sale all of the Shares held by him, unless he holds less than 10% of the then outstanding Shares. Pursuant to the agreement, the Company grants to each of Fremont, RCBA and Dr. James Leininger the preemptive right to purchase shares of the Company in an amount up to the percentage of all outstanding fully diluted stock of the Company owned by such party. At any time after the fifth anniversary of the agreement, if there has not been a public offering of the Company's Shares, Fremont, RCBA or Dr. Leininger may request that the Company register at least 33% of the Shares held by such party. In addition, each party will have the right to request additional registration of at least 33% of the Shares then held by such party at any time after one year, but before three years, following the completion of a public offering of the Shares. If the Company shall proceed with a filing of a registration statement in connection with the Company's proposed offer and sale of Shares, the Company will notify 27 29 Fremont, RCBA and Dr. James Leininger and shall include in such registration the number of Shares requested by such parties. The Agreement Among Shareholders further provides that until there is a public offering of Shares, Fremont, RCBA and Dr. James Leininger will take all steps to insure that the Board of Directors of the Company shall have eight members and (iii) that the Nominating Committee of the Board of Directors will consist of Dr. James Leininger, one director designated by Fremont and one director designated by RCBA. The eight-member board will consist of Dr. James Leininger, the Company's then current Chief Executive Officer, two persons designated by Fremont, two persons designated by RCBA and two or more independent directors designated by the Nominating Committee. The Support Agreement. The following is a summary of the Support Agreement, a copy of which is filed as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Such summary is qualified in its entirety by reference to the Support Agreement. Pursuant to the Support Agreement, Dr. James Leininger has agreed, subject to the terms and conditions thereof, (i) to grant to Purchasers an option to purchase from him at the Per Share Amount, 4,200,000 Shares owned or controlled by him, (ii) to tender 13,792,211 Shares owned (either beneficially or of record) by Dr. James Leininger pursuant to the Offer and (iii) vote all Shares owned (either beneficially or of record) at the time of the Shareholders' Meeting in favor of the Merger. Dr. James Leininger thereby granted to F Purchaser an irrevocable option (the "F Option") to purchase 2,529,197 Shares at a price per Share equal to $19.25 (the "Purchase Price") and Dr. James Leininger thereby granted to B Purchaser an irrevocable option (the "B Option"; and together with the F Option, the "Support Agreement Options"; and each individually, a "Support Agreement Option") to purchase 1,670,803 Shares at a price per Share equal to the Purchase Price. The Support Agreement Options shall expire if not exercised prior to the earlier of (i) the close of business on the 180th day following termination of the Transaction Agreement, if the Transaction Agreement is terminated because the Company (a) withdraws or modifies its approval or recommendation of the offer or (b) recommends another proposal or (ii) the consummation of the Merger. The Purchasers may exercise their Support Agreement Options, provided that (a) to the extent necessary, any applicable waiting periods (and any extension thereof) under the HSR Act with respect to the exercise of an option shall have expired or been terminated and (b) no preliminary or permanent injunction or other order, decree or ruling issued by any court or governmental or regulatory authority, domestic or foreign, of competent jurisdiction prohibiting the exercise of the Support Agreement Options or the delivery of Shares shall be in effect. Either Purchaser may exercise its Support Agreement Option at any time following termination of the Transaction Agreement pursuant to a termination, if the Transaction Agreement is terminated because the Company (a) withdraws or modifies its approval or recommendation of the offer or (b) recommends another proposal until the expiration of such Support Agreement Option. In the event that either Purchaser wishes to exercise its Support Agreement Option, such Purchaser shall give written notice (the date of such notice being herein called the "Notice Date"), to Dr. James Leininger specifying a place and date (not later than ten business days and not earlier than three Business Days following the Notice Date) for closing such purchase (the "Closing"). The Support Agreement provides that Dr. James Leininger thereby undertakes to validly tender or cause to be validly tendered an aggregate of 13,792,211 Shares owned or controlled pursuant to the Offer by the tenth business day following the commencement of the Offer and thereafter not to withdraw from the Offer any such Shares prior to the expiration or termination of the Offer. The Support Agreement provides that Dr. James Leininger, with respect to those Shares that he owns of record, appoints Purchasers, or any nominee of Purchasers, with full power of substitution, as his true and lawful attorney and proxy, for and in its name, place and stead, to vote each of such Shares as his proxy, at every annual, special or adjourned meeting of the shareholders of the Company (including the right to sign his name (as shareholder) to any consent, certificate or other document relating to the Company that may be permitted or required by applicable law) (i) in favor of the adoption of the Transaction Agreement and approval of the Merger and the other transactions contemplated by the Transaction Agreement, (ii) against 28 30 any transaction pursuant to an Acquisition Proposal or any other action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Transaction Agreement or which could result in any of the conditions to the Company's obligations under the Transaction Agreement not being fulfilled, and (iii) in favor of any other matter relating to consummation of the transactions contemplated by the Transaction Agreement. Dr. James Leininger further agrees to cause the Shares owned by him beneficially to be voted in accordance with the foregoing. The Support Agreement provides that, until the earlier of (i) the consummation of the Merger or (ii) 180 days after the termination of the Transaction Agreement, Dr. James Leininger shall not, directly or indirectly, through any representative, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person or entity relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any recapitalization, business combination or similar transaction with the Company or any of its subsidiaries (any communication with respect to the foregoing being an "Proposal") or participate in any negotiations regarding, or furnish to any other person or entity any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing. Dr. James Leininger will immediately cease all existing activities, discussions and negotiations with any parties conducted heretofore with respect to any Proposal. From and after the execution of the Support Agreement, Dr. James Leininger shall immediately advise Purchasers in writing of the receipt, directly or indirectly, of any inquiries, discussions, negotiations, or proposals relating to a Proposal that Dr. James Leininger receives in his capacity as a shareholder of the Company (including the specific terms thereof and the identity of the other party or parties involved) and furnish to Purchasers within 48 hours of such receipt an accurate description of all material terms (including any changes or adjustments to such terms as a result of negotiations or otherwise) of any such written proposal in addition to any information provided to any third party relating thereto. Agreement Among Bidders. The following is a summary of the Agreement Among Bidders, a copy of which is filed as an exhibit to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Such summary is qualified in its entirety by reference to the Agreement Among Bidders Agreement. On October 2, 1997, Fremont and RCBA entered into an agreement (the "Agreement Among Bidders") governing the respective obligations and relationship of each party in connection with the Transaction Agreement and the transactions contemplated thereby. The Agreement Among Bidders provides that Fremont and RCBA will (i) confer on all decisions relating to the transactions and reach all decisions jointly, (ii) be responsible for all funding for the transactions and (iii) assume joint and several liability, if any, relating to the transactions. RELATED PARTY TRANSACTIONS In August 1995, the Company loaned $10.0 million to Dr. James Leininger. This loan was secured by a stock pledge agreement covering 1,000,000 Shares owned by Dr. James Leininger. The interest on the loan accrued at 7.94% per annum. In January 1996, the loan was repaid in full. On December 18, 1996, a company controlled by Dr. James Leininger acquired a tract of land (the "Property") from the Company for $395,000. The Property is comprised of approximately 2.2 acres and is adjacent to the Company's corporate headquarters. The purchase price was based on the aggregate cost of the Property to the Company (including acquisition expenses). The Company believes that the acreage was transferred to Dr. James Leininger at a price equal to its fair market value. In connection with the purchase of the Property, the Company loaned Dr. James Leininger $3,000,000 in February 1997 to develop the Property. The loan bears interest at a rate equal to the prime rate of Texas Commerce Bank (but such rate shall not be less than 6.25% or greater than 10.25%) and matures on the fifth anniversary of the loan. The loan is non-recourse to Dr. James Leininger but is secured by the Property, the improvements on the Property and 300,000 Shares owned by Dr. James Leininger. 29 31 Pursuant to the provisions of the Executive Committee Stock Ownership Policy, the Company loaned funds to Christopher M. Fashek, the President of KCI Therapeutic Services, Inc. (a wholly-owned subsidiary of the Company), Bianca A. Rhodes, the Company's Chief Financial Officer at the time and Dennis E. Noll, the Company's Senior Vice President and General Counsel. These loans were utilized by such executive officers to acquire Shares in order to meet the standards set forth in the Company's Executive Committee Stock Ownership Policy. The loans bear interest at the applicable federal rate established by the Internal Revenue Service and have a term of five years. At the option of each such executive officer, the loans are repayable on a biweekly basis through payroll deduction or in equal installments of principal and interest on an annual basis. The initial loans made to Mr. Fashek, Ms. Rhodes and Mr. Noll were $107,672, $170,672 and $86,310, respectively, and the outstanding balance of principal and accrued interest on such loans as of December 31, 1996 were $87,076, $166,003 and $81,888, respectively. Mr. Noll repaid his loan in February 1997 and Ms. Rhodes repaid the principal amount of her loan in July 1997. The Board has amended the Executive Committee Stock Ownership Policy to make the ownership thresholds in the policy voluntary and, as a result, the Company will not be making loans to executive officers under the policy in the future. BENEFICIAL OWNERSHIP OF COMMON STOCK Based upon information received upon request from the persons concerned, each person known to be the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of more than five percent of the Shares, each director, named executive officer and all directors and executive officers of the Company as a group, owned beneficially as of October 2, 1997, the number and percentage of outstanding Shares indicated in the following table:
SHARES BENEFICIALLY OWNED AS OF PERCENT NAMES OF INDIVIDUALS OCTOBER 2, 1997(1) OF CLASS -------------------------------------------------------- ------------------- -------- James R. Leininger, M.D.(2)(3)(4)(5)(6)(13)............. 21,413,396 50.22% 8023 Vantage Drive San Antonio, TX 78230 Richard C. Blum & Associates, L.P....................... 4,040,250 9.48% and certain related parties(7) 909 Montgomery St., Suite 400 San Francisco, CA 94133 Wellington Management Company, LLP(8)................... 3,053,400 7.16% 75 State Street Boston, MA 02109 Peter A. Leininger, M.D.(5)(6)(9)(13)................... 2,603,147 6.10% Raymond R. Hannigan(10)(13)............................. 1,014,400 2.35% Sam A. Brooks(3)(11).................................... 179,000 * Frank A. Ehmann(11)..................................... 30,000 * Wendy L. Gramm, Ph.D.(11)............................... 24,000 * Bernhard T. Mittemeyer, M.D.(11)........................ 25,200 * Christopher M. Fashek(12)(13)........................... 55,573 * Frank DiLazzaro(12)(13)................................. 48,510 * All directors and executive officers as a group (18 persons)(13)(14)...................................... 24,043,062 54.94%
- --------------- * Less than one (1%) percent (1) Except as otherwise indicated in the following notes, the persons named in the table directly own the number of Shares indicated in the table and have the sole voting power and investment power with respect to all of such Shares. Shares beneficially owned include options exercisable prior to December 1, 1997. 30 32 (2) The Shares shown for Dr. James Leininger include beneficial ownership of 27,572 Shares held by Dr. James Leininger as trustee for the children of Dr. Peter Leininger. Dr. James Leininger disclaims beneficial ownership of the aforesaid Shares. The Shares shown also include an aggregate of 555,000 Shares with respect to which Dr. James Leininger has granted stock options to certain persons, all of which are currently exercisable. The Shares shown for Dr. James Leininger do not include any Shares owned by any "Reporting Person," as that term is defined in the Schedule 13D/A filed with the Securities and Exchange Commission by Dr. James Leininger, Purchasers and certain other parties on October 6, 1997. As a result of Dr. James Leininger's entering into the Support Agreement, Dr. James Leininger and the Reporting Persons may be deemed a group, in which case Dr. James Leininger would be deemed to have beneficial ownership of 25,453,646 Shares. Please refer to such Schedule 13D/A for a complete description of such beneficial ownership and the Reporting Persons. (3) The board of directors of Children's Covenant Foundation, Inc., which consists of Dr. James Leininger, Cecelia A. Leininger (Dr. James Leininger's wife), Sam A. Brooks and Dan A. Brooks, has voting and dispositive power over the Shares owned by this charitable foundation. The Shares shown for Dr. James Leininger and Sam A. Brooks include the 40,000 Shares owned by Children's Covenant Foundation, Inc. Dr. James Leininger and Sam A. Brooks disclaim beneficial ownership of the aforesaid Shares. (4) The board of directors of Covenant Foundation, Inc., which consists of Dr. James Leininger, Cecelia A. Leininger and Charles A. Staffel, has voting and dispositive power over the Shares owned by this charitable foundation. The Shares shown for Dr. James Leininger include the 2,221,833 Shares owned by Covenant Foundation, Inc. Dr. James Leininger disclaims beneficial ownership of the aforesaid Shares. (5) The board of directors of JCL Foundation, which consists of Dr. James Leininger, Cecelia A. Leininger, Dr. Peter Leininger and Thomas W. Lyles, Jr., has voting and dispositive power over the Shares owned by this charitable foundation. The Shares shown for Dr. James Leininger and Dr. Peter Leininger include the 1,160,125 Shares owned by JCL Foundation. Dr. James Leininger and Dr. Peter Leininger disclaim beneficial ownership of the aforesaid Shares. (6) The board of directors of The PAL Foundation, which consists of Dr. James Leininger, Dr. Peter Leininger, Dr. John H. Leininger and Daniel E. Leininger, has voting and dispositive power over the Shares owned by this charitable foundation. The Shares shown for Dr. James Leininger and Dr. Peter Leininger include the 107,500 Shares owned by The PAL Foundation. Dr. James Leininger and Dr. Peter Leininger each disclaim beneficial ownership of the aforesaid Shares. (7) As reported in the Schedules 13D/A filed on September 10, 1997 and October 6, 1997, and as otherwise reported to the Company by RCBA, Richard C. Blum & Associates, L.P. is the general partner of or investment advisor for limited partnerships and managed accounts (collectively, the "Blum Reporting Persons") that own in the aggregate 3,837,890 Shares. In addition, because the Blum Reporting Persons acquired certain of the Shares in block transactions with other persons, the Blum Reporting Persons and such other persons (collectively, the "Reporting Persons") may be deemed a group, in which case they would be deemed to have beneficial ownership of 4,040,250 Shares. The Shares shown for the Reporting Persons do not include the Shares designated as being beneficially owned by Dr. James Leininger. As a result of Purchasers' entering into the Support Agreement with Dr. James Leininger, the Related Persons and Dr. James Leininger may be deemed a group, in which case the Reporting Persons would be deemed to have beneficial ownership of 25,453,646 Shares. Please refer to such Schedule 13D/A for a complete description of the nature of such beneficial ownership. (8) As reported in the Schedule 13G/A filed on February 14, 1997, Wellington Management Company LLP ("WMC") reported that, in its capacity as an investment advisor, it may be deemed to beneficially own the Shares indicated, with shared voting power over 999,300 of the Shares indicated and shared dispositive power over 3,053,400 of the Shares indicated. (9) The Shares shown for Dr. Peter Leininger include beneficial ownership of 155,091 Shares held by Dr. Peter Leininger as trustee for the children of Dr. James Leininger, 17,000 Shares held by Dr. Peter Leininger as trustee for the children of John H. Leininger and 20,000 Shares held by Dr. Peter 31 33 Leininger as trustee for the children of Daniel E. Leininger. Dr. Peter Leininger disclaims beneficial ownership of the aforesaid Shares. The Shares shown also include 42,332 Shares which he has the right to acquire under stock options granted by the Company. (10) The Shares shown for Mr. Hannigan include 340,000 Shares which he has the right to acquire upon the exercise of a stock option granted to him by Dr. James Leininger. The Shares shown also include 574,400 Shares that Mr. Hannigan has the right to acquire under stock options granted by the Company. (11) The Shares shown for Messrs. Brooks, Ehmann and Mittemeyer and Ms. Gramm include 110,000, 20,000, 20,000 and 24,000 Shares, respectively, which they have the right to acquire under stock options granted by the Company. Mr. Ehmann's stock options are held in the name of The Frank Ehmann Trust. (12) The Shares shown for Mr. Fashek and Mr. DiLazzaro include 38,150 and 28,510 Shares, respectively, which such persons have the right to acquire under stock options granted by the Company. (13) The Shares shown exclude the approximately 6,432 Shares held by The Frost National Bank, as trustee of the Company's employee stock ownership plan, for the benefit of the executive officers of the Company, of which approximately 1,092, 1,092, 33, 33 and 825 Shares are held for the benefit of Dr. James Leininger, Dr. Peter Leininger, Raymond R. Hannigan, Christopher M. Fashek and Frank DiLazzaro, respectively. (14) The Shares shown include 1,128,615 Shares which the directors and executive officers have the right to acquire under stock options granted by the Company. With respect to the 340,000 Shares which Mr. Hannigan has the right to acquire under currently exercisable stock options granted by Dr. James Leininger and the 1,307,625 Shares owned by charitable foundations of which Dr. James Leininger and either Dr. Peter Leininger or Sam A. Brooks are directors, such shares are only counted once for the purpose of determining the Shares beneficially owned by all directors and executive officers as a group. See footnotes 2, 3, 5, 6 and 10 above. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE SHARES On February 1, 1995, Mr. Hannigan acquired 43,500 Shares from Dr. James Leininger at a price of $5.74 per Share pursuant to the exercise of an option and on May 7, 1996, Mr. Hannigan acquired an additional 56,500 Shares from Dr. James Leininger at a price of $5.74 per Share pursuant to the exercise of an option. On January 24, 1996, Dr. James Leininger, Dr. Peter Leininger, and certain charitable foundations affiliated with Dr. James Leininger, sold a total of 5,809,183 shares in an underwritten public offering at a price of $10.25 per share with aggregate net proceeds of $56,755,717.91. On May 17, 1996, Dr. Peter Leininger acquired 1,200,000 Shares from Dr. James Leininger at a price of $3.50 per Share pursuant to the exercise of an option. Since January 1995, the Company has purchased a total of 3,193,618 Shares in various individual transactions. The price paid by the Company for such purchases of Shares has ranged from $6.75 per Share in June 1995 to $17.75 per Share in June 1996. The Option Plans maintained by the Company prior to the consummation of the Offer, granted participants Old Options at defined exercise prices. Upon consummation of the Offer, the Old Options that have not yet vested will be accelerated in their vesting to become fully exercisable. The Old Options, with the exception of Old Options granted under the 1997 Plan, may, until the termination of the notice period (which will occur before the end of the Offer), be exercised for Shares or exchanged for cash. Old Options granted under the 1997 Plan may be exercised for Shares until the end of the notice period, or exchanged for cash until the EP Date. Certain directors and members of management will exchange certain of their Old Options for options ("Exchange Options") governed by the Company's Management Equity Plan (the "MEP"). Old Options that are not exercised to purchase Shares prior to the consummation of the Offer or exchanged for cash or Exchange Options will be canceled at the end of their respective notice periods. 32 34 In conjunction with the Transactions, the Company anticipates adopting the MEP, under which the Company will grant awards of Shares (the "Management Shares") or nonqualified stock options (the "New Options" and together with the Exchange Options, the "Employee Options") to purchase Shares to certain employees of the Company and its subsidiaries, subject to the execution of an award agreement ("Stock Award Agreement") by each employee. The MEP also provides for the exchange of Old Options for Exchange Options and the retention of Shares held prior to the effective date of the MEP, with such Shares becoming subject to the terms of the MEP and considered Management Shares. Certain directors and members of management have agreed to exchange, in the aggregate, Old Options to purchase 821,550 Shares for Exchange Options to purchase an equal number of Shares pursuant to the terms of the MEP. The MEP will be administered by a Committee of the Board of Directors (the "Committee"). The option price of the Exchange Options ranges from $3.50 to $16.75. Mr. Hannigan, the Chief Executive Officer of the Company, will recommend for approval by the Board individuals to whom Management Shares and Employee Options (the "Awards") may be granted (the "Participants"). The terms and conditions of each grant or sale of Awards will be embodied in a Stock Award Agreement in a form approved by the Committee, which will contain terms and conditions not inconsistent with the MEP and which will incorporate the MEP by reference. The MEP provides that no Management Share, Employee Option or Share received upon the exercise of an Employee Option (an "Option Share") whose terms are governed by the MEP may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of to any third party other than the Company except as provided in the MEP or a Stock Award Agreement or to a Permitted Transferee (as defined in the MEP). The maximum number of Shares that may be issued in connection with Awards granted under the MEP (together with any Shares issued in connection with Management Shares and Employee Options) is 6.5% of the initial Shares outstanding as of the consummation of the Merger, subject to adjustment. Copies of the Kinetic Concepts, Inc. Management Equity Plan, the Form of Stock Retention Agreement, and the Management Equity Agreement for Raymond R. Hannigan, dated October 2, 1997 are attached as exhibits to the Schedule 13E-4 filed by the Company with the Commission in connection with the Offer. Except as set forth in this Offer to Purchase, neither the Company nor, to the Company's knowledge, any of its affiliates, directors or executive officers or any person controlling the Company, is a party to any contract, arrangement, understanding or relationship with any other person relating, directly or indirectly, to, or in connection with, the Offer with respect to any securities of the Company (including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations). Except as described in this Offer to Purchase, since the commencement of the Company's second full fiscal year preceding the date of this Offer to Purchase, no contracts or negotiations concerning a merger, consolidation, or acquisition, a tender offer for or other acquisition of any securities of the Company, an election of directors of the Company, or a sale or other transfer of a material amount of assets of the Company, has been entered into or has occurred between any affiliates of the Company or between the Company or any of its affiliates and any unaffiliated person. The Company has been informed by its directors and executive officers (other than Dr. James Leininger and as otherwise provided in any Stock Retention Agreement) that they intend either to tender all shares beneficially owned by them to the Company pursuant to the Offer or to vote such Shares in favor of the approval and adoption by the shareholders of the Company of the Transaction Agreement and the Merger. THE TENDER OFFER 1. TERMS OF THE OFFER; EXPIRATION DATE Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the Company will accept for payment, and will pay for all outstanding Shares validly tendered prior to the Expiration Date (as hereinafter defined) and not withdrawn as specified in "THE TENDER OFFER -- Section 4. Withdrawal Rights". The term "Expiration 33 35 Date" means 12:00 midnight, New York City time, on Wednesday, November 5, 1997, unless and until the Company, at the direction of Purchasers (but subject to the terms and conditions of the Transaction Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Company, shall expire. The Company shall, at the direction of Purchasers (but subject to the terms and conditions of the Transaction Agreement), at any time and from time to time, extend for any reason the Offer for one or more times during which the Offer is open (such period not to exceed 10 business days in the aggregate), including the occurrence of any of the conditions specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer", by giving oral or written notice of such extension to the Depositary. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw such shareholder's Shares. See "THE TENDER OFFER -- Section 4. Withdrawal Rights". The Offer is conditioned upon, among other things, the satisfaction of the Minimum Condition and the Company's obtaining the Debt Financing. See "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer". Subject to the applicable regulations of the Commission, the Company also expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Transaction Agreement), at any time and from time to time, (i) to delay acceptance for payment of, or, regardless of whether such Shares were theretofore accepted for payment, payment for, any Shares, pending receipt of any regulatory approval specified in "THE TENDER OFFER -- Section 12. Certain Legal Matters and Regulatory Approval", (ii) to terminate the Offer and not accept for payment any Shares upon the occurrence of any of the conditions specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer" and (iii) to waive any condition, other than the Minimum Condition, or otherwise amend the Offer in any respect, by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. The Company acknowledges that (i) Rule 14e-1(c) under the Exchange Act requires the Company to pay the consideration offered or return the Shares tendered promptly after the termination or withdrawal of the Offer and (ii) the Company may not delay acceptance for payment of, or payment for (except as provided in clause (i) of the first sentence of this paragraph), any Shares upon the occurrence of any of the conditions specified in "THE TENDER OFFER--Section 11. Certain Conditions to the Offer" without extending the period of time during which the Offer is open. Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof, such announcement in the case of an extension to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Subject to applicable law (including Rules 13e-4(e) and 14e-1 under the Exchange Act, which require that material changes be promptly disseminated to shareholders in a manner reasonably calculated to inform them of such changes) and without limiting the manner in which the Company may choose to make any public announcement, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. If the Company makes a material change in the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, the Company will extend the Offer to the extent required by Rules 13e-4(e) and 13e-3(e) under the Exchange Act. Subject to the terms of the Transaction Agreement, if, prior to the Expiration Date, the Company should decide to decrease the number of Shares being sought or to increase or decrease the consideration being offered in the Offer, such decrease in the number of Shares being sought or such increase or decrease in the consideration being offered will be applicable to all shareholders whose Shares are accepted for payment pursuant to the Offer and, if at the time notice of any such decrease in the number of Shares being sought or such increase or decrease in the consideration being offered is first published, sent or given to holders of such Shares, the Offer is scheduled to expire at any time earlier than the period ending on the tenth business day from and including the date that such notice is first so published, sent or given, the Offer will be extended at 34 36 least until the expiration of such ten business day period. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or United States federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time. This Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished, for subsequent transmittal to beneficial owners of Shares, to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Company will accept for payment, and will pay for, all outstanding Shares validly tendered prior to the Expiration Date and not properly withdrawn, promptly after the latest to occur of (i) the Expiration Date and (ii) the satisfaction or waiver of the conditions to the Offer specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer". Subject to applicable rules of the Commission, the Company expressly reserves the right to delay acceptance for payment of, or payment for, Shares pending receipt of any regulatory approvals specified in "THE TENDER OFFER -- Section 12. Certain Legal Matters and Regulatory Approvals" or in order to comply in whole or in part with any other applicable law. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (A) the certificates evidencing such Shares (the "Share Certificates") or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures specified in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares", (B) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees or, in the case of a book-entry transfer, an Agent's Message (as defined below) in lieu of the Letter of Transmittal and (C) any other documents required under the Letter of Transmittal. For purposes of the Offer, the Company will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn as, if and when the Company gives oral or written notice to the Depositary of the Company's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the Per Share Amount with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from the Company and transmitting such payments to tendering shareholders whose Shares have been accepted for payment. Under no circumstances will the Company pay interest on the Per Share Amount, regardless of any delay in making such payment. If any tendered Shares are not accepted for payment for any reason pursuant to the terms and conditions of the Offer, or if Share Certificates are submitted evidencing more Shares than are tendered, Share Certificates evidencing unpurchased Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility pursuant to the procedure specified in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares", such Shares will be credited to an account maintained at the Book-Entry Transfer Facility), as promptly as practicable following the expiration or termination of the Offer. If, prior to the Expiration Date, the Company increases the consideration offered to any holders of Shares pursuant to the Offer, such increased consideration shall be paid to all holders of Shares that are purchased pursuant to the Offer, whether or not such Shares were tendered prior to such increase in consideration. The Company reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer, but 35 37 any such transaction or assignment will not relieve the Company of its obligations under the Offer and will in no way prejudice the rights of tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES In order for a holder of Shares to validly tender Shares pursuant to the Offer, the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, together with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal) and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase and either (i) the Share Certificates evidencing tendered Shares must be received by the Depositary at such address or such Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary (including an Agent's Message if the tendering shareholder has not delivered a Letter of Transmittal), in each case prior to the Expiration Date, or (ii) the tendering shareholder must comply with the guaranteed delivery procedures described below. The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares which are the subject of such Book-Entry Confirmation, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at the Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the system of the Book-Entry Transfer Facility may make a book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry transfer at the Book-Entry Transfer Facility, either the Letter of Transmittal, properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any other required documents, must, in any case, be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering shareholder must comply with the guaranteed delivery procedure described below. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signature Guarantees. Signatures on all Letters of Transmittal must be guaranteed by a firm which is a member of the Medallion Signature Guarantee Program, or by any other "eligible guarantor institution", as such term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing, an "Eligible Institution"), except in cases where Shares are tendered (i) by a registered holder of Shares who has not completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If a Share Certificate is registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or a Share Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), then the Share Certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) 36 38 on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to the Offer and the Share Certificates evidencing such shareholder's Shares are not immediately available or such shareholder cannot deliver the Share Certificates and all other required documents to the Depositary prior to the Expiration Date, or such shareholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such Shares may nevertheless be tendered, provided that all the following conditions are satisfied: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Company, is received prior to the Expiration Date by the Depositary as provided below; and (iii) the Share Certificates (or a Book-Entry Confirmation) evidencing all tendered Shares, in proper form for transfer, in each case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, and any other documents required by the Letter of Transmittal are received by the Depositary within three Nasdaq trading days after the date of execution of such Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the form of Notice of Guaranteed Delivery made available by the Company. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of the Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the delivery of such Shares, and the Letter of Transmittal, properly completed and duly executed, with any required signature guarantees, and any other documents required by the Letter of Transmittal. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by the Company in its sole discretion, which determination shall be final and binding on all parties. The Company reserves the absolute right to reject any and all tenders determined by it not to be in proper form or the acceptance for payment of which may, in the opinion of its counsel, be unlawful. The Company also reserves the absolute right to waive any condition of the Offer or any defect or irregularity in the tender of any Shares of any particular shareholder, whether or not similar defects or irregularities are waived in the case of other shareholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of the Company, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Company's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. Cancellation. Promptly following the purchase of the Shares pursuant to the Offer, the Company intends to cancel any such Shares purchased in the Offer. The acceptance for payment by the Company of Shares pursuant to any of the procedures described above will constitute a binding agreement between the tendering shareholder and the Company upon the terms and subject to the conditions of the Offer. TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH SHAREHOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH RESPECT TO A SHAREHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF TRANSMITTAL. 37 39 4. WITHDRAWAL RIGHTS Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment by the Company pursuant to the Offer, may also be withdrawn at any time after Friday, December 5, 1997. If the Company extends the Offer, is delayed in its acceptance for payment of Shares or is unable to accept Shares for payment pursuant to the Offer for any reason, then, without prejudice to the Company's rights under the Offer, the Depositary may, nevertheless, on behalf of the Company, retain tendered Shares, and such Shares may not be withdrawn except to the extent that tendering shareholders are entitled to withdrawal rights as described in this Section 4. For a withdrawal to be effective, a written notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover page of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of such Shares, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on the such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares", any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by the Company, in its sole discretion, whose determination will be final and binding. None of the Company, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares". 5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES U.S. Federal Income Tax. The receipt of cash for Shares pursuant to the Offer or in the Merger will be a taxable transaction for U.S. federal income tax purposes under the Code and may also be a taxable transaction under applicable state, local or foreign tax laws. In general, a shareholder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount of cash received in exchange for the Shares sold and such shareholder's adjusted tax basis in such Shares. Assuming the Shares constitute capital assets in the hands of the shareholder, such gain or loss will be capital gain or loss. In the case of an individual shareholder, such capital gain generally will be subject to a maximum federal income tax rate of 20% if the individual has held the Shares for more than 18 months, or 28%, if the individual has held the Shares for more than one year and up to 18 months. Gain or loss will be calculated separately for each block of Shares tendered pursuant to the Offer or converted pursuant to the Merger. The deductibility of capital losses is subject to certain limitations. Prospective investors should consult their own tax advisors in this regard. In general, in order to prevent backup federal income tax withholding at a rate of 31% on the cash consideration to be received in the Offer or pursuant to the Merger, each shareholder who is not otherwise exempt from such requirements must provide such shareholder's correct taxpayer identification number (and certain other information) by completing the Substitute Form W-9 in the Letter of Transmittal. 38 40 THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF SHAREHOLDERS, INCLUDING BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN CORPORATIONS. THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW, WHICH IS SUBJECT TO CHANGE POSSIBLY WITH RETROACTIVE EFFECT. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. 6. PRICE RANGE OF SHARES; DIVIDENDS The Shares are quoted on the Nasdaq National Market under the symbol "KNCI". The following table sets forth the high and low closing sale prices of the Shares for the periods indicated.
HIGH LOW ------- ------- 1995 First Quarter.................................................. $ 8.250 $ 6.563 Second Quarter................................................. 8.125 6.625 Third Quarter.................................................. 11.625 7.000 Fourth Quarter................................................. 13.000 10.000 1996 First Quarter.................................................. $13.875 $10.438 Second Quarter................................................. 17.375 13.125 Third Quarter.................................................. 16.063 13.500 Fourth Quarter................................................. 15.000 11.875 1997 First Quarter.................................................. $15.875 $11.375 Second Quarter................................................. 18.375 13.500 Third Quarter.................................................. 19.938 16.875 Fourth Quarter (through October 7, 1997)....................... 19.000 18.438
The Board declared quarterly cash dividends on the Shares in 1996 and 1995. The cash dividends totaled $0.15 per Share in each of 1996 and 1995. The Credit Facility (as hereinafter defined) to be executed and delivered in connection with the Offer will contain certain covenants which limit the Company's ability to declare and pay cash dividends. For the first and second fiscal quarters of 1997, the Company paid dividends of $0.0375 per Share on June 2, 1997 to holders of record as of May 23, 1997 and $0.0375 per Share on August 11, 1997 to holders of record as of August 1, 1997, respectively. In the third fiscal quarter of 1997, the Company intends to pay a dividend of $0.0375 per Share. As of October 1, 1997, the approximate number of holders of record of the Shares was 364. 7. CERTAIN INFORMATION CONCERNING THE COMPANY The Company designs, manufactures, markets and distributes therapeutic products, primarily specialty hospital beds and mattress overlays, that treat and prevent the complications of immobility and medical devices that treat chronic wounds and help prevent deep vein thrombosis. By preventing these complications or accelerating the healing process, the Company's therapies and services can significantly reduce the cost of patient care while improving clinical outcomes. From an initial base of specialty hospital beds designed for and used almost exclusively in acute care hospitals, the Company has broadened its existing product line and expanded its distribution network to serve the extended and home care settings. More recently, the Company has developed innovative medical devices to treat chronic wounds and help prevent deep vein thrombosis. The Company has also developed a product line to aid in the care of obese patients. 39 41 Founded by Dr. James Leininger, an emergency room physician, to provide better care for his patients, the Company was incorporated in Texas in 1976. The Company's executive offices are located at 8023 Vantage Drive, San Antonio, Texas 78230, and its telephone number is (210) 524-9000. The Company is organized into four operating divisions: KCI Therapeutic Services, Inc. ("KCI Therapeutic Services" or "KCTS"), KCI Home Care, KCI International, Inc. ("KCI International") and KCI New Technologies, Inc. ("NuTech"). KCI Therapeutic Services. KCI Therapeutic Services provides a complete line of therapeutic specialty support surfaces to patients in acute and sub-acute facilities as well as extended-care settings. This division consists of approximately 1000 personnel. Sales are generated by a sales force of approximately 300 individuals who are responsible for new accounts in addition to the management and expansion of existing accounts. A portion of this sales force is focused exclusively on either the extended care market or the acute care market although the majority of the sales force is responsible for sales in both care settings. KCI Therapeutic Services has a national 24-hour customer service communications system which enhances its ability to quickly and efficiently respond to its customers' needs, in some cases on a 24-hours-a-day, seven-days-a-week basis. The Company distributes its specialty patient support products to acute and extended care facilities through a network of 143 domestic service centers. The KCTS service centers are organized as profit centers and the general managers who supervise the service centers are responsible for both sales and service operations. Each center has an inventory of specialty beds and overlays which are delivered to the individual hospitals or nursing homes on an as-needed basis. The KCTS sales and support staff is comprised of approximately 300 employees with medical or clinical backgrounds. The principal responsibility of approximately 140 of these clinicians is making product rounds and participating in treatment protocols. These clinicians help to educate hospital staff on issues related to patient treatment, assist in the establishment of protocols and accumulate outcome data related to the treatment of the patient. The clinical staff makes approximately 200,000 patient rounds annually. KCTS accounted for approximately 64%, 61% and 53%, respectively, of the Company's total revenue in the years ended December 31, 1996, 1995 and 1994. KCI Home Care. KCI Home Care rents and sells products that address the unique demands of the home healthcare market. In January 1995, KCI Home Care started a transition from a combined direct/dealer distribution system to distributing its products through home medical equipment providers. The Company believes that selling through the home care provider network gives it access to a larger patient population and improves the overall contribution from this business segment despite a reduction in per patient revenue. KCI Home Care accounted for approximately 5% of the Company's total revenue in 1996. KCI International. KCI International offers the Company's therapies and services in a number of foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Italy and Denmark. The Denmark office has recently been expanded to serve all of Scandinavia. In addition, relationships with independent distributors in Latin America, the Middle East, Asia and Eastern Europe allow KCI International to serve the demands of a growing global market. KCI International accounted for approximately 25%, 25% and 17%, respectively, of the Company's total revenue in 1996, 1995 and 1994. NuTech. NuTech manufactures and markets the PlexiPulse and PlexiPulse All-in-1 System. The products are sold through the Company's direct sales force and rented through an alliance with Mediq/PRN a company with a national presence. NuTech accounted for approximately 6% of the Company's total revenue in 1996. RECENT DEVELOPMENTS On October 1, 1997, the Company consummated the acquisition of substantially all of the assets of RIK Medical, L.L.C., a Delaware limited liability company ("RIK"). The Company paid approximately $23.3 million for the acquisition of such assets plus an earnout of up to $2.0 million. RIK is a manufacturer of non-powered therapeutic patient support surfaces based in Boulder, Colorado. 40 42 SUMMARY HISTORICAL FINANCIAL INFORMATION The summary financial information for the Company for the years ended December 31, 1996 and 1995, set forth below has been derived from, and should be read in conjunction with, the audited financial statements (including the related notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"). The summary financial information for the six month periods ended June 30, 1997 and 1996, has been derived from, and should be read in conjunction with, the unaudited financial statements for such periods included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (the "Form 10-Q"). Such summary financial information is qualified in its entirety by reference to such reports and all financial statements and related notes contained therein. The Form 10-K and the Form 10-Q are available for examination, and copies may be obtained, in the manner set forth below under "Additional Information". The financial information for the six-month periods ended June 30, 1997 and 1996, has not been audited and, in the opinion of management, reflects all adjustments (consisting of normal recurring adjustments) which are necessary for a fair presentation of such information. Results for the six-month periods are not necessarily indicative of results for the full year. SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE COMPANY (IN THOUSANDS EXCEPT RATIOS AND PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------- ------------------- 1997 1996 1996 1995 -------- -------- -------- -------- INCOME STATEMENT DATA: Revenues............................................ $148,212 $131,859 $269,881 $243,443 Income from continuing operations................... 32,440 26,462 55,354 43,792 Income before income taxes.......................... 33,293 28,336 64,441 48,346 BALANCE SHEET DATA (at end of period): Working capital..................................... $101,997 $116,216 $107,334 $109,413 Total assets........................................ 271,257 251,951 253,393 243,726 Total long-term indebtedness........................ -- -- -- -- Shareholders' equity................................ 222,514 216,677 211,078 210,324 PER SHARE DATA: Net income per common and common share equivalents -- continuing.......... $ 0.46 $ 0.37 $ 0.86 $ 0.63 Ratio of earnings to fixed charges.................. 26.6x 26.9x 29.3x 21.9x Book value per share................................ $ 5.26 $ 4.90 $ 4.98 $ 4.74 Shares used in earnings per share computations...... 43,737 46,015 45,489 45,457
8. FINANCING OF THE TRANSACTIONS The total amount of funds required to consummate the Offer and Merger and to pay all related fees and expenses is $699,356,000, which will be provided through a combination of (i) the approximately $155,611,000 in proceeds from the Stock Purchase, (ii) borrowings under a $530,000,000 senior secured credit facility to be provided to the Company (the "Credit Facility") and (iii) either the proceeds from the sale of $200,000,000 of senior subordinated high-yield notes to be issued by the Company (the "Notes") or borrowings under the Bridge Loan (as defined below). The Company has received a commitment letter dated October 1, 1997 from Bank of America National Trust and Savings Association, BancAmerica Robertson Stephens, Bankers Trust Company and BT Alex. Brown (collectively, the "Banks") with respect to the Credit Facility pursuant to which up to $300,000,000 will be available in three tranches as term loans (the "Term Loan Facility"), $130,000,000 will be available as a tender facility (the "Tender Facility"), $50,000,000 will be available as a six-year revolving credit facility 41 43 (the "Revolving Facility"), and $50,000,000 will be available as an acquisition facility (the "Acquisition Facility"). If the Company is unable to complete the sale of Notes by the time of the closing of the Offer, the Company intends to use the proceeds of the Tender Facility, Acquisition Facility and Revolving Facility to finance the Offer and Merger and pay related fees and expenses. Indebtedness of the Company under the Credit Facility will be guaranteed by certain of the subsidiaries of the Company and will be secured by (i) a first priority security interest in all, subject to certain customary exceptions, of the tangible and intangible assets of the Company and its domestic subsidiaries, including, without limitation, intellectual property and real estate owned by the Company and its subsidiaries, (ii) a first priority perfected pledge of all capital stock of the Company's domestic subsidiaries and (iii) a first priority perfected pledge of up to 65% of the capital stock of foreign subsidiaries owned directly by the Company or its domestic subsidiaries. The Credit Facility will contain customary affirmative and negative covenants including financial covenants regarding the Company's earnings before interest, depreciation and amortization, interest coverage ratio and maximum leverage ratio. The Tender Facility, if borrowed, will be repayable within 21 days thereafter, and the Term Loan Facility and Acquisition Facility will have various amortization schedules with final maturities ranging from six to eight years after funding. Interest will accrue at various rates above the fluctuating eurodollar rate or bank reference rate as is customary in these types of financings. Amounts outstanding under the Credit Facility will bear interest at a base rate plus a margin that ranges initially from 1.25% to 1.75% or a Eurodollar rate plus a margin that ranges initially from 2.25% to 2.75%. The Company has retained BT Alex. Brown and BancAmerica Robertson Stephens to act as joint co-lead managing underwriters, initial purchasers or placement agents for the Notes. It is currently anticipated that the Notes would be issued in a Rule 144A transaction and pursuant to a customary purchase agreement, would mature in 2007, would be unsecured and would be guaranteed by certain of the Company's domestic subsidiaries. The interest rate on the Notes will be determined by market factors when the Notes are sold. It is also anticipated that the indenture governing the Notes would contain provisions with respect to redemption and affirmative and negative covenants customary for a transaction of this nature. The Company has also received a commitment letter from Bankers Trust New York Corporation and Bank of America National Trust and Savings Association (collectively, the "Lenders") pursuant to which the Lenders have committed, subject to customary conditions precedent, to make available to the Company a $200,000,000 unsecured senior subordinated bridge loan (the "Bridge Loan") to refinance in part, the Credit Facility, in the event that the Notes are not issued by the Company. The Bridge Loan would, subject to certain limited conditions, be available to the Company, on two business days' prior notice, following the closing of the Credit Facility (but in no event later than 21 days thereafter) and would bear interest at a cash rate between 9% and 14%. The following table sets forth the anticipated approximate sources and uses of funds in connection with the Offer and the Merger. SOURCES Revolving and Acquisition Facility............................................ $43,745,000 Term Loan Facility............................................................ 300,000,000 Senior Subordinated Notes..................................................... 200,000,000 Fremont Equity Financing...................................................... 138,197,000 RCBA Equity Financing......................................................... 17,414,000 ----------- Total Sources of Funds................................................ 699,356,000 ========== USES Purchase of Primary Shares.................................................... 628,204,000 Net Purchase of Options....................................................... 25,600,000 Fees and Expenses............................................................. 45,552,000 ----------- Total Uses of Funds................................................... 699,356,000 ==========
42 44 9. DIVIDENDS AND DISTRIBUTIONS For the first and second fiscal quarters of 1997, the Company paid dividends of $0.0375 per Share on June 2, 1997 to holders of record as of May 23, 1997 and $0.0375 per Share on August 11, 1997 to holders of record as of August 1, 1997, respectively. The Company intends to pay a cash dividend in their third fiscal quarter of $0.0375. If, after the payment of such dividend, the Company should declare or pay any dividend on the Shares or make any other distribution (including the issuance of additional shares of capital stock pursuant to a stock dividend or stock split, the issuance of other securities or the issuance of rights for the purchase of any securities) with respect to the Shares that is payable or distributable to shareholders of record on a date prior to the transfer to the name of the Company or its nominee or transferee on the Company's stock transfer records of the Shares pursuant to the Offer, then, without prejudice to the Company's rights specified in "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer", (i) the purchase price per Share payable by the Company pursuant to the Offer will be reduced (subject to the Transaction Agreement) to the extent any such dividend or distribution is payable in cash and (ii) any non-cash dividend, distribution or right shall be received and held by the tendering shareholder for the account of the Company and will be required to be promptly remitted and transferred by each tendering shareholder to the Depositary for the account of the Company, accompanied by appropriate documentation of transfer. Pending such remittance and subject to applicable law, the Company will be entitled to all the rights and privileges as owner of any such non-cash dividend, distribution or right and may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by the Company in its sole discretion. 10. EFFECT OF THE TRANSACTIONS ON THE MARKET FOR THE SHARES; EXCHANGE ACT REGISTRATION The purchase of Shares by the Company pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and will reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by the public. Depending upon the number of Shares purchased pursuant to the Offer, the Shares may no longer meet the standards for continued listing on Nasdaq. According to Nasdaq's published guidelines, the Shares would not be eligible to be included for listing if, among other things, the number of Shares publicly held falls below 100,000, the number of holders of Shares falls below 300 or the market value of such publicly held Shares is not at least $200,000. If, as a result of the purchase of Shares pursuant to the Offer, the Merger or otherwise, the Shares no longer meet the requirements of Nasdaq for continued listing, the listing of the Shares will be discontinued. In such event, the market for the Shares would be adversely affected. In the event the Shares were no longer eligible for listing on Nasdaq, quotations might still be available from other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend upon the number of holders of such Shares remaining at such time, the interest in maintaining a market in such Shares on the part of securities firms, the possible termination of registration of such Shares under the Exchange Act as described below and other factors. The Shares are currently "margin securities", as such term is defined under the rules of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such securities. Depending upon factors similar to those described above regarding listing and market quotations, following the Offer it is possible that the Shares might no longer constitute "margin securities" for purposes of the margin regulations of the Federal Reserve Board, in which event such Shares could no longer be used as collateral for loans made by brokers. The Shares are currently registered under the Exchange Act. Such registration may be terminated upon application by the Company to the Commission if the Shares are not listed on a national securities exchange and there are fewer than 300 record holders. The termination of the registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to holders of Shares and to the Commission and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with shareholders' meetings and the requirements of Rule 13e-3 under the Exchange Act with 43 45 respect to the "going private" transactions, no longer applicable to the Shares. In addition, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of the ability to dispose of such securities pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended. If registration of the Shares under the Exchange Act were terminated, the Shares would no longer be "margin securities" or be eligible for Nasdaq reporting. Purchaser currently intends to seek to cause the Company to terminate the registration of the Shares under the Exchange Act as soon as practicable after consummation of the Offer if the requirements for termination of registration are met. 11. CERTAIN CONDITIONS TO THE OFFER Notwithstanding any other provision of the Offer, the Company shall not be required to accept for payment or pay for any Shares tendered pursuant to the Offer, if (v) the Minimum Condition shall not have been satisfied, (w) any applicable waiting period under the HSR Act (as defined herein) shall not have expired or been terminated prior to the expiration of the Offer, (x) the Debt Financing shall not have been obtained, (y) the Closing shall not have occurred or (z) at any time on or after the date of the Transaction Agreement, and prior to the acceptance for payment of Shares, any of the following conditions shall exist: (a) there shall be instituted or be pending any action or proceeding before any court or governmental, administrative or regulatory authority or agency, domestic or foreign, in each case that has a reasonable likelihood of success notwithstanding the reasonable efforts of the Company and Purchasers to dismiss or otherwise terminate such action or proceeding; (i) challenging or seeking to make illegal, materially delay or otherwise directly or indirectly restrain or prohibit or make materially more costly the making of the Offer, the acceptance for payment of, or payment for, any Shares by the Company, Purchasers or any affiliate of either of Purchasers, or the consummation of any other Transaction, or seeking to obtain material damages in connection with any Transaction; (ii) seeking to prohibit or limit materially the ownership or operation by the Company, Purchasers or any of their affiliates of all or any material portion of the business or assets of the Company, Purchasers or any of their affiliates, or to compel the Company, Purchasers or any of their affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company, Purchasers or any of their affiliates, as a result of the Transactions; (iii) seeking to impose or confirm limitations on the ability of Purchasers or any of their affiliates to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Purchaser pursuant to the Stock Purchase or the Shareholder Support Agreement or otherwise on all matters properly presented to the Company's shareholders, including, without limitation, the approval and adoption of the Transaction Agreement and the transactions contemplated hereby; or (iv) seeking to require divestiture by Purchasers or any of their affiliates; (b) there shall have been any action taken, or any statute, rule, regulation, legislation, interpretation, judgment, order or injunction enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Purchasers, the Company or any of their affiliates or (ii) any Transaction, by any legislative body, court, government or governmental, administrative or regulatory authority or agency, domestic or foreign, other than the routine application of the waiting period provisions of the HSR Act to the Offer, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; (c) there shall have occurred any change, condition, event or development that has a Material Adverse Effect on the Company; (d) there shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on any national securities exchange, the Nasdaq National Market, or the over-the-counter market in the United States, (ii) any decline, measured from the date hereof, in the Standard & Poor's 500 Index by an amount in excess of 15%, (iii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iv) any limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, on, or other event that, in the reasonable judgment of Purchasers, might affect, the extension of credit by 44 46 banks or other lending institutions, (v) a commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States or (vi) in the case of any of the foregoing existing on the date hereof, a material acceleration or worsening thereof; (e) (i) it shall have been publicly disclosed or Purchasers shall have otherwise learned that beneficial ownership (determined for the purposes of this paragraph as set forth in Rule 13d-3 of the Exchange Act) of 20% or more of the then outstanding Shares has been acquired by any person, other than Purchasers or any of either of their affiliates or (ii) (A) the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchasers the approval or recommendation of the Offer or the Transactions, or approved or recommended any takeover proposal or any other acquisition of Shares other than pursuant to the Transactions or (B) the Board or any committee thereof shall have resolved to do any of the foregoing; (f) the Transaction Agreement shall have been terminated in accordance with its terms; (g) Purchasers and the Company shall have agreed that the Company shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder; or (h) the Company shall not have received Houlihan Lokey's written opinion, which opinion shall not have been withdrawn, addressed to the Board and the Purchasers with respect to solvency and related matters. Purchasers and the Company acknowledge that the Conditions to the Offer set forth above are for the benefit of the Purchasers and the Company and that the Company shall not assert failure of, or waive, any such condition without the prior written consent of each Purchaser (which consent shall not be unreasonably withheld). 12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS General. Except as set forth in this Offer to Purchase, the Company is not aware of any license or regulatory permit that appears to be material to its business that might be adversely affected by its acquisition of Shares as contemplated in the Offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the Company's acquisition of Shares pursuant to the Offer. Should any such approval or other action be required, the Company currently contemplates that it will seek such approval or other action. The Company cannot predict whether it may determine that it is required to delay the acceptance for payment of Shares tendered pursuant to the Offer pending the outcome of any such matter. There can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that the failure to obtain any such approval or other action might not result in adverse consequences to the Company's business. The Company intends to make all required filings under the Exchange Act. The Company's obligation under the Offer to accept Shares for payment is subject to certain conditions. See "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer". Antitrust. Under the Hart-Scott-Rodino Antitrust Act of 1976, as amended (the "HSR Act"), and the rules and regulations that have been promulgated thereunder by the Federal Trade Commission (the "FTC"), certain acquisition transactions may not be consummated until certain information and documentary material have been furnished for review by the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The Stock Purchase is subject to such requirements; however, the Offer and the Merger are not subject to such requirements. Under the provisions of the HSR Act applicable to the Transactions, the Stock Purchase may not be consummated until the expiration of a 30 calendar-day waiting period following the filing by the Company and each of the Purchasers (or their ultimate parent entities) of certain required information and documentary material with respect to the Stock Purchase with the FTC and the Antitrust Division, unless such waiting period is earlier terminated by the FTC and the Antitrust Division. The Company and each of the Purchasers filed a Premerger Notification and Report Form with the Antitrust Division and the FTC in connection with the Merger under the HSR Act on October 6, 1997; and, accordingly, the required waiting period with respect 45 47 to the Stock Purchase will expire on or about November 5, 1997, unless earlier terminated by the Antitrust Division or the FTC or the Company or Purchasers receives a request for additional information or documentary material prior thereto. If, within such 30 calendar-day waiting period, either the FTC or the Antitrust Division were to request additional information or documentary material from the Company or Purchasers, the waiting period with respect to the Stock Purchase would be extended for an additional period of 20 calendar days following the date of substantial compliance with such request by the Company and Purchasers. One extension of the waiting period pursuant to a request for additional information is authorized by the rules promulgated under the HSR Act. Thereafter, the waiting period could be extended only by court order or with the consent of the Company and Purchasers. The additional 20 calendar-day waiting period may be terminated sooner by the FTC or the Antitrust Division. At any time before or after the Stock Purchase, the Antitrust Division or the FTC could take such action under the antitrust laws as either deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Stock Purchase, the divestiture of Shares purchased pursuant to the Stock Purchase or the divestiture of substantial assets of Purchasers, the Company or any of their respective subsidiaries or affiliates. Private parties as well as state attorneys general may also bring legal actions under the antitrust laws under certain circumstances. Based upon an examination of publicly available information relating to the businesses in which the Company is engaged, management and Purchasers believe that the acquisition of Shares by Purchasers pursuant to the Stock Purchase should not violate the applicable antitrust laws. Nevertheless, there can be no assurance that a challenge to the Stock Purchase on antitrust grounds will not be made, or, if such challenge is made, what the result will be. State Takeover Laws. A number of states have adopted laws and regulations applicable to attempts to acquire securities of corporations which are incorporated, or have substantial assets, shareholders, principal executive offices or principal places of business, or whose business operations otherwise have substantial economic effects, in such states. In Edgar v. MITE Corp., the Supreme Court of the United States invalidated on constitutional grounds the Illinois Business Takeover Statute, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987 in CTS Corp. v. Dynamics Corp. of America, the Supreme Court held that the State of Indiana may, as a matter of corporate law and, in particular, with respect to those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining shareholders. The state law before the Supreme Court was by its terms applicable only to corporations that had a substantial number of shareholders in the state and were incorporated there. The Company conducts business in a number of states throughout the United States, some of which have enacted takeover laws. The Company does not know whether any of these laws will, by their terms, apply to the Transactions and has not complied with any such laws. Should any person seek to apply any state takeover law, the Company will take such action as then appears desirable, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover laws are applicable to the Transactions, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Transactions, the Company might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, the Company might be unable to accept for payment any Shares tendered pursuant to the Offer, or be delayed in continuing or consummating the Offer and the Merger. In such case, the Company may not be obligated to accept for payment any Shares tendered. See "THE TENDER OFFER -- Section 11. Certain Conditions to the Offer". Texas Business Combination Law. The State of Texas recently enacted Part Thirteen (Article 13.01 et seq.) of Texas Law (the "Business Combination Law") which has application to "issuing public corporations" formed under Texas Law, such as the Company. The Business Combination Law imposes a three year moratorium on certain business combination transactions between an issuing public corporation and an "affiliated shareholder" (generally, a beneficial owner of 20% or more of the then outstanding voting shares 46 48 of the issuing public corporation) or any affiliate or associate of the affiliated shareholder unless (i) the proposed business combination, or the purchase or acquisition of voting shares on the date such person became an affiliated shareholder (the "share acquisition date"), was approved by the board of directors of the issuing public corporation prior to the affiliated shareholder's share acquisition date or (ii) the proposed business combination is approved by the affirmative vote of at least two-thirds of the outstanding voting shares (excluding the shares owned by the affiliated shareholder and its affiliates and associates) at a meeting of shareholders (and not by written consent) duly called for that purpose not less than six months after the affiliated shareholder's share acquisition date of such affiliated shareholder. Application of the Business Combination Law is subject to a number of exceptions. Because the Transactions have been approved by the Disinterested Directors and the Board, the restrictions under the Business Combination Law will not affect the Merger and other transactions contemplated under the Transaction Agreement. The Business Combination Law will apply to the Company for so long as it has (i) 100 or more shareholders of record, (ii) any class of voting securities registered under Exchange Act or (iii) any class of voting securities qualified for trading in a national market system, but not thereafter. The Business Combination Law also permits a corporation's board of directors, when considering the best interests of the corporation, to consider the long-term as well as the short-term interests of the corporation and its shareholders, including the possibility that those interests may be best served by the continued independence of the corporation. 13. FEES AND EXPENSES The Company has retained BT Alex. Brown as its financial advisor in connection with the Offer and the Merger and as Dealer Manager for the Offer. Pursuant to the terms of BT Alex. Brown's engagement, the Company has agreed to pay BT Alex. Brown upon consummation of the Offer an aggregate financial advisory fee equal to 0.60% of the total consideration (including liabilities assumed) payable in the Offer and the Merger for its services as financial advisor and Dealer Manager. In addition, the Company has agreed to reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown and certain related parties against certain liabilities, including certain liabilities under the federal securities laws, relating to, or arising out of, its engagement. The Company has retained Georgeson & Company Inc. as Information Agent and Boston EquiServe, L.P. as Depositary in connection with the Offer. The Information Agent and the Depositary will each receive reasonable and customary compensation for customary services in connection with the Offer and will be reimbursed for customary and reasonable out-of-pocket expenses. The Company has agreed to indemnify the Information Agent and the Depositary against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws. Neither the Information Agent nor the Depositary has been retained to, or is authorized to, make solicitations or recommendations in connection with the Offer. The Company will not pay any fees or commissions to any broker, dealer, commercial bank, trust company or other person for soliciting Shares pursuant to the Offer. The Company will, however, on request, reimburse such persons for customary handling and mailing expenses incurred in forwarding materials in respect of the Offer to the beneficial owners for which they act as nominees. No broker, dealer, commercial bank or trust company has been authorized to act as an agent for the Company for the purpose of the Offer. The Company will not pay (or cause to be paid) any stock transfer taxes on its purchase of Shares pursuant to the Offer, except as otherwise provided in Instruction 6 of the Letter of Transmittal. 47 49 Estimated costs and fees in connection with the Transactions, all of which are the obligation of the Company if the Transactions is consummated, are as follows: Financing and commitment costs................................. $19,150,000 Legal, accounting and other professional fees.................. 5,225,000 Financial advisory fees........................................ 5,582,000 Filing fees.................................................... 221,000 Printing and distribution costs................................ 500,000 Severance, incentive payments and related expenses............. 5,944,000 Transaction fee................................................ 8,500,000 Miscellaneous.................................................. 435,000 -------- TOTAL.......................................................... $45,552,000 ========
See "SPECIAL FACTORS--The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" for a description of certain provisions for the reimbursement by the Company of certain fees and expenses, incurred by Purchasers. See "SPECIAL FACTORS--Opinion of BT Alex. Brown Incorporated" for a description of the fees payable to BT Alex. Brown. 14. CERTAIN INFORMATION CONCERNING PURCHASERS RCBA. RCBA Purchaser I, L.P. is a Delaware limited partnership formed for the purpose of effecting the Offer and Merger and has conducted no business otherwise. Its principal executive office is located at 909 Montgomery Street, Suite 400, San Francisco, California 94133. Richard C. Blum & Associates, Inc., a California corporation ("RCBA Inc."), is the general partner of Richard C. Blum & Associates, L.P., a California limited partnership ("RCBA L.P."), which is the sole partner of the partnership at this time. RCBA Inc. is in turn controlled, for purposes of the federal securities laws, by Richard C. Blum, the Chairman and a substantial shareholder of RCBA Inc. RCBA L.P. is the general partner or investment adviser to Stinson Capital Partners, L.P., a California limited partnership ("Stinson"); BK Capital Partners IV, L.P., a California limited partnership ("BK IV"); the Carpenters Pension Trust for Southern California (the "Carpenters Trust"); United Brotherhood of Carpenters and Joiners of America Local Unions and Councils Pension Fund ("UBC"); and Insurance Company Supported Organizations Pension Plan ("ICSOPP"). Stinson and BK IV are each a California limited partnership whose principal business is investing in securities, and whose principal office is located at 909 Montgomery Street, Suite 400, San Francisco, California 94133. RCBA L.P. is a California limited partnership whose principal business is acting as general partner for investment partnerships and providing investment advisory and financial consulting services. RCBA L.P. is a registered investment adviser with the Securities and Exchange Commission. The sole general partner of RCBA L.P. is RCBA Inc. The principal business office address of RCBA L.P. and RCBA Inc. is 909 Montgomery Street, Suite 400, San Francisco, California 94133. Richard C. Blum, Nils Colin Lind, Jeffrey W. Ubben, William C. Johnston, John C. Walker, Murray A. Indick, George F. Hamel, Jr., Marc T. Scholvinch and Thomas L. Kempner are the directors and executive officers of RCBA Inc. Messrs. Blum, Ubben, Johnston, Walker, Indick, Hamel, Schlolvinch and Kempner is each a citizen of the United States of America and Mr. Lind is a citizen of Norway. Messrs. Blum, Lind, Ubben, Johnston, Walker, Indich, Hamel and Schlolvinch each has as his principal business address 909 Montgomery Street, Suite 400, San Francisco, California 94133. Mr. Kempner has as his business address 40 Wall Street, New York, New York 10005. RCBA is a strategic equity investor, based in San Francisco, with more than $1.2 billion in domestic assets under management and a twenty year investment performance record. RCBA's investment strategy is to 48 50 source negotiated private equity transactions with minority strategic block investments through the public market. RCBA sources its investments by identifying companies (or industries) undergoing change, which represent good businesses available at compelling values and where the opportunity exists to build relationships with management and subsequently implement strategies or extraordinary transactions to provide a superior return on investments. Fremont. Fremont Purchaser II, Inc. is a Delaware Corporation formed for the purpose of effecting the Transactions and has conducted no business otherwise. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. Fremont Acquisition Company II, L.L.C. is the parent of Fremont Purchaser II, Inc. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. Fremont Partners, L.P., a Delaware limited partnership and the managing member of Fremont Acquisition II, L.L.C., is a private investment fund headquartered in San Francisco with committed capital of approximately $605 million. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. FP Advisors, L.L.C., a Delaware limited liability company is the sole general partner of Fremont Partners, L.P. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. Fremont Group, L.L.C., a Delaware limited liability company, is the sole managing member of FP Advisors, L.L.C. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. Fremont Investors, Inc., a Nevada corporation, is the sole managing member of Fremont Group, L.L.C. Its principal office is located at 50 Fremont Street, Suite 3700, San Francisco, California 94105. Fremont is a private investment company managing over $7.4 billion of assets. Alan M. Dachs, Stephen D. Bechtel, Jr., Richard E. Cavanagh, Harold J. Haynes, Cordell W. Hull, Robert Jaunich II, Gilbert H. Lamphere, David L. Redo, George P. Shultz, John W. Weiser, Joseph D. Mahaffey, Jon S. Higgins, Richard S. Kopf and David W. Aronson are the directors and/or executive officers of Fremont Investors, Inc. Each is citizen of the United States and each has as his principal place of business 50 Fremont Street, Suite 3700, San Francisco, California 94105. 15. RECAPITALIZATION ACCOUNTING The Transactions will be accounted for as a recapitalization, consisting of Debt Financing, an equity investment by Purchasers of $155.6 million and the cancellation of certain Shares in the Offer for the Per Share Amount and in the Merger in exchange for the Merger Consideration. 16. MISCELLANEOUS The Company is not aware of any jurisdiction in which the making of the Offer is prohibited by any administrative or judicial action pursuant to any valid state statute. If the Company becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, the Company will make a good faith effort to comply with any such state statute. If, after such good faith effort, the Company cannot comply with any such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Company by the Dealer Manager or by one or more registered brokers or dealers licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO 49 51 PURCHASE OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. Pursuant to Section 13(e)(1) of the Exchange Act, the Company has filed with the Commission the Schedule 13E-4 together with exhibits, furnishing additional information with respect to the Offer. The Company has filed a statement on Schedule 13E-3 with respect to the Offer and may file amendments to the Schedule 13E-3. Such statements, including exhibits and any amendments thereto, which furnish certain additional information with respect to the Offer may be inspected at, and copies may be obtained from, the same places and in the same manner as set forth in "THE TENDER OFFER -- Section 7. Certain Information Concerning the Company" (except that they will not be available at the regional offices of the Commission). Kinetic Concepts, Inc. October 8, 1997 50 52 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Certain information is set forth below concerning the executive officers of the Company, each of whom has been elected to serve until the 1998 annual meeting of directors and until his successor is duly elected and qualified. The executive officers of the Company and their ages and positions as of October 1, 1997 are as follows:
NAME AGE POSITION --------------------------------------- --- --------------------------------------- James R. Leininger, M.D................ 53 Chairman of the Board of Directors Raymond R. Hannigan.................... 58 Director, President and Chief Executive Officer Peter A. Leininger, M.D................ 54 Director and Executive Vice President Sam A. Brooks.......................... 58 Director Frank A. Ehmann........................ 63 Director Wendy L. Gramm......................... 52 Director Bernhard T. Mittemeyer................. 66 Director Dennis E. Noll......................... 42 Senior Vice President, General Counsel and Secretary Frank DiLazzaro........................ 39 President, KCI International Christopher M. Fashek.................. 48 President, KCI Therapeutic Services Richard C. Vogel....................... 43 Vice President and General Manager, NuTech Michael C. Wells....................... 45 Vice President and General Manager, KCI Home Care John H. Vrzalik, Sr. .................. 54 Vice President, Engineering Martin J. Landon....................... 38 Vice President, Accounting and Corporate Controller Michael J. Burke....................... 50 Vice President, Manufacturing Scott S. Brooks........................ 49 Vice President, National Accounts Larry P. Baker......................... 43 Vice President, Corporate Services George P. Peace........................ 42 Vice President, Information Systems
James R. Leininger, M.D. is the founder of the Company and has served as Chairman of the Board of Directors since 1976. From January 1990 to November 1994, Dr. James Leininger served as President and Chief Executive Officer of the Company. From 1975 until October 1986, Dr. James Leininger was also the Chairman of the Emergency Department of the Baptist Hospital System in San Antonio, Texas. Raymond R. Hannigan joined the Company as its President and Chief Executive Officer in November 1994 and has served as a director of the Company since 1994. From January 1991 to November 1994, Mr. Hannigan was the President of the International Division of Sterling Winthrop Consumer Health Group (a pharmaceutical company with operations in over 40 countries), a wholly-owned subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr. Hannigan was the President of Sterling Drug International. Peter A. Leininger, M.D. joined the Company as its Vice President, Medical in 1978, became Chief Administrative Officer and Senior Vice President of the Company in January 1994 and was named Executive Vice President in September 1995. Dr. Peter Leininger became a member of the Company's Board of Directors in 1980. Prior to 1978, Dr. Peter Leininger maintained a private medical practice and functioned as I-1 53 the southeast regional distributor for the Company's products. Peter A. Leininger, M.D. is the brother of James R. Leininger, M.D. Sam A. Brooks has served as a Director of the Company since 1987. Mr. Brooks also serves on the Board of Directors of Nationwide Health Properties, Inc. (a real estate investment trust), Renal Care Group, Inc. (a nephrology practice management company), Quorum Health Group, Inc. (a hospital management company) and PhyCor, Inc. (a physician management company), each of which has securities registered under the Exchange Act. Mr. Brooks has served as the Chairman of the Board of MedSolutions, Inc. (a radiology medical management company) since 1992, President and Chief Executive Officer of the Renal Care Group, Inc. (a nephrology practice management company) since July 1995 and President of MedCare Investment Corp. (the general partner of a medical venture capital fund) since April 1991. From 1986 to October 1989, he was President of Nationwide Health Properties, Inc. and prior to 1986, Mr. Brooks served as Executive Vice President and Chief Financial Officer of Hospital Corporation of America (a hospital management company). Frank A. Ehmann has served as a Director of the Company since 1987. He is also a member of the Board of Directors of Genderm Inc. (a pharmaceutical company), SPX Corporation (an automotive parts manufacturer), American Health Corp., Inc. (a diabetes treatment provider) and AHA Investment Funds, Inc. (an investment advisory company). SPX Corporation, American Health Corp. and AHA Investment Funds have securities registered under the Exchange Act. Mr. Ehmann was President and Chief Operating Officer of United Stationers, Inc. (an office products company) from March 1986 to October 1989. Prior to December 1985, Mr. Ehmann was an Executive Vice President and Co-Chief Operating Officer of Baxter Travenol Laboratories, Inc. (a medical products company). Wendy L. Gramm, Ph.D. has served as a Director of the Company since 1996. Dr. Gramm is an economist, holding a Ph.D from Northwestern University and a B.A. from Wellesley College, both in economics. She chaired the Commodity Futures Trading Commission from 1988-1993. Prior to 1988, Dr. Gramm served as Administrator for Information and Regulatory Affairs at the Office of Management and Budget, Executive Director of the Presidential Task Force on Regulatory Relief, Director of the Bureau of Economics at the Federal Trade Commission and research economist at the Institute for Defense Analyses. She also was a professor of economics at Texas A&M University. Dr. Gramm currently directs the Regulatory Analysis Program at the Center for Study of Public Choice at George Mason University in Virginia. She has also been named to the Boards of Directors of the Chicago Merchantile Exchange (a commodities exchange), Enron Corp. (an energy company), IBP, Inc. (a meat processing company), and State Farm Insurance Companies (an insurance company) and Invesco Funds Group, Inc. (a mutual fund company). Enron Corp. and IBP, Inc. have securities registered under the Exchange Act. Bernhard T. Mittemeyer, M.D. has served as a Director of the Company since 1987. Dr. Mittemeyer currently is a Professor of Urological Surgery at the Texas Tech University School of Medicine. Dr. Mittemeyer served as Executive Vice President and Provost of the Texas Tech University Health Science Center from 1986 until 1996. Dr. Mittemeyer also served as Interim Dean of the Texas Tech School of Medicine from November 1988 until August 1990. From March 1985 until October 1986, Dr. Mittemeyer served as the Senior Vice President and Corporate Medical Director of Whittaker Health Services (a health maintenance organization). Prior to March 1985, Dr. Mittemeyer served for 28 years as a career officer in the United States Army which culminated in his service as the Surgeon General of the United States Army from October 1981 to February 1985. Dennis E. Noll joined the Company in February 1992 as its Senior Corporate Counsel and was appointed Vice President, General Counsel and Secretary in January 1993. Mr. Noll was promoted to Senior Vice President in September 1995. Prior to joining the Company in February 1992, Mr. Noll was a shareholder of the law firm of Cox & Smith Incorporated. Frank DiLazzaro joined the Company in 1988 as General Manager, KCI Medical Canada. Mr. DiLazzaro served as Vice President, KCI International from June 1989 to December 1992. Mr. DiLazzaro has served as President, KCI International since January 1993 and was Vice President, Marketing from April 1993 to September 1995. I-2 54 Christopher M. Fashek joined the Company in February 1995 as President of KCI Therapeutic Services. Prior to joining the Company, he served as General Manager, Sterling Winthrop, New Zealand since February 1993, and served as Vice President Sales of Sterling Health USA from 1989 until February 1993. Richard C. Vogel joined the Company as its Vice President and General Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr. Vogel served as Executive Vice President of Vestar, Inc., a California-based biotechnology company. Michael C. Wells joined the Company as Regional Vice President, KCI Therapeutic Services, in August 1994 and served in that role until June 1996 when he was promoted to the position of Vice President and General Manager, KCI Home Care. Prior to joining the Company, he served in Sales Management and Infusion Management roles from 1988 to August 1994 with Homedco, which currently operates today as the Apria Healthcare Group. From 1978 to 1988, Mr. Wells held Marketing and Sales Management positions with Baxter Healthcare, formerly American Hospital Supply Corporation. John H. Vrzalik, Sr. joined the Company in 1977, was promoted to Vice President, Engineering in 1979 and has served in that position since that time. Martin J. Landon joined the Company in May 1994 as Senior Director of Corporate Development and was promoted to Vice President, Accounting and Corporate Controller in October 1994. From 1987 to May 1994, Mr. Landon worked for Intelogic Trace, Inc., most recently serving as Vice President, Chief Financial Officer. Michael J. Burke joined the Company in September 1995 as Vice President, Manufacturing. Prior to joining the Company, Mr. Burke worked for Sterling Winthrop, Inc., a Division of Eastman Kodak Company, for 25 years, where he served as Vice President, Manufacturing and as General Manager, Sterling Health HK/China since 1992. Scott S. Brooks joined the Company in July of 1989 as Director of Sales and Marketing for Simmons Healthcare. In November of 1989, he was promoted to the position of Vice President, Sales and Marketing for Simmons Healthcare. In July of 1990, Mr. Brooks served as Vice President of Sales and Marketing for Medical Services. From April 1991 to March 1993, Mr. Brooks served as Regional Vice President of KCI Therapeutic Services. From April 1993 to February 1994, Mr. Brooks served as Vice President, National Accounts of the Company. From March 1994 to March 1995, Mr. Brooks served as the President of Medical Retro Design, a subsidiary of the Company. Since 1975, Mr. Brooks has held the position of Vice President of National Accounts. Larry P. Baker joined the Company in 1987 as the Director of Human Resources. Since 1993, Mr. Baker has held the position of Vice President, Corporate Services. George P. Peace joined the Company in November 1994 as Vice President of Information Systems. From October 1992 to October 1994, Mr. Peace served as Vice President of Information Systems of La Quinta Inns, Inc. Prior to October 1992, Mr. Peace served as Director of Information Systems Operations of La Quinta Inns, Inc. I-3 55 SCHEDULE II [BT ALEX. BROWN INCORPORATED LETTERHEAD] October 1, 1997 Board of Directors Kinetic Concepts, Inc. 8023 Vantage Drive San Antonio, Texas 78230 Members of the Board: Kinetic Concepts, Inc., a Texas corporation ("KCI"), Fremont Purchaser II, Inc., a Delaware corporation ("F Purchaser"), and RCBA Purchaser I, L.P., a Delaware limited partnership ("B Purchaser" and, together with F Purchaser, the "Purchasers"), have proposed to enter into a Transaction Agreement (the "Agreement"). Pursuant to the Agreement, the implementation of which is contingent on, among other things, completion of debt and equity financing, KCI will commence a tender offer to purchase all outstanding shares of the common stock, par value $0.001 per share, of KCI (the "KCI Common Stock"), other than a portion of such shares held by B Purchaser and its affiliates and certain other shareholders of KCI who will retain an equity interest in KCI (the "Roll-over Shareholders"), at a purchase price of $19.25 per share, net to the seller in cash (the "Tender Offer"). The Agreement also provides that, following such Tender Offer, each Purchaser will be merged with and into KCI (the "Merger" and, together with the Tender Offer, the "Transaction") pursuant to which each outstanding share of KCI Common Stock not previously tendered (other than those shares held by Roll-over Shareholders) will be converted into the right to receive $19.25 in cash. We have assumed, with your consent, that the Transaction will be treated as a recapitalization for financial reporting purposes. You have requested our opinion as to whether the cash consideration to be received in the Transaction by the holders of KCI Common Stock (other than Roll-over Shareholders) is fair, from a financial point of view, to such holders. BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of KCI in connection with the Transaction and will be acting as dealer manager for the Tender Offer and will receive a fee for our services, a significant portion of which is contingent upon the consummation of the Transaction and a portion of which is payable upon the delivery of this opinion. We previously have acted as a co-managing underwriter in connection with public offerings of KCI Common Stock and, with your consent, will be acting as a lead managing underwriter of the proposed offering of senior subordinated debt securities to be issued to finance the Transaction, for which services we have received and will receive compensation. Affiliates of BT Alex. Brown also will be participating, with your consent, as documentation agent and a syndicated lender in the senior secured credit facility for the financing of the Transaction, for which services such affiliates will receive compensation. BT Alex. Brown maintains a market in KCI Common Stock and regularly publishes research reports regarding the health care industry and the businesses and securities of KCI and other publicly owned companies in the health care industry. In the ordinary course of business, BT Alex. Brown may actively trade the securities of KCI for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in securities of KCI. In connection with this opinion, we have reviewed and analyzed certain publicly available financial information and other information concerning KCI and certain internal analyses and other information furnished to us by KCI. We have also held discussions with the members of the senior management of KCI and representatives of the Purchasers regarding the business and prospects of KCI. In addition, we have (i) reviewed the reported prices and trading activity for KCI Common Stock, (ii) compared certain financial and stock market information for KCI with similar information for certain other companies whose securities II-1 56 Board of Directors Kinetic Concepts, Inc. October 1, 1997 Page 2 are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement as furnished to us in draft form, and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to the information relating to the prospects of KCI, we have assumed that such information reflects the best currently available judgments and estimates of the management of KCI as to the likely future financial performance of KCI. We also have assumed, with your consent, that the final terms of the Agreement reviewed by us in draft form will not vary materially from the draft reviewed by us. In addition, we have not made an independent evaluation or appraisal of the assets or liabilities of KCI, nor have we been furnished with any such evaluations or appraisals. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. In connection with our engagement to provide financial advisory services to the Board of Directors concerning strategic alternatives, we were authorized to solicit, and did solicit, interest from third parties with respect to the acquisition of KCI. In arriving at our opinion, we have considered the nature, scope and results of such solicitation. Our advisory services and the opinion expressed herein were prepared for the use of the Board of Directors of KCI and do not constitute a recommendation to any shareholder as to whether or not any such shareholder should tender shares of KCI Common Stock in the Tender Offer or how such shareholder should vote on the proposed Merger. We hereby consent to the inclusion of this opinion in its entirety as an exhibit to the tender offer or proxy statement of KCI distributed in connection with the Transaction. Based upon and subject to the foregoing, it is our opinion that, as of the date of this letter, the cash consideration to be received in the Transaction by the holders of KCI Common Stock (other than Roll-over Shareholders) is fair, from a financial point of view, to such holders. Very truly yours, /s/ BT ALEX. BROWN INCORPORATED -------------------------------------- BT ALEX. BROWN INCORPORATED II-2 57 SCHEDULE III TEXAS BUSINESS CORPORATION ACT ARTICLES 5.11-5.13 DISSENTER'S RIGHTS ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE ACTIONS A. Any shareholder of a domestic corporation shall have the right to dissent from any of the following corporate actions: (1) Any plan of merger to which the corporation is a party if shareholder approval is required by Article 5.03 or 5.16 of this Act and the shareholder holds shares of a class or series that was entitled to vote thereon as a class or otherwise; (2) Any sale, lease, exchange or other disposition (not including any pledge, mortgage, deed of trust or trust indenture unless otherwise provided in the articles of incorporation) of all, or substantially all, the property and assets, with or without good will, of a corporation if special authorization of the shareholders is required by this Act and the shareholders hold shares of a class or series that was entitled to vote thereon as a class or otherwise; (3) Any plan of exchange pursuant to Article 5.02 of this Act in which the shares of the corporation of the class or series held by the shareholder are to be acquired. B. Notwithstanding the provisions of Section A of this Article, a shareholder shall not have the right to dissent from any plan of merger in which there is a single surviving or new domestic or foreign corporation, or from any plan of exchange, if: (1) the shares held by the shareholder are part of a class or series, shares of which are on the record date fixed to determine the shareholders entitled to vote on the plan of merger or plan of exchange: (a) listed on a national securities exchange; (b) listed on the Nasdaq Stock Market (or successor quotation system) or designated as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or successor entity; or (c) held of record by not less than 2,000 holders; (2) the shareholder is not required by the terms of the plan of merger or plan of exchange to accept for the shareholder's shares any consideration that is different than the consideration (other than cash in lieu of fractional shares that the shareholder would otherwise be entitled to receive) to be provided to any other holder of shares of the same class or series of shares held by such shareholder; and (3) the shareholder is not required by the terms of the plan of merger or the plan of exchange to accept for the shareholder's shares any consideration other than: (a) shares of a domestic or foreign corporation that, immediately after the effective time of the merger or exchange, will be part of a class or series, shares of which are: (i) listed, or authorized for listing upon official notice of issuance, on a national securities exchange; (ii) approved for quotation as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or successor entity; or (iii) held of record by not less than 2,000 holders; (b) cash in lieu of fractional shares otherwise entitled to be received; or (c) any combination of the securities and cash described in Subdivisions (a) and (b) of this subsection. III-1 58 ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS A. Any shareholder of any domestic corporation who has the right to dissent from any of the corporate actions referred to in Article 5.11 of this Act may exercise that right to dissent only by complying with the following procedures: (1) (a) With respect to proposed corporate action that is submitted to a vote of shareholders at a meeting, the shareholder shall file with the corporation, prior to the meeting, a written objection to the action, setting out that the shareholder's right to dissent will be exercised if the action is effective and giving the shareholder's address, to which notice thereof shall be delivered or mailed in that event. If the action is effected and the shareholder shall not have voted in favor of the action, the corporation, in the case of action other than a merger, or the surviving or new corporation (foreign or domestic) or other entity that is liable to discharge the shareholder's right of dissent, in the case of a merger, shall, within ten (10) days after the action is effected, deliver or mail to the shareholder written notice that the action has been effected, and the shareholder may, within ten (10) days from the delivery or mailing of the notice, make written demand on the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, for payment of the fair value of the shareholder's shares. The fair value of the shares shall be the value thereof as of the day immediately preceding the meeting, excluding any appreciation or depreciation in anticipation of the proposed action. The demand shall state the number and class of the shares owned by the shareholder and the fair value of the shares as estimated by the shareholder. Any shareholder failing to make demand within the ten (10) day period shall be bound by the action. (b) With respect to proposed corporate action that is approved pursuant to Section A of Article 9.10 of this Act, the corporation, in the case of action other than a merger, and the surviving or new corporation (foreign or domestic) or other entity that is liable to discharge the shareholder's right of dissent, in the case of a merger, shall, within ten (10) days after the date the action is effected, mail to each shareholder of record as of the effective date of the action notice of the fact and date of the action and that the shareholder may exercise the shareholder's right to dissent from the action. The notice shall be accompanied by a copy of this Article and any articles or documents filed by the corporation with the Secretary of State to effect the action. If the shareholder shall not have consented to the taking of the action, the shareholder may, within twenty (20) days after the mailing of the notice, make written demand on the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, for payment of the fair value of the shareholder's shares. The fair value of the shares shall be the value thereof as of the date the written consent authorizing the action was delivered to the corporation pursuant to Section A of Article 9.10 of this Act, excluding any appreciation or depreciation in anticipation of the action. The demand shall state the number and class of shares owned by the dissenting shareholder and the fair value of the shares as estimated by the shareholder. Any shareholder failing to make demand within the twenty (20) day period shall be bound by the action. (2) Within twenty (20) days after receipt by the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, of a demand for payment made by a dissenting shareholder in accordance with Subsection (1) of this Section, the corporation (foreign or domestic) or other entity shall deliver or mail to the shareholder a written notice that shall either set out that the corporation (foreign or domestic) or other entity accepts the amount claimed in the demand and agrees to pay that amount within ninety (90) days after the date on which the action was effected, and, in the case of shares represented by certificates, upon the surrender of the certificates duly endorsed, or shall contain an estimate by the corporation (foreign or domestic) or other entity of the fair value of the shares, together with an offer to pay the amount of that estimate within ninety (90) days after the date on which the action was effected, upon receipt of notice within sixty (60) days after that date from the shareholder that the shareholder agrees to accept that amount and, in the case of shares represented by certificates, upon the surrender of the certificates duly endorsed. (3) If, within sixty (60) days after the date on which the corporate action was effected, the value of the shares is agreed upon between the shareholder and the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, payment for the shares shall be made within ninety (90) III-2 59 days after the date on which the action was effected and, in the case of shares represented by certificates, upon surrender of the certificates duly endorsed. Upon payment of the agreed value, the shareholder shall cease to have any interest in the shares or in the corporation. B. If, within the period of sixty (60) days after the date on which the corporate action was effected, the shareholder and the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, do not so agree, then the shareholder or the corporation (foreign or domestic) or other entity may, within sixty (60) days after the expiration of the sixty (60) day period, file a petition in any court of competent jurisdiction in the county in which the principal office of the domestic corporation is located, asking for a finding and determination of the fair value of the shareholder's shares. Upon the filing of any such petition by the shareholder, service of a copy thereof shall be made upon the corporation (foreign or domestic) or other entity, which shall, within ten (10) days after service, file in the office of the clerk of the court in which the petition was filed a list containing the names and addresses of all shareholders of the domestic corporation who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the corporation (foreign or domestic) or other entity. If the petition shall be filed by the corporation (foreign or domestic) or other entity, the petition shall be accompanied by such a list. The clerk of the court shall give notice of the time and place fixed for the hearing of the petition by registered mail to the corporation (foreign or domestic) or other entity and to the shareholders named on the list at the addresses therein stated. The forms of the notices by mail shall be approved by the court. All shareholders thus notified and the corporation (foreign or domestic) or other entity shall thereafter be bound by the final judgment of the court. C. After the hearing of the petition, the court shall determine the shareholders who have complied with the provisions of this Article and have become entitled to the valuation of and payment for their shares, and shall appoint one or more qualified appraisers to determine that value. The appraisers shall have power to examine any of the books and records of the corporation the shares of which they are charged with the duty of valuing, and they shall make a determination of the fair value of the shares upon such investigation as to them may seem proper. The appraisers shall also afford a reasonable opportunity to the parties interested to submit to them pertinent evidence as to the value of the shares. The appraisers shall also have such power and authority as may be conferred on Masters in Chancery by the Rules of Civil Procedure or by the order of their appointment. D. The appraisers shall determine the fair value of the shares of the shareholders adjudged by the court to be entitled to payment for their shares and shall file their report of that value in the office of the clerk of the court. Notice of the filing of the report shall be given by the clerk to the parties in interest. The report shall be subject to exceptions to be heard before the court both upon the law and the facts. The court shall by its judgment determine the fair value of the shares of the shareholders entitled to payment for their shares and shall direct the payment of that value by the existing, surviving, or new corporation (foreign or domestic) or other entity, together with interest thereon, beginning 91 days after the date on which the applicable corporate action from which the shareholder elected to dissent was effected to the date of such judgment, to the shareholders entitled to payment. The judgment shall be payable to the holders of uncertificated shares immediately but to the holders of shares represented by certificates only upon, and simultaneously with, the surrender to the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, of duly endorsed certificates for those shares. Upon payment of the judgment, the dissenting shareholders shall cease to have any interest in those shares or in the corporation. The court shall allow the appraisers a reasonable fee as court costs, and all court costs shall be allotted between the parties in the manner that the court determines to be fair and equitable. E. Shares acquired by the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, pursuant to the payment of the agreed value of the shares or pursuant to payment of the judgment entered for the value of the shares, as in this Article provided, shall, in the case of a merger, be treated as provided in the plan of merger and, in all other cases, may be held and disposed of by the corporation as in the case of other treasury shares. III-3 60 F. The provisions of this Article shall not apply to a merger if, on the date of the filing of the articles of merger, the surviving corporation is the owner of all the outstanding shares of the other corporations, domestic or foreign, that are parties to the merger. G. In the absence of fraud in the transaction, the remedy provided by this Article to a shareholder objecting to any corporate action referred to in Article 5.11 of this Act is the exclusive remedy for the recovery of the value of his shares or money damages to the shareholder with respect to the action. If the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, complies with the requirements of this Article, any shareholder who fails to comply with the requirements of this Article shall not be entitled to bring suit for the recovery of the value of his shares or money damages to the shareholder with respect to the action. ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS A. Any shareholder who has demanded payment for his shares in accordance with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote or exercise any other rights of a shareholder except the right to receive payment for his shares pursuant to the provisions of those articles and the right to maintain an appropriate action to obtain relief on the ground that the corporate action would be or was fraudulent, and the respective shares for which payment has been demanded shall not thereafter be considered outstanding for the purposes of any subsequent vote of shareholders. B. Upon receiving a demand for payment from any dissenting shareholder, the corporation shall make an appropriate notation thereof in its shareholder records. Within twenty (20) days after demanding payment for his shares in accordance with either Article 5.12 or 5.16 of this Act, each holder of certificates representing shares so demanding payment shall submit such certificates to the corporation for notation thereon that such demand has been made. The failure of holders of certificated shares to do so shall, at the option of the corporation, terminate such shareholder's rights under Articles 5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and sufficient cause shown shall otherwise direct. If uncertificated shares for which payment has been demanded or shares represented by a certificate on which notation has been so made shall be transferred, any new certificate issued therefor shall bear similar notation together with the name of the original dissenting holder of such shares and a transferee of such shares shall acquire by such transfer no rights in the corporation other than those which the original dissenting shareholder had after making demand for payment of the fair value thereof. C. Any shareholder who has demanded payment for his shares in accordance with either Article 5.12 or 5.16 of this Act may withdraw such demand at any time before payment for his shares or before any petition has been filed pursuant to Article 5.12 or 5.16 of this Act asking for a finding and determination of the fair value of such shares, but no such demand may be withdrawn after such payment has been made or, unless the corporation shall consent thereto, after any such petition has been filed. If, however, such demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B of this Article the corporation shall terminate the shareholder's rights under Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking for a finding and determination of fair value of such shares by a court shall have been filed within the time provided in Article 5.12 or 5.16 of this Act, as the case may be, or if after the hearing of a petition filed pursuant to Article 5.12 or 5.16, the court shall determine that such shareholder is not entitled to the relief provided by those articles, then, in any such case, such shareholder and all persons claiming under him shall be conclusively presumed to have approved and ratified the corporate action from which he dissented and shall be bound thereby, the right of such shareholder to be paid the fair value of his shares shall cease, and his status as a shareholder shall be restored without prejudice to any corporate proceedings which may have been taken during the interim, and such shareholder shall be entitled to receive any dividends or other distributions made to shareholders in the interim. III-4 61 SCHEDULE IV INDEX TO HISTORICAL FINANCIAL STATEMENTS
PAGE ---- Annual Financial Statements Report of Independent Auditors...................................................... IV-2 Consolidated Balance Sheets as of December 31, 1996 and 1995........................ IV-3 Consolidated Statements of Earnings for the Years Ended December 31, 1996, 1995 and 1994............................................................................. IV-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994......................................................................... IV-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994.............................................................. IV-6 Notes to Consolidated Financial Statements.......................................... IV-7
IV-1 62 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Kinetic Concepts, Inc.: We have audited the accompanying consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kinetic Concepts, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method of applying overhead to inventory in 1994. /s/ KPMG PEAT MARWICK LLP -------------------------------------- KPMG PEAT MARWICK LLP San Antonio, Texas February 5, 1997 IV-2 63 CONSOLIDATED BALANCE SHEETS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS)
DECEMBER 31, --------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................ $ 59,045 $ 52,399 Accounts receivable, net............................................. 58,241 56,032 Inventories.......................................................... 20,042 18,854 Note receivable from principal shareholder........................... -- 10,291 Prepaid expenses and other........................................... 6,860 4,865 -------- -------- Total current assets......................................... 144,188 142,441 -------- -------- Net property, plant and equipment...................................... 65,224 62,276 Other notes receivable, net............................................ -- 3,187 Goodwill, less accumulated amortization of $12,021 in 1996 and $10,625 in 1995...................................................... 13,541 13,968 Other assets, less accumulated amortization of $5,614 in 1996 and $5,638 in 1995....................................................... 30,440 21,854 -------- -------- $253,393 $243,726 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................................... $ 3,974 $ 2,512 Current installments of capital lease obligations.................... 118 -- Accrued expenses..................................................... 29,792 26,490 Income tax payable................................................... 2,970 4,026 -------- -------- Total current liabilities.................................... 36,854 33,028 -------- -------- Capital lease obligations, excluding current installments.............. 396 -- Deferred income taxes, net............................................. 5,065 374 -------- -------- 42,315 33,402 -------- -------- Commitments and contingencies (Note 11) Shareholders' equity: Common stock; issued and outstanding 42,355 in 1996 and 44,331 in 1995................................................................. 42 44 Additional paid-in capital............................................. -- 12,123 Retained earnings...................................................... 210,816 197,290 Cumulative foreign currency translation adjustment..................... 555 1,052 Notes receivable from officers......................................... (335) (185) -------- -------- 211,078 210,324 -------- -------- $253,393 $243,726 ======== ========
See accompanying notes to consolidated financial statements. IV-3 64 CONSOLIDATED STATEMENT OF EARNINGS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- Revenue: Rental and service....................................... $225,450 $206,653 $228,832 Sales and other.......................................... 44,431 36,790 40,814 -------- -------- -------- Total revenue......................................... 269,881 243,443 269,646 -------- -------- -------- Rental expenses............................................ 146,205 137,420 159,235 Cost of goods sold......................................... 16,315 13,729 19,388 -------- -------- -------- 162,520 151,149 178,623 -------- -------- -------- Gross profit.......................................... 107,361 92,294 91,023 Selling, general and administrative expenses............... 52,007 48,502 51,813 Unusual items.............................................. -- -- (84,868) -------- -------- -------- Operating earnings.................................... 55,354 43,792 124,078 Interest income (expense), net............................. 9,087 4,554 (4,528) -------- -------- -------- Earnings before income taxes, minority interest and cumulative effect of change in accounting principle........................................... 64,441 48,346 119,550 Income taxes............................................... 25,454 19,905 55,949 -------- -------- -------- Earnings before minority interest and cumulative effect of change in accounting principle............ 38,987 28,441 63,601 Minority interest in subsidiary loss....................... -- -- 40 Cumulative effect of change in accounting for inventory.... -- -- 742 -------- -------- -------- Net earnings.......................................... $ 38,987 $ 28,441 $ 64,383 ======== ======== ======== Earnings per common and common equivalent share: Earnings before cumulative effect of change in accounting principle............................................. $ 0.86 $ 0.63 $ 1.44 Cumulative effect of change in accounting for inventory............................................. -- -- 0.02 -------- -------- -------- Earnings per share.................................... $ 0.86 $ 0.63 $ 1.46 ======== ======== ======== Shares used in earnings per share computations............. 45,489 45,457 44,143 ======== ======== ========
See accompanying notes to consolidated financial statements. IV-4 65 CONSOLIDATED STATEMENTS OF CASH FLOWS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 -------- -------- --------- Cash flows from operating activities: Net earnings............................................ $ 38,987 $ 28,441 $ 64,383 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................ 21,794 22,760 38,795 Provision for uncollectible accounts receivable...... 2,457 1,883 1,100 Noncash portion of unusual items..................... -- -- 4,797 Loss (gain) on KCIFS and Medical Services dispositions....................................... -- 2,933 (10,121) Gain on early repayment of notes receivable.......... (5,180) -- -- Change in assets and liabilities net of effects from purchase of subsidiaries and unusual items: Decrease (increase) in accounts receivable, net.... (4,626) (2,695) 7,316 Decrease (increase) in notes receivable............ 3,187 6,014 (9,201) Decrease (increase) in inventory................... (1,034) (998) 2,735 Decrease (increase) in prepaid and other assets.... (1,927) (593) 3,947 Increase (decrease) in accounts payable............ 1,525 (895) (3,672) Increase (decrease) in accrued expenses............ 3,349 (520) 2,781 Increase (decrease) in income taxes payable........ (1,056) (3,999) 5,378 Increase (decrease) in deferred income taxes....... 4,691 4,451 (11,787) -------- -------- --------- Net cash provided by operating activities....... 62,167 56,782 96,451 -------- -------- --------- Cash flows from investing activities: Additions to property, plant and equipment.............. (27,783) (36,104) (13,814) Decrease (increase) in inventory to be converted into equipment for short-term rental...................... 700 (1,000) 4,250 Dispositions of property, plant and equipment........... 5,400 3,231 2,869 Proceeds from sale of KCIFS and Medical Services divisions............................................ -- 7,182 65,300 Excess principal repayment on discounted notes receivable........................................... 5,180 -- -- Business acquired in purchase transactions, net of cash acquired............................................. (1,146) -- -- Decrease (increase) in finance lease receivables, net... -- 339 (1,561) Note (received) repaid from principal shareholder....... 10,000 (10,000) -- Increase in other assets................................ (9,960) (6,531) (9,230) -------- -------- --------- Net cash provided (used) by investing activities.................................... (17,609) (42,883) 47,814 -------- -------- --------- Cash flows from financing activities: Repayments of notes payable and long-term obligations... -- (800) (102,625) Borrowing (repayments)of capital lease obligations...... 457 (64) (2,382) Proceeds from the exercise of stock options............. 4,264 4,919 915 Purchase and retirement of treasury stock............... (35,241) (2,849) (1,157) Cash dividends paid to shareholders..................... (6,607) (6,631) (6,588) Other................................................... (150) (185) (791) -------- -------- --------- Net cash used by financing activities........... (37,277) (5,610) (112,628) -------- -------- --------- Effect of exchange rate changes on cash and cash equivalents............................................. (635) 869 1,324 -------- -------- --------- Net increase in cash and cash equivalents................. 6,646 9,158 32,961 Cash and cash equivalents, beginning of year.............. 52,399 43,241 10,280 -------- -------- --------- Cash and cash equivalents, end of year.................... $ 59,045 $ 52,399 $ 43,241 ======== ======== =========
See accompanying notes to consolidated financial statements. IV-5 66 KINETIC CONCEPTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE FOREIGN ADDITIONAL CURRENCY COMMON PAID-IN RETAINED TRANSLATION TREASURY LOAN TO STOCK CAPITAL EARNINGS ADJUSTMENT STOCK ESOP ------ ---------- -------- ---------- -------- ------- Balances at December 31, 1993................. $ 46 $ 18,803 $117,685 $ (1,602) $(8,510) $(655) Net earnings................................ -- -- 64,383 -- -- -- Exercise of stock options................... -- 803 -- -- -- -- Forgiveness of officer receivable........... -- -- -- -- -- -- Tax benefit realized from stock option plan...................................... -- 112 -- -- -- -- Treasury stock purchased.................... -- -- -- -- (1,157) -- Treasury stock retired...................... (2) (9,665) -- -- 9,667 -- Cash dividends on common and preferred preferred stock -- $0.15 per share........ -- -- (6,588) -- -- -- Payments on loan to ESOP.................... -- -- -- -- -- 655 Foreign currency translation adjustment..... -- -- -- 1,448 -- -- --- ------- -------- ------- ------- ----- Balances at December 31, 1994................. 44 10,053 175,480 (154) -- -- --- ------- -------- ------- ------- ----- Net earnings................................ -- -- 28,441 -- -- -- Exercise of stock options................... -- 4,024 -- -- -- -- Tax benefit realized from stock option plan............................... -- 895 -- -- -- -- Treasury stock purchased.................... -- -- -- -- (2,849) -- Treasury stock retired...................... -- (2,849) -- -- 2,849 -- Cash dividends on common stock -- $0.15 per share..................................... -- -- (6,631) -- -- -- Foreign currency translation adjustment..... -- -- -- 1,206 -- -- --- ------- -------- ------- ------- ----- Balances at December 31, 1995................. 44 12,123 197,290 1,052 -- -- --- ------- -------- ------- ------- ----- Net earnings................................ -- -- 38,987 -- -- -- Exercise of stock options................... -- 2,098 -- -- -- -- Tax benefit realized from stock option plan............................... -- 2,166 -- -- -- -- Treasury stock purchased.................... -- -- -- -- (35,241) -- Treasury stock retired...................... (2) (16,387) (18,854) -- 35,241 -- Cash dividends on common stock -- $0.15 per share..................................... -- -- (6,607) -- -- -- Foreign currency translation adjustment..... -- -- -- (497) -- -- --- ------- -------- ------- ------- ----- Balances at December 31, 1996................. $ 42 $ -- $210,816 $ 555 $ -- $ -- === ======= ======== ======= ======= ===== NOTES RECEIVABLE FROM TOTAL OFFICERS FOR EXERCISE SHAREHOLDERS' OF STOCK OPTIONS EQUITY --------------------- ------------- < Balances at December 31, 1993................. $ (60) $ 125,707 Net earnings................................ -- 64,383 Exercise of stock options................... -- 803 Forgiveness of officer receivable........... 60 60 Tax benefit realized from stock option plan...................................... -- 112 Treasury stock purchased.................... -- (1,157) Treasury stock retired...................... -- -- Cash dividends on common and preferred preferred stock -- $0.15 per share........ -- (6,588) Payments on loan to ESOP.................... -- 655 Foreign currency translation adjustment..... -- 1,448 ----- -------- Balances at December 31, 1994................. -- 185,423 ----- -------- Net earnings................................ -- 28,441 Exercise of stock options................... (185) 3,839 Tax benefit realized from stock option plan............................... -- 895 Treasury stock purchased.................... -- (2,849) Treasury stock retired...................... -- -- Cash dividends on common stock -- $0.15 per share..................................... -- (6,631) Foreign currency translation adjustment..... -- 1,206 ----- -------- Balances at December 31, 1995................. (185) 210,324 ----- -------- Net earnings................................ -- 38,987 Exercise of stock options................... (150) 1,948 Tax benefit realized from stock option plan............................... -- 2,166 Treasury stock purchased.................... -- (35,241) Treasury stock retired...................... -- (2) Cash dividends on common stock -- $0.15 per share..................................... -- (6,607) Foreign currency translation adjustment..... -- (497) ----- -------- Balances at December 31, 1996................. $(335) $ 211,078 ===== ========
See accompanying notes to consolidated financial statements. IV-6 67 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of Kinetic Concepts, Inc. ("KCI") and all subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of amounts related to prior years have been made to conform with the 1996 presentation. (b) Nature of Operations and Customer Concentration The Company designs, manufactures, markets and distributes therapeutic products, primarily specialty hospital beds, mattress overlays and medical devices that treat and prevent the complications of immobility. The principal markets for the Company's products are domestic and international health care providers, predominantly hospitals and extended care facilities throughout the U.S. and Western Europe. Receivables from these customers are unsecured. The Company contracts with both proprietary and voluntary purchasing organizations ("GPOs"). Proprietary GPOs own all of the hospitals which they represent and, as a result, can ensure complete compliance with an executed national agreement. Voluntary GPOs negotiate contracts on behalf of member hospital organizations but cannot ensure that their members will comply with the terms of an executed national agreement. Approximately 47% of the Company's revenue during 1996 was generated under national agreements with GPOs. The Company operates directly in ten foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Sweden and Italy (see Note 13). (c) Revenue Recognition Service and rental revenue are recognized as services are rendered. Sales and other revenue are recognized when products are shipped. Through June 15, 1995, the Company leased certain medical equipment under long-term lease agreements which were accounted for as direct financing leases. Unearned interest was amortized to income over the term of the lease using the interest method (see Note 2). (d) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Costs include material, labor and manufacturing overhead costs. Inventory expected to be converted into equipment for short-term rental has been reclassified to property, plant and equipment. On January 1, 1994, the Company changed its method of applying overhead to inventory. Historically, a single labor overhead rate and a single materials overhead rate were used in valuing ending inventory. Labor overhead was applied as labor was incurred while materials overhead was applied at the time of shipping. (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Betterments which extend the useful life of the equipment are capitalized. IV-7 68 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (g) Depreciation and Amortization Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives (thirty to forty years for the buildings and between three and ten years for most of the Company's other property and equipment) of the assets. (h) Goodwill Goodwill represents the excess purchase price over the fair value of net assets acquired and is amortized over five to thirty-five years from the date of acquisition using the straight-line method. The carrying value of goodwill is based on management's current assessment of recoverability. Management evaluates recoverability using both objective and subjective factors. Objective factors include management's best estimates of projected future earnings and cash flows and analysis of recent sales and earnings trends. Subjective factors include competitive analysis, technological advantage or disadvantage, and the Company's strategic focus. (i) Other Assets Other assets consist principally of patents, trademarks, system development costs, long-term investments, cash and investments restricted for use by the Company's captive insurance company, and the estimated residual value of assets subject to leveraged leases. Patents and trademarks are amortized over the estimated useful life of the respective asset using the straight-line method. (j) Income Taxes The Company recognizes certain transactions in different time periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The provision for deferred income taxes represents the change in deferred income tax accounts during the year. (k) Common Stock and Earnings Per Common and Common Equivalent Share Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options (using the treasury stock method). Earnings per share computed on a fully diluted basis is not presented as it is not significantly different from earnings per share computed on a primary basis. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Insurance Programs The Company established the KCI Employee Benefits Trust (the "Trust") as a self-insurer for certain risks related to the Company's U.S. employee health plan and certain other benefits. The Company funds the IV-8 69 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Trust based on the value of expected future payments, including claims incurred but not reported. The Company has purchased insurance which limits the Trust's liability under the benefit plans. The Company's wholly-owned captive insurance company, KCI Insurance Company, Ltd. (the "Captive"), reinsures the primary layer of commercial general liability, workers' compensation and auto liability insurance for certain operating subsidiaries. Provisions for losses expected under these programs are recorded based upon estimates of the aggregate liability for claims incurred based on actuarial reviews. The Company has obtained insurance coverage for catastrophic exposures as well as those risks required to be insured by law or contract. (n) Foreign Currency Translation The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. (o) Stock Options During October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation". The new Statement allows companies to continue accounting for stock-based compensation under the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees"; however, companies are encouraged to adopt a new accounting method based on the estimated fair value of employee stock options. Companies that do not follow the new fair value based method will be required to provide expanded disclosures in footnotes to the financial statements. The Company has elected to continue accounting for stock-based compensation under the provisions of APB Opinion 25 and has provided the required by disclosures (See Note 9). NOTE 2. ACQUISITIONS AND DISPOSITIONS On June 15, 1995, the Company sold KCI Financial Services ("KCIFS") to Cura Capital Corporation ("Cura") for cash under a Stock Purchase Agreement. Upon consummation of this transaction, Cura acquired all of the outstanding capital stock of KCIFS. Total proceeds from the sale were $7.2 million. This transaction resulted in a pre-tax loss of $2.9 million which is reflected in selling, general and administrative expenses in 1995. In addition, the Company and its affiliates agreed not to provide lease financing for medical equipment manufactured by third parties for a period of three years. KCIFS served as the leasing agent for Medical Services, certain assets of which were sold in September 1994. The operating results of KCIFS for 1995 and 1994 were not material as compared to the overall results of the Company. In December of 1994, the Company adopted a plan to liquidate the assets of Medical Retro Design, Inc. ("MRD"). Pursuant to that plan, the Company sold certain operating assets of MRD to HBR Healthcare Co. under an Asset Purchase Agreement effective March 27, 1995. The sales price was approximately $250,000. In conjunction with the sale, KCI and its affiliates agreed not to refurbish certain hospital beds and related furniture for a period of three years. Goodwill of $1.5 million associated with MRD was written off in 1994. The write-off was treated as an unusual item. The operating results of MRD for 1995 and 1994 were immaterial to the overall results of the Company. On September 30, 1994, the Company sold certain assets (the "Assets") used exclusively by Medical Services to Mediq/PRN under an Asset Purchase Agreement. Upon consummation of this transaction, Mediq/PRN acquired the Assets and assumed certain liabilities of Medical Services. The sales price was approximately $84.1 million. In conjunction with the sale, the Company and its affiliates agreed not to rent or distribute a portfolio of critical care and life support equipment for five years. IV-9 70 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Gross proceeds included a cash payment of approximately $65.3 million and promissory notes in the aggregate principal amount of $18.8 million. The net proceeds of $72.8 million, pre-tax gain of $10.1 million, and after-tax net loss of $2.5 million were calculated, as follows (in thousands): Cash.............................................................. $ 65,300 Notes receivable (See Note 3)..................................... 9,852 Fees and commissions.............................................. (2,329) -------- Net proceeds................................................. 72,823 Equipment and inventory sold...................................... (38,959) Goodwill.......................................................... (25,778) Accounts receivable provision..................................... (479) Capital leases assumed............................................ 2,514 -------- Pre-tax gain on disposition.................................. 10,121 -------- Tax expense....................................................... (12,601) -------- Net loss on disposition...................................... $ (2,480) ========
Tax expense exceeded the pre-tax gain amount due to the nondeductibility of $25.8 million in unamortized goodwill. During the second quarter of 1996, the Company acquired Astec Medical, a small overlay company in the United Kingdom. This firm produces a well-received product which will enable the Company to further penetrate the community hospital market throughout Europe. Subsequent to December 31, 1996, the Company acquired H.F. Systems, Inc. of Los Angeles. H.F. Systems offers a complete line of therapeutic specialty support surfaces primarily to the West Coast extended care marketplace. The purchase price was approximately $8 million in cash and other considerations. NOTE 3. NOTES RECEIVABLE In August 1995, the Company loaned $10.0 million to James R. Leininger, M.D., the principal shareholder and chairman of the Company's Board of Directors. The note was secured by a Stock Pledge Agreement covering one million shares of common stock in Kinetic Concepts, Inc. Interest was payable in annual installments at the rate of 7.94%. In January 1996, the note receivable was collected in full. Other notes receivable included notes received from Mediq/PRN as part of the proceeds on the sale of Medical Services effective September 30, 1994. At the time of the sale, the Company received an opinion from an independent investment banker on the notes receivable which was used to arrive at the carrying values. In October of 1996, the Company negotiated the early repayment of all remaining notes for $8.5 million, plus interest accrued through closing. As a result of this transaction, the Company recognized a one-time gain of $5.2 million before income taxes which has been included as interest income as of IV-10 71 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1996. The values of the various notes receivable at December 31, 1995 for accounting purposes are described below (in thousands):
YEAR ENDED DECEMBER 31, PRINCIPAL BALANCE ------------------- 1996 1995 ------- ------- Note from PRN Holding, Inc. with 10% interest due quarterly in arrears beginning March 1996 and principal due September 1999......................................... $ -- $10,000 Less discount and valuation allowance.................... -- (6,813) ------- ------- Notes receivable, noncurrent............................. $ -- $ 3,187 ======= =======
NOTE 4. SUPPLEMENTAL BALANCE SHEET DATA Accounts receivable consist of the following (in thousands):
DECEMBER 31, ------------------- 1996 1995 ------- ------- Trade accounts receivable................................ $63,613 $60,149 Employee and other receivables........................... 2,160 2,060 ------- ------- 65,773 62,209 Less allowance for doubtful receivables.................. 7,532 6,177 ------- ------- $58,241 $56,032 ======= =======
Inventories consist of the following (in thousands):
DECEMBER 31, ------------------- 1996 1995 ------- ------- Finished goods........................................... $ 5,586 $ 2,890 Work in process.......................................... 1,893 1,040 Raw materials, supplies and parts........................ 17,113 20,174 ------- ------- 24,592 24,104 Less amounts expected to be converted into equipment for short-term rental...................................... 4,550 5,250 ------- ------- $20,042 $18,854 ======= =======
Net property, plant and equipment consist of the following (in thousands):
DECEMBER 31, --------------------- 1996 1995 -------- -------- Land................................................... $ 1,007 $ 742 Buildings.............................................. 14,254 13,418 Equipment for short-term rental........................ 133,896 110,858 Machinery, equipment and furniture..................... 36,821 27,610 Leasehold improvements................................. 1,388 1,042 Inventory to be converted into equipment............... 4,550 5,250 -------- -------- 191,916 158,920 Less accumulated depreciation and amortization......... 126,692 96,644 -------- -------- $ 65,224 $ 62,276 ======== ========
IV-11 72 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accrued expenses consist of the following (in thousands):
DECEMBER ------------------- 1996 1995 ------- ------- Payroll, commissions and related taxes................... $13,162 $12,589 Insurance accruals....................................... 2,887 3,470 Other accrued expenses................................... 13,743 10,431 ------- ------- $29,792 $26,490 ======= =======
The carrying amount of financial instruments in current assets and current liabilities approximate fair value because of the short maturity of these instruments. NOTE 5. NOTE PAYABLE AND LONG-TERM OBLIGATIONS The Company entered into a revolving credit and term loan agreement (the "Credit Agreement") with a bank as agent for itself and certain other financial institutions. The Credit Agreement provides for a $50 million one-year revolving credit facility with a two-year renewal option. Any advances under the Credit Agreement are due at the end of the period covered by the Credit Agreement. At December 31, 1996, the entire $50 million balance was available. The interest rate payable on borrowings under the Credit Agreement is at the election of the Company: (i) the Bank's reference rate, or (ii) the London inter-bank offered rate quoted to the Bank for one, two, three, or six month Eurodollar deposits adjusted for appropriate reserves ("LIBOR") plus 40 basis points. The Credit Agreement requires that the Company maintain specified ratios and meet certain financial targets. The Credit Agreement also contains certain events of default, includes certain provisions governing a change in control of the Company, and establishes various fees to be paid by the Company. At December 31, 1996, the Company was in compliance with all covenants. Interest paid on debt during 1996, 1995 and 1994 amounted to $0.2 million, $0.4 million and $5.4 million, respectively. NOTE 6. LEASING OBLIGATIONS The Company is obligated for equipment under various capital leases which expire at various dates during the next four years. At December 31, 1996 the gross amount of equipment under capital leases totaled $619,000 and related accumulated depreciation totaled $175,000. The Company leases service vehicles, office space, various storage spaces and manufacturing facilities under noncancelable operating leases which expire at various dates over the next six years. Total rental expense for operating leases, net of sublease payments received, was $13.5 million, $12.0 million and $10.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. IV-12 73 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1996 are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- 1997...................................................... $ 208 $10,498 1998...................................................... 160 7,947 1999...................................................... 160 5,221 2000...................................................... 93 3,771 2001...................................................... -- 1,073 Later years............................................... -- -- ---- ------- Total minimum lease payments.............................. 621 $28,510 ======= Less amount representing interest......................... 107 ---- Present value of net minimum capital lease payments....... 514 Less current portion...................................... 118 ---- Obligations under capital leases excluding current installments............................................ $ 396 ====
NOTE 7. INCOME TAXES Earnings before income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ------- ------- -------- Domestic............................................. $51,771 $37,542 $110,287 Foreign.............................................. 12,670 10,804 9,263 ------- ------- -------- $64,441 $48,346 $119,550 ======= ======= ========
Income tax expense attributable to income from continuing operations consists of the following (in thousands):
YEAR ENDED DECEMBER 31, 1996 ---------------------------------- CURRENT DEFERRED TOTAL ------- -------- ------- Federal.............................................. $14,363 $4,464 $18,827 State................................................ 2,569 552 3,121 International........................................ 3,831 (325) 3,506 ------- ------ ------- $20,763 $4,691 $25,454 ======= ====== =======
YEAR ENDED DECEMBER 31, 1995 ---------------------------------- CURRENT DEFERRED TOTAL ------- -------- ------- Federal.............................................. $ 8,148 $4,174 $12,322 State................................................ 2,140 277 2,417 International........................................ 5,166 -- 5,166 ------- ------ ------- $15,454 $4,451 $19,905 ======= ====== =======
IV-13 74 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1994 -------------------------------- CURRENT DEFERRED TOTAL ------- -------- ------- Federal.............................................. $56,697 $(11,031) $45,666 State................................................ 8,212 (756) 7,456 International........................................ 3,282 -- 3,282 ------- -------- ------- $68,191 $(11,787) $56,404 ======= ======== =======
Income tax expense attributable to income from continuing operations differed from the amounts computed by applying the statutory tax rate of 35 percent to pre-tax income from continuing operations as a result of the following:
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ------- -------- ------- Computed "expected" tax expense....................... $22,554 $ 16,921 $41,843 Goodwill.............................................. 442 533 9,307 State income taxes, net of Federal benefit............ 2,028 1,571 4,846 Tax-exempt interest from municipal bonds.............. (445) -- -- Foreign income taxed at other than U.S. rates......... 1,145 1,836 350 Utilization of foreign net operating loss carryforwards....................................... (123) (231) (814) Nonconsolidated foreign net operating loss............ 67 492 566 Foreign, other........................................ (441) (1,450) 271 Effect of change in inventory accounting method....... -- -- 455 Other, net............................................ 227 233 (420) ------- ------- ------- $25,454 $ 19,905 $56,404 ======= ======= =======
IV-14 75 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and December 31, 1995 are presented below:
1996 1995 -------- -------- Deferred Tax Assets: Accounts receivable, principally due to allowance for doubtful accounts......................................... $ 4,458 $ 3,591 Intangible assets, deducted for book purposes but capitalized and amortized for tax purposes............................ 1 323 Net operating loss carryforwards............................. 67 492 Inventories, principally due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986... 664 702 Notes receivable, basis difference........................... -- 397 Legal fees, capitalized and amortized for tax purposes....... 670 402 Accrued liabilities.......................................... 1,015 519 Deferred foreign tax asset................................... 325 -- Other........................................................ 1,089 41 -------- -------- Total gross deferred tax assets........................... 8,289 6,467 Less valuation allowance.................................. (67) (492) -------- -------- Net deferred tax assets................................... 8,222 5,975 Deferred Tax Liabilities: Plant and equipment, principally due to differences in depreciation and basis.................................... (11,722) (5,686) Deferred state tax liability................................. (973) (421) Investments, principally due to differences in tax treatment of certain components..................................... (506) -- Other........................................................ (86) (242) -------- -------- Total gross deferred tax liabilities.................... (13,287) (6,349) -------- -------- Net deferred tax liability........................... $ (5,065) $ (374) ======== ========
At December 31, 1996, the Company had $1.1 million of operating loss carryforwards available to reduce future taxable income of certain international subsidiaries. These loss carryforwards must be utilized within the applicable carryforward periods. A valuation allowance has been provided for the deferred tax assets related to loss carryforwards. Carryforwards of $712,000 can be used indefinitely and the remainder expire from 1997 through 2001. The Company anticipates that the reversal of existing taxable temporary differences and future taxable income will provide sufficient taxable income to realize the tax benefit of the remaining deferred tax assets. In accordance with the Company's accounting policy, U.S. deferred taxes have not been provided on undistributed earnings of foreign subsidiaries at the end of 1996, as the Company intends to reinvest these earnings permanently in the foreign operations or to repatriate such earnings only when it is advantageous for the Company to do so. The amount of the unrecognized tax liability for these undistributed earnings was not material at the end of 1996 due to the availability of foreign tax credits. Income taxes paid during 1996, 1995 and 1994 were $15.4 million, $15.1 million and $57.3 million, respectively. IV-15 76 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. SHAREHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS Common Stock: The Company is authorized to issue 100 million shares of Common Stock, $.001 par value (the "Common Stock"). The number of shares of Common Stock issued and outstanding at the end of 1996 and 1995 was 42,355,000 and 44,331,000, respectively. Treasury Stock: In July, 1995, the Company's Board of Directors approved a program to repurchase up to 3,000,000 shares of its Common Stock. The Company repurchased 2,563,000 shares during 1996 and 77,000 shares during 1995. As of December 31, 1996, there were 360,000 remaining shares to be repurchased in the program. In 1994, the Company's Board of Directors adopted a resolution to return all repurchased shares to the status of authorized but unissued shares. In accordance with this resolution, the Company retired 2,563,000 and 77,000 treasury shares in 1996 and 1995, respectively. Subsequent to 1996, the Company's Board of Directors approved a program which authorizes the Company to purchase up to an additional 3 million shares. Preferred Stock: The Company is authorized to issue up to 20 million shares of Redeemable Preferred Stock, par value $0.001 per share, in one or more series. As of December 31, 1996 and December 31, 1995, none were issued. Employee Stock Ownership Plan: The Company has established an Employee Stock Ownership Plan (the "ESOP") covering employees of the Company who meet minimum age and length of service requirements. The ESOP enables eligible employees to acquire a proprietary interest in the Company. As of December 31, 1996, all shares of stock owned by the ESOP have been allocated to employees. Based on the number of shares planned to be allocated for the year, ESOP expense recorded during 1996, 1995 and 1994 amounted to $0, $263,000 and $476,000, respectively. Investment Plan: The Company has an Investment Plan intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986. The Investment Plan is available to all domestic employees and the Company matches employee contributions up to a specified limit. In 1996, 1995 and 1994, $498,000, $265,000 and $314,000, respectively, was charged to expense for matching contributions. NOTE 9. STOCK OPTION PLANS In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation". While the new accounting standard encourages the adoption of a new fair-value method for expense recognition, Statement 123 allows companies to continue accounting for stock options and other stock-based awards as provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company has elected to follow the provisions of APB 25 and related interpretations in accounting for its stock options plans because, as discussed below, the alternative fair-value method prescribed by FASB Statement No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options generally equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. IV-16 77 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the "Key Contributor Stock Option Plan") covers up to an aggregate of 5,750,000 shares of the Company's Common Stock. Options may be granted under the Key Contributor Stock Option Plan to employees (including officers), non-employee directors and consultants of the Company. The exercise price of the options is determined by a committee of the Board of Directors of the Company. The Key Contributor Stock Option Plan permits the Board of Directors to declare the terms for payment when such options are exercised. Options may be granted with a term not exceeding ten years. The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the "Directors Stock Option Plan") covers an aggregate of 300,000 shares of the Company's Common Stock and may be granted to non-employee directors of the Company. The exercise price of options granted under the Directors Stock Option Plan shall be the fair market value of the shares of the Company's Common Stock on the date that such option is granted. The 1995 Kinetic Concepts, Inc. Senior Executive Management Stock Option Plan (the "Senior Executive Stock Option Plan") covers a total of 1,400,000 shares of the Company's Common Stock and may be granted to certain senior executives of the Company at the recommendation of the Chief Executive Officer and discretion of the Company's Board of Directors. The exercise price for each share of common stock covered by an option shall be established by the Board of Directors but may not in any case be less than the fair market value of the shares of common stock of the Company on the date of grant. Vesting of options granted is subject to certain terms and conditions. The Senior Executive Stock Option Plan is subject to final approval by the Company's shareholders. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair-value method of that statement. The fair value for options granted during the two fiscal years ended December 31, 1996 and 1995, respectively, was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.1% and 6.0%, dividend yields of 0.9% and 2.1%, volatility factors of the expected market price of the Company's common stock of .32 and .33, and a weighted-average expected option life of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the underlying assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1996 1995 ------- ------- Net Earnings as Reported................................. $38,987 $28,441 Pro Forma Net Earnings................................... $37,996 $28,238 Earnings Per Share as Reported........................... $ 0.86 $ 0.63 Pro Forma Earnings Per Share............................. $ 0.84 $ 0.62
The Company is not required to apply the method of accounting prescribed by Statement 123 to stock options granted prior to January 1, 1995. As such, the pro forma compensation cost reflected above may not be representative of future results. IV-17 78 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summaries information about stock options outstanding at December 31, 1996 (shares in thousands):
WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED OPTIONS CONTRACT AVERAGE OPTIONS AVERAGE RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/96 (YRS) PRICE AT 12/31/96 PRICE - ----------------------------------- ----------- --------- -------- ----------- -------- $ 3.00 to $ 4.63................... 1,166 6.9 $ 4.22 594 $ 4.23 $ 5.00 to $ 9.50................... 1,272 7.5 $ 6.26 435 $ 6.14 $11.13 to $17.00................... 901 9.2 $15.61 292 $14.23 ----- --- ------ ----- ------ 3,339 8.0 $ 8.68 1,321 $ 7.07 ===== === ====== ===== ======
A summary of the Company's stock option activity, and related information, for years ended December 31, 1996, 1995 and 1994 follows (options in thousands):
1996 1995 1994 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- Options Outstanding -- Beginning of Year................................ 2,833 $ 5.21 3,029 $ 4.50 2,668 $ 5.35 Granted............................. 1,317 $14.47 873 $ 6.89 2,124 $ 4.15 Exercised........................... (628) $ 5.05 (792) $ 4.56 (199) $ 4.07 Forfeited........................... (183) $ 9.34 (277) $ 4.57 (1,564) $ 5.53 ----- ------ ----- ----- ------ ----- Options Outstanding -- End of Year.... 3,339 $ 8.68 2,833 $ 5.21 3,029 $ 4.50 ===== ====== ===== ===== ====== ===== Exercisable at End of Year............ 1,321 $ 7.07 ===== ====== Weighted-Average Fair Value of Options Granted During the Year............. $ 5.80 $ 2.19 ====== =====
Exercise prices for options outstanding as of December 31, 1996 ranged from $3.00 to $17.00. The weighted average remaining contractual life of those options is 8.0 years. The following table summarizes the activity in the Company's 1987 Key Contributor Stock Option Plan (in thousands, except per share data):
SHARES OPTION PRICE PER SHARE ------ ---------------------- Outstanding, January 1, 1994...................................... 2,606 $3.00 to $8.625 Granted......................................................... 2,116 $3.375 to $6.00 Canceled........................................................ (1,556) $3.50 to $8.625 Exercised....................................................... (199) $3.50 to $5.75 ---------------- ------ Outstanding, December 31, 1994.................................... 2,967 $3.00 to $8.625 ---------------- ------ Granted......................................................... 865 $5.50 to $11.75 Canceled........................................................ (277) $3.375 to $8.1875 Exercised....................................................... (760) $3.375 to $6.75 ---------------- ------ Outstanding, December 31, 1995.................................... 2,795 $3.00 to $11.75 ---------------- ------ Granted......................................................... 806 $11.75 to $17.00 Canceled........................................................ (183) $3.625 to $16.50 Exercised....................................................... (618) $3.50 to $16.50 ---------------- ------ Outstanding, December 31, 1996.................................... 2,800 $3.00 to $17.00 ====== ================
IV-18 79 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the activity in the Company's 1988 Eligible Directors Stock Option Plan (in thousands, except per share data):
SHARES OPTION PRICE PER SHARE ------ ---------------------- Outstanding, January 1, 1994...................................... 62 $ 4.125 to $ 9.375 Granted......................................................... 8 $ 3.75 to $ 4.50 Exercised....................................................... -- $ -- Lapsed.......................................................... (8) $ 5.00 to $ 5.25 ------------------ --- Outstanding, December 31, 1994.................................... 62 $ 3.75 to $ 9.375 ------------------ --- Granted......................................................... 8 $ 8.125 to $ 9.25 Exercised....................................................... (32) $ 4.125 to $ 5.875 Lapsed.......................................................... -- $ -- ------------------ --- Outstanding, December 31, 1995.................................... 38 $ 3.75 to $ 9.375 ------------------ --- Granted......................................................... 31 $14.625 to $16.125 Exercised....................................................... (10) $ 4.375 to $ 9.375 Lapsed.......................................................... -- $ -- ------------------ --- Outstanding, December 31, 1996.................................... 59 $ 3.75 to $16.125 === ==================
In July, 1991, the Company granted options to three non-employee directors of the Company to acquire a total of 30,000 shares of the Company's Common Stock at $5.00 per share (the fair market value at date of grant). At December 31, 1996, 20,000 options are exercisable and expire ten years from the grant date. During 1994, the Chairman of the Board issued options for 440,000 of his shares at fair market value of $5.74 to the newly appointed Chief Executive Officer. At December 31, 1996, 340,000 options are exercisable and expire three years from the grant date. NOTE 10. OTHER ASSETS A summary of other long-term assets follows (in thousands):
1996 1995 ------- ------- Investment in assets subject to leveraged leases........... $14,766 $ 7,566 Information systems development projects................... 3,124 5,601 Investment in long-term securities......................... 4,989 4,872 Intangible assets.......................................... 3,660 3,475 Deposits and other......................................... 8,529 5,978 ------- ------- $35,068 $27,492 (Less) Accumulated amortization............................ 4,628 5,638 ------- ------- $30,440 $21,854 ======= =======
Long-term securities consist primarily of government backed securities held by the Company's wholly owned captive insurance company and are carried at market value, which is not significantly different than cost. The carrying value of the long-term securities approximates fair value. On December 30, 1996, the Company acquired beneficial ownership of a Grantor Trust. The Trust assets consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisition, KCI paid cash equity of $7.2 million and assumed non-recourse debt of $47.0 million. The DC-10 aircraft is on lease to the Federal Express Corporation through June 2012. Federal Express pays monthly rent to a third IV-19 80 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) party who, in turn, pays this entire amount to the holders of the non-recourse certificated indebtedness, which is secured by the aircraft. Recourse to the certificate holders is limited to the Trust assets only. NOTE 11. COMMITMENTS AND CONTINGENCIES On February 21, 1992, Novamedix Limited filed a lawsuit against the Company in the United States District Court for the Western District of Texas. Novamedix holds the patent rights to the principal product which directly competes with the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents held by Novamedix, that the Company breached a confidential relationship with Novamedix and a variety of subsidiary claims. Novamedix seeks injunctive relief and monetary damages. Initial discovery in this case has been substantially completed. Although it is not possible to predict the outcome of this litigation or the damages which could be awarded, the Company believes that its defenses to these claims are meritorious and that the litigation will not have a material effect on the Company's business, financial condition or results of operations. On August 16, 1995, the Company filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom. The suit was filed in the United States District Court for the Western District of Texas. The suit alleges that Hill-Rom used its monopoly power in the standard hospital bed business to gain an unfair advantage in the specialty hospital bed business. Although discovery is just beginning and it is not possible to predict the outcome of this litigation or the damages which might be awarded, the Company believes that its claims are meritorious. On October 31, 1996 the Company received a counterclaim which had been filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company filed in 1995. The counterclaim alleges that the Company's antitrust lawsuit and other actions were designed to enable Kinetic Concepts to monopolize the bed market. Although it is not possible to predict the outcome of this litigation, the Company believes that the counterclaim is without merit. On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries, Inc. filed a lawsuit against the Company alleging that the Company's TriaDyne(TM) bed infringes a patent issued to Hill-Rom in December 1996. This suit was filed in the United States District Court for the District of South Carolina. Substantive discovery in the case has not begun. Based upon its initial investigation, the Company does not believe that the TriaDyne(TM) bed infringes the Hill-Rom patent or that this lawsuit will materially impact the marketing of the TriaDyne(TM) bed. The Company is party to several lawsuits generally incidental to its business, including product claims and is contesting certain adjustments proposed by the Internal Revenue Service to prior years' tax returns. Provisions have been made in the accompanying financial statements for estimated exposures related to these lawsuits and adjustments. In the opinion of management, the disposition of these items will not have a material effect on the Company's business, financial condition or results of operations. See discussion of self-insurance program at Note 1 and leases at Note 6. NOTE 12. UNUSUAL ITEMS During the third quarter of 1994, the Company recorded a gain from the settlement of a patent infringement lawsuit brought against SSI. The settlement was $84.75 million. Net of legal expenses, this transaction added $81.6 million of pre-tax income to the 1994 results. In addition, a $10.1 million pre-tax gain from the sale of Medical Services was recognized. The Company recorded certain other unusual items, primarily planned dispositions of under-utilized rental assets and over-stocked inventories of $6.8 million. These items together total $84 million and are included in Unusual Items on the 1994 Statement of Earnings. IV-20 81 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates primarily in one industry segment: the distribution of specialty therapeutic beds and medical devices to select health care providers. A summary of financial information by geographic area is as follows:
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------ DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ Total revenue: Unaffiliated customers...................... $201,116 $68,765 $ -- $269,881 Intercompany transfers...................... 7,272 -- (7,272) -- -------- ------- -------- -------- Total............................... $208,388 $68,765 $ (7,272) $269,881 ======== ======= ======== ======== Operating earnings............................ $ 40,810 $15,197 $ (653) $ 55,354 ======== ======= ======== ======== Total assets: Identifiable assets......................... $156,273 $49,622 $(11,547) $194,348 ======== ======= ======== Corporate assets............................ 59,045 -------- Total assets........................ $253,393 ========
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------ DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ Total revenue: Unaffiliated customers...................... $182,754 $60,689 $ -- $243,443 Intercompany transfers...................... 6,991 -- (6,991) -- -------- ------- -------- -------- Total............................... $189,745 $60,689 $ (6,991) $243,443 ======== ======= ======== ======== Operating earnings............................ $ 33,779 $10,845 $ (832) $ 43,792 ======== ======= ======== ======== Total assets: Identifiable assets......................... $157,615 $43,787 $(10,075) $191,327 ======== ======= ======== Corporate assets............................ 52,399 -------- Total assets........................ $243,726 ========
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------ DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ Total revenue: Unaffiliated customers...................... $223,202 $46,444 $ -- $269,646 Intercompany transfers...................... 5,489 -- (5,489) -- -------- ------- -------- -------- Total............................... $228,691 $46,444 $ (5,489) $269,646 ======== ======= ======== ======== Operating earnings............................ $117,368 $ 7,737 $ (1,027) $124,078 ======== ======= ======== ======== Total assets: Identifiable assets......................... $156,248 $41,756 $ (8,514) $189,490 ======== ======= ======== Corporate assets............................ 43,241 -------- Total assets........................ $232,731 ========
IV-21 82 KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Domestic intercompany transfers primarily represent shipments of equipment and parts to international subsidiaries. These intercompany shipments are made at transfer prices which approximate prices charged to unaffiliated customers and have been eliminated from consolidated net revenues. Corporate assets consist of cash and cash equivalents. NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The unaudited consolidated results of operations by quarter are summarized below:
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Revenue............................................. $67,587 $64,272 $67,970 $70,052 Operating earnings.................................. $13,741 $12,721 $13,629 $15,263 Net earnings........................................ $ 8,814 $ 8,187 $ 8,858 $13,128 Earnings per common and common equivalent share..... $ 0.19 $ 0.18 $ 0.19 $ 0.30
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Revenue............................................. $57,027 $59,790 $61,606 $65,020 Operating earnings.................................. $ 9,577 $ 8,717 $12,734 $12,764 Net earnings........................................ $ 6,098 $ 5,716 $ 8,535 $ 8,092 Earnings per common and common equivalent share..... $ 0.14 $ 0.13 $ 0.19 $ 0.18
Earnings per share for the full year may differ from the total of the quarterly earnings per share due to rounding differences. IV-22 83 SCHEDULE V INDEX TO INTERIM FINANCIAL STATEMENTS Interim Financial Statements Condensed Consolidated Balance Sheet as of June 30, 1997 (Unaudited)................. V-2 Condensed Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 1997 and 1996 (Unaudited).......................................... V-3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited)......................................................... V-4 Notes to Condensed Consolidated Financial Statements (Unaudited)..................... V-5
V-1 84 CONDENSED CONSOLIDATED BALANCE SHEETS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------- (UNAUDITED) ----------- ASSETS Current assets: Cash and cash equivalents......................................... $ 38,388 $ 59,045 Accounts and notes receivable, net................................ 74,129 58,241 Inventories....................................................... 21,173 20,042 Prepaid expenses and other........................................ 8,722 6,860 -------- -------- Total current assets...................................... 142,412 144,188 -------- -------- Net property, plant and equipment................................... 72,060 65,224 Notes receivable.................................................... 3,250 -- Goodwill, less accumulated amortization of $12,510 in 1997 and $12,021 in 1996............................................... 23,047 13,541 Other assets, less accumulated amortization of $2,906 in 1997 and $2,837 in 1996................................................ 30,488 30,440 -------- -------- $ 271,257 $ 253,393 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable.................................................. $ 4,740 $ 3,974 Current installments of capital lease obligations................. 134 118 Accrued expenses.................................................. 32,299 29,792 Income tax payable................................................ 3,242 2,970 -------- -------- Total current liabilities................................. 40,415 36,854 -------- -------- Capital lease obligations, net of current installments.............. 378 396 Deferred income taxes, net.......................................... 7,528 5,065 Other............................................................... 218 -- -------- -------- 48,539 42,315 -------- -------- Minority interest................................................... 204 -- Shareholders' equity: Common stock; issued and outstanding 42,305 in 1997 and 42,355 in 1996........................................................... 42 42 Retained earnings................................................. 225,314 210,816 Cumulative foreign currency translation adjustment................ (2,602) 555 Notes receivable from officers.................................... (240) (335) -------- -------- 222,514 211,078 -------- -------- $ 271,257 $ 253,393 ======== ========
See accompanying notes to condensed consolidated financial statements. V-2 85 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- --------------------- 1997 1996 1997 1996 ------- ------- -------- -------- Revenue: Rental and service.............................. $61,300 $54,095 $123,125 $110,885 Sales and other................................. 13,731 10,177 25,087 20,974 ------- ------- -------- -------- Total revenue................................ 75,031 64,272 148,212 131,859 Rental expenses................................... 38,904 35,611 76,616 72,857 Cost of goods sold................................ 5,770 3,786 10,012 7,829 ------- ------- -------- -------- 44,674 39,397 86,628 80,686 ------- ------- -------- -------- Gross profit................................. 30,357 24,875 61,584 51,173 Selling, general and administrative expenses...... 14,134 12,154 29,144 24,711 ------- ------- -------- -------- Operating earnings........................... 16,223 12,721 32,440 26,462 Net interest income............................... 399 904 853 1,874 ------- ------- -------- -------- Earnings before income taxes and minority interest................................... 16,622 13,625 33,293 28,336 Income taxes...................................... 6,649 5,438 13,317 11,335 Minority interest................................. 21 -- 21 -- ------- ------- -------- -------- Net earnings................................. $ 9,952 $ 8,187 $ 19,955 $ 17,001 ======= ======= ======== ======== Earnings per common and common equivalent share...................................... $ 0.23 $ 0.18 $ 0.46 $ 0.37 ======= ======= ======== ======== Shares used in earnings per share computations............................... 43,806 46,459 43,737 46,015 ======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements. V-3 86 CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------- 1997 1996 ------- ------- Cash flows from operating activities: Net earnings........................................................... $19,955 $17,001 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization....................................... 10,974 11,709 Provision for uncollectible accounts receivable..................... 1,434 1,187 Change in assets and liabilities: Increase in accounts receivable................................... (15,656) (1,736) Increase in inventories........................................... (643) (1,983) Increase in prepaid and other assets.............................. (1,816) (2,395) Increase (decrease) in accounts payable........................... (291) 597 Increase (decrease) in accrued expenses........................... 1,065 (99) Increase in income taxes payable.................................. 272 630 Increase in deferred income taxes................................. 2,463 492 ------- ------- Net cash provided by operating activities...................... 17,757 25,403 ------- ------- Cash flows from investing activities: Additions to property, plant, and equipment............................ (13,533) (12,480) Increase in inventory to be converted into equipment for short-term rental.............................................................. (3,645) (150) Dispositions of property, plant, and equipment......................... 1,096 750 Business acquired in purchase transactions, net of cash acquired....... (12,445) -- Decrease in note receivable from principal shareholder................. -- 10,000 Increase in other assets............................................... (3,223) (1,340) ------- ------- Net cash used by investing activities.......................... (31,750) (3,220) ------- ------- Cash flows from financing activities: Repayments of capital lease obligations................................ (53) -- Proceeds from the exercise of stock options............................ 1,963 4,276 Purchase and retirement of treasury stock.............................. (4,133) (10,363) Cash dividends paid to shareholders.................................... (3,205) (3,331) Other.................................................................. 217 (138) ------- ------- Net cash used by financing activities.......................... (5,211) (9,556) ------- ------- Effect of exchange rate changes on cash and cash equivalents............. (1,453) (160) ------- ------- Net increase in cash and cash equivalents................................ (20,657) 12,467 Cash and cash equivalents, beginning of year............................. 59,045 52,399 ------- ------- Cash and cash equivalents, end of period................................. $38,388 $64,866 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the first six months for: Interest............................................................ 84 82 Income taxes........................................................ 8,783 6,160
See accompanying notes to condensed consolidated financial statements. V-4 87 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS KINETIC CONCEPTS, INC. AND SUBSIDIARIES (UNAUDITED) (1) BASIS OF PRESENTATION The financial statements presented herein include the accounts of Kinetic Concepts, Inc. and all subsidiaries (the "Company"). The condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The foregoing financial information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Interim period operating results are not necessarily indicative of the results to be expected for the full fiscal year. (2) INVENTORY COMPONENTS Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories are comprised of the following (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ Finished goods........................................ $ 4,006 $ 5,586 Work in process....................................... 3,143 1,893 Raw materials, supplies and parts..................... 22,219 17,113 ------- ------- 29,368 24,592 Less amounts expected to be converted into equipment for short-term rental............................... 8,195 4,550 ------- ------- Total inventories........................... $ 21,173 $ 20,042 ======= =======
(3) NOTES RECEIVABLE Notes receivable included a $3.0 million note received from James R. Leininger, M.D., the principal shareholder and chairman of the Company's Board of Directors, the proceeds of which were used to finance a construction project for Home Dome, L.L.C., a third party affiliated with Dr. Leininger. The note carries a variable interest rate which will fluctuate between 6.25% and 10.25% per annum, and requires quarterly interest payments beginning May 3, 1997. Monthly principal payments commence March 3, 1998 based on a 20-year note amortization. The note has a final maturity date of February 3, 2002, at which time the entire amount of unpaid principal and interest shall be due. The note is secured by 300,000 shares of the Company's Common Stock and a mortgage on the property under construction. (4) ACQUISITIONS/DISPOSITIONS On April 18, 1997, the Company acquired 80% of the outstanding capital stock of Ethos Medical Group, Ltd. located in Athlone, Ireland, for approximately $2.3 million in cash plus other consideration. Ethos manufactures the Keene Roto Rest (R) trauma bed and other medical devices and rents specialty support surfaces to caregivers throughout Ireland. Ethos Medical's operating results are not expected to have a material impact on the Company's results of operations for 1997. On February 1, 1997, the Company acquired the assets of H.F. Systems, Inc. of Los Angeles. H.F. Systems offers a complete line of therapeutic specialty support surfaces primarily to the California extended care marketplace. The Company acquired the assets of H.F. Systems in a single transaction for approximately $8.0 million in cash plus other consideration. H.F. Systems will be integrated into Kinetic Concepts' extensive V-5 88 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS KINETIC CONCEPTS, INC. AND SUBSIDIARIES -- (CONTINUED) distribution system and, as a result, the Company expects to benefit from the elimination of certain redundant expenses. H.F. Systems recorded revenue of approximately $7.0 million for 1996 and is not expected to have a material impact on the Company's results of operations for 1997. On January 3, 1997 the Company purchased from Trac Medical, Inc., a North Carolina corporation, all of the assets and technology rights related to the "Access" patient care device, an environmental control system which is mountable on hospital beds. The purchase price of the Access device was approximately $2.0 million in cash plus other consideration. (5) SHARES USED IN EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE COMPUTATIONS The weighted average number of common and common equivalent shares used in the computation of earnings per share is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------- ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ Average outstanding common shares....................... 42,317 44,307 42,322 44,332 Average common equivalent shares-dilutive effect of option shares......................................... 1,489 2,152 1,415 1,683 ------- ------- ------- ------- Shares used in earnings per share computations.......... 43,806 46,459 43,737 46,015 ======= ======= ======= =======
Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options (using the treasury stock method). Earnings per share computed on a fully diluted basis is not presented as it is not significantly different from earnings per share computed on a primary basis. (6) COMMITMENTS AND CONTINGENCIES The Company is party to several lawsuits generally incidental to its business and is contesting certain adjustments proposed by the Internal Revenue Service to prior years' tax returns. Provisions have been made in the accompanying financial statements for estimated exposures related to these lawsuits and adjustments. In the opinion of management, the disposition of these items will not have a material effect on the Company's financial statements. (7) NEW PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary ("basic") earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in basic earnings per share for the six month period ended June 30, 1997 and June 30, 1996 of $0.01 and $0.01 per share, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material. V-6 89 The Letter of Transmittal and certificates evidencing Shares and any other required documents should be sent or delivered by each shareholder or his broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: BOSTON EQUISERVE, L.P.
By Mail: By Hand: By Overnight Courier: BOSTON EQUISERVE, L.P. BANKBOSTON, N.A. BANKBOSTON, N.A. CORPORATE REORGANIZATION SECURITIES TRANSFER & BOSTON EQUISERVE, L.P. POST OFFICE BOX 8029 REPORTING SERVICES, INC. CORPORATE REORGANIZATION BOSTON, MA 02266-8029 55 BROADWAY, 3RD FLOOR 150 ROYALL STREET NEW YORK, NY 10006 MAIL STOP 45-01-40 ATTN: DELIVERY WINDOW CANTON, MA 02021
------------------ Questions or requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers listed below. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent. A shareholder may also contact brokers, dealers, commercial banks or trust companies for assistance concerning the Offer. The Information Agent for the Offer is: [Georgeson & Co. Inc. LOGO] Wall Street Plaza New York, New York 10005 Bankers and Brokers Call Collect: (212) 440-9800 ALL OTHERS CALL TOLL FREE: (800) 223-2064 The Dealer Manager for the Offer is: [LOGO BT ALEX. BROWN] One South Street Baltimore, Maryland 21202 (410) 895-4525 EX-99.D.2 14 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF KINETIC CONCEPTS, INC. PURSUANT TO ITS OFFER TO PURCHASE DATED OCTOBER 8, 1997 THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: BOSTON EQUISERVE, L.P. By Mail: By Hand: By Overnight Courier: Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A. Corporate Reorganization Securities Transfer & Reporting Boston EquiServe, L.P. Post Office Box 8029 Services, Inc. Corporate Reorganization Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street New York, NY 10006 Mail Stop 45-01-40 Attn: Delivery Window Canton, MA 02021
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. 2 This Letter of Transmittal is to be completed by shareholders either if certificates evidencing Shares (as defined below) are to be forwarded herewith or if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company (the "DTC") pursuant to the book-entry transfer procedure described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase (as defined below). DELIVERY OF DOCUMENTS TO THE DTC DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Shareholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates or deliver confirmation of the book entry transfer of the Shares into the Depositary's Account at the DTC ("Book-Entry Confirmation") and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" of the Offer to Purchase) and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. See Instruction 2. [ ] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT THE DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution -------------------------------------------------------------------------- Account Number ------------------------------------------------------------------------- Transaction Code Number ------------------------------------------------------------------------- [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) ------------------------------------------------------------------------- Window Ticket No. (if any) ------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery ------------------------------------------------------------------------- Name of Institution which Guaranteed Delivery ------------------------------------------------------------------------- If delivery is by book-entry transfer, give the following: DTC Account Number ------------------------------------------------------------------------- Transaction Code Number ------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - ------------------------------------------------------------------------------------------------------------------ NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) SHARE CERTIFICATE(S) AND SHARE(S) TENDERED APPEAR(S) ON SHARE CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY) ------------------------------------------------------------------------------------------------------------------ TOTAL NUMBER OF SHARES NUMBER SHARE CERTIFICATE EVIDENCED BY OF SHARES NUMBER(S) SHARE CERTIFICATE(S) TENDERED --------------------------------------------------------------- --------------------------------------------------------------- =============================================================== Total Shares................................ ------------------------------------------------------------------------------------------------------------------
* Need not be completed by shareholders delivering Shares by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. ================================================================================ 4 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Kinetic Concepts, Inc., a Texas corporation (the "Company"), the above-described shares of common stock, $.001 par value per share (the "Shares"), pursuant to the Company's offer to purchase all outstanding Shares, at a price of $19.25 per Share, net to the seller in cash (such amount, or any greater amount per Share paid pursuant to the Offer (as defined below), being referred to herein as the "Per Share Amount"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"). Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to all the Shares tendered herewith and all dividends and distributions (including, without limitation, distributions of additional Shares) made in respect of such Shares on or after October 2, 1997 (collectively, "Distributions") and irrevocably appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares and all Distributions, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver Share Certificates evidencing such Shares and all Distributions, or transfer ownership of such Shares and all Distributions on the account books maintained by the DTC, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of the Company, (ii) present such Shares and all Distributions for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Distributions, all in accordance with the terms of the Offer. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered herewith and all Distributions, that when such Shares are accepted for payment by the Company, the Company will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Distributions will be subject to any adverse claim. The undersigned, upon request, shall execute and deliver all additional documents deemed by the Depositary or the Company to be necessary or desirable to complete the assignment and transfer of the Shares tendered herewith and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Depositary for the account of the Company all Distributions, accompanied by appropriate documentation of transfer, and pending such remittance and transfer or appropriate assurance thereof, the Company shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby, or deduct from such purchase price, the amount or value of such Distribution as determined by the Company in its sole discretion. No authority herein conferred or agreed to be conferred shall be affected by, and all such authority shall survive, the death or incapacity of the undersigned. All obligations of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Offer. The Company's acceptance of such Shares for payment will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Offer. Unless otherwise indicated herein in the box entitled "Special Payment Instructions", please issue the check for the purchase price of all Shares purchased, and return all Share Certificates evidencing Shares not 5 purchased or not tendered in the name(s) of the registered holder(s) appearing above under "Description of Shares Tendered". Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions", please mail the check for the purchase price of all Shares purchased and all Share Certificates evidencing Shares not tendered or not purchased (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under "Description of Shares Tendered". In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of all Shares purchased and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of, and mail such check and Share Certificates to, the person(s) so indicated. Unless otherwise indicated herein in the box entitled "Special Payment Instructions", please credit any Shares tendered hereby and delivered by book-entry transfer, but which are not purchased by crediting the account at the DTC. The undersigned recognizes that the Company has no obligation pursuant to the Special Payment Instructions to transfer any Shares from the name of the registered holder(s) thereof if the Company does not purchase any of the Shares tendered hereby. 6 ------------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares or Share Certificates evidencing Shares not tendered or not purchased is to be issued in the name of someone other than the undersigned, or if Shares tendered hereby and delivered by book-entry transfer which are not purchased are to be returned by credit to an account at the DTC other than that designated above. Issue: [ ] Check [ ] Share Certificate(s) to: Name ---------------------------------------------------- (PLEASE PRINT) Address -------------------------------------------------- ------------------------------------------------------------ (INCLUDE ZIP CODE) ------------------------------------------------------------ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE) [ ] Credit Shares delivered by book-entry transfer and not purchased to the account set forth below: ------------------------------------------------------------ (ACCOUNT NUMBER) ============================================================ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be mailed to someone other than the undersigned, or the undersigned at an address other than that shown under "Description of Shares Tendered". Mail: [ ] Check [ ] Share Certificate(s) to: Name ---------------------------------------------------- (PLEASE PRINT) Address -------------------------------------------------- ------------------------------------------------------------ (ZIP CODE) ------------------------------------------------------------ (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER) (SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE) ------------------------------------------------------------ 7 IMPORTANT SHAREHOLDERS: SIGN HERE (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE(S) OF HOLDER(S) Dated: - ---------------------------, 199_ (Must be signed by registered holder(s) exactly as name(s) appear(s) on Share Certificates or on a security position listing by a person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney- in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5). Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLEASE PRINT Capacity (full title): - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INCLUDE ZIP CODE Area Code and Telephone No.: - ------------------------------------------------------------------------- Taxpayer Identification or Social Security No.: - ------------------------------------------------------------------------- (SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE) GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5) FOR USE BY FINANCIAL INSTITUTIONS ONLY. FINANCIAL INSTITUTIONS: PLACE MEDALLION GUARANTEE IN SPACE BELOW. 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. Guarantee of Signatures. All signatures on this Letter of Transmittal must be guaranteed by a firm which is a member of the Medallion Signature Guarantee Program, or by any other "eligible guarantor institution", as such term is defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended (each of the foregoing being referred to as an "Eligible Institution"), unless (i) this Letter of Transmittal is signed by the registered holder(s) of the Shares (which term, for purposes of this document, shall include any participant in the DTC whose name appears on a security position listing as the owner of Shares) tendered hereby and such holder(s) has (have) completed neither the box entitled "Special Payment Instructions" nor the box entitled "Special Delivery Instructions" on the reverse hereof or (ii) such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. Delivery of Letter of Transmittal and Share Certificates. This Letter of Transmittal is to be used either if Share Certificates are to be forwarded herewith or if Shares are to be delivered by book-entry transfer pursuant to the procedure set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Share Certificates evidencing all physically tendered Shares, or a confirmation of a book-entry transfer into the Depositary's account at the DTC of all Shares delivered by book-entry transfer as well as a properly completed and duly executed Letter of Transmittal and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the reverse hereof prior to the Expiration Date (as defined in "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. Shareholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Company, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates evidencing all physically delivered Shares in proper form for transfer by delivery, or a confirmation of a book-entry transfer into the Depositary's account at the DTC of all Shares delivered by book-entry transfer, in each case together with a Letter of Transmittal, properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, a Book-Entry Confirmation (as defined in "THE TENDER OFFER -- Section 2. Acceptance for Payment and Payment for Shares" of the Offer to Purchase)), and any other documents required by this Letter of Transmittal, must be received by the Depositary within three Nasdaq National Market ("Nasdaq") trading days after the date of execution of such Notice of Guaranteed Delivery, all as described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. The method of delivery of this Letter of Transmittal, Share Certificates and all other required documents, including delivery through the DTC, is at the option and risk of the tendering shareholder, and the delivery will be deemed made only when actually received by the Depositary. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. By execution of this Letter of Transmittal all tendering shareholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. Inadequate Space. If the space provided herein under "Description of Shares Tendered" is inadequate, the Share Certificate numbers, the number of Shares evidenced by such Share Certificates and the number of Shares tendered should be listed on a separate schedule and attached hereto. 9 4. Partial Tenders (not applicable to shareholders who tender by book-entry transfer). If fewer than all the Shares evidenced by any Share Certificate delivered to the Depositary herewith are to be tendered hereby, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered". In such cases, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the Share Certificates delivered to the Depositary herewith will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions" on the reverse hereof, as soon as practicable after the expiration or termination of the Offer. All Shares evidenced by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. Signatures on Letter of Transmittal; Stock Powers and Endorsements. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered herewith, the signature(s) must correspond with the name(s) as written on the face of the Share Certificates evidencing such Shares without alteration, enlargement or any other change whatsoever. If any Shares tendered herewith are owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered herewith are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such Shares. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificates or separate stock powers are required, unless payment is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), in which case, the Share Certificate(s) evidencing the Shares tendered herewith must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered herewith, the Share Certificate(s) evidencing the Shares tendered herewith must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to the Company of such person's authority so to act must be submitted. 6. Stock Transfer Taxes. Except as otherwise provided in this Instruction 6, the Company will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price of any Shares purchased is to be made to, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares purchased, unless evidence satisfactory to the Company of the payment of such taxes, or exemption therefrom, is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Share Certificates evidencing the Shares tendered herewith. 7. Special Payment and Delivery Instructions. If a check for the purchase price of any Shares tendered herewith is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Shares Tendered" on the reverse hereof, the appropriate boxes on the reverse of this 10 Letter of Transmittal must be completed. Shareholders delivering Shares tendered herewith by book-entry transfer may request that Shares not purchased be credited to such account maintained at the DTC as such shareholder may designate in the box entitled "Special Payment Instructions" on the reverse hereof. If no such instructions are given, all such Shares not purchased will be returned by crediting the account at the DTC as the account from which such Shares were delivered. 8. Questions and Requests for Assistance or Additional Copies. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses or telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. 9. Substitute Form W-9. Each tendering shareholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below, and to certify, under penalty of perjury, that such number is correct and that such shareholder is not subject to backup withholding of federal income tax. If a tendering shareholder has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding, such shareholder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such shareholder has since been notified by the Internal Revenue Service that such shareholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to 31% federal income tax withholding on the payment of the purchase price of all Shares purchased from such shareholder. If the tendering shareholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such shareholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% on all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. IMPORTANT: THIS LETTER OF TRANSMITTAL PROPERLY COMPLETED AND DULY EXECUTED (TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN "THE TENDER OFFER -- SECTION 1. TERMS OF THE OFFER; EXPIRATION DATE" OF THE OFFER TO PURCHASE). IMPORTANT TAX INFORMATION Under the federal income tax law, a shareholder whose tendered Shares are accepted for payment is required by law to provide the Depositary (as payer) with such shareholder's correct TIN on Substitute Form W-9 below. If such shareholder is an individual, the TIN is such shareholder's social security number. If the Depositary is not provided with the correct TIN, the shareholder may be subject to a $50 penalty imposed by the Internal Revenue Service and payments that are made to such shareholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31%. In addition, if a shareholder makes a false statement that results in no imposition of backup withholding, and there was no reasonable basis for such statement, a $500 penalty may also be imposed by the Internal Revenue Service. Certain shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a statement, signed under penalties of perjury, attesting to such individual's exempt status. Forms of such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. A shareholder should consult his or her tax advisor as to such shareholder's qualification for exemption from backup withholding and the procedure for obtaining such exemption. 11 If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the shareholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a shareholder with respect to Shares purchased pursuant to the Offer, the shareholder is required to notify the Depositary of such shareholder's correct TIN by completing the form below certifying that the TIN provided on Substitute Form W-9 is correct (or that such shareholder is awaiting a TIN), and that (i) such shareholder has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of a failure to report all interest or dividends or (ii) the Internal Revenue Service has notified such shareholder that such shareholder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The shareholder is required to give the Depositary the social security number or employer identification number of the record holder of the Shares tendered hereby. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering shareholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the shareholder should write "Applied For" in the space provided for the TIN in Part I, and sign and dated the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 12 PAYER'S NAME: BOSTON EQUISERVE, L.P. - ---------------------------------------------------------------------------------------------- SUBSTITUTE PART I -- Taxpayer Identification ------------------------------- FORM W-9 Number -- For all accounts, enter Social Security Number your taxpayer identification number OR in the box at right. (For most --------------------------------- individuals, this is your social Taxpayer Identification security number. If you do not have Number a number, see Obtaining a Number in (If awaiting TIN write the enclosed Guidelines.) Certify by "Applied For") signing and dating below. Note: If the account is in more than one name, see the chart in the enclosed Guidelines to determine which number to give the payer. ---------------------------------------------------------------------- Payer's Request for PART II -- For Payees Exempt From Backup Withholding, see the Taxpayer enclosed Guidelines and complete as instructed therein. Identification Number (TIN) - ---------------------------------------------------------------------------------------------- CERTIFICATION -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the enclosed Guidelines.) - ---------------------------------------------------------------------------------------------- SIGNATURE DATE , 199 ------------------------------------------------ ---------------------- --
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THIS OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 13 The Depositary for the Offer is: BOSTON EQUISERVE, L.P. By Mail: By Hand: By Overnight Courier: Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A. Corporate Reorganization Securities Transfer & Reporting Boston EquiServe, L.P. Post Office Box 8029 Services, Inc. Corporate Reorganization Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street New York, NY 10006 Mail Stop 45-01-40 Attn: Delivery Window Canton, MA 02021
Questions or requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers listed below. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent. A shareholder may also contact brokers, dealers, commercial banks or trust companies for assistance concerning the Offer. The Information Agent for the Offer is: [Georgeson & Co. Inc. LOGO] Toll Free: 1-800-223-2064 Wall Street Plaza New York, New York 10005 Banks and Brokers call collect: (212) 440-9800 All others call toll free: (800) 223-2064 The Dealer Manager for the Offer is: [LOGO BT ALEX. BROWN] ONE SOUTH STREET BALTIMORE, MARYLAND 21202 (410) 895-4525 EX-99.D.3 15 NOTICE OF GUARANTEED DELIVERY 1 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF KINETIC CONCEPTS, INC. (NOT TO BE USED FOR SIGNATURE GUARANTEES) This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) (i) if certificates ("Share Certificates") evidencing shares of common stock, $.001 par value per share ("Shares"), are not immediately available, (ii) if Share Certificates and all other required documents cannot be delivered to Boston EquiServe, L.P., as Depositary (the "Depositary"), prior to the Expiration Date (as defined in "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" of the Offer to Purchase) or (iii) if the procedure for delivery by book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or mail to the Depositary. See "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. The Depositary for the Offer is: BOSTON EQUISERVE, L.P. By Mail: By Hand: By Overnight Courier: Boston EquiServe, L.P. BankBoston, N.A. BankBoston, N.A. Corporate Reorganization Securities Transfer & Boston EquiServe, L.P. Post Office Box 8029 Reporting Services, Inc. Corporate Reorganization Boston, MA 02266-8029 55 Broadway, 3rd Floor 150 Royall Street New York, NY 10006 Mail Stop 45-01-40 Attn: Delivery Window Canton, MA 02021
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION, WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. 2 Ladies and Gentlemen: The undersigned hereby tenders to Kinetic Concepts Inc., a Texas corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares specified below pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Number of Shares: --------------------------------------------- --------------------------------- --------------------------------------------- SIGNATURE(S) OF HOLDER(S) Certificate Nos. (If Available): - --------------------------------------------- Dated: , 199 -------------------------------- -- [ ] Check box if Shares will be delivered by book-entry transfer Name(s) of Holders: Account No. --------------------------------------------- - --------------------------------------- --------------------------------------------- PLEASE TYPE OR PRINT --------------------------------------------- ADDRESS --------------------------------------------- ZIP CODE --------------------------------------------- AREA CODE AND TELEPHONE NO.
2 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm which is a member of the Medallion Signature Guarantee Program, guarantees to deliver to the Depositary, at one of its addresses set forth above, either Share Certificates evidencing the Shares tendered hereby, in proper form for transfer, or confirmation of book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company, in each case with delivery of a Letter of Transmittal properly completed and duly executed with any required signature guarantees or a Book-Entry Confirmation (as defined in "THE TENDER OFFER -- Section 2. Acceptance for Payment and Payment for Shares" of the Offer to Purchase) in the case of a book-entry delivery, and any other required documents, all within three Nasdaq National Market trading days of the date hereof. - -------------------------------------------- -------------------------------------------- NAME OF FIRM AUTHORIZED SIGNATURE - -------------------------------------------- -------------------------------------------- ADDRESS TITLE - -------------------------------------------- Name: -------------------------------------------- ZIP CODE PLEASE TYPE OR PRINT - -------------------------------------------- Dated: , 199 AREA CODE AND TELEPHONE NO. -------------------------------- --
DO NOT SEND SHARE CERTIFICATES WITH THIS NOTICE. SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 3 EX-99.D.4 16 LETTER TO BROKERS 1 OFFER BY KINETIC CONCEPTS, INC. TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF ITS COMMON STOCK AT $19.25 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. October 8, 1997 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by Kinetic Concepts, Inc., a Texas corporation (the "Company"), to act as Dealer Manager in connection with the Company's offer to purchase for cash all outstanding shares of its common stock, $.001 par value per share ("Shares"), at a price of $19.25 per Share, net to seller in cash, upon the terms and subject to the conditions set forth in the Company's Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer") enclosed herewith. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares registered in your name or in the name of your nominee. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (i) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST 27,500,000 SHARES (THE "MINIMUM CONDITION") AND (ii) THE COMPANY'S OBTAINING THE DEBT FINANCING (AS DEFINED IN "INTRODUCTION" OF THE OFFER TO PURCHASE). Enclosed for your information and use are copies of the following documents: 1. Offer to Purchase, dated October 8, 1997; 2. Letter of Transmittal to be used by holders of Shares in accepting the Offer and tendering Shares; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Shares and all other required documents are not immediately available or cannot be delivered to Boston EquiServe, L.P. (the "Depositary") by the Expiration Date (as defined in "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date" of the Offer to Purchase) or if the procedure for book-entry transfer cannot be completed by the Expiration Date; 4. A letter dated October 8, 1997 to shareholders of the Company from Raymond R. Hannigan, President and Chief Executive Officer of the Company; 5. A letter that may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to the Depositary. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates evidencing such Shares (or a confirmation of a book-entry 2 transfer of such Shares into the Depositary's account at The Depository Trust Company, a Letter of Transmittal properly completed and duly executed and any other required documents. If holders of Shares wish to tender, but cannot deliver their certificates or other required documents or cannot comply with the procedure for book-entry transfer, prior to the expiration of the Offer, a tender may be effected by following the guaranteed delivery procedure described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. The Company will not pay any fees or commissions to any broker, dealer or other person (other than BT Alex. Brown Incorporated (the "Dealer Manager"), the Depositary and Georgeson & Company Inc. (the "Information Agent") as described in the Offer) in connection with the solicitation of tenders of Shares pursuant to the Offer. However, the Company will reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Company will pay or cause to be paid any stock transfer taxes payable with respect to the transfer of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to BT Alex. Brown Incorporated or Georgeson & Company Inc. at their respective addresses and telephone numbers set forth on the back cover page of the Offer to Purchase. Additional copies of the enclosed material may be obtained from the Information Agent, at the address and telephone number set forth on the back cover page of the Offer to Purchase. Very truly yours, BT ALEX. BROWN INCORPORATED NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR ANY OTHER PERSON THE AGENT OF THE COMPANY, THE DEALER MANAGER, THE INFORMATION AGENT OR THE DEPOSITARY, OR OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. 2 EX-99.D.5 17 LETTER TO CLIENTS 1 OFFER BY KINETIC CONCEPTS, INC. TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF ITS COMMON STOCK AT $19.25 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. October 8, 1997 To Our Clients: Enclosed for your consideration are an Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"), and a related Letter of Transmittal in connection with the offer by Kinetic Concepts, Inc., a Texas corporation (the "Company"), to purchase for cash all outstanding shares of its common stock, $.001 par value per share ("Shares"), at a price of $19.25 per Share, net to seller in cash (such amount, or any greater amount per Share paid pursuant to the Offer (as defined below), being referred to herein as the "Per Share Amount"), upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"). We are the holder of record of Shares held by us for your account. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. The tender price is $19.25 per Share, net to you in cash. 2. The Offer is being made for all outstanding Shares. 3. The Board of Directors (the "Board") and the Disinterested Directors (as defined in "SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board; Fairness of the Transactions" of the Offer to Purchase) of the Company have each unanimously determined, after giving careful consideration to a number of factors, that the Offer and the Merger are fair to, and in the best interests of, the shareholders of the Company, and have each unanimously approved the Transaction Agreement and the transactions contemplated thereby, including the Offer at the Per Share Amount, the Stock Purchase (as defined in "INTRODUCTION" of the Offer to Purchase) and the Merger (as defined in "INTRODUCTION" of the Offer to Purchase). The Board and the Disinterested Directors recommend that the shareholders of the Company accept the Offer and tender their Shares pursuant to the Offer. 4. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. 5. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer at least 27,500,000 Shares and (ii) the Company's obtaining the Debt Financing (as defined in "INTRODUCTION" of the Offer to Purchase). 6. The Company will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. 2 If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified in your instructions. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US AS SOON AS POSSIBLE SO THAT WE WILL HAVE AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. The Offer is made solely by the Offer to Purchase and the related Letter of Transmittal, and is being made to all holders of Shares. The Company is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Company becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, the Company will make a good faith effort to comply with such state statute. If, after such good faith effort, the Company cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Company by BT Alex. Brown Incorporated or one or more registered brokers or dealers licensed under the laws of such jurisdiction. 2 3 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL THE OUTSTANDING SHARES OF COMMON STOCK OF KINETIC CONCEPTS, INC. The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated October 8, 1997, and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer") in connection with the offer by Kinetic Concepts, Inc., a Texas corporation, to purchase for cash all outstanding shares of its common stock, $.001 par value per share ("Shares"). This will instruct you to tender the number of Shares indicated below (or, if no number is indicated below, all Shares) that are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. SIGN HERE ------------------------------------ ------------------------------------ SIGNATURE(S) Dated: --------------------------, 199 ------------------------------------ - ---------------------------------------- PLEASE TYPE OR PRINT NAME(S) - ---------------------------------------- - ---------------------------------------- PLEASE TYPE OR PRINT ADDRESS - ----------------------------------------
- ----------------------------------------- ----------------------------------------- AREA CODE AND TELEPHONE NUMBER Number of Shares to be Tendered: ----------------------------------------- ------------ Shares* TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER - -----------------------------------------
- --------------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. 3 EX-99.D.6 18 GUIDELINES 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. -- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer. - --------------------------------------------------------- GIVE THE NAME AND FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF -- ========================================================= GIVE THE NAME AND FOR THIS TYPE OF ACCOUNT: EMPLOYER IDENTIFICATION NUMBER OF -- - --------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of account) the account or, if combined funds, the first individual on the account(1) 3. Husband and wife (joint The actual owner of account) the account or, if joint funds, either person(1) 4. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor(1) 6. Account in the name of guardian The ward, minor, or or committee for a designated incompetent ward, minor, or incompetent person(3) person 7. a. The usual revocable savings The grantor- trust account (grantor is trustee(1) also trustee) b. So-called trust account that The actual owner(1) is not a legal or valid trust under state law 8. Sole proprietorship account The owner(4) - --------------------------------------------------------- 9. A valid trust, estate, or The legal entity pension trust (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or The organization educational organization account 12. Partnership account held in the The partnership name of the business 13. Association, club, or other tax The organization exempt organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of The public entity Agriculture in the name of a public entity (such as a state or local government, school district, or prison) that receives agricultural program payments - ---------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's Social Security number or employer identification number. (4) Show your individual name. You may also enter your business name. You may use your Social Security number or employer identification number. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under Section 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or an individual retirement plan. - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any of its agencies or instrumentalities. - A registered dealer in securities or commodities registered in the United States or a possession of the United States. - A futures commission merchant registered with the Commodity Futures Trading Commission. - A real estate investment trust. - A common trust fund operated by a bank under Section 584(a) of the Code. - An exempt charitable remainder trust, or a non-exempt trust described in Section 4947(a)(1) of the Code. - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to non-resident aliens subject to withholding under Section 1441 of the Code. - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to an appropriate nominee. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under Section 852 of the Code). - Payments described in Section 6049(b)(5) of the Code to non-resident aliens. - Payments on tax-free covenant bonds under Section 1451 of the Code. - Payments made by certain foreign organizations. - Payments made to an appropriate nominee. Exempt payees described above should file Substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NON-RESIDENT ALIEN OR A FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS). Certain payments other than interest, dividends and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under Sections 6041, 6041A(a), 6042, 6044, 6045, 6049, and 6050N of the Code. PRIVACY ACT NOTICE. -- Section 6109 of the Code requires most recipients of dividends, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you fail to furnish your correct taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE EX-99.D.7 19 SUMMARY ADVERTISEMENT 1 THIS ANNOUNCEMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER TO SELL SHARES (AS DEFINED BELOW). THE OFFER (AS DEFINED BELOW) IS MADE SOLELY BY THE OFFER TO PURCHASE DATED OCTOBER 8, 1997 AND THE RELATED LETTER OF TRANSMITTAL, AND IS BEING MADE TO ALL HOLDERS OF SHARES. THE COMPANY IS NOT AWARE OF ANY STATE WHERE THE MAKING OF THE OFFER IS PROHIBITED BY ADMINISTRATIVE OR JUDICIAL ACTION PURSUANT TO ANY VALID STATE STATUTE. IF THE COMPANY BECOMES AWARE OF ANY VALID STATE STATUTE PROHIBITING THE MAKING OF THE OFFER OR THE ACCEPTANCE OF SHARES PURSUANT THERETO, THE COMPANY WILL MAKE A GOOD FAITH EFFORT TO COMPLY WITH SUCH STATE STATUTE. IF, AFTER SUCH GOOD FAITH EFFORT, THE COMPANY CANNOT COMPLY WITH SUCH STATE STATUTE, THE OFFER WILL NOT BE MADE TO (NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF) THE HOLDERS OF SHARES IN SUCH STATE. IN ANY JURISDICTION WHERE THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE MADE ON BEHALF OF THE COMPANY BY BT ALEX. BROWN INCORPORATED OR ONE OR MORE REGISTERED BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. Notice of Offer to Purchase for Cash by KINETIC CONCEPTS, INC. All Outstanding Shares of its Common Stock At $19.25 Net Per Share Kinetic Concepts, Inc., a Texas corporation (the "Company"), is offering to purchase all outstanding shares of its Common Stock, $.001 par value per share ("Shares"), at a price of $19.25 per Share, net to the seller in cash (the "Per Share Amount"), upon the terms and subject to the conditions set forth in the Company's Offer to Purchase, dated October 8, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"). Following the Offer, the Company intends to effect the Merger (as defined below). THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, NOVEMBER 5, 1997, UNLESS THE OFFER IS EXTENDED. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer at least 27,500,000 Shares (the "Minimum Condition") and (ii) the Company's obtaining the Debt Financing (as defined in "INTRODUCTION" of the Offer to Purchase). The Offer is being made pursuant to a Transaction Agreement dated as of October 2, 1997 (the "Transaction Agreement") among Fremont Purchaser II, Inc., a Delaware corporation ("F Purchaser"), RCBA Purchaser I, L.P., a Delaware limited partnership ("B Purchaser" and together with F Purchaser, "Purchasers"), and the Company. The Transaction Agreement provides that, among other things, upon the terms and subject to the conditions set forth in the Transaction Agreement, and in accordance with the General Corporation Law of the State of Delaware, the Revised Uniform Limited Partnership Act of the State of Delaware and the Texas Business Corporation Act, Purchasers will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the separate existence of both Purchasers will cease and the Company will continue as the surviving corporation. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time, other than Excluded Shares (as defined in "SPECIAL FACTORS--The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" of the Offer to Purchase), will be cancelled and converted automatically into the right to receive $19.25 in cash, or any higher price that may be paid per Share in the Offer, without interest. The Board of Directors and the Disinterested Directors (as defined in "SPECIAL FACTORS--Recommendation of the Disinterested Directors and the Board; Fairness of the Offer and Merger" of the Offer to Purchase) of the Company have each unanimously determined, after giving careful consideration to a number of factors, that the Offer and the Merger are fair to, and in the best interests of, the shareholders of the Company, and have each unanimously approved the Transaction Agreement and the transactions contemplated thereby, including the Offer at the Per Share Amount, the Stock Purchase (as defined in "INTRODUCTION" of the Offer to Purchase) and the Merger. The Board and Disinterested Directors recommend that the shareholders of the Company accept the Offer and tender their Shares pursuant to the Offer. The Board of Directors has received a written opinion, dated October 1, 1997, of BT Alex. Brown Incorporated to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the Per Share Amount and the Merger Consideration (as defined in "INTRODUCTION" of the Offer to Purchase) to be received in the Offer and the Merger by holders of Shares (other than Continuing Shareholders (as defined in "INTRODUCTION" of the Offer to Purchase)) was fair from a financial point of view to such holders. Simultaneously with entering into the Transaction Agreement, Purchasers entered into a Shareholder Support Agreement with James R. Leininger, M.D. ("Dr. James Leininger") dated as of October 2, 1997 (the "Support Agreement"). Pursuant to the Support Agreement, Dr. James Leininger granted to Purchasers an irrevocable option (the "Stock Option") to purchase 4,200,000 Shares (the "Option Shares") owned by Dr. James Leininger, at a cash purchase price per Option Share equal to $19.25 (the "Purchase Price"), subject to the terms and conditions set forth in the Support Agreement. In addition, Dr. James Leininger has agreed, subject to the terms and conditions set forth in the Support Agreement, to tender 13,792,211 Shares pursuant to the Offer and to vote all Shares owned or controlled by him at the time of the Shareholder's Meeting (as defined in "SPECIAL FACTORS--The Transaction Agreement, the Support Agreement and the Agreement Among Bidders" of the Offer to Purchase) in favor of the Merger. For purposes of the Offer, the Company will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn as, if and when the Company gives oral or written notice to Boston EquiServe, L.P. (the "Depositary") of the Company's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from the Company and transmitting such payments to tendering shareholders whose Shares have been accepted for payment. Under no circumstances will interest on the purchase price for Shares be paid, regardless of any extension of the Offer or delay in making such payment. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares ("Share Certificates") or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at the Book-Entry Transfer Facility (as defined in "THE TENDER OFFER--Section 2. Acceptance for Payment and Payment for Shares" of the Offer to Purchase) pursuant to the procedure set forth in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase, (ii) the Letter of Transmittal, properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message (as defined in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase) and (iii) any other documents required under the Letter of Transmittal. The Company shall, if directed by Purchasers (subject to the terms and conditions of the Transaction Agreement), extend for any reason the time period during which the Offer is open (such period not to exceed 10 business days in the aggregate), including the occurrence of any condition specified in "THE TENDER OFFER--Section 11. Certain Conditions to the Offer" of the Offer to Purchase, by giving oral or written notice of such extension to the Depositary. Any such extension will be followed as promptly as practicable by public announcement thereof, such announcement to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date (as defined below) of the Offer. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw his Shares. The term "Expiration Date" means 12:00 Midnight, New York City time, on Wednesday, November 5, 1997, unless and until the Company, at the direction of Purchasers (but subject to the terms and conditions of the Transaction Agreement), shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Company, will expire. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment by the Company pursuant to the Offer, may also be withdrawn at any time after Friday, December 5, 1997. For the withdrawal to be effective, a written notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover page of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of such Shares, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase), unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in "THE TENDER OFFER--Section 3. Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility and otherwise comply with the Book-Entry Facility's procedures. All questions as to the form and validity (including the time of receipt) of any notice of withdrawal will be determined by the Company, in its sole discretion, which determination will be final and binding. The purpose of the Transactions (as defined in "INTRODUCTION" of the Offer to Purchase) is (i) to enable Purchasers to obtain, in the aggregate, majority ownership in the Company and (ii) to provide the Company's shareholders with liquidity for their Shares by enabling them to sell their Shares at a fair price and at a premium over recent market prices more quickly than through alternative transaction structures that had been considered. Following consummation of the Transactions, the Shares will no longer be traded on the Nasdaq National Market and registration of the Shares will likely be terminated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The information required to be disclosed by Rule 13e-4(d)(1) under the Exchange Act is contained in the Offer to Purchase and is incorporated herein by reference. The Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. The Offer to Purchase and the related Letter of Transmittal contain important information which should be read before any decision is made with respect to the Offer. Questions and requests for assistance or for additional copies of the Offer to Purchase and the related Letter of Transmittal and other tender offer materials may be directed to the Information Agent or the Dealer Manager as set forth below, and copies will be furnished promptly at the Company's expense. No fees or commissions will be paid to brokers, dealers or other persons (other than the Information Agent and the Dealer Manager) for soliciting tenders of Shares pursuant to the Offer. THE INFORMATION AGENT FOR THE OFFER IS: [Georgeson & Company Logo] Wall Street Plaza New York, New York 10005 Banks and Brokers Call Collect: (212) 440-9800 Call Toll Free: 1-800-223-2064 THE DEALER MANAGER FOR THE OFFER IS: [BT Alex. Brown logo] One South Street Baltimore, Maryland 21202 (410) 895-4525 OCTOBER 8, 1997 EX-99.D.8 20 PRESS RELEASE 1 PRESS RELEASE CONTACT RAYMOND HANNIGAN (210) 524-9000 KCI ENTERS TENDER OFFER AGREEMENT WITH BLUM & ASSOCIATES AND FREMONT PARTNERS SAN ANTONIO, TEXAS, OCTOBER 3, 1997 -- Kinetic Concepts, Inc. ("KCI") (NASDAQ: KNCI) today announced that it has entered into an agreement with Richard C. Blum and Associates, L.P. ("RCBA") and Fremont Partners, L.P. ("Fremont") in which RCBA and Fremont, in conjunction with management, will acquire all of the outstanding common stock of KCI. Raymond Hannigan, KCI President and Chief Executive Officer, said the transaction will take the form of a tender offer by KCI for all of its shares at a price of $19.25 in cash net per share and a simultaneous purchase of shares by RCBA and Fremont. This transaction will be followed by a merger in which the remaining public shareholders of KCI would receive the same per share cash consideration. The total consideration to be offered for all KCI shares is between $850 million and $875 million. The tender offer is subject to customary terms and conditions including a minimum of 27.5 million shares of KCI common stock being tendered, representing 67 percent of the outstanding common shares. KCI intends to commence the tender as soon as practicable. James R. Leininger, M.D., KCI's Board Chairman and holder of approximately 19 million common shares, has agreed to retain approximately 6 million of those shares, representing approximately a 33.5 percent post-closing interest in the Company; and has committed to tender the balance of his shares. After completion of the transactions, Fremont will own approximately 40.0 percent and RCBA will own approximately 26.5 percent of the Company. Dr. Leininger has also agreed to grant an option to Fremont and RCBA on 4.2 million common shares which he owns. KCI's Board of Directors has unanimously recommended that shareholders accept the offer and has received a fairness opinion from BT Alex. Brown Incorporated. Hannigan said, "The expertise and success record that our two new investors bring to the table will enable us to continue building on the traditional strengths of the Company while also exploring new possibilities. We will stay on course with our existing senior management team and will continue marketing our medically proven products and valuing the support and commitment of our 2,000 KCI team members. -more - 2 "Of course, this is good news for San Antonio, too. We are proud of our record as a good corporate citizen in this city and will continue to support the community efforts of our employees in San Antonio." Dr. James Leininger said, "As founder and Chairman of the Board of KCI, I am so pleased that all our shareholders can share in the success of the Company. In supporting this transaction, I have committed to retain a significant interest in the Company and have been asked to continue on the Board. Both Fremont and RCBA will be good partners for KCI's management, its employees, and customers." Fremont Partners, L.P. is a private equity fund based in San Francisco. It is part of The Fremont Group, a private investment company with more than $7 billion in assets under management. Among other operating companies where Fremont has had significant roles are Caldwell Banker; Crown Pacific (NYSE: CRO), a major timber and forest products company; and Kerr (NYSE: KGM). Fremont also manages publicly traded mutual funds (Fremont Funds) and real estate, energy and venture capital assets. Robert Jaunich II, Managing Director of Fremont Partners, said, "KCI has explored for many months the issues of strategic options and shareholder value optimization. We are pleased that Fremont and RCBA will have the opportunity to partner with management and Dr. Leininger as the Company faces the challenges ahead." Richard C. Blum & Associates, L.P., also based in San Francisco, is a private investment company specializing in strategic block relationship investing with assets of approximately $2 billion under management. Richard Blum said, "As a substantial shareholder for the past two years, this transaction expresses our confidence in management and the principals, and the growth prospects for the business." KCI develops and markets innovative therapeutic healing systems that address skin breakdown, circulatory problems, and pulmonary complications associated with patient immobility. The Company's healing systems include specialty beds, mattress replacement systems, and related devices. KCI serves hospitals, long-term and home care settings throughout the United States and in 30 countries. EX-99.D.9 21 LETTER TO THE COMPANY'S SHAREHOLDERS 1 [KCI LETTERHEAD] October 8, 1997 Dear Shareholder: On behalf of the Board of Directors of Kinetic Concepts, Inc. (the "Company" or "KCI"), I am pleased to inform you that KCI has entered into a Transaction Agreement, dated as of October 2, 1997 (the "Transaction Agreement"), with Fremont Purchaser II, Inc. ("F Purchaser") and RCBA Purchaser I, L.P. ("B Purchaser" and, together with F Purchaser, the "Purchasers"), pursuant to which KCI has commenced a tender offer (the "Offer") to purchase for cash all outstanding shares of its Common Stock, $.001 par value per share ("Shares"), at $19.25 per Share, net to seller in cash. Following the successful completion of the Offer, upon the terms and subject to the conditions contained in the Transaction Agreement, the Purchasers will be merged with and into the Company (the "Merger"), with the Company as the surviving corporation. At the effective time of the Merger, each remaining issued and outstanding Share (other than those held by Purchasers, any direct or indirect subsidiary of Purchasers or certain other parties described in the enclosed Offer to Purchase) shall, subject to dissenters' rights if any, be converted into the right to receive $19.25 in cash, or any higher price that may be paid per Share pursuant to the Offer, without interest. The Board of Directors of the Company (the "Board"), by unanimous vote of all directors present and voting based upon, among other things, the unanimous recommendation of the directors of the Company who are not members of the Company's management (the "Disinterested Directors"), has determined that the Transaction Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to, and in the best interests of, the Company. The Board has also unanimously approved the Offer, the Merger and the Transaction Agreement and recommends that shareholders accept the Offer and tender their Shares to the Company pursuant to the Offer. In arriving at their decisions, the Disinterested Directors and the Board gave careful consideration to a number of factors described in the enclosed Offer to Purchase, which is an exhibit to the Company's Tender Offer Statement on Schedule 13E-4 being filed today with the Securities and Exchange Commission. The enclosed Offer to Purchase describes the Disinterested Directors' and the Board's decisions and contains other important information relating to such decisions. Also accompanying this letter is a Letter of Transmittal to be used for tendering your Shares. The Offer to Purchase and Letter of Transmittal set forth the terms and conditions of the Offer and provide instructions as to how to tender your Shares. We urge you to read the enclosed materials carefully and consider all factors set forth therein before making your decision with respect to the Offer. On behalf of the Board of Directors, management and employees of KCI, I thank you for the support you have given KCI. Very truly yours, /s/ Raymond R. Hannigan Raymond R. Hannigan President and Chief Executive Officer [KCI Letterhead] -----END PRIVACY-ENHANCED MESSAGE-----