Kinetic Concepts Inc, et al. – ‘424B3’ on 2/12/98

As of:  Thursday, 2/12/98   ·   Accession #:  950134-98-1067   ·   File #s:  333-42783, -01, -02, -03, -04, -05, -06, -07, -08, -09, -10

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Prospectus   —   Rule 424(b)(3)
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Document/Exhibit                   Description                      Pages   Size 

 1: 424B3       Prospectus Supplement                                167    890K 

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                                Filed Pursuant to Rule 424(b)(3)
                             Registration Number 333-42783

PROSPECTUS                                                                      

KINETIC CONCEPTS, INC.
OFFER TO EXCHANGE 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B 
FOR ANY AND ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED
NOTES DUE 2007, SERIES A

THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 3, 1998, UNLESS EXTENDED.

Kinetic Concepts, Inc., a Texas corporation ("KCI" or the "Company"), 
hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in
this Prospectus ("Prospectus") and the accompanying Letter of Transmittal (the  
"Letter of Transmittal"), to exchange $1,000 principal amount of its 9 5/8%     
Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"), which have 
been registered under the Securities Act of 1933, as amended (the "Securities   
Act"), pursuant to a Registration Statement of which this Prospectus is a part, 
for each $1,000 principal amount of its outstanding 9 5/8% Senior Subordinated  
Notes due 2007, Series A (the "Series A Notes"), of which $200,000,000 principal
amount is outstanding. The form and terms of the Exchange Notes will be the same
as the form and terms of the Series A Notes (which they replace) except that (i)
the Exchange Notes will bear a Series B designation, (ii) the Exchange Notes    
will have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and will not be subject to certain provisions
relating to an increase in the interest rate which were applicable to the Series
A Notes in certain circumstances relating to the timing of the Exchange Offer,  
(iii) holders of the Exchange Notes will not be entitled to certain rights of   
holders of the Series A Notes under the Registration Rights Agreement (as       
defined), which rights will terminate upon consummation of the Exchange Offer   
and (iv) the Tender Offer (as defined) having been timely consummated, the      
Exchange Notes will not be subject to certain provisions relating to a special  
redemption that would have been applicable if the Tender Offer had not been     
consummated on or prior to November 6, 1997. The Exchange Notes will evidence   
the same debt as the Series A Notes (which they replace) and will be issued     
under and be entitled to the benefits of the Indenture dated as of November 5,  
1997 (the "Indenture") among the Company, the Guarantors (as defined) and Marine
Midland Bank, as Trustee, governing the Series A Notes and the Exchange Notes.  
As used herein, the term "Notes" refers to both the Series A Notes and the      
Exchange Notes. See "The Exchange Offer" and "Description of Notes."            

Interest on the Exchange Notes will accrue from the date of original  
issuance of the Series A Notes for which they were exchanged (November 5, 1997) 
and will be payable semi-annually on May 1 and November 1 of each year,         
commencing on May 1, 1998, at the rate of 9 5/8% per annum. The Exchange Notes  
will be redeemable, in whole or in part, at the option of the Company on or     
after November 1, 2002, at the redemption prices set forth herein plus accrued  
and unpaid interest, if any, to the date of redemption. In addition, prior to   
November 1, 2000, the Company, at its option, may redeem up to 35% of the       
aggregate principal amount of the Notes originally issued under the Indenture   
with the net cash proceeds of one or more Equity Offerings (as defined) at a    
redemption price equal to 109.625% of the aggregate principal amount to be      
redeemed, together with accrued and unpaid interest, if any, to the date of     
redemption, provided that at least 65% of the aggregate principal amount of the 
Notes originally issued remain outstanding immediately after such redemption.   
See "Description of Notes -- Redemption."                                       
                                                        (continued on next page)

SEE "RISK FACTORS" ON P. 18 FOR A DESCRIPTION OF CERTAIN RISKS TO BE  
CONSIDERED BY HOLDERS WHO TENDER THEIR SERIES A NOTES IN THE EXCHANGE OFFER.    

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 

  THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED SERIES A
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON MARCH 3, 1998,   
UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF SERIES A NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS 
NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF SERIES A NOTES BEING       
TENDERED FOR EXCHANGE. SERIES A NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES
OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE OFFER AND DOES NOT  
ACCEPT FOR EXCHANGE ANY SERIES A NOTES, THE COMPANY WILL PROMPTLY RETURN ALL    
PREVIOUSLY TENDERED SERIES A NOTES TO THE HOLDERS THEREOF.                      

The date of this Prospectus is February 11, 1998. 

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(continued from previous page)                                                  

     The Exchange Notes will be unsecured senior subordinated obligations of the
Company and will be subordinated in right of payment to all existing and future 
Senior Debt (as defined) of the Company, including indebtedness under the New   
Credit Facilities (as defined). The Exchange Notes will also be effectively     
subordinated to all secured indebtedness of either the Company or any of its    
subsidiaries to the extent of the assets secured by such indebtedness. The      
Exchange Notes will rank pari passu with any future senior subordinated         
indebtedness of the Company and will rank senior in right of payment to all     
other subordinated obligations of the Company. The Exchange Notes will be       
unconditionally guaranteed by each of the domestic subsidiaries of the Company  
(the "Guarantors") on an unsecured senior subordinated basis. As of September   
30, 1997, on a pro forma basis after giving effect to the Transactions (as      
defined) and the Acquisitions (as defined), the Company and the Guarantors would
have had approximately $342.7 million of Senior Debt outstanding and            
approximately $57.3 million of availability under the New Credit Facilities. In 
addition, on September 30, 1997, the Company's subsidiaries that are not        
Guarantors would have had, on the same pro forma basis, approximately $5.7      
million of indebtedness and liabilities, including trade payables, which would  
be structurally senior to the Exchange Notes. See "Description of Notes."       

 Upon the occurrence of a Change of Control (as defined), each holder of
Notes will have the right to require the Company to repurchase such holder's    
Notes at a price equal to 101% of the principal amount thereof, together with   
accrued and unpaid interest, if any, to the date of repurchase. In addition, the
Company is obligated to offer to repurchase the Notes at 100% of the principal  
amount thereof plus accrued interest to the date of repurchase in the event of  
certain asset sales. An event constituting a Change of Control will also result 
in a default under the New Credit Facilities and may also result in a default   
under other Senior Debt, if any. See "Description of Notes -- Change of         
Control."                                                                       

 The Company will accept for exchange any and all Series A Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on March 3,  
1998, unless extended by the Company in its sole discretion (the "Expiration    
Date"). Tenders of the Series A Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary 
conditions. The Series A Notes were sold by the Company on November 5, 1997 to  
the Initial Purchasers (as defined) and were thereupon sold by the Initial      
Purchasers in reliance upon Rule 144A under the Securities Act, to a limited    
number of qualified institutional buyers that agreed to comply with certain     
transfer restrictions and other conditions. Accordingly, the Series A Notes may 
not be offered, resold or otherwise transferred in the United States unless     
registered under the Securities Act or unless an applicable exemption from the  
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company  
and the Guarantors under the Registration Rights Agreement entered into by the  
Company, the Guarantors and the Initial Purchasers in connection with the       
offering of the Series A Notes. See "The Exchange Offer."                       

Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third    
parties, the Company believes that the Exchange Notes issued pursuant to the    
Exchange Offer may be offered for resale, resold and otherwise transferred by   
any holder thereof (other than any such holder that is an "affiliate" of the    
Company or any of the Guarantors within the meaning of Rule 405 under the       
Securities Act or a broker-dealer who purchased the Series A Notes directly from
the Company for resale pursuant to Rule 144A or another exemption from the      
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder is not engaged 
in, and does not intend to engage in, a distribution of the Exchange Notes and  
has no arrangement or understanding with any person to participate in the       
distribution of such Exchange Notes. See "Purpose of the Exchange Offer" and    
"Resale of the Exchange Notes." By tendering the Series A Notes in exchange for 
Exchange Notes, each holder, other than a broker-dealer, will represent to the  
Company that: (i) it is not an affiliate of the Company or any of the Guarantors
(as defined in Rule 405 under the Securities Act) or a broker-dealer tendering  
Series A Notes acquired directly from the Company for its own account; (ii) any 
Exchange Notes to be received by it will be acquired in the ordinary course of  
its business; and (iii) it is not                                               

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(continued from previous page)                                                  

engaged in, and does not intend to engage in, a distribution of the Exchange    
Notes and has no arrangement or understanding to participate in a distribution  
of the Exchange Notes. If a Holder of Series A Notes is engaged in or intends to
engage in a distribution of the Exchange Notes or has any arrangement or        
understanding with respect to the distribution of the Exchange Notes to be      
acquired pursuant to the Exchange Offer, such holder may not rely on the        
applicable interpretations of the staff of the Commission and must comply with  
the registration and prospectus delivery requirements of the Securities Act in  
connection with any secondary resale transaction. Each broker-dealer that       
receives the Exchange Notes for its own account pursuant to the Exchange Offer  
(a "Participating Broker-Dealer") must acknowledge that it will deliver a       
prospectus in connection with any resale of such Exchange Notes. The Letter of  
Transmittal states that by so acknowledging and by delivering a prospectus, a   
participating Broker-Dealer will not be deemed to admit that it is an           
"underwriter" within the meaning of the Securities Act. This Prospectus, as it  
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of the Exchange Notes received in      
exchange for the Series A Notes where such Series A Notes were acquired by such 
Participating Broker-Dealer as a result of market-making activities or other    
trading activities. Pursuant to the Registration Rights Agreement, the Company  
agreed that it will make this Prospectus available to any Participating         
Broker-Dealer for use in connection with any such resale during the period      
required by the Securities Act. See "Plan of Distribution."                     

The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer. No underwriter is 
being utilized in connection with the Exchange Offer.                           

THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT  
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A NOTES IN ANY JURISDICTION IN  
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE   
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.                     

   NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR   
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION 
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE      
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF  
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES      
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF   
ANY DATE SUBSEQUENT TO THE DATE HEREOF.                                         

     UNTIL MAY 12, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION THEREWITH.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN   
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR           
SUBSCRIPTIONS.                                                                  

The Series A Notes have been designated as eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkages market. Prior  
to this Exchange Offer, there has been no public market for the Exchange Notes. 
If such a market were to develop, the Exchange Notes could trade at prices that 
may be higher or lower than their principal amount. The Company does not intend 
to apply for listing of the Exchange Notes on any securities exchange or for    
quotation of the Exchange Notes through the Nasdaq Stock Market's National      
Market or otherwise. The Initial Purchasers have previously made a market in the
Series A Notes and the Company has been advised that the Initial Purchasers     
currently intend to make a market in the Exchange Notes, as permitted by        
applicable laws and regulations, after consummation of the Exchange Offer. The  
Initial Purchasers are not obligated, however, to make a market in the Series A 
Notes or the Exchange                                                           

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(continued from previous page)                                                  

Notes and any such market making activity may be discontinued at any time       
without notice at the sole discretion of the Initial Purchasers. There can be no
assurance as to the liquidity of the public market for the Exchange Notes or    
that any active public market for the Exchange Notes will develop or continue.  
If an active public market does not develop or continue, the market price and   
liquidity of the Exchange Notes may be adversely affected. See "Risk            
Factors -- Lack of Public Market." Moreover, to the extent that the Series A    
Notes are tendered and accepted in the Exchange Offer, the trading market for   
untendered and tendered but unaccepted Series A Notes could be adversely        
affected.                                                                       

     The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer   
will be issued in the form of a Global Certificate (as defined herein), which   
will be deposited with, or on behalf of, The Depository Trust Company (the      
"Depositary" or "DTC") and registered in its name or in the name of Cede & Co., 
its nominee. Beneficial interests in the Global Certificate representing the    
Exchange Notes will be shown on, and transfers thereof will be affected through,
records maintained by the Depositary and its participants. After the initial    
issuance of the Global Certificate, the Exchange Notes in certified form will be
issued in exchange for the Global Certificate only on the terms set forth in the
Indenture. See "Book-Entry; Delivery and Form."                                 

 Holders of the Series A Notes not tendered and accepted in the Exchange
Offer will continue to hold such Series A Notes and will be entitled to all of  
the rights and benefits and will be subject to the limitations applicable       
thereto under the Indenture and with respect to transfer under the Securities   
Act. The Company will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company and the Guarantors will pay   
all the expenses incurred by them incident to the Exchange Offer. See "The      
Exchange Offer."                                                                

NOTICE TO NEW HAMPSHIRE RESIDENTS 

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER THIS CHAPTER WITH THE STATE OF NEW HAMPSHIRE NOR   
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN   
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT 
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A    
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY   
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,  
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE    
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION      
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.                             

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 provides a "safe 
harbor" for certain forward-looking statements. The factors discussed under     
"Risk Factors," among others, could cause actual results to differ materially   
from those contained in forward-looking statements made in this Prospectus,     
including, without limitation, the statements in "Business" and "Management's   
Discussion and Analysis of Financial Condition and Results of Operations," in   
the Company's press releases and in oral statements made by authorized officers 
of the Company. When used in this Prospectus, the words "estimate," "project,"  
"anticipate," "expect," "intend," "believe" and similar expressions are intended
to identify forward-looking statements. All of these forward-looking statements 
are based on estimates and assumptions made by management of the Company, which,
although believed to be reasonable, are inherently uncertain. Therefore, undue  
reliance should not be placed upon such estimates and statements. No assurance  
can be given that any of such statements or estimates will be realized and      
actual results will differ from those contemplated by such forward-looking      
statements.                                                                     

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SUMMARY 

   The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements     
including the notes thereto appearing elsewhere in this Prospectus. Prospective 
purchasers should carefully consider the information set forth or referred to   
under the heading "Risk Factors." As used in this Prospectus, unless the context
indicates otherwise, (i) the "Company" and "KCI" mean Kinetic Concepts, Inc. and
its consolidated subsidiaries, (ii) all dollar amounts are expressed in United  
States dollars, (iii) all references to financial statement balances are        
determined in accordance with United States generally accepted accounting       
principles ("GAAP") and (iv) "pro forma" means as adjusted on a pro forma basis 
for the Transactions (as defined) and the Acquisitions (as defined).            

OVERVIEW                                                                        

Kinetic Concepts, Inc. is a worldwide leader in innovative therapeutic
systems which prevent and treat the complications of immobility that can result 
from disease, trauma, surgery or obesity. The Company's clinically effective    
therapeutic systems include specialty hospital beds, specialty mattress overlays
and non-invasive medical devices combined with on-site patient care consultation
by the Company's clinically-trained staff. The complications of immobility      
include pressure sores, pneumonia and circulatory problems which can increase   
patient treatment costs by as much as $75,000 and, if left untreated, can result
in death. The Company's therapeutic systems can significantly improve clinical  
outcomes while reducing the cost of patient care by preventing these            
complications or accelerating the healing process, as well as by providing labor
savings. The Company has also been successful in applying its therapeutic       
expertise to bring to market innovative medical devices that treat chronic      
wounds and help prevent blood clots. For the latest twelve-month period ended   
September 30, 1997, the Company generated unaudited pro forma revenue and EBITDA
(as defined) of $308.1 million and $95.2 million, respectively. From 1994 to    
1996, KCI increased revenue and EBITDA (excluding divested businesses and other 
non-recurring gains) at compound annual growth rates of 10.2% and 10.1%,        
respectively.                                                                   

    The Company designs, manufactures, markets and services its products, many
of which are proprietary. KCI's therapeutic systems are used to treat patients  
across all health care settings including acute care hospitals, extended care   
facilities and patients' homes. Health care providers generally prefer to rent  
rather than purchase the Company's products in order to avoid the ongoing       
service, storage and maintenance requirements and the high initial capital      
outlay associated with purchasing such products, as well as to receive the      
Company's high-quality clinical support. KCI's therapeutic systems typically    
rent for $20 to $175 per day. The Company can deliver its therapeutic systems to
any major domestic trauma center within two hours of notice through its network 
of service centers.                                                             

   Management believes that approximately two-thirds of the patients who use
the Company's therapeutic systems are over the age of 65. Management believes   
that the market for its therapeutic systems will continue to grow due to the    
aging of the population and further market penetration of the Company's         
therapeutic systems as a result of increased pressure on health care providers  
to control costs and improve patient outcomes.                                  

The Company's principal executive offices are located at 8023 Vantage 
Drive, San Antonio, Texas 78230 and its telephone number is (210) 524-9000.     

THERAPIES                                                                       

The Company's therapeutic systems deliver one or a combination of the 
following therapies:                                                            

Pressure Relief/Pressure Reduction.  The Company's pressure relief and
pressure reduction surfaces provide effective skin care therapy in the treatment
of pressure sores, burns, skin grafts and other skin conditions and help prevent
the formation of pressure sores which develop in certain immobile individuals.  
The Company's beds and mattress overlays reduce the amount of pressure at any   
point on a patient's skin by using surfaces supported by air, silicon beads, or 
a viscous fluid. Some of the products further promote healing through pulsation.

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Pulmonary Care.  The Company's pulmonary care systems provide Kinetic 
Therapy to help prevent and treat acute respiratory problems, such as pneumonia,
by reducing the build-up of fluid in the lungs. The United States Centers for   
Disease Control (the "CDC") defines Kinetic Therapy as the lateral rotation of a
patient by at least 40 degrees to each side (a continuous 80 degree arc). KCI is
the only manufacturer of beds which deliver Kinetic Therapy, which the Company  
believes is essential to the prevention or effective treatment of pneumonia in  
immobile patients. Some of the Company's products combine Kinetic Therapy with  
additional therapies such as percussion and pulsation which help loosen mucous  
buildup and promote circulation.                                                

     Bariatric Care.  The Company offers a line of bariatric care products which
are designed to accommodate obese individuals. These products are used generally
for patients weighing from 250 to 500 pounds, but can accommodate patients      
weighing up to 1,000 pounds. These individuals are often unable to fit into     
standard-sized beds and wheelchairs. The Company's most advanced bariatric care 
product serves as a bed, chair, scale and x-ray table, helps patients enter and 
exit the bed, and contains other features which permit patients to be treated   
safely and with dignity. Moreover, treating obese patients is a significant     
staffing issue for many health care facilities because moving and handling these
patients increases the risk of injury to hospital personnel. Management believes
that its bariatric care products enable health care personnel to treat obese    
patients in a manner which is safer to such personnel than traditional methods, 
which can help reduce worker's compensation claims. Some of the bariatric       
products also address complications of immobility and obesity such as pressure  
sores.                                                                          

     Closure of Chronic Wounds.  The Company is the sole provider of a patented,
non-invasive device which uses negative pressure to promote the healing of      
chronic wounds. The negative pressure is applied through a proprietary foam     
dressing which draws the tissue together, stimulates blood flow, reduces        
swelling and decreases bacterial growth. The device heals wounds more quickly   
than traditional methods and has been effective at closing chronic wounds which 
have, in some cases, been open for years.                                       

  Circulatory Improvement.  The Company offers a non-invasive device which
improves blood circulation, decreases swelling in the lower extremities and     
reduces the incidence of blood clots. The therapy is accomplished by wrapping   
inflatable cuffs around a foot or leg and then automatically inflating and      
deflating them at prescribed intervals. The products are often used by          
individuals who have had hip or knee surgeries, diabetes or other conditions    
which reduce circulation.                                                       

COMPETITIVE STRENGTHS                                                           

   Management believes the following competitive strengths contribute to the
Company's leading market position and its growth in revenue and EBITDA.         

Effective therapeutic systems.  The Company has focused on therapeutic
systems that are designed to improve patient outcomes and reduce the cost of    
patient care. For example, the Company believes that its Kinetic Therapy systems
can reduce the probability of an immobile patient contracting pneumonia in the  
acute care setting by as much as 50%, and that its pressure relief systems can  
heal pressure sores up to three times faster than traditional methods.          

Proprietary products.  The Company is the only manufacturer of Kinetic
Therapy systems and has the exclusive license to market its vacuum wound closure
technology. The Company has several other therapeutic products under development
which management believes are unique and further believes that the use of such  
products will reduce the cost of patient care and yield superior outcomes when  
compared to traditional methods.                                                

    Established service distribution network and broad product line.  With 143
domestic service centers, a fleet of approximately 26,500 surfaces, a clinically
trained sales force that conducts more than 200,000 patient visits annually and 
the ability to deliver therapies to every major domestic trauma center within   
two hours, the Company has a national presence that management believes is a    
significant competitive advantage. The Company believes its network addresses   
the needs of customers by providing nationwide coverage, consistent availability
of a broad range of products and high-quality service.                          

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  Industry leadership in clinical research.  KCI's therapeutic systems are
supported by the most extensive collection of published clinical studies in the 
industry. These studies demonstrate the clinical efficacy demanded by health    
care providers and the cost effectiveness of the Company's products.            

Strong management team.  The Company installed a new, experienced     
professional management team beginning in 1994. This team, led by Raymond R.    
Hannigan, President and Chief Executive Officer, has refocused the Company's    
strategy toward providing cost-effective, clinically-proven outcomes.           
Management's initiatives have resulted in increased revenue, improved           
profitability, improved efficiencies and enhanced distribution and information  
systems. As a result, from 1994 to 1996, KCI increased revenue and EBITDA       
(excluding divested businesses and other non-recurring gains) at compound annual
growth rates of 10.2% and 10.1%, respectively.                                  

BUSINESS STRATEGY                                                               

    The Company intends to continue to grow operating earnings and improve its
market position by pursuing the following strategies:                           

   Increase presence in extended care and home care markets.  Because of the
cost pressures within the health care industry, acute care hospitals are        
discharging patients earlier, thereby increasing the demand for the Company's   
products in the extended and home care settings. KCI provides therapies to      
patients across multiple care settings through its national distribution network
and broad product line which are designed to provide a continuum of care. The   
Company's new marketing programs specifically target national and regional      
extended care providers.                                                        

   Further penetrate the acute care market.  KCI serves over 1,300 medium to
large hospitals and is presently focusing its marketing efforts on an additional
1,900 similarly-sized hospitals in which the Company has had a relatively small 
presence. The Company believes its strong position as the sole manufacturer of  
Kinetic Therapy beds and exclusive provider of its wound closure device will    
help KCI penetrate these new accounts.                                          

 Increase usage of recently introduced products.  The Company intends to
increase revenues by improving market awareness for its most recently introduced
products. The Company's newest products include medical devices for treatment of
chronic wounds, specialty surfaces for obese patients and sophisticated Kinetic 
Therapy beds. The Company believes these unique products have excellent growth  
potential and provide the Company with an opportunity to penetrate competitive  
accounts.                                                                       

   Introduce new products.  Approximately 30% of the Company's 1996 domestic
revenues were generated by products which have been introduced since 1994. One  
of KCI's objectives is to continue to expand revenues by acquiring or developing
new products which improve patient outcomes and reduce the cost of patient care.
In addition, existing products are continuously improved in consultation with   
health care professionals to enhance their features and improve their clinical  
effectiveness.                                                                  

  Expand internationally.  The Company has direct operations in 13 foreign
countries and has 75 independent dealers in other foreign markets. The Company  
intends to continue to expand in growing international markets by establishing  
additional direct operations and expanding its dealership network.              

 Pursue strategic acquisitions.  The Company intends to pursue strategic
fold-in acquisitions, both domestically and internationally, to enhance its     
geographic coverage and broaden its product line. Between January and October   
1997, the Company completed five such acquisitions. For example, the Company's  
acquisition of substantially all of the assets of RIK Medical L.L.C. in October 
1997 broadened its product line to include a new non-powered proprietary support
surface.                                                                        

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RECENT ACQUISITIONS                                                             

On October 1, 1997, the Company consummated the acquisition of        
substantially all of the assets of RIK Medical, L.L.C. ("RIK"), a Delaware      
limited liability company. The Company paid approximately $23.3 million for the 
acquisition plus an earn-out of up to $2.0 million. RIK is a manufacturer of    
non-powered therapeutic support surfaces based in Boulder, Colorado. The RIK    
products incorporate several unique and patented components and features. Other 
recent acquisitions include Ethos Medical, Ltd., and substantially all the      
assets of H.F. Systems, Inc. ("H.F. Systems"), Trac Medical, Inc. and Equi-Tron 
Mfg., Inc. The acquisitions of RIK and H.F. Systems are collectively referred to
as the "Acquisitions."                                                          

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SUMMARY OF THE TRANSACTIONS 

THE INVESTORS                                                                   

 Fremont Purchaser II, Inc. (the "Fremont Investor"), is a subsidiary of
Fremont Acquisition Company II, L.L.C. and Fremont Acquisition Company IIA,     
L.L.C., which were both formed by Fremont Partners L.P.                         

Fremont Partners L.P., and certain affiliated parties (collectively,  
"Fremont"), is a private equity fund headquartered in San Francisco with        
committed capital of $605 million. Fremont is part of The Fremont Group, a      
private investment company with more than $7.4 billion in assets under          
management. Fremont's strategy is to make substantial privately negotiated      
equity investments in sizable businesses and apply a hands-on operating approach
to enhance and create value in partnership with management. Among the companies 
where Fremont and its affiliates have had significant roles are Crown Pacific   
Partners, L.P. (timber and forest products; NYSE: CRO), Coldwell Banker         
Corporation (residential real estate), and, most recently, Kerr Group, Inc.     
(specialty plastic closures; NYSE: KGM). The principal offices of Fremont are   
located at 50 Fremont Street, Suite 3700, San Francisco, CA 94105.              

RCBA Purchaser I, L.P. (the "RCBA Investor" and, together with Fremont
Investor, the "Investors"), was formed by Richard C. Blum & Associates, L.P.    

Richard C. Blum & Associates, L.P. and its predecessors and certain   
affiliated parties (collectively, "RCBA") is a San Francisco based private      
investment concern specializing in strategic block, relationship-oriented       
investing. RCBA and its affiliates have approximately $1.2 billion in assets    
under management and a 20-year investment performance record. RCBA's investment 
strategy is to source negotiated private equity transactions through minority   
strategic block investments in the public market. RCBA sources its investments  
by identifying companies (or industries) undergoing change, which represent good
businesses and where the opportunity exists to build relationships with         
management and subsequently implement strategies to provide a superior return on
investments. Among the investments in which RCBA has played a significant role  
are Northwest Airlines Corporation (airline; NASDAQ: NWAC); National Education  
Corporation (educational training and publishing; previously NYSE: NEC); and URS
Corporation (infrastructure engineering; NYSE: URS). The offices of RCBA are    
located at 909 Montgomery Street, Suite 400, San Francisco, CA 94133.           

THE TRANSACTIONS                                                                

     The Company and the Investors entered into a Transaction Agreement dated as
of October 2, 1997, as amended by a letter agreement dated November 5, 1997 (as 
so amended, the "Transaction Agreement"), pursuant to which the Investors       
participated in the recapitalization (the "Recapitalization") of the Company.   
Pursuant to the Transaction Agreement, the Investors purchased in the aggregate 
7,802,180 newly-issued shares of the Company's common stock, $.001 par value per
share ("Shares"), at a per Share price equal to $19.25 (the "Stock Purchase").  
The proceeds of the Stock Purchase, together with approximately $343.0 million  
of aggregate proceeds from certain financings described below, and the proceeds 
from the offering of the Series A Notes (the "Offering"), have been and will be 
used by the Company to (i) purchase 31,006,942 Shares tendered to the Company   
pursuant to the terms of that certain Offer to Purchase dated October 8, 1997   
(the "Tender Offer") at a price of $19.25 per Share, net to each seller in cash 
(the "Per Share Amount"), (ii) pay all related fees and expenses, (iii) pay the 
Merger Consideration (as defined) for Shares in connection with the Merger (as  
defined) and (iv) for general corporate purposes.                               

   Pursuant to the Transaction Agreement, the Investors were merged with and
into the Company (the "Merger" and, together with the Recapitalization, the     
Tender Offer and the Stock Purchase, the "Transactions") with the Company as the
surviving corporation of the Merger (the "Surviving Corporation"). Following the
consummation of the Merger, Fremont, RCBA, Dr. James Leininger and Dr. Peter    
Leininger own 7,029,922, 4,644,010, 5,939,220 and 100,000 Shares, respectively, 
representing 39.7%, 26.2%, 33.5% and 0.6% of the Shares outstanding. There are  
currently no other shareholders but certain members of management have retained,
and have been granted, additional options to purchase Shares.                   

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    Funding for the Recapitalization consisted of: (i) gross proceeds from the
Offering of $200.0 million; (ii) borrowings under the New Credit Facilities of  
approximately $343.0 million; and (iii) an investment of approximately $348.8   
million in equity in the Company (the "Equity Financing"), comprised of the     
contribution of approximately $198.6 million of the Continuing Shares (as       
defined) at a price of $19.25 per Share by the Continuing Shareholders (as      
defined) and the purchase by the Investors of approximately $150.2 million of   
Shares from the Company. The New Credit Facilities provide for up to $400.0     
million in the form of (i) three tranches of term loans (the "Term Loan         
Facility"), (ii) a six-year revolving credit facility (the "Revolving Credit    
Facility") and (iii) a six-year acquisition facility (the "Acquisition          
Facility", and together with the Term Loan Facility and the Revolving Credit    
Facility, the "New Credit Facilities"). See "The Transactions", "Use of         
Proceeds", and "Description of New Credit Facilities".                          

PURPOSE OF THE EXCHANGE OFFER 

     The Exchange Offer provides holders of the Series A Notes with the Exchange
Notes which will generally be freely transferable by the holders thereof without
registration or any prospectus delivery requirement under the Securities Act.   
The Company's purpose in engaging in the Exchange Offer is to provide holders of
the Series A Notes with freely transferable securities and to comply with the   
provisions of the Registration Rights Agreement which require, subject to       
certain conditions, that the Exchange Offer be made. See "Purpose of the        
Exchange Offer".                                                                

THE EXCHANGE OFFER

Exchange Ratio.............  Each Series A Note is exchangeable for a like      
             principal amount of Exchange Notes.

Expiration Date............  5:00 p.m., New York City time, on March 3, 1998    
                             unless extended, in which case the term "Expiration
                           Date" means the latest date and time to which the
                  Exchange Offer shall have been extended.

Principal Amount of                                                             
Notes......................  Subject to the terms and conditions of the Exchange
                            Offer, any and all Series A Notes will be accepted
                     if duly tendered and not withdrawn prior to
                       acceptance thereof. The Exchange Offer is not
                          conditioned upon any minimum principal amount of
                          the Series A Notes being tendered. The Indenture
                            limits the aggregate principal amount which may be
                        outstanding thereunder, including the Series A
                         Notes and the Exchange Notes, to $300.0 million
                      principal amount, of which $200.0 million is
                           currently outstanding in the form of the Series A
Notes.                

Trading and Market Price...  The Series A Notes are currently eligible for      
                       quotation through the National Association of
                            Securities Dealers, Inc.'s PORTAL system. Prior to
                        the date hereof, there has been only a private
                       institutional trading market for the Series A
                         Notes. It is anticipated that a similar trading
                            market will exist for the Exchange Notes following
                             the Exchange Offer. BT Alex. Brown Incorporated and
                      BancAmerica Robertson Stephens (the "Initial
                         Purchasers") have advised the Company that they
                         intend to act as market makers for the Exchange
                             Notes; however, they are not obligated to do so and
                       may discontinue market making activities with
                        respect to the Exchange Notes at any time. See
                  "Risk Factors -- Lack of Public Market."

Resale of Exchange Notes...  Based on interpretations by the staff of the       
                       Commission, as set forth in no-action letters
                            issued to third parties, the Company believes that
                            the Exchange Notes issued pursuant to the Exchange
                    Offer may be offered for resale, resold or
                         otherwise transferred by holders thereof (other
                             than broker-dealers who acquire such Exchange Notes
directly from the     
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                            Company for resale pursuant to Rule 144A under the
                         Securities Act or any other available exemption
                           under the Securities Act or any holder that is an
                             "affiliate" of the Company or any of the Guarantors
                           as defined in Rule 405 under the Securities Act),
                      without compliance with the registration and
                          prospectus delivery provisions of the Securities
                             Act, provided that such Exchange Notes are acquired
                          in the ordinary course of such holders' business
                         and such holders are not engaged in, and do not
                     intend to engage in, a distribution of such
                   Exchange Notes and have no arrangement or
                           understanding with any person to participate in a
                           distribution of such Exchange Notes. By tendering
                             Series A Notes in exchange for Exchange Notes, each
                            holder, other than a broker-dealer, will represent
                            to the Company that: (i) it is not an affiliate of
                          the Company or any of the Guarantors (as defined
                    under Rule 405 of the Securities Act) or a
                         broker-dealer tendering Series A Notes acquired
                             directly from the Company for its own account; (ii)
                         any Exchange Notes to be received by it will be
                          acquired in the ordinary course of its business;
                             and (iii) it is not engaged in, and does not intend
                             to engage in, a distribution of such Exchange Notes
                    and has no arrangement or understanding to
                       participate in a distribution of the Exchange
                            Notes. If a holder of Series A Notes is engaged in
                       or intends to engage in a distribution of the
                  Exchange Notes or has any arrangement or
                           understanding with respect to the distribution of
                           the Exchange Notes to be acquired pursuant to the
                         Exchange Offer, such holder may not rely on the
                        applicable interpretations of the staff of the
                          Commission and must comply with the registration
                     and prospectus delivery requirements of the
                         Securities Act in connection with any secondary
                resale transaction. Each Participating
                            Broker-Dealer that receives Exchange Notes for its
                         own account pursuant to the Exchange Offer must
                          acknowledge that it will deliver a prospectus in
                            connection with any resale of such Exchange Notes.
                     The Letter of Transmittal states that by so
                         acknowledging and by delivering a prospectus, a
                           Participating Broker-Dealer will not be deemed to
                      admit that it is an "underwriter" within the
                            meaning of the Securities Act. This Prospectus, as
                        it may be amended or supplemented from time to
                            time, may be used by a Participating Broker-Dealer
                      in connection with resales of Exchange Notes
                            received in exchange for Series A Notes where such
                            Series A Notes were acquired by such Participating
                    Broker-Dealer as a result of market-making
                             activities or other trading activities. The Company
                      has agreed that it will make this Prospectus
                          available to any Participating Broker-Dealer for
                           use in connection with any such resale. See "Plan
                         of Distribution." To comply with the securities
                            laws of certain jurisdictions, it may be necessary
                            to qualify for sale or register the Exchange Notes
                           prior to offering or selling such Exchange Notes.
                 The Company has agreed, pursuant to the
                      Registration Rights Agreement and subject to
                            certain specified limitations therein, to register
                         or qualify the Exchange Notes for offer or sale
                         under the securities or "blue sky" laws of such
                         jurisdictions as may be necessary to permit the
                         holders of Exchange Notes to trade the Exchange
                             Notes without any restrictions or limitations under
                          the securities laws of the several states of the
United States.        

Consequences of Failure to                                                      
Exchange Series A                                                           
  Notes....................  Upon consummation of the Exchange Offer, subject to
                           certain exceptions, holders of Series A Notes who
        do not exchange their Series A

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                             Notes for Exchange Notes in the Exchange Offer will
                          no longer be entitled to registration rights and
                          will not be able to offer or sell their Series A
                            Notes, unless such Series A Notes are subsequently
                             registered under the Securities Act (which, subject
                         to certain limited exceptions, the Company will
                          have no obligation to do), except pursuant to an
                            exemption from or in a transaction not subject to,
                            the Securities Act and applicable state securities
                            laws. See "Risk Factors -- Consequences of Failure
                          to Exchange" and "The Exchange Offer -- Terms of
the Exchange Offer."  

Conditions of the Exchange                                                      
  Offer....................  The Company's obligation to consummate the Exchange
                          Offer is subject to certain conditions. See "The
                       Exchange Offer -- Conditions." Tenders of the
                           Series A Notes may be withdrawn at any time prior
                   to the Expiration Date. See "The Exchange
      Offer -- Withdrawal Rights."

How to Tender..............  Tendering holders of the Series A Notes must either
                             (i) complete and sign a Letter of Transmittal, have
                          their signatures guaranteed if required, forward
                          the Letter of Transmittal and any other required
                            documents to the Exchange Agent at the address set
                       forth under the caption "Exchange Agent," and
                           either deliver the Series A Notes to the Exchange
                             Agent or tender such Series A Notes pursuant to the
                            procedures for book-entry transfer or (ii) request
                        a broker, dealer, bank, trust company or other
                     nominee to effect the transaction for them.
                            Beneficial owners of the Series A Notes registered
                      in the name of a broker, dealer, bank, trust
                    company or other nominee must contact such
                         institution to tender their Series A Notes. The
                         Series A Notes may be physically delivered, but
                             physical delivery is not required if a confirmation
                            of a book-entry transfer of such Series A Notes to
                             the Exchange Agent's account at DTC is delivered in
                             a timely fashion. Certain provisions have also been
                       made for holders whose Series A Notes are not
                         readily available or who cannot comply with the
                       procedure for book-entry transfer on a timely
                      basis. Questions regarding how to tender and
                            requests for information should be directed to the
                           Exchange Agent. See "The Exchange Offer -- How to
Tender."              

Guaranteed Delivery                                                             
 Procedures...............  Holders of Series A Notes who wish to tender their
                         Series A Notes and whose Series A Notes are not
                           immediately available or who cannot deliver their
                           Series A Notes and a properly completed Letter of
                            Transmittal or any other documents required by the
                           Letter of Transmittal to the Exchange Agent prior
                          to the Expiration Date may tender their Series A
                    Notes according to the guaranteed delivery
                            procedures set forth in "The Exchange Offer -- How
to Tender."           

Withdrawal Rights..........  Tenders of Series A Notes may be withdrawn at any  
                             time prior to 5:00 p.m., New York City time, on the
                           Expiration Date. To withdraw a tender of Series A
                           Notes, a written or facsimile transmission notice
                        of withdrawal must be received by the Exchange
                          Agent at its address set forth herein under "The
                         Exchange Offer -- Exchange Agent" prior to 5:00
                           p.m., New York City time, on the Expiration Date.

Acceptance of Tenders......  Subject to the terms and conditions of the Exchange
                            Offer, including the reservation of certain rights
                             by the Company, the Series A Notes validly tendered
                           prior to the Expiration Date will be accepted for
exchange.             

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                            Subject to such terms and conditions, the Exchange
                             Notes to be issued in exchange for validly tendered
                             Series A Notes will be mailed by the Exchange Agent
                            promptly after acceptance of the tendered Series A
                      Notes or credited to the holder's account in
                            accordance with appropriate book-entry procedures.
                           Although the Company does not currently intend to
                         do so, if it modifies the terms of the Exchange
                           Offer prior to the Expiration Date, such modified
                       terms will be available to all holders of the
                             Series A Notes, whether or not their Series A Notes
                            have been tendered prior to such modification. Any
                    material modification will be disclosed in
                     accordance with the applicable rules of the
                         Commission and, if required, the Exchange Offer
                            will be extended to permit holders of the Series A
                            Notes adequate time to consider such modification.
                            See "The Exchange Offer -- Acceptance of Tenders."

Exchange Agent.............  Marine Midland Bank                                

Fees and Expenses..........  All expenses incident to the Company's consummation
                       of the Exchange Offer and compliance with the
                            Registration Rights Agreement will be borne by the
                      Company. See "The Exchange Offer -- Fees and
Expenses."            

Use of Proceeds............  There will be no cash proceeds payable to the      
                         Company from the issuance of the Exchange Notes
                           pursuant to the Exchange Offer. The proceeds from
                          the sale of the Series A Notes were used and are
                            being used in connection with the Recapitalization
             and for general corporate purposes.

Issuer.....................  Kinetic Concepts, Inc., a Texas corporation.       

Notes Offered..............  $200,000,000 aggregate principal amount of 9 5/8%  
             Senior Subordinated Notes due 2007.

Maturity Date..............  November 1, 2007                                   

Interest Payment Dates.....  Interest on the Exchange Notes will accrue from the
                         date of original issuance of the Series A Notes
                            (November 5, 1997) and be payable semi-annually on
                            each May 1 and November 1, commencing May 1, 1998.

Optional Redemption........  The Series A Notes are, and the Exchange Notes will
                         be, redeemable at the option of the Company, in
                             whole or in part, at any time or from time to time,
                         on or after November 1, 2002, at the redemption
                          prices set forth herein, plus accrued and unpaid
                         interest, if any, to the date of redemption. In
                           addition, prior to November 1, 2000, the Company,
                    at its option, may redeem up to 35% of the
                            aggregate principal amount of the Notes originally
                            issued with the net proceeds of one or more Equity
                             Offerings (as defined) at a price equal to 109.625%
                           of the aggregate principal amount to be redeemed,
                            together with accrued and unpaid interest, if any,
                           to the date of redemption, provided that at least
                            65% of the aggregate principal amount of the Notes
                          originally issued remain outstanding immediately
                    after such redemption. See "Description of
Notes -- Redemption." 

Change of Control..........  Upon the occurrence of a Change of Control, each   
                            holder of Exchange Notes and each holder of Series
                            A Notes will have the right to require the Company
                         to repurchase such holder's Notes at a purchase
                     price equal to 101% of the principal amount
          thereof, plus accrued and unpaid

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                          interest, if any, to the date of repurchase. See
                      "Description of Notes -- Change of Control."

Offers to Purchase.........  In the event of certain asset sales, the Company   
                     will be required to offer to repurchase the
                             Exchange Notes and the Series A Notes to the extent
                             of the net cash proceeds from such asset sales at a
                             price equal to 100% of their principal amount, plus
                             accrued and unpaid interest, if any, to the date of
                          repurchase. See "Description of Notes -- Certain
                  Covenants -- Limitation on Asset Sales."

Guarantees.................  The Series A Notes are, and the Exchange Notes will
                           be, unconditionally guaranteed (the "Guarantees")
                     by each of the domestic subsidiaries of the
                      Company. The Guarantees are unsecured senior
                         subordinated obligations of the Guarantors, and
                             rank pari passu in right of payment to all existing
                  and future unsecured senior subordinated
                             indebtedness of the Guarantors. See "Description of
Notes -- Guarantees." 

Ranking....................  The Series A Notes are, and the Exchange Notes will
                          be, unsecured senior subordinated obligations of
                         the Company and are and will be subordinated in
                            right of payment to all existing and future Senior
                           Debt of the Company, including indebtedness under
                           the New Credit Facilities. The Notes also are and
                         will be effectively subordinated to all secured
                          indebtedness of either the Company or any of its
                             subsidiaries to the extent of the assets secured by
                           such indebtedness. The Notes will rank pari passu
                             with any future senior subordinated indebtedness of
                      the Company and will rank senior in right of
                          payment to all other subordinated obligations of
                         the Company. As of September 30, 1997, on a pro
                             forma basis after giving effect to the Transactions
                   and the Acquisitions, the Company and the
                        Guarantors would have had approximately $342.7
                million of Senior Debt outstanding and
                           approximately $57.3 million of availability under
                    the New Credit Facilities. In addition, on
                             September 30, 1997, the Company's subsidiaries that
                            are not Guarantors would have had, on the same pro
                    forma basis, approximately $5.7 million of
                       indebtedness and liabilities, including trade
                             payables, which would be structurally senior to the
            Notes. See "Description of Notes."

Certain Covenants..........  The Indenture governing the Notes (the "Indenture")
                           imposes certain limitations on the ability of the
                      Company and its subsidiaries to, among other
                    things, incur additional indebtedness, pay
                    dividends or make certain other restricted
                         payments, consummate certain asset sales, enter
                          into certain transactions with affiliates, incur
                        liens, create restrictions on the ability of a
                     subsidiary to pay dividends or make certain
                    payments, sell or issue preferred stock of
                             subsidiaries to third parties, merge or consolidate
                          with any other person or sell, assign, transfer,
                      lease, convey or otherwise dispose of all or
                             substantially all of the assets of the Company. See
                      "Description of Notes -- Certain Covenants."

Federal Income Tax                                                              
 Considerations...........  For federal income tax purposes, holders of Series
                          A Notes will not recognize any gain or loss upon
                       the receipt of Exchange Notes pursuant to the
                           Exchange Offer. See "Certain Tax Considerations."

     For additional information regarding the Notes, see "Description of Notes."

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EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST

     In the Registration Rights Agreement, the Company and the Guarantors agreed
(i) to file a registration statement with respect to the Exchange Offer within  
45 days after the date of issuance of the Series A Notes (the "Issue Date"),    
(ii) to use their best efforts to cause such registration statement to be       
declared effective under the Securities Act within 150 days after the Issue Date
and (iii) to use their best efforts to consummate the Exchange Offer within 180 
days of the Issue Date. If the Company and the Guarantors do not comply with    
their registration obligations in a timely manner, they will be required to pay 
additional interest (in addition to the scheduled payment of interest) during   
the first 90 day period of such default in an amount equal to 0.50% per annum at
the end of such 90 day period. The amount of the additional interest will       
increase by an additional 0.50% per annum for each subsequent 90 day period     
until such obligations are complied with, up to a maximum amount of additional  
interest of 1.50% per annum. In the event that applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer, 
or if for any other reason the Exchange Offer is not consummated within 180 days
of the Issue Date, or if certain holders of the Series A Notes are not permitted
to receive the benefit of the Exchange Offer, the Company and the Guarantors    
will use their best efforts to cause to become effective a shelf registration   
statement with respect to the resale of the Series A Notes and to keep such     
shelf registration statement effective until the earlier of two years after its 
effective date and such time as all of the Series A Notes have been sold        
thereunder.                                                                     

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA 

     The following table presents summary historical consolidated financial data
of the Company for the three years ended December 31, 1996, for the nine months 
ended September 30, 1996 and 1997, and for the latest twelve-month period       
("LTM") ended September 30, 1997, which have been derived from the Company's    
consolidated financial statements and unaudited historical and pro forma        
financial data. The pro forma data give effect to the consummation of the       
Transactions and the Acquisitions. The unaudited Pro Forma Condensed            
Consolidated Balance Sheet data reflects such adjustments as if the Transactions
and the Acquisitions had occurred at September 30, 1997, and the unaudited Pro  
Forma Statements of Earnings data for the nine month period ended September 30, 
1997, and for the LTM ended September 30, 1997, reflect such adjustments as if  
the Transactions and the Acquisitions had occurred at the beginning of the      
respective periods. The historical consolidated financial data of the Company   
for the nine months ended September 30, 1996 and 1997, and for the LTM ended    
September 30, 1997 have been derived from the Company's interim consolidated    
financial statements which, in the opinion of management of the Company, have   
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting of only normal recurring adjustments)   
necessary for a fair presentation of the financial data for such periods. The   
information in this table should be read in conjunction with "Management's      
Discussion and Analysis of Financial Condition and Results of Operations,"      
"Selected Historical Consolidated Financial Data," the Consolidated Financial   
Statements and the notes thereto and the unaudited Pro Forma Condensed          
Consolidated Financial Statements and the notes thereto included elsewhere in   
this Prospectus.                                                                

                                                        [Enlarge/Download Table]

                                   YEAR ENDED DECEMBER 31,               NINE MONTHS ENDED SEPTEMBER 30,  
                         --------------------------------------------   ----------------------------------
                                    PRO FORMA                                                    PRO FORMA
                           1994      1994(1)       1995        1996       1996        1997        1997(2) 
                         --------   ----------   ---------   --------   --------   -----------   ---------
                                    (DOLLARS IN THOUSANDS)                         (UNAUDITED)            
                                                                                                          
Operating Data:                                                                                           
  Revenue............... $269,646    $ 222,084    $243,443   $269,881   $199,829    $224,511     $233,839 
  Gross profit..........   91,023       74,289      92,294    107,361     78,881      92,801       96,333 
  Operating                                                                                               
     earnings(3)........  124,078      113,383      43,792     55,354     40,090      48,605       51,701 
  Interest income.......    1,318        1,318       5,063      9,332      3,055       1,421          548 
  Interest expense......    5,846          109         509        245        118         126       37,139 
  Net earnings(4).......   64,383       70,783      28,441     38,987     25,859      29,903        8,420 
Other Data:                                                                                               
  EBITDA(5)(6)..........   80,105       67,091      71,615     81,300     59,632      67,133       71,274 
  EBITDA margin.........       30%          30%         29%        30%        30%         30%          30%
  Depreciation and                                                                                        
     amortization.......   38,795       26,355      22,760     21,794     16,487      17,144       19,060 
  Capital                                                                                                 
     expenditures.......    9,564        5,425      37,104     27,083     19,137      24,004       25,654 
  Ratio of EBITDA to                                                                                      
     cash interest                                                                                        
     expense............                                                                             2.03x
  Therapy days..........    4,166        4,166       4,761      5,240      3,897       4,655        4,655 

                                                                [Download Table]

                                                                LTM ENDED  
                                                              SEPTEMBER 30,
                                                                  1997     
                                                              -------------
                                                                           
Pro Forma Data:                                                            
  Revenue...................................................    $308,094   
  EBITDA(6).................................................      95,187   
  EBITDA margin.............................................          31%  
  Cash interest expense.....................................      46,941   
  Ratio of EBITDA to cash interest expense..................        2.03x  

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                                                  DECEMBER 31,                             PRO FORMA  
                                         ------------------------------  SEPTEMBER 30,   SEPTEMBER 30,
                                           1994       1995       1996        1997           1997(2)   
                                         --------   --------   --------  -------------   -------------
                                             (DOLLARS IN THOUSANDS)               (UNAUDITED)         
                                                                                                      
Balance Sheet Data (end of period):                                                                   
Cash.................................... $ 43,241   $ 52,399   $ 59,045    $ 45,535        $  22,276  
Working capital.........................   90,731    109,413    107,334     111,164           99,508  
Total assets............................  232,731    243,726    253,393     286,023          319,452  
Total debt..............................    7,924         --        514         477          543,127  
Stockholders' equity (deficit)..........  185,423    210,324    211,078     230,826         (278,460) 

---------------                                                                 
(1) The 1994 unaudited pro forma selected consolidated financial data is based  
   on the historical financial statements of the Company, giving effect to the
   sale of certain assets of the Company's Medical Services Division ("Medical
Services") and all of the capital stock of KCI Financial Services, Inc. 
 ("KCIFS") as if such sales had been consummated as of January 1, 1994 and
   giving effect to such other assumptions and adjustments as set forth in the
notes accompanying the 1994 unaudited pro forma condensed consolidated  
  statement of earnings. See 1994 Unaudited Pro Forma Condensed Consolidated
 Statements of Earnings and the notes thereto included in this Prospectus.

(2) The unaudited pro forma selected consolidated financial data is based on the
historical financial statements of the Company giving effect to the     
Acquisitions and the Transactions and giving effect to such other       
  assumptions as set forth in the notes accompanying the unaudited pro forma
consolidated condensed financial statements. The unaudited pro forma    
    selected consolidated balance sheet data give effect to the Transactions and
 Acquisitions as if they had occurred on September 30, 1997. The unaudited
   pro forma selected consolidated operating and other data give effect to the
 Transactions and Acquisitions as if they had occurred at the beginning of
the nine month period ended September 30, 1997. See Unaudited Pro Forma 
  Condensed Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.                                           

(3) Excluding the effect of the proceeds of $84.8 million from the patent       
 litigation settlement and other unusual items, operating earnings and pro
forma operating earnings for the year ended December 31, 1994 would have
been $39.2 million and $38.6 million, respectively.                     

(4) Excluding the effect of the proceeds of $84.8 million from the patent       
 litigation settlement and other unusual items, net earnings and pro forma
net earnings for the year ended December 31, 1994 would have been $22.0 
million and $25.1 million respectively.                                 

(5) EBITDA is defined as earnings before interest expense, income taxes,        
depreciation, and amortization. EBITDA and pro forma EBITDA for the year
ended December 31, 1994 exclude the proceeds of $84.8 million from the  
    patent litigation settlement and other unusual items. Had these amounts been
  included, EBITDA and pro forma EBITDA for the year ended December 31, 1994
would have been $165.0 million and $141.8 million, respectively. While  
  EBITDA should not be construed as a substitute for operating earnings, net
    earnings, or cash flows from operating activities in analyzing the Company's
 operating performances, financial position or cash flows, the Company has
included EBITDA because it is commonly used by certain investors and    
analysts to analyze and compare companies on the basis of operating     
   performance, leverage and liquidity and to determine a company's ability to
service debt.                                                           

(6) EBITDA for the year ended December 31, 1996 and pro forma EBITDA for the LTM
   ended September 30, 1997 exclude a one-time gain of $5.2 million related to
  the early repayment of notes receivable from MEDIQ/PRN that had previously
been discounted.                                                        

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RISK FACTORS

    Prospective investors should carefully consider the following risk factors
in addition to the other information contained herein before making an          
investment in the Exchange Notes offered hereby.                                

SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT                                

    As a result of the Transactions, the Company has significant indebtedness.
At September 30, 1997, the Company's total liabilities would have been $597.9   
million and its stockholders' deficiency would have been $278.5 million, in each
case on a pro forma basis after giving effect to the Transactions and the       
Acquisitions. The pro forma stockholders' deficiency is a result of the         
Recapitalization. In addition, subject to the restrictions in the New Credit    
Facilities and the Indenture, the Company may incur additional indebtedness from
time to time to finance acquisitions or capital expenditures or for other       
purposes. After giving effect to the Transactions and the Acquisitions as if    
they had occurred at the beginning of the nine month period ended September 30, 
1997 and the twelve month period ended December 31, 1996, the Company's pro     
forma ratio of earnings to fixed charges would have been 1.39x and 1.35x        
respectively.                                                                   

The degree to which the Company is leveraged could have important     
consequences to holders of the Notes including, but not limited to, the         
following: (i) a substantial portion of the Company's cash flow from operations 
must be dedicated to debt service and will not be available for other purposes; 
(ii) the Company's future ability to obtain additional debt financing for       
working capital, capital expenditures or acquisitions may be limited; and (iii) 
the Company's level of indebtedness could limit its flexibility in reacting to  
changes in the industry and general economic conditions. Certain of the         
Company's competitors currently operate on a less leveraged basis and have      
significantly greater operating and financing flexibility than the Company.     

     The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations (including those incurred in connection with the               
Recapitalization) will depend upon its future operating performance including   
its ability to implement its business strategy, which will be affected by the   
factors described herein and by prevailing economic conditions and financial,   
business, regulatory and other factors, many of which are beyond its control.   
The Company currently anticipates that its operating cash flow, together with   
borrowings under the New Credit Facilities, will be sufficient to meet its      
operating expenses and to service its debt requirements as they become due.     
However, if the Company is unable to service its indebtedness, it will be forced
to adopt an alternative strategy that may include actions such as reducing or   
delaying capital expenditures, selling assets, restructuring or refinancing its 
indebtedness, or seeking additional equity capital. There can be no assurance   
that any of these strategies could be effected on satisfactory terms, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results of 
Operations -- Liquidity and Capital Resources."                                 

RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS                     

The Indenture and the Bank Credit Agreement (as defined) entered into 
pursuant to the New Credit Facilities restrict, among other things, the         
Company's ability to: incur additional indebtedness; incur liens; pay dividends 
or make certain other restricted payments; consummate certain asset sales; enter
into certain transactions with affiliates; incur indebtedness that is           
subordinate in right of payment to any Senior Debt and senior in right of       
payment to the Notes; impose restrictions on the ability of a subsidiary to pay 
dividends or make certain payments to the Company; merge or consolidate with any
other person; or sell, assign, transfer, lease, convey or otherwise dispose of  
all or substantially all of the assets of the Company. See "Description of      
Notes -- Certain Covenants" and "Description of New Credit Facilities." In      
addition, the Bank Credit Agreement contains other and more restrictive         
covenants and prohibits the Company from prepaying certain of its indebtedness  
(including the Notes). The Bank Credit Agreement also requires the Company to   
maintain specified financial ratios and satisfy certain financial condition     
tests. The Company's ability to meet those financial ratios and tests can be    
affected by events beyond its control, and there can be no assurance that the   
Company will meet those tests. A breach of any of these covenants could result  
in a default under the Bank Credit Agreement and/or the Indenture. Upon the     
occurrence of an event of default under the Bank Credit Agreement, the lenders  
could elect to declare all amounts outstanding under the Bank Credit Agreement, 

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together with accrued interest, to be immediately due and payable. If the       
Company were unable to repay those amounts, the lenders could proceed against   
the collateral granted to them to secure that indebtedness. If the indebtedness 
under the New Credit Facilities were to be accelerated, there can be no         
assurance that the assets of the Company would be sufficient to repay in full   
the indebtedness thereunder and the other indebtedness of the Company, including
the Notes. Substantially all of the assets of the Company and each of its       
domestic subsidiaries are pledged as security under the Bank Credit Agreement.  
See "Description of New Credit Facilities."                                     

SUBORDINATION                                                                   

    The Notes and the Guarantees are and will be unsecured senior subordinated
obligations of the Company and the Guarantors, respectively, and, as such, are  
subordinated to all existing and future Senior Debt of the Company and the      
Guarantors, including borrowings under the New Credit Facilities. The Notes are 
also effectively subordinated to all secured indebtedness of either the Company 
or any of its subsidiaries to the extent of the assets secured by such          
indebtedness. As of September 30, 1997, on a pro forma basis, the Company and   
the Guarantors would have had approximately $342.7 million of Senior Debt. In   
addition, on a pro forma basis, the Company would have had approximately $57.3  
million available under the New Credit Facilities. Subsidiaries of the Company  
that are not Guarantors would have had, on a pro forma basis, approximately $5.7
million of indebtedness and liabilities, including trade payables, which would  
be structurally senior to the Notes.                                            

  The Company may not pay principal of, premium, if any, or interest on or
other amounts owing in respect of the Notes, make any deposit pursuant to any   
defeasance provisions or repurchase, redeem or otherwise retire the Notes if    
certain Senior Debt is not paid when due or any other default on such           
Indebtedness (as defined) occurs and the maturity of such Indebtedness is       
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived, any such acceleration has been rescinded or such          
Indebtedness has been paid in full. Moreover, under certain circumstances, if   
any non-payment default exists with respect to such Indebtedness, the Company   
may not make any payments on the Notes for a specified time, unless such default
is cured or waived, any acceleration of such indebtedness has been rescinded or 
such indebtedness has been paid in full. See "Description of                    
Notes -- Subordination."                                                        

HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES                        

    The Company is a holding company, the principal assets of which consist of
equity interests in its subsidiaries. The Company's cash flow and, consequently,
its ability to service debt, including the Notes, is dependent upon the earnings
of its subsidiaries and the payment of funds by those subsidiaries to the       
Company in the form of loans, dividends or otherwise. The Notes are and will be 
guaranteed on an unsecured senior subordinated basis by the Guarantors, and as a
result, should the Company fail to satisfy any payment obligation under the     
Notes, the holders would have a direct claim therefor against the Guarantors.   
However, the Guarantors are obligors with respect to substantial indebtedness,  
including in their capacity as guarantors under the New Credit Facilities on a  
senior basis, and the capital stock of the Guarantors is pledged to secure      
amounts borrowed thereunder. Accordingly, there may be insufficient assets      
remaining after payment of senior and/or secured claims to pay amounts due on   
the Notes. The Company's non-Guarantor subsidiaries are separate and distinct   
legal entities and have no obligation, contingent or otherwise, to pay any      
amounts due pursuant to the Notes or to make funds available therefor, whether  
in the form of loans, dividends or otherwise. The Indenture permits the Company 
and its subsidiaries (including non-Guarantor subsidiaries) to incur additional 
indebtedness, subject to certain limited exceptions. See "Description of        
Notes -- Certain Covenants -- Limitation on Incurrence of Additional            
Indebtedness." Any right of the Company to participate in any distribution of   
the assets of any of the non-Guarantor subsidiaries upon the liquidation,       
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the Notes to participate in the distribution of those assets) will be
subject to the claims of creditors (including trade creditors) and preferred    
stockholders, if any, of such non-Guarantor subsidiary, except to the extent    
that the Company has a claim against such non-Guarantor subsidiary as a creditor
of such non-Guarantor subsidiary. Moreover, the payment of dividends and the    
making of loan advances to the Company by its subsidiaries will be subject to   
restrictive                                                                     

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covenants in agreements entered into by certain of such subsidiaries and may be 
restricted upon an event of default thereunder.                                 

LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL                       

    Upon a Change of Control, each holder of Notes will have certain rights to
require the Company to repurchase all or a portion of such holder's Notes. See  
"Description of Notes." If a Change of Control were to occur, there can be no   
assurance that the Company would have sufficient funds to pay the repurchase    
price for all Notes tendered by the holders thereof and such failure would      
result in an event of default under the Indenture. In addition, a Change of     
Control would constitute a default under the New Credit Facilities and is       
otherwise restricted by the New Credit Facilities and may be prohibited or      
limited by, or create an event of default under, the terms of other agreements  
relating to borrowings which the Company may enter into from time to time,      
including other agreements relating to secured indebtedness or Senior Debt. No  
payment or distribution may be made on the Notes, nor may any of the Notes be   
acquired, by or on behalf of the Company while a payment default is continuing  
under any Senior Debt or, under certain circumstances and for a specified time, 
if a non-payment default exists with respect to certain Senior Debt. See        
"Description of Notes -- Subordination." Also, if the Company's obligations     
under the New Credit Facilities or any other secured Indebtedness of the Company
or its subsidiaries were accelerated due to a default thereunder, the lenders   
thereunder would have a priority claim on the proceeds from the sale of the     
collateral securing such Indebtedness.                                          

COMPETITION                                                                     

The Company faces substantial competition from other companies which  
manufacture or market specialty beds, mattress overlays, mattress replacement   
systems or medical devices. The Company's principal competitor has financial and
other resources substantially in excess of those available to the Company.      
Competitive pressures include increased price competition and the introduction  
of new products by the Company's competitors, which could have a material       
adverse effect on the Company's business, financial condition or results of     
operations. See "Business -- Competition."                                      

UNCERTAINTY OF HEALTH CARE REFORM                                               

 There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 (the "BBA")   
significantly reduces federal spending on Medicare and Medicaid over the next   
five years by reducing annual payment updates to acute care hospitals, changing 
payment systems for both skilled nursing facilities and home health care        
services from cost-based to prospective payment systems, eliminating annual     
payment updates for durable medical equipment ("DME"), and allowing states      
greater flexibility in controlling Medicaid costs at the state level. Until the 
Health Care Financing Administration ("HCFA") issues regulations implementing   
this legislation in late 1997 and early 1998, the Company cannot reliably       
predict the timing of or the exact effect which these initiatives could have on 
the pricing and profitability of, or demand for, the Company's products.        
However, certain of the provisions of the BBA, such as the changes in the manner
Medicare Part A reimburses skilled nursing facilities, may change the manner in 
which the Company's customers make renting and purchasing decisions and could   
have a material adverse effect on the Company. The Company also believes it is  
likely that efforts by governmental and private payors to contain costs through 
managed care and other efforts and to reform health systems will continue in the
future. There can be no assurance that current or future initiatives will not   
have a material adverse effect on the Company's business, financial conditions  
or results of operations. See "Management Discussion and Analysis of Financial  
Condition and Results of Operations -- General" and "Business -- Reimbursement".

CONSOLIDATION OF PURCHASING ENTITIES                                            

  One of the most tangible results of the health care reform debate in the
United States has been that it has caused health care providers to examine their
cost structures and reassess the manner in which they provide health care       
services. This review, in turn, has led many health care providers to merge or  
consolidate with                                                                
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other members of their industry in an effort to reduce costs or achieve         
operating synergies. A substantial number of the Company's customers, including 
group purchasing organizations, hospitals, national nursing home companies and  
national home health care agencies, have been affected by this consolidation.   
Because larger purchasers or groups of purchasers tend to have more leverage in 
negotiating prices, this trend could have a material adverse effect on the      
Company's business, financial condition or results of operations. In addition,  
the consolidation of health care providers often results in the renegotiation of
contracts and in the granting of price concessions. Finally, as group purchasing
organizations and integrated health care systems increase in size, each contract
represents a greater concentration of market share and the adverse consequences 
of losing a particular contract increases considerably. As of September 30,     
1997, the Company's ten largest group purchasing contracts accounted for        
approximately 41% of the Company's total revenue.                               

REIMBURSEMENT OF HEALTH CARE COSTS                                              

The Company's products are rented and sold principally to hospitals,  
skilled nursing facilities and DME suppliers who receive reimbursement for the  
products and services they provide from various public and private third party  
payors, including Medicare, Medicaid and private insurance programs. The Company
also acts as a Durable Medical Equipment Supplier under 42 U.S.C. 1395 et seq.  
and as such furnishes its products directly to customers and bills payors. As a 
result, the demand for the Company's products in any specific care setting is   
dependent in part on the reimbursement policies of the various payors in that   
setting. In order to be reimbursed, the products generally must be found to be  
reasonable and necessary for the treatment of medical conditions and must       
otherwise fall within the payor's list of covered services. For example, the    
Company is seeking to establish coverage and payment by Medicare Part A and     
Medicare Part B for the V.A.C., its chronic wound treatment product, and the    
PlexiPulse, its circulatory treatment product, in skilled nursing facilities and
home care. Although clinical acceptance of these products has continued to      
increase, neither product has been officially classified as a covered item by   
either Part A or Part B. In light of increased controls on Medicare spending,   
there can be no assurance on the outcome of future coverage or payment decisions
for any of the Company's products by governmental or private payors. If         
providers, suppliers and other users of the Company's products and services are 
unable to obtain sufficient reimbursement for the provision of KCI products, a  
material adverse impact on the Company's business, financial condition or       
operations will likely result. See "Business -- Reimbursement."                 

FRAUD AND ABUSE LAWS                                                            

The Company is subject to various federal and state laws pertaining to
health care fraud and abuse including prohibitions on the submission of false   
claims and the payment or acceptance of kickbacks or other remuneration in      
return for the purchase or lease of Company products. The United States         
Department of Justice and the Office of the Inspector General of the United     
States Department of Health and Human Services has launched an enforcement      
initiative which specifically targets the long term care, home health and DME   
industries. Sanctions for violating these laws include criminal penalties and   
civil sanctions, including fines and penalties, and possible exclusion from the 
Medicare, Medicaid and other federal health care programs. Although the Company 
believes its business arrangements comply with federal and state fraud and abuse
laws, there can be no assurance that the Company's practices will not be        
challenged under these laws in the future or that such a challenge would not    
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Business -- Government Regulation -- Fraud and Abuse
Laws."                                                                          

PRODUCT LIABILITY                                                               

    The manufacturing and marketing of medical products necessarily entails an
inherent risk of product liability claims. Although the Company has not         
experienced any significant losses due to product liability claims and currently
maintains umbrella liability insurance coverage, there can be no assurance that 
the amount or scope of the coverage maintained by the Company will be adequate  
to protect it in the event a significant product liability claim is successfully
asserted against the Company. See "Business -- Legal Proceedings."              

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GOVERNMENT REGULATION                                                           

   The Company's products are subject to regulation by numerous governmental
authorities, principally the United States Food and Drug Administration (the    
"FDA") and corresponding state and foreign regulatory agencies. Noncompliance   
with applicable requirements can result in, among other things, fines,          
injunctions, civil penalties, recall or seizure of products, total or partial   
suspension of production, failure of the government to grant premarket clearance
or premarket approval for medical devices, withdrawal of marketing clearances or
approvals and criminal prosecution. The FDA also has the authority to request   
repair, replacement or refund of the cost of any product manufactured or        
distributed by the Company.                                                     

 On October 6, 1997, at the conclusion of an inspection of the Company's
principal manufacturing facility, the FDA issued the Company a Form 483 which   
identified eight observations of conditions that the FDA believed to be in      
violation of the FDA's Quality System Regulations ("QSR") (formerly Good        
Manufacturing Practices) and Medical Device Reporting ("MDR") requirements.     
Several of these observations concerned the Company's TransportAir device and   
were similar to previous FDA inspectional observations that became the basis of 
a warning letter issued to the Company in August 1995. Specifically, the FDA's  
Form 483 stated, among other things, that the Company had not provided solutions
for or verified the implementation of solutions to quality assurance problems   
concerning malfunctions of the TransportAir, and that the Company had failed to 
submit Medical Device Reports for a number of incidents involving the           
TransportAir. The TransportAir device, which provides an auxiliary air supply   
for the Company's KinAir, BioDyne, and Therapulse product lines, permits those  
bed products to be moved while in full inflation mode. The TransportAir is the  
subject of a pending 510(k) notice and has been marketed since 1986 without     
specific premarket clearance on the product on a stand-alone basis.             

     The Company submitted a written response to the FDA's Form 483 observations
on November 20, 1997. However, there can be no assurance that the FDA will agree
with the Company's response or that, regardless of the Company's response, the  
FDA will not invoke any of its regulatory or enforcement authority against the  
Company. In addition to other regulatory and enforcement actions, the FDA may   
issue the Company a Warning Letter which could have an adverse effect on the    
Company's ability to obtain Certificates for Products for Export until the FDA's
inspectional observations are corrected to the agency's satisfaction. Federal   
agencies could also be advised of the issuance of the Warning Letter which may  
be taken into account when considering the award of federal contracts to the    
Company. The FDA may also determine that reinspection of the Company's          
manufacturing facility is necessary before the agency determines that the       
Company's response to the Form 483 is adequate.                                 

  The Company has begun modifying the TransportAir to address the problems
that the Company has encountered. If the FDA determines that there is a         
reasonable probability that the TransportAir would cause serious, adverse health
consequences or death, the FDA could order the Company to recall the            
TransportAir and not allow its redistribution until the Company has verified    
that it has implemented appropriate corrective actions. Alternatively, the FDA  
could consider the present modification to be a voluntary recall and require the
Company to assure that the modification has been fully implemented and that its 
customers are adequately notified of the need for the modification. In addition,
because the TransportAir is not specifically the subject of a cleared 510(k)    
notice, the FDA could require the Company to discontinue marketing the device   
until it is cleared by the FDA. The failure of the Company to be able to market 
the TransportAir would prevent the Company from supplying an alternative power  
supply for three of its principal products which could have a material adverse  
effect on the Company's ability to market those devices. Any regulatory or      
enforcement action invoked by the FDA could have a material adverse effect upon 
the Company's business, financial condition or results of operations.           

   The Company is also subject to numerous federal, state and local laws and
regulations relating to such matters as safe working conditions, manufacturing  
practices, fire hazard control and the handling and disposal of hazardous or    
potentially hazardous substances. The Company owns and leases properties which  
are subject to environmental laws and regulations. There can be no assurance    
that the Company will not be required to incur significant costs to comply with 
such laws and regulations in the future or that such laws or regulations        

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will not have a material adverse effect upon the Company's business, financial  
condition or results of operations. See "Business -- Government Regulation."    

CONTROLLING SHAREHOLDERS                                                        

   Upon consummation of the Merger, Fremont and RCBA, in the aggregate, will
own a majority of the issued and outstanding Shares. There can be no assurance  
that the interests of Fremont and RCBA (or their respective affiliates), either 
individually or collectively, will not conflict with the interests of the       
holders of the Notes.                                                           

DEPENDENCE ON KEY PERSONNEL                                                     

The Company's business is managed by a small number of key executive  
officers. The Company's Chief Executive Officer, Raymond R. Hannigan, and other 
members of senior management do not have employment contracts with the Company. 
However, Mr. Hannigan and other members of senior management will be Continuing 
Shareholders and as such will have an economic incentive (in the form of stock  
options and other management incentive plans) to remain with the Company. See   
"Management -- Executive Compensation." Nonetheless, there can be no assurance  
that Mr. Hannigan or other key executive officers or members of senior          
management will continue their employment with the Company. The Company does not
maintain a "key man" insurance policy in respect of its Chief Executive Officer 
or any of its senior management. The loss of the services of key senior         
management, or the Company's inability to attract and retain additional         
management personnel, could have a material adverse effect on the Company's     
business, financial condition or results of operations. See "Management."       

PATENT LITIGATION                                                               

   The Company is presently the defendant in five separate lawsuits in which
the plaintiff in the lawsuit has alleged that a product marketed by the Company 
infringes a patent held by such plaintiff. Although the Company believes that   
its products do not infringe a valid claim of any patent and that it has        
meritorious defenses to each of these lawsuits, it is not possible to reliably  
predict the outcomes of any of these lawsuits. In the event a court found that  
one of the Company's products infringed a valid patent of a third party, the    
court may award damages (which in certain of the cases, could be significant)   
and enjoin the use of the product in question, either of which could have a     
material adverse effect on the Company's business, financial condition or       
results of operations. See "Business -- Legal Proceedings."                     

FRAUDULENT TRANSFER CONSIDERATIONS/AVOIDANCE OF GUARANTEES                      

    Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or void the Notes or any
Guarantee in favor of other existing or future creditors of the Company or a    
Guarantor.                                                                      

    The incurrence by the Company of indebtedness, such as the Notes, would be
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy case or a lawsuit by or on behalf of unpaid creditors of the       
Company or a representative of such creditors, such as a trustee or the Company 
as debtor-in-possession. Under such laws, if a court were to find that, at the  
time such indebtedness was incurred or the Notes were issued, either (i) the    
Company incurred such indebtedness or issued the Notes with intent of hindering,
delaying or defrauding creditors, or (ii) the Company received less than a      
reasonably equivalent value or fair consideration for incurring such            
indebtedness or issuing the Notes and the Company (a) was insolvent by reason of
the incurrence of such indebtedness, including the Notes, (b) was engaged in a  
business or a transaction, or was about to engage in a business or a            
transaction, for which any property remaining with Company constituted an       
unreasonably small amount of capital or (c) intended to incur, or believed that 
it would incur, debts beyond its ability to pay as they matured, such court     
could void the Company's obligations under the Notes and direct the repayment of
any amount paid thereunder to the Company to a fund for the benefit of the      
Company's creditors, or take other action detrimental to the holder of the      
Notes.                                                                          

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Similarly, indebtedness under the Guarantees of the Notes also may be 
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy of a Guarantor or in a lawsuit brought by or on behalf of creditors
of a Guarantor under the same standard described above with respect to the      
incurrence by a Guarantor of the Guarantee of the Notes. A legal challenge of a 
Guarantee on fraudulent conveyance grounds could, among other things, focus on  
the benefits, if any, realized by a Guarantor as the result of the issuance by  
the Company of the Notes. Pursuant to the terms of the Guarantees, the liability
of each Guarantor is limited to the maximum amount of indebtedness permitted, at
the time of the grant of such Guarantee, to be incurred in compliance with      
fraudulent conveyance or similar laws.                                          

     To the extent any Guarantee was avoided as a fraudulent conveyance, limited
as described above, or held unenforceable for any other reason, holders of the  
Notes would, to such extent, cease to have a claim in respect of such Guarantee 
and, to such extent, would be creditors solely of the Company and any Guarantor 
whose Guarantee was not avoided, limited, or held unenforceable. In such event, 
the claims of the holders of the Notes against the issuer of an avoided, limited
or unenforceable Guarantee would be subject to the prior payment of all         
liabilities of such Guarantor. There can be no assurance that, after providing  
for all prior claims, there would be sufficient assets to satisfy the claims of 
the holder of the Notes.                                                        

FORWARD-LOOKING STATEMENTS                                                      

Certain statements contained in this Prospectus, including without    
limitation, statements containing the words "believes," "anticipates,"          
"intends," "expects" and words of similar import, constitute "forward-looking   
statements." Such forward-looking statements involve known and unknown risks,   
uncertainties and other factors that may cause the actual results, performance  
or achievements of the Company or industry results to be materially different   
from any future results, performance or achievements expressed or implied by    
such forward-looking statements. Such factors include, among others, the        
following: general economic and business conditions, both domestic and foreign; 
industry and market capacity; demographic changes; existing government          
regulations and changes in, or the failure to comply with, government           
regulations; legislative proposals for health care reform; liability and other  
claims asserted against the Company; competition; the loss of any significant   
customers; changes in operating strategy or development plans; the ability to   
attract and retain qualified personnel; the significant indebtedness of the     
Company after the Merger; the availability and terms of capital to fund the     
expansion of the Company's business; and other factors referenced in this       
Prospectus. Certain of these factors are discussed in more detail elsewhere in  
this Prospectus, including, without limitation, under the captions "Prospectus  
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial    
Condition and Results of Operations," and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such         
forward-looking statements. The Company disclaims any obligation to update any  
such factors or to publicly announce the result of any revisions to any of the  
forward-looking statements contained herein to reflect future events or         
developments.                                                                   

ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER                

There is no existing market for the Notes, and although the Notes are 
expected to be eligible for trading in the PORTAL Market, the National          
Association of Securities Dealers' screen-based automated market for trading of 
securities eligible for resale under Rule 144A, there can be no assurance as to 
the liquidity of any market that may develop for the Notes, the ability of      
holders of the Notes to sell their Notes, or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company does not   
intend to apply for listing of the Notes on any securities exchange or the      
Nasdaq National Market. The Company has been advised by the Initial Purchasers  
that they currently intend to make a market in the Notes. However, the Initial  
Purchasers are not obligated to do so and any market-making activities with     
respect to the Notes may be discontinued at any time without notice. In         
addition, such market-making activity is subject to the limits imposed by the   
Securities Act and the Exchange Act, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer and the pendency of any shelf registration    
statement.                                                                      

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CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF EXCHANGE   
NOTES                                                                           

Holders of Series A Notes who do not exchange their Series A Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Series A Notes as set forth in the legend      
thereon as a consequence of the issuance of the Series A Notes pursuant to      
exemptions from, or in transactions not subject to, the registration            
requirements of the Securities Act and applicable state securities laws. In     
general, the Series A Notes may not be offered or sold, unless registered under 
the Securities Act, except pursuant to an exemption from, or in a transaction   
not subject to, the Securities Act and applicable state securities laws. The    
Company does not currently anticipate that it will register Series A Notes under
the Securities Act. To the extent that Series A Notes are tendered and accepted 
in the Exchange Offer, the trading market for untendered and tendered but       
unaccepted Series A Notes could be adversely affected.                          

   Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the Exchange Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by any holder 
thereof (other than any such holder that is an "affiliate" of the Company or any
of the Guarantors within the meaning of Rule 405 under the Securities Act)      
without compliance with the registration and prospectus delivery provisions of  
the Securities Act, PROVIDED that such Exchange Notes are acquired in the       
ordinary course of such holder's business and such holder has no arrangement or 
understanding with any person to, and does not intend to, participate in the    
distribution of such Exchange Notes.                                            

  Any Participating Broker-Dealer that acquired Series A Notes for its own
account as a result of market-making activities or other trading activities may 
be a statutory underwriter. Each Participating Broker-Dealer that receives      
Exchange Notes for its own account pursuant to the Exchange Offer must          
acknowledge that it will deliver a prospectus in connection with any resale of  
such Exchange Notes. The Letter of Transmittal states that by so acknowledging  
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.  
This Prospectus, as it may be amended or supplemented from time to time, may be 
used by a Participating Broker-Dealer in connection with resales of Exchange    
Notes received in exchange for Series A Notes where such Series A Notes were    
acquired by such Participating Broker-Dealer as a result of market-making       
activities or other trading activities.                                         

The Company and the Guarantors have agreed that they will make this   
Prospectus, as it may be amended or supplemented from time to time, available to
any Participating Broker-Dealer for use in connection with any such resale. See 
"Plan of Distribution."                                                         

    If (i) any holder of Series A Notes (A) is prohibited by law or Commission
policy from participating in the Exchange Offer; (B) may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a   
prospectus and this Prospectus, as it may be amended or supplemented from time  
to time, is not appropriate or available for such resales; or (C) is a          
Participating Broker-Dealer and owns Series A Notes acquired directly from the  
Company or an affiliate of the Company or either of the Guarantors and (ii) such
holder has satisfied certain conditions relating to the provision of information
to the Company for use therein, the Company and the Guarantors have agreed to   
register such Series A Notes pursuant to the Shelf Registration Statement and to
use their respective best efforts to cause it to be declared effective by the   
Commission on or prior to 120 days after the date on which the Company and the  
Guarantors became obligated to file the Shelf Registration Statement. The       
Company and the Guarantors have agreed to maintain the effectiveness of the     
Shelf Registration Statement for, under certain circumstances, a maximum of two 
years, to cover resales of Series A Notes held by such holders. See "Purpose of 
the Exchange Offer."                                                            

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THE TRANSACTIONS

The Company and the Investors entered into the Transaction Agreement  
pursuant to which the Investors participated in the Recapitalization. Pursuant  
to the Transaction Agreement, the Investors purchased in the aggregate 7,802,180
newly-issued Shares at a per Share price equal to $19.25 in the Stock Purchase. 
The proceeds of the Stock Purchase, together with approximately $343.0 million  
of aggregate proceeds from certain other financings described below, and the    
proceeds from the Offering, have been and will be used by the Company to (i)    
purchase 31,006,942 Shares tendered pursuant to the terms of the Tender Offer at
a price of $19.25 per Share, net to each seller in cash; (ii) pay all related   
fees and expenses; (iii) pay the Merger Consideration for Shares in connection  
with the Merger; and (iv) for general corporate purposes.                       

 Pursuant to the Transaction Agreement on January 5, 1998, the Investors
were merged with and into the Company with the Company as the Surviving         
Corporation of the Merger.                                                      

At the effective time of the Merger (the "Effective Time"), each Share
issued and outstanding immediately prior to the Effective Time, other than      
Shares that were to be cancelled or to remain outstanding as described in this  
paragraph ("Continuing Shares"), were cancelled and converted automatically into
the right to receive the Per Share Amount (the "Merger Consideration"), subject 
to dissenters' rights as provided under the Texas Business Corporation Act      
("Texas Law"). Shares held in the treasury of the Company, each Share owned by  
any direct or indirect wholly-owned subsidiary of the Company, and Shares owned 
by Investors immediately prior to the Effective Time, were cancelled without any
conversion thereof and no payment or distribution was made with respect thereto.
Each share of common stock of Fremont Investor outstanding immediately prior to 
the Effective Time was converted and exchanged for a number of validly issued,  
fully paid and nonassessable shares of common stock, par value $.001 per share, 
of the Surviving Corporation equal to the quotient obtained by dividing the     
number of Shares acquired by Fremont Investor in the Stock Purchase by the      
number of outstanding shares of common stock of the Fremont Investor, and each  
limited or general partnership interest of RCBA Investor was converted and      
exchanged for a number of validly issued, fully paid and nonassessable shares of
common stock, par value $.001 per share, of the Surviving Corporation equal to  
the quotient obtained by dividing the number of Shares acquired by the RCBA     
Investor in the Stock Purchase by the number of outstanding partnership         
interests in RCBA Investor. The 5,939,220 Shares held by and registered in the  
name of Dr. James Leininger at the Effective Time, 3,871,752 Shares held by The 
Common Fund for Non-Profit Organizations, Stinson Capital Partners II, L.P. and 
RCBA-KCI Capital Partners, L.P., 100,000 Shares held by Dr. Peter Leininger and 
Options to acquire Shares, held by certain members of Company management who    
have entered into stock retention agreements, were not cancelled and remained   
outstanding (all of the foregoing persons or entities being herein referred to  
as the "Continuing Shareholders").                                              

   The Investors entered into a Shareholder Support Agreement with Dr. James
Leininger, dated as of October 2, 1997 (the "Shareholder Support Agreement"),   
providing, subject to certain conditions, for (i) the grant by Dr. James        
Leininger to the Fremont Investor of an irrevocable option to purchase up to    
2,529,197 Shares at $19.25 per Share, subject to the conditions set forth       
therein, which option terminated upon consummation of the Tender Offer, (ii) the
grant by Dr. James Leininger to the RCBA Investor of an irrevocable option to   
purchase up to 1,670,803 Shares at $19.25 per Share, subject to the conditions  
set forth therein, which option terminated upon consummation of the Tender      
Offer, (iii) the tender of 13,917,146 Shares owned or controlled by Dr. James   
Leininger pursuant to the Tender Offer and (iv) the voting by Dr. James         
Leininger of all Shares owned or controlled by him at the time of the           
shareholders' meeting called to consider the Merger in favor of the Merger.     

Following the consummation of the Merger, Fremont, RCBA, Dr. James    
Leininger and Dr. Peter Leininger own 7,029,922, 4,644,010, 5,939,220 and       
100,000 Shares, respectively, representing 39.7%, 26.2%, 33.5% and 0.6% of the  
Shares outstanding. There are currently no other shareholders, but certain      
members of management have retained, and may be granted, additional options to  
purchase Shares.                                                                

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    Funding for the Recapitalization consisted of: (i) gross proceeds from the
Offering of $200.0 million; (ii) borrowings under the New Credit Facilities of  
approximately $343.0 million; and (iii) an investment of approximately $348.8   
million in equity in the Company (the "Equity Financing"), including the        
rollover of approximately $198.6 million of the Continuing Shares by the        
Continuing Shareholders and the purchase by the Investors of approximately      
$150.2 million of Shares from the Company. The New Credit Facilities provide for
up to $400.0 million in the form of (i) the Term Loan Facility, (ii) the        
Revolving Credit Facility and (iii) the Acquisition Facility. See "Use of       
Proceeds," and "Description of New Credit Facilities."                          

PURPOSE OF THE EXCHANGE OFFER 

    In connection with the initial sale of the Series A Notes, the Company and
the Guarantors agreed, subject to certain conditions, to use their best efforts 
to conduct the Exchange Offer pursuant to the terms of the Registration Rights  
Agreement by and among the Company, the Guarantors and the Initial Purchasers   
(the "Registration Rights Agreement"). Pursuant to the Registration Rights      
Agreement, the Company and the Guarantors agreed to (i) cause to be filed with  
the Commission, no later than 45 days after the Issue Date, a registration      
statement under the Securities Act relating to the Exchange Notes and the       
Exchange Offer, and (ii) use their best efforts (a) to cause such registration  
statement to be declared effective by the Commission in no event later than 150 
days after the Issue Date, (b) to cause the Exchange Offer to remain open for a 
period of not less than 20 days (or longer if required by applicable law) and   
(c) to consummate the Exchange Offer on or prior to the 180th day after the     
Issue Date. The Company's purpose in making the Exchange Offer is to comply with
such agreement and to avoid the increase in interest rate on the Series A Notes 
which would occur if the Exchange Offer were not duly and timely consummated.   
The Exchange Offer should provide holders of the Series A Notes with the ability
to effect, for federal income tax purposes, a tax-free exchange of such Series A
Notes, which are subject to trading limitations, for Exchange Notes that will   
not be subject to such restrictions.                                            

     The Exchange Offer provides holders of the Series A Notes with the Exchange
Notes that will generally be freely transferable by holders thereof (other than 
any holder who is an "affiliate" or "promoter" of the Company or any of the     
Guarantors within the meaning of Rule 405 under the Securities Act), who may    
offer for resale, resell or otherwise transfer such Exchange Notes without      
complying with the registration and prospectus delivery provisions of the       
Securities Act, provided that such Exchange Notes are acquired in the ordinary  
course of each such holder's business and such holders have no arrangement or   
understanding with any person to participate in a distribution of the Exchange  
Notes. Each holder who participates in the Exchange Offer will be required to   
represent that any Exchange Notes to be received by it will be acquired in the  
ordinary course of its business, that at the time of consummation of the        
Exchange Offer such holder will have no arrangement or understanding with any   
person to participate in the distribution of the Exchange Notes in violation of 
the provisions of the Securities Act, and that such holder is not an affiliate  
of the Company or any of the Guarantors within the meaning of the Securities    
Act.                                                                            

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RESALE OF THE EXCHANGE NOTES

    With respect to resales of the Exchange Notes, based on interpretations by
the staff of the Commission set forth in no-action letters issued to third      
parties, the Company believes that a holder or other person who receives        
Exchange Notes, whether or not such person is the holder (other than a person   
that is an "affiliate" of the Company or any of the Guarantors within the       
meaning of Rule 405 under the Securities Act), in exchange for Series A Notes in
the ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to         
participate, in the distribution of the Exchange Notes, will be allowed to      
resell the Exchange Notes to the public without further registration under the  
Securities Act and without delivering to the purchasers of the Exchange Notes a 
prospectus that satisfies the requirements of Section 10 of the Securities Act. 
However, if any holder acquires Exchange Notes in the Exchange Offer for the    
purpose of distributing or participating in a distribution of the Exchange      
Notes, such holder cannot rely on the position of the staff of the Commission   
enunciated in such no-action letters or any similar interpretive letters, and   
must comply with the registration and prospectus delivery requirements of the   
Securities Act (with such prospectus containing the selling securityholder      
information required by Item 507 of Regulation S-K under the Securities Act) in 
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives    
Exchange Notes for its own account in exchange for Series A Notes, where such   
Series A Notes were acquired by such Participating Broker-Dealer as a result of 
market-making activities or other trading activities, may be a statutory        
underwriter and must acknowledge that it will deliver a prospectus meeting the  
requirements of the Securities Act (which may be this Prospectus, as it may be  
amended or supplemented from time to time) in connection with any resale of such
Exchange Notes.                                                                 

As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to 
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be  
acquired by the holder or the person receiving such Exchange Notes, whether or  
not such person is the holder, in the ordinary course of business, (ii) the     
holder or any such other person (other than a broker-dealer referred to in the  
next sentence) is not engaging and does not intend to engage, in the            
distribution of the Exchange Notes, (iii) the holder or any such other person   
has no arrangement or understanding with any person to participate in the       
distribution of the Exchange Notes, (iv) neither the holder nor any such other  
person is an "affiliate" of the Company or any of the Guarantors within the     
meaning of Rule 405 under the Securities Act, and (v) the holder or any such    
other person acknowledges that if such holder or other person participates in   
the Exchange Offer for the purpose of distributing the Exchange Notes it must   
comply with the registration and prospectus delivery requirements of the        
Securities Act in connection with any resale of the Exchange Notes and cannot   
rely on such no-action letters. As indicated above, each Participating          
Broker-Dealer that receives an Exchange Note for its own account in exchange for
the Series A Notes must acknowledge that it will deliver a prospectus in        
connection with any resale of such Exchange Notes. For a description of the     
procedures for such resales by Participating Broker-Dealers, see "Plan of       
Distribution."                                                                  

PLAN OF DISTRIBUTION

   Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a  
prospectus in connection with any resale of such Exchange Notes. This           
Prospectus, as it may be amended or supplemented from time to time, may be used 
by a Participating Broker-Dealer in connection with resales of Exchange Notes   
received in exchange for the Series A Notes where such Series A Notes were      
acquired as a result of market-making activities or other trading activities.   
The Company has agreed that it will make this Prospectus, as amended or         
supplemented, available to any Participating Broker-Dealer for use in connection
with any such resale during the period required by the Securities Act.          

  The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by           
Participating Broker-Dealers for their own account pursuant to the Exchange     
Offer may be sold from time to time in one or more transactions in the          
over-the-counter                                                                

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market, in negotiated transactions, through the writing of options on the       
Exchange Notes or a combination of such methods of resale, at market prices     
prevailing at the time of resale, at prices related to such prevailing market   
prices or negotiated prices. Any such resale may be made directly to the        
purchaser or through brokers or dealers who may receive compensation in the form
of commissions or concessions from any such Participating Broker-Dealer and/or  
the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that 
resells the Exchange Notes that were received by it for its own account pursuant
to the Exchange Offer and any broker or dealer that participates in a           
distribution of such Exchange Notes may be deemed to be an "underwriter" within 
the meaning of the Securities Act and any profit on any such resale of Exchange 
Notes and any commissions or concessions received by any such persons may be    
deemed to be underwriting compensation under the Securities Act. The Letter of  
Transmittal states that by acknowledging that it will deliver and by delivering 
a prospectus, a Participating Broker-Dealer will not be deemed to admit that it 
is an "underwriter" within the meaning of the Securities Act. The Company has   
agreed to pay all expenses incident to the Exchange Offer other than commissions
or concessions of any brokers or dealers and will indemnify certain parties     
against certain liabilities, including liabilities under the Securities Act.    

     The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer   
that requests such documents in the Letter of Transmittal.                      

THE EXCHANGE OFFER

TERMS OF THE OFFER                                                              

   The Company hereby offers, upon the terms and conditions set forth herein
and in the related Letter of Transmittal, to exchange the Exchange Notes for a  
like principal amount of the outstanding Series A Notes. An aggregate of $200.0 
million principal amount of Series A Notes are outstanding. The Exchange Offer  
is not conditioned upon any minimum amount of the Series A Notes being tendered.

   The Exchange Offer will expire at 5:00 p.m., New York City time, on March
3, 1998, unless extended. The term "Expiration Date" means 5:00 p.m., New York  
City time, on March 3, 1998, unless the Company, in its sole discretion,        
notifies the Exchange Agent that the period of the Exchange Offer has been      
extended, in which case the term "Expiration Date" means the latest time and    
date on which the Exchange Offer as so extended will expire. See "-- Expiration 
and Extension."                                                                 

   Holders of the Series A Notes who wish to exchange the Series A Notes for
the Exchange Notes and who validly tender the Series A Notes to the Exchange    
Agent or validly tender the Series A Notes by complying with the book-entry     
transfer procedures described below and, in each case, who furnish the Letter of
Transmittal and any other required documents to the Exchange Agent, will either 
have the Exchange Notes mailed to them by the Exchange Agent or have the        
Exchange Notes credited to their account in accordance with the book-entry      
transfer procedures described below, promptly after such tender is accepted by  
the Company. Subject to the terms and conditions of the Exchange Offer, the     
Series A Notes which have been validly tendered prior to the Expiration Date    
will be accepted on or promptly after the Expiration Date. Subject to the       
applicable rules of the Commission, the Company, however, reserves the right,   
prior to the first acceptance of tendered Series A Notes, to delay acceptance of
tendered Series A Notes, or to terminate the Exchange Offer, subject to the     
provisions of Rule 14e-1(c) under the Exchange Act, which requires that a tender
offeror pay the consideration offered or return the tendered securities promptly
after the termination or withdrawal of a tender offer.                          

In addition, the Company reserves the right to waive any condition or 
otherwise amend the Exchange Offer in any respect consistent with the Indenture 
and the Registration Rights Agreement prior to the acceptance of tendered Series
A Notes. If any amendment by the Company of the Exchange Offer or waiver by the 
Company of any condition thereto constitutes a material change in the           
information previously disclosed to the holders of Series A Notes, the Company  
will, in accordance with the applicable rules of the Commission, disseminate    
promptly disclosure of such change in a manner reasonably calculated to inform  
such holders of such change. If it is necessary to permit an adequate           
dissemination of information regarding                                          
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such material change, the Company will extend the Exchange Offer to permit an   
adequate time for holders of the Series A Notes to consider the additional      
information.                                                                    

CERTAIN EFFECTS OF THE EXCHANGE OFFER                                           

     Because the Exchange Offer is for any and all Series A Notes, the number of
Series A Notes tendered and exchanged in the Exchange Offer will reduce the     
principal amount of Series A Notes outstanding. As a result, the liquidity of   
any remaining Series A Notes may be substantially reduced. The Series A Notes   
are currently eligible for sale pursuant to Rule 144A through the PORTAL System 
of the National Association of Securities Dealers, Inc. Because the Company     
anticipates that most holders of Series A Notes will elect to exchange such     
Series A Notes for the Exchange Notes due to the more limited restrictions on   
the resale thereof under the Securities Act, the Company anticipates that the   
liquidity of the market for any Series A Notes remaining after the consummation 
of the Exchange Offer may be substantially limited.                             

EXPIRATION AND EXTENSION                                                        

   The Exchange Offer will expire at 5:00 p.m., New York City time, on March
3, 1998, unless extended by the Company. The Exchange Offer may be extended by  
oral or written notice from the Company to the Exchange Agent at any time or    
from time to time, on or prior to the date then fixed for the expiration of the 
Exchange Offer. Public announcement of any extension of the Exchange Offer will 
be timely made by the Company, but, unless otherwise required by law or         
regulation, the Company will not have any obligation to communicate such public 
announcement other than by making a release to the Dow Jones News Service.      

The Company reserves the right, in its sole discretion, (i) to delay  
accepting any Series A Notes, (ii) to extend the Exchange Offer or (iii) if any 
conditions set forth below under "-- Conditions" shall not have been satisfied, 
to terminate the Exchange Offer by giving oral or written notice of such delay, 
extension or termination to the Exchange Agent. Any such delay in acceptance,   
extension, termination or amendment will be followed as promptly as practicable 
by oral or written notice thereof to the registered holders. If the Exchange    
Offer is amended in a manner determined by the Company to constitute a material 
change, the Company will promptly disclose such amendment by means of a         
prospectus supplement that will be distributed to the registered holders of the 
Private Notes, and the Company will extend the Exchange Offer for a period of   
five to ten business days, depending upon the significance of the amendment and 
the manner of disclosure to the registered holders, if the Exchange Offer would 
otherwise expire during such five to ten business day period.                   

CONDITIONS                                                                      

     The Exchange Offer is subject to the following conditions: (i) the Exchange
Offer does not violate applicable law or any applicable interpretation of the   
staff of the Commission, (ii) no action or proceeding is instituted or          
threatened in any court or by any governmental agency which might materially    
impair the ability of the Company to proceed with the Exchange Offer and no     
material adverse development has occurred in any existing action or proceeding  
with respect to the Company and (iii) all governmental approvals have been      
obtained, which approvals the Company deems necessary for the consummation of   
the Exchange Offer.                                                             

REGISTRATION RIGHTS                                                             

On November 5, 1997, the Company and the Guarantors entered into the  
Registration Rights Agreement with the Initial Purchasers pursuant to which the 
Company and the Guarantors have, for the benefit of the holders of the Notes, at
the Company's cost, agreed to (i) file the registration statement of which this 
Prospectus forms a part (the "Exchange Offer Registration Statement"), under the
Securities Act with respect to the Exchange Offer which constitutes the         
Company's offer to exchange the Series A Notes for the Exchange Notes, which    
will have terms identical in all material respects to the Series A Notes (except
that the Exchange Notes will not contain terms with respect to transfer         
restrictions and will not contain certain provisions relating to an increase in 
the interest rate which were applicable to the Series A Notes in certain        
circumstances relating to the timing of the Exchange Offer or contain certain   
provisions relating to a special                                                

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redemption pertaining to the timing of the Tender Offer), and (ii) cause the    
Exchange Offer Registration Statement to be declared effective under the        
Securities Act within 150 days after the Issue Date. The Company will keep the  
Exchange Offer open for not less than 20 calendar days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the    
holders of the Series A Notes.                                                  

    In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit the Company to effect the Exchange 
Offer, (ii) the Exchange Offer is not consummated within 180 days of the Issue  
Date, (iii) in certain circumstances, certain holders of unregistered Exchange  
Notes so request within 120 days after the consummation of the Exchange Offer or
(iv) in the case of any holder that participates in the Exchange Offer, such    
holder does not receive Exchange Notes on the date of the exchange that may be  
sold without restriction under state and federal securities laws (other than due
solely to the status of such holder as an affiliate of the Company or any of the
Guarantors within the meaning of the Securities Act) and so notifies the Company
within 90 days after such holder first becomes aware of such restriction and    
provides the Company with a reasonable basis for its conclusion, in the case of 
each of clauses (i)-(iv) of this sentence, then the Company will promptly       
deliver to the holders and the Trustee written notice thereof and the Company   
and the Guarantors shall, at the Company's cost, (a) within 45 days after the   
delivery of such notice, file a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b) use their best efforts to   
cause the Shelf Registration Statement to be declared effective under the       
Securities Act and (c) use their best efforts to keep the Shelf Registration    
Statement effective until two years after its effective date, or such shorter   
period ending when (i) all Notes covered by the Shelf Registration Statement    
have been sold in the manner set forth and as contemplated therein or (ii) a    
subsequent Shelf Registration Statement covering all unregistered Notes has been
declared effective under the Securities Act. The Company will, in the event of  
the filing of a Shelf Registration Statement, provide to each holder of the     
Notes copies of the prospectus which is a part of the Shelf Registration        
Statement, notify each such holder when the Shelf Registration Statement for the
Notes has become effective and take certain other actions as are required to    
permit unrestricted resales of the Notes. A holder of Notes that sells such     
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a 
prospectus to purchasers, will be subject to certain of the civil liability     
provisions under the Securities Act in connection with such sales and will be   
bound by the provisions of the Registration Rights Agreement which are          
applicable to such a holder (including certain indemnification obligations). In 
addition, each holder of the Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the    
Registration Rights Agreement in order to have its Notes included in the Shelf  
Registration Statement and to benefit from the provisions regarding liquidated  
damages set forth therein.                                                      

The summary herein of certain provisions of the Registration Rights   
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights     
Agreement, a copy of which is available without charge by writing to the Company
at 8023 Vantage Drive, San Antonio, Texas 78230-4726, Attention: Dennis E. Noll,
Secretary.                                                                      

HOW TO TENDER                                                                   

A holder of the Series A Notes may tender the Series A Notes by (a)   
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed 
to include a facsimile thereof) and delivering the same, together with the      
Series A Notes being tendered (or a confirmation of an appropriate book-entry   
transfer) to the Exchange Agent on or prior to the Expiration Date or (b)       
requesting a broker, dealer, bank, trust company or other nominee to effect the 
transaction for such holder prior to the Expiration Date.                       

    If Exchange Notes are to be delivered to an address other than that of the
registered holder appearing on the note register (the "Note Register")          
maintained by the registrar of the Notes, the signature on the Letter of        
Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit 
union, savings association or other entity which is a member in good standing of
the Securities Transfer Agents Medallion Program, the New York Stock Exchange   
Medallion Signature Guarantee Program, the Stock Exchange Medallion             
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Program, or by any other bank, broker, dealer, credit union, savings association
or other entity which is an "eligible guarantor institution," as such term is   
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended   
(each of the foregoing constituting an "Eligible Institution"). Exchange Notes  
will not be issued in the name of a person other than that of the registered    
holder of the Series A Notes appearing on the Note Register.                    

   The Exchange Agent will establish an account with respect to the Series A
Notes at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Series A Notes by causing DTC to transfer such Series A Notes into the   
Exchange Agent's account in accordance with DTC's procedure for such transfer.  
Although delivery of the Series A Notes may be effected through book-entry      
transfer into the Exchange Agent's account at DTC, the Letter of Transmittal,   
with any required signature guarantees and any other required documents, must in
any case be transmitted to and received by the Exchange Agent on or prior to the
Expiration Date at one of its addresses set forth below under "Exchange Agent", 
or in compliance with the guaranteed delivery procedure described below.        
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All references in this Prospectus to deposit or delivery of Series A Notes shall
be deemed to include DTC's book-entry delivery method.                          

Notwithstanding the foregoing, any financial institution that is a    
participant in the Depositary's Book-Entry Transfer Facility system (the        
"Book-Entry Transfer Facility") may make book-entry delivery of the Existing    
Notes by causing the Depositary to transfer such Existing Notes into the        
Exchange Agent's account in accordance with the Depositary's Automated Tender   
Offer Program ("ATOP") procedures for such book-entry transfers. However, the   
exchange for the Existing Notes so tendered will only be made after timely      
confirmation (a "Book-Entry Confirmation") of such book-entry transfer of       
Existing Notes into the Exchange Agent's account, and timely receipt by the     
Exchange Agent of an Agent's Message (as such term is defined in the next       
sentence) and any other documents required by the Letter of Transmittal. The    
term "Agent's Message" means a message, transmitted by the Book-Entry Transfer  
Facility and received by the Exchange Agent and forming a part of a Book-Entry  
Confirmation, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from a participant tendering the Series A Notes that is  
the subject of such Book-Entry Confirmation that such participant has received  
and agrees to be bound by the terms of the Letter of Transmittal, and that the  
Company may enforce such agreement against such participant.                    

THE METHOD OF DELIVERY OF THE SERIES A NOTES AND ALL OTHER DOCUMENTS, 
INCLUDING DELIVERY THROUGH DTC, IS AT THE ELECTION AND RISK OF THE HOLDER. IF   
SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, 
BE USED, AND PROPER INSURANCE BE OBTAINED.                                      

     If a holder desires to tender Series A Notes pursuant to the Exchange Offer
and such holder's Series A Notes are not immediately available or time will not 
permit all of the above documents to reach the Exchange Agent prior to the      
Expiration Date, or such holder cannot complete the procedure of book-entry     
transfer on a timely basis, such tender may be effected if the following        
conditions are satisfied:                                                       

    (a) such tenders are made by or through an Eligible Institution;

   (b) a properly completed and duly executed Notice of Guaranteed
     Delivery, in substantially the form provided by the Company, is received by
  the Exchange Agent as provided below on or prior to the Expiration Date;
and                                                                   

        (c) the Series A Notes, in proper form for transfer (or confirmation
 of book-entry transfer of such Series A Notes into the Exchange Agent's
    account at DTC as described above), together with a properly completed and
     duly executed Letter of Transmittal and all other documents required by the
    Letter of Transmittal, are received by the Exchange Agent within three New
    York Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery.                                        

   The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile transmission or mailed to the Exchange Agent and must include a    
guarantee by an Eligible Institution in the form set forth in such Notice of    
Guaranteed Delivery.                                                            
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A tender will be deemed to have been received as of the date when the 
tendering holder's duly signed Letter of Transmittal accompanied by Series A    
Notes (or a timely confirmation received of a book-entry transfer of Series A   
Notes into the Exchange Agent's account at DTC) or a Notice of Guaranteed       
Delivery from an Eligible Institution is received by the Exchange Agent.        
Issuances of Exchange Notes in exchange for Series A Notes tendered pursuant to 
a Notice of Guaranteed Delivery by an Eligible Institution will be made only    
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Series A Notes (or a timely confirmation received of a         
book-entry transfer of Series A Notes into the Exchange Agent's account at DTC) 
with the Exchange Agent.                                                        

 Partial tenders of Series A Notes may be made only if (i) the principal
amount tendered is equal to $1,000 or an integral multiple thereof and (ii) the 
remaining untendered portion of such Series A Note is in a principal amount of  
$250,000, or any integral multiple of $1,000 in excess of such amount. Holders  
tendering less than the entire principal amount of any Series A Note they hold  
in accordance with the foregoing restrictions must appropriately indicate such  
fact on the Letter of Transmittal accompanying the tendered Series A Note.      

With respect to tenders of Series A Notes, the Company reserves full  
discretion to determine whether the documentation is complete and generally to  
determine all questions as to tenders, including the date of receipt of a       
tender, the propriety of execution of any document, and other questions as to   
the validity, form, eligibility or acceptability of any tender. The Company     
reserves the right to reject any tender not in proper form or otherwise not     
valid or the acceptance for exchange of which may, in the opinion of the        
Company's counsel, be unlawful or to waive any irregularities or conditions, and
the Company's interpretation of the terms and conditions of the Exchange Offer  
(including the instructions on the Letter of Transmittal) will be final and     
binding. The Company and the Exchange Agent shall not be obligated to give      
notice of any defects or irregularities in tenders and shall not incur any      
liability for failure to give any such notice. The Exchange Agent may, but shall
not be obligated to, give notice of any irregularities or defects in tenders,   
and shall not incur any liability for any failure to give any such notice. The  
Series A Notes shall not be deemed to have been duly or validly tendered unless 
and until all defects and irregularities have been cured or waived. All         
improperly tendered Series A Notes, as well as Series A Notes in excess of the  
principal amount tendered for exchange, will be returned (unless irregularities 
and defects are timely cured or waived), without cost to the tendering holder   
(or, in the case of Series A Notes delivered by book-entry transfer within DTC, 
will be credited to the account maintained within DTC by the participant in DTC 
which delivered such shares), promptly after the Expiration Date.               

TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL                               

   The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.       

Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the        
ordinary course of its business, unless it is a Participating Broker-Dealer, it 
is not engaging and does not intend to engage in the distribution of the        
Exchange Notes, that at the time of consummation of the Exchange Offer such     
holder will have no arrangement or understanding with any person to participate 
in the distribution of the Exchange Notes in violation of the provision of the  
Securities Act, that such holder is not an "affiliate" of the Company or any of 
the Guarantors within the meaning of the Securities Act and that if it          
participates in the Exchange Offer for the purpose of distributing the Exchange 
Notes it must comply with the registration and prospectus delivery requirements 
of the Securities Act in connection with any resale of the Exchange Notes.      

     The Series A Notes tendered in exchange for the Exchange Notes (or a timely
confirmation of a book-entry transfer of such Series A Notes into the Exchange  
Agent's account at DTC) must be received by the Exchange Agent, with the Letter 
of Transmittal and any other required documents, by 5:00 p.m., New York City    
time, on or prior to March 3, 1998, unless extended, or within the time periods 
set forth above in "-- How to Tender" pursuant to a Notice of Guaranteed        
Delivery from an Eligible Institution. The party tendering the Series A Notes   
for exchange (the "Holder") will sell, assign and transfer the Series A Notes to

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the Exchange Agent, as agent of the Company, and irrevocably constitute and     
appoint the Exchange Agent as the Holder's agent and attorney-in-fact to cause  
the Series A Notes to be transferred and exchanged. The Holder will warrant that
it has full power and authority to tender, exchange, sell, assign and transfer  
the Series A Notes and to acquire the Exchange Notes issuable upon the exchange 
of such tendered Series A Notes, the Exchange Agent, as agent of the Company,   
will acquire good and unencumbered title to the tendered Series A Notes, free   
and clear of all liens, restrictions, charges and encumbrances, and that the    
Series A Notes tendered for exchange are not subject to any adverse claims or   
encumbrance when accepted by the Exchange Agent, as agent of the Company. The   
Holder will also covenant and agree that it will, upon request, execute and     
deliver any additional documents deemed by the Company or the Exchange Agent to 
be necessary or desirable to complete the exchange, sale, assignment and        
transfer of the Series A Notes. All authority conferred or agreed to be         
conferred in the Letter of Transmittal by the Holder will survive the death or  
incapacity of the Holder and any obligation of the Holder shall be binding upon 
the heirs, personal representatives, successors and assigns of such Holder.     

    Signature(s) on the Letter of Transmittal are required to be guaranteed as
set forth above in "-- How to Tender." All questions as to the validity, form,  
eligibility (including time of receipt) and acceptability of any tender will be 
determined by the Company, in its sole discretion, and such determination will  
be final and binding. Unless waived by the Company, irregularities and defects  
must be cured by the Expiration Date. The Company will pay all security transfer
taxes, if any, applicable to the transfer and exchange of the Series A Notes    
tendered.                                                                       

WITHDRAWAL RIGHTS                                                               

 All tenders of the Series A Notes may be withdrawn at any time prior to
acceptance thereof on the Expiration Date. To be effective, a notice of         
withdrawal must be timely received by the Exchange Agent at the address set     
forth below under "-- Exchange Agent." Any notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered the Series A Notes 
to be withdrawn. If the Series A Notes have been physically delivered to the    
Exchange Agent, the tendering holder must also submit the serial number shown on
the particular Series A Notes to be withdrawn. If the Series A Notes have been  
delivered pursuant to the book-entry procedures set forth above under "-- How to
Tender," any notice of withdrawal must specify the name and number of the       
participant's account at DTC to be credited with the withdrawn Series A Notes.  
The Exchange Agent will return the properly withdrawn Series A Notes as soon as 
practicable following receipt of notice of withdrawal. All questions as to the  
validity, including time of receipt, of notices of withdrawals will be          
determined by the Company, and such determinations will be final and binding on 
all parties.                                                                    

ACCEPTANCE OF TENDERS                                                           

  Subject to the terms and conditions of the Exchange Offer, including the
reservation of certain rights by the Company, the Series A Notes tendered       
(either physically or through book-entry delivery as described in "-- How to    
Tender") with a properly executed Letter of Transmittal and all other required  
documentation, and not withdrawn, will be accepted promptly after the Expiration
Date. Subject to such terms and conditions, Exchange Notes to be issued in      
exchange for properly tendered Series A Notes will either be mailed by the      
Exchange Agent or credited to the holder's account in accordance with the       
appropriate book-entry procedures promptly after the acceptance of the properly 
tendered Series A Notes. Acceptance of Series A Notes will be effected by the   
delivery of a notice to that effect by the Company to the Exchange Agent.       
Subject to the applicable rules of the Commission, the Company, however,        
reserves the right, prior to the acceptance of tendered Series A Notes, to delay
acceptance of tendered Series A Notes upon the occurrence of any of the         
conditions set forth above under the caption "-- Conditions." The Company       
confirms that its reservation of the right to delay acceptance of tendered      
Series A Notes is subject to the provisions of Rule 14e-1(c) under the 1934 Act 
which requires that a tender offeror pay the consideration offered or return the
tendered securities promptly after the termination or withdrawal of a tender    
offer.                                                                          

     Although the Company does not currently intend to do so, if it modifies the
terms of the Exchange Offer, such modified terms will be available to all       
holders of Series A Notes, whether or not their Series A Notes                  
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have been tendered prior to such modification. Any material modification will be
disclosed in accordance with the applicable rules of the Commission and, if     
required, the Exchange Offer will be extended to permit holders of Series A     
Notes adequate time to consider such modification.                              

The tender of Series A Notes pursuant to any one of the procedures set
forth in "-- How to Tender" will constitute an agreement between the tendering  
holder and the Company upon the terms and subject to the conditions of the      
Exchange Offer.                                                                 

EXCHANGE AGENT

   Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Letters of Transmittal must be addressed to the Exchange Agent at one of 
the addresses set forth below:                                                  

                                                                [Download Table]
                                                                                
            By Mail:                                 By Courier or By Hand:     
      Marine Midland Bank                             Marine Midland Bank       
Attn: Corporate Trust Department                Attn: Corporate Trust Operations
     140 Broadway, Level A                           140 Broadway, Level A      
 New York, New York 10005-1180                   New York, New York 10005-1180  

By Facsimile: (212) 658-2292
Attn: Paulette Shaw 
Telephone: (212) 658-5931 

Delivery to other than the above addresses will not constitute valid  
delivery.                                                                       

SOLICITATION OF TENDERS; EXPENSES                                               

Except as described above under "Exchange Agent," the Company has not 
retained any agent in connection with the Exchange Offer and will not make any  
payments to brokers, dealers or other persons for soliciting or recommending    
acceptances of the Exchange Offer. The Company will, however, pay the Exchange  
Agent reasonable and customary fees for its services and will reimburse the     
Exchange Agent for its reasonable out-of-pocket expenses in connection          
therewith. The Company will also pay brokerage houses and other custodians,     
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them 
in forwarding copies of this Prospectus and related documents to the beneficial 
owners of the Series A Notes and in handling or forwarding tenders for their    
customers.                                                                      

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USE OF PROCEEDS 

The Company will not receive any proceeds as a result of the Exchange 
Offer.                                                                          

     The net proceeds to the Company from the Offering were approximately $191.7
million after deducting discounts and estimated offering expenses payable by the
Company. The Company utilized and will utilize the net proceeds, together with  
borrowings under the New Credit Facilities, the Investors' equity investment and
the Continuing Shareholders' rollover equity investment to consummate the       
Recapitalization, pay related fees and expenses and for general corporate       
purposes. See "The Transactions." The following table illustrates the sources   
and uses of proceeds:                                                           

                                                                [Download Table]

                                                                AMOUNT  
                                                              ----------
                                                               (DOLLARS 
                                                                  IN    
                                                              THOUSANDS)
                                                                        
SOURCES OF FUNDS:                                                       
New Credit Facilities                                                   
  Term Loans................................................   $300,000 
  Revolving Credit Facility(1)..............................     33,000 
  Acquisition Facility(2)...................................     10,000 
Notes.......................................................    200,000 
Fremont Investor equity investment..........................    135,326 
RCBA Investor equity investment.............................     14,866 
Continuing Shareholders' rollover equity investment.........    198,553 
Existing cash reserves......................................      2,699 
                                                               -------- 
     Total Sources..........................................   $894,444 
                                                               ======== 
USES OF FUNDS:                                                          
Purchases of Shares.........................................   $631,638 
Net purchase of options.....................................     20,832 
Continuing Shareholders' rollover equity investment.........    198,553 
Fees and expenses...........................................     43,421 
                                                               -------- 
     Total Uses.............................................   $894,444 
                                                               ======== 

---------------                                                                 
(1) The Revolving Credit Facility has total commitments of $50.0 million.       

(2) The Acquisition Facility has total commitments of $50.0 million.            

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CAPITALIZATION

     The following table sets forth the unaudited consolidated capitalization of
the Company as of September 30, 1997 (i) on a historical basis and (ii) on a pro
forma basis after giving effect to the Transactions and Acquisitions including  
the Offering and the application of the net proceeds therefrom, as if they had  
occurred on September 30, 1997. This table should be read in conjunction with   
"The Transactions", "Description of Notes", "Description of New Credit          
Facilities" and the historical financial data of the Company included elsewhere 
in this Prospectus.                                                             

                                                        [Enlarge/Download Table]

                                                             AS OF SEPTEMBER 30, 1997  
                                                             ------------------------- 
                                                               ACTUAL       PRO FORMA  
                                                             ----------    ----------- 
                                                              (DOLLARS IN THOUSANDS)   
                                                                                       
Cash and cash equivalents...................................   $ 45,535      $  22,276 
Current portion of long-term debt:                                                     
  New Credit Facilities.....................................   $     --      $   4,800 
  Capital lease obligation..................................        137            137 
                                                               --------      --------- 
                                                               $    137      $   4,937 
                                                               ========      ========= 
Long-term debt:                                                                        
  Existing bank credit facilities...........................   $     --      $      -- 
  New Credit Facilities(1)..................................         --        337,850 
  Notes.....................................................         --        200,000 
  Capital lease obligation..................................        340            340 
                                                               --------      --------- 
Total long-term debt........................................        340        538,190 
                                                               --------      --------- 
Minority Interest...........................................        220            220 
                                                               --------      --------- 
Stockholders' equity including paid-in capital:                                        
  Common stock, $.001 par value; 100,000,000 shares                                    
     authorized.............................................         42             17 
  Additional paid-in capital................................         --        133,904 
  Retained earnings (deficit)...............................    235,579       (407,586)
  Other.....................................................     (4,795)        (4,795)
                                                               --------      --------- 
     Total stockholders' equity.............................    230,826       (278,460)
                                                               --------      --------- 
       Total Capitalization.................................   $231,386      $ 259,950 
                                                               ========      ========= 

---------------                                                                 
(1) As of September 30, 1997, on a pro forma basis after giving effect to the   
  Transactions and the Acquisitions, the Company would have had availability
    of $22.3 million under the Revolving Credit Facility and $35.0 million under
the Acquisition Facility.                                               

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

The following unaudited pro forma condensed consolidated financial    
statements give effect to the Acquisitions and the Transactions. The unaudited  
pro forma condensed consolidated balance sheet as of September 30, 1997 gives   
effect to the Transactions and the Acquisitions as if they had occurred on      
September 30, 1997. The unaudited condensed consolidated statements of earnings 
for the nine months ended September 30, 1997, for the year ended December 31,   
1996, and for the nine months ended September 30, 1996 give effect to the       
Acquisitions and the Transactions as if they had occurred at the beginning of   
each period presented.                                                          

     The information in the column titled "The Company Historical" is summarized
from the historical consolidated financial statements of the Company included   
elsewhere in this Prospectus.                                                   

  The unaudited pro forma condensed consolidated financial statements have
been prepared by Company management and are presented for informational purposes
only. The pro forma adjustments are based on available information and          
assumptions that Company management believes are reasonable. These unaudited pro
forma condensed consolidated financial statements may not be indicative of the  
results that actually would have occurred if the Transactions and the           
Acquisitions had been in effect on the dates indicated or which may be obtained 
in the future. The unaudited pro forma condensed consolidated financial         
statements should be read in conjunction with the Company's consolidated        
financial statements appearing elsewhere in this Prospectus.                    

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                ADJUSTMENTS                      
                                               THE      ---------------------------       THE    
                                             COMPANY    ACQUISITION        THE          COMPANY  
                                            HISTORICAL   OF RIK(A)     TRANSACTIONS    PRO FORMA 
                                            ----------  -----------    ------------    --------- 
                                                                                                 
ASSETS                                                                                           
Current assets:                                                                                  
  Cash and equivalents.....................  $ 45,535    $(23,259)      $(643,741)(b)  $  22,276 
                                                                          133,911(c)             
                                                                          521,854(d)             
                                                                          (12,024)(e)            
  Accounts receivable, net.................    74,875       3,181                         78,056 
  Inventories..............................    21,068         627                         21,695 
  Income taxes receivable..................                                 7,969(b)      12,568 
                                                                            4,599(e)             
  Prepaid expenses and other...............    10,653          92                         10,745 
                                             --------    --------       ---------      --------- 
  Total current assets.....................   152,131     (19,359)         12,568        145,340 
Net property, plant and equipment..........    72,535       2,260                         74,795 
Notes receivable...........................     3,100                                      3,100 
Goodwill, net..............................    27,649      17,059                         44,708 
Other assets, net..........................    30,608         105          20,796(d)      51,509 
                                             --------    --------       ---------      --------- 
          Total Assets.....................  $286,023    $     65       $  33,364      $ 319,452 
                                             ========    ========       =========      ========= 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                             
  (DEFICIT)                                                                                      
Current liabilities:                                                                             
  Accounts payable.........................  $  5,423    $              $              $   5,423 
  Current installments of long-term                                                              
     obligations...........................                                 4,800(d)       4,800 
  Current installments of capital lease                                                          
     obligations...........................       137                                        137 
  Accrued expenses.........................    33,631          65                         33,696 
  Income taxes payable.....................     1,776                                      1,776 
                                             --------    --------       ---------      --------- 
          Total current liabilities........    40,967          65           4,800         45,832 
                                             ========    ========       =========      ========= 
New Credit Facility........................                               337,850(d)     337,850 
The Notes..................................                               200,000(d)     200,000 
Capital leases obligations, excluding                                                            
  current installments.....................       340                                        340 
Deferred income taxes......................    13,462                                     13,462 
Other......................................       208                                        208 
Minority interest..........................       220                                        220 
                                             --------    --------       ---------      --------- 
          Total Liabilities................    55,197          65         542,650        597,912 
                                             --------    --------       ---------      --------- 
Shareholders' equity (deficit):                                                                  
  Common stock.............................        42                         (32)(b)         17 
                                                                                7(c)             
  Additional paid-in capital...............                               133,904(c)     133,904 
  Retained earnings (deficit)..............   235,579                    (635,740)(b)   (407,586)
                                                                           (7,425)(e)            
  Other....................................    (4,795)                                    (4,795)
                                             --------    --------       ---------      --------- 
                                              230,826                    (509,286)      (278,460)
                                             --------    --------       ---------      --------- 
          Total Liabilities and                                                                  
            Shareholders'                                                                        
            Equity (Deficit)...............  $286,023    $     65       $  33,364      $ 319,452 
                                             ========    ========       =========      ========= 

See accompanying notes to unaudited pro forma condensed consolidated financial
statements. 
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                 ADJUSTMENTS                         
                                                         ---------------------------                 
                                                THE      ACQUISITION                                 
                                              COMPANY      OF RIK           THE         THE COMPANY  
                                             HISTORICAL   AND HF(F)     TRANSACTIONS     PRO FORMA   
                                             ----------  -----------    ------------    -----------  
                                                                                                     
Revenue:                                                                                             
  Service and rental........................  $184,730     $8,425               --       $193,155    
  Sales and other...........................    39,781        903               --         40,684    
                                              --------     ------         --------       --------    
     Total revenue..........................   224,511      9,328               --        233,839    
Rental expenses.............................   115,633      5,349               --        120,982    
Cost of goods sold..........................    16,077        447               --         16,524    
                                              --------     ------         --------       --------    
                                               131,710      5,796                         137,506    
                                              --------     ------         --------       --------    
     Gross profit...........................    92,801      3,532               --         96,333    
Selling, general and administrative                                                                  
  expenses..................................    44,196      1,971         $ (1,535)(g)     44,632    
                                              --------     ------         --------       --------    
     Operating earnings.....................    48,605      1,561            1,535         51,701    
Interest income.............................     1,421       (873)                            548    
Interest expense............................      (126)        --          (37,013)(h)    (37,139)(j)
                                              --------     ------         --------       --------    
     Earnings before income taxes and                                                                
       minority interest....................    49,900        688          (35,478)        15,110    
Income tax..................................    19,960        263          (13,570)(i)      6,653    
Minority interest...........................        37         --               --             37    
                                              --------     ------         --------       --------    
     Net earnings...........................  $ 29,903     $  425         $(21,908)      $  8,420    
                                              ========     ======         ========       ========    
Other Information(k):                                                                                
  EBITDA....................................  $ 67,133     $2,606         $  1,535       $ 71,274    
  EBITDA margin.............................        30%                                        30%   
  Depreciation and amortization.............    17,144      1,916                          19,060    
  Capital expenditures......................    24,004      1,650                          25,654    
  Ratio of EBITDA to cash interest                                                                   
     expense................................                                                 2.03x   

See accompanying notes to unaudited pro forma condensed consolidated financial
statement.
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UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS 
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                  ADJUSTMENTS                          
                                               THE      -------------------------------                
                                             COMPANY      ACQUISITION          THE        THE COMPANY  
                                            HISTORICAL  OF RIK AND HF(F)   TRANSACTIONS    PRO FORMA   
                                            ----------  ----------------   ------------   -----------  
                                                                                                       
Revenue:                                                                                               
  Service and rental.......................  $225,450       $16,025                --      $241,475    
  Sales and other..........................    44,431           782                --        45,213    
                                             --------       -------          --------      --------    
     Total revenue.........................   269,881        16,807                         286,688    
Rental expenses............................   146,205        10,585                --       156,790    
Cost of goods sold.........................    16,315           305                --        16,620    
                                             --------       -------          --------      --------    
                                              162,520        10,890                         173,410    
                                             --------       -------          --------      --------    
     Gross profit..........................   107,361         5,917                --       113,278    
Selling, general and administrative                                                                    
  expenses.................................    52,007         4,883          $ (2,281)(g)    54,609    
                                             --------       -------          --------      --------    
     Operating earnings....................    55,354         1,034             2,281        58,669    
Interest income............................     9,332        (1,164)                          8,168    
Interest expense...........................      (245)           --           (48,930)(h)   (49,175)(j)
                                             --------       -------          --------      --------    
     Earnings (loss) before income taxes                                                               
       and minority interest...............    64,441          (130)          (46,649)       17,622    
Income tax.................................    25,454           (50)          (17,843)(i)     7,561    
                                             --------       -------          --------      --------    
     Net earnings (loss)...................  $ 38,987       $   (80)         $(28,806)     $ 10,101    
                                             ========       =======          ========      ========    
Other Information(k):                                                                                  
     EBITDA................................  $ 81,300       $ 3,208          $  2,281      $ 86,789    
     EBITDA margin.........................        30%                                           30%   
     Depreciation and amortization.........    21,794         3,338                          25,132    
     Capital expenditures..................    27,083         2,790                          29,873    
     Ratio of EBITDA to cash interest                                                                  
       expense.............................                                                    1.86x   

See accompanying notes to unaudited pro forma condensed consolidated financial
statements. 
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UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT RATIOS) 

                                                        [Enlarge/Download Table]

                                                                  ADJUSTMENTS                          
                                               THE      -------------------------------                
                                             COMPANY      ACQUISITION          THE        THE COMPANY  
                                            HISTORICAL  OF RIK AND HF(A)   TRANSACTIONS    PRO FORMA   
                                            ----------  ----------------   ------------   -----------  
                                                                                                       
Revenue:                                                                                               
Service and rental.........................  $167,523       $12,019                        $179,542    
Sales and other............................    32,306           587                          32,893    
                                             --------       -------          --------      --------    
Total revenue..............................   199,829        12,606                         212,435    
Rental expenses............................   109,263         7,939                         117,202    
Cost of goods sold.........................    11,685           229                          11,914    
                                             --------       -------          --------      --------    
                                              120,948         8,168                         129,116    
                                             --------       -------          --------      --------    
Gross profit...............................    78,881         4,438                          83,319    
Selling, general and administrative                                                                    
  expenses.................................    38,791         3,674          $ (1,711)(g)    40,754    
                                             --------       -------          --------      --------    
Operating earnings.........................    40,090           764             1,711        42,565    
Interest income............................     3,055          (873)                          2,182    
Interest expense...........................      (118)                        (36,655)(h)   (36,773)(j)
                                             --------       -------          --------      --------    
Earnings (loss) before income taxes and                                                                
  minority interest........................    43,027          (109)          (34,944)        7,974    
Income tax.................................    17,168           (42)          (13,366)(i)     3,760    
                                             --------       -------          --------      --------    
Net earnings (loss)........................  $ 25,859       $   (67)         $(21,578)     $  4,214    
                                             ========       =======          ========      ========    
Other Information(k):                                                                                  
EBITDA.....................................  $ 59,632       $ 1,980          $  1,711      $ 63,323    
EBITDA margin..............................        30%                                           30%   
Depreciation and amortization..............    16,487         2,089                          18,576    
Capital expenditures.......................    19,137         2,063                          21,200    
Ratio of EBITDA to cash interest expense...                                                    1.82x   

See accompanying notes to unaudited pro forma condensed consolidated financial
statements. 
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NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 
(DOLLARS IN THOUSANDS)

ACQUISITIONS                                                                    

    On February 1, 1997, the Company acquired the assets of H.F. Systems, Inc.
("HF") for approximately $7,955 in cash. On October 1, 1997, the Company        
acquired the assets of RIK Medical L.L.C. ("RIK") for approximately $23,259 in  
cash plus an earn-out of up to $2,000. The acquisitions were accounted for as   
purchase transactions and the results of operations are included in the         
Company's audited financial statements from the date of acquisition.            

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET                        

   The unaudited pro forma condensed consolidated balance sheet gives effect
to the acquisition of RIK, the Offering and the Recapitalization assuming that  
the transactions occurred on that date. The Acquisitions include the acquisition
of RIK on October 1, 1997 and HF on February 1, 1997 in transactions accounted  
for as purchases. The Offering and the Recapitalization include the offer to    
purchase certain outstanding Shares and the related equity investment by the    
Investors and certain financings.                                               

         (a) Represents net assets acquired, the excess of purchase price over
net assets acquired, and the related cash payment.                    

        (b) Represents cash payment for 32,358,906 Shares tendered at $19.25
   per Share, net purchase of 2,247,015 stock options outstanding and income
tax benefit of $7,969.                                                

          (c) Represents proceeds from sale of 7,436,042 Shares to the Investors
and related increases in equity, net of expenses of $9,233.           

       (d) Represents proceeds of financing from the Term Loan Facility of
  $300,000, the Offering of $200,000 and the Revolving Credit Facility and
Acquisition Facility of $42,650, including capitalized costs related  
thereto of $20,796. As of November 30, 1997, the aggregate amount     
  outstanding under the Revolving Credit Facility and Acquisition Facility
was $43,000.                                                          

  (e) Represents the expensing of nonrecurring fees and expenses
 directly related to the Offering, the Recapitalization and related cash
payment.                                                              

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS               

    The pro forma condensed consolidated statements of earnings give effect to
the Transactions and the Acquisitions as if all of them had occurred at the     
beginning of the year. The Acquisitions reflect the results of operations of RIK
and HF. The Transactions include additional interest expense, certain expense   
savings and the related income tax effects.                                     

 (f) Represents historical results of RIK and HF, adjusted for
amortization of additional goodwill, expected reductions in operating 
expenses due to anticipated efficiencies and consolidations, and the  
    related income tax effect. Results of HF after the date of acquisition are
included in the Company's historical amounts.                         

    (g) Reflects reductions in compensation and administrative costs
resulting from changes in organizational structure as a result of the 
Recapitalization.                                                     

          (h) Reflects interest expense on the New Credit Facilities at weighted
     average interest rates ranging from approximately 7.9% to 8.1% and interest
     on the Notes of 9 5/8%. For every  1/8% change in the assumed interest rate
  on the Notes, the effect would be an increase of $250 to pretax interest
expense.                                                              

        (i) Represents income tax effect at an effective tax rate of 38.25%.

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NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The unaudited pro forma condensed consolidated statement of earnings  
excludes approximately $12,024 of nonrecurring expenses (principally            
compensation and other fees) directly related to the Offering that are expected 
to be incurred within the next twelve months.                                   

INTEREST EXPENSE                                                                

       (j) Includes non-cash charges of amortized deferred financing costs
    for the periods ended September 30, 1997, December 31, 1996, and September
30, 1996 of $1,950, $2,600, and $1,950, respectively.                 

OTHER INFORMATION                                                               

     (k) EBITDA is defined as earnings before interest expense, income
     taxes, depreciation and amortization. EBITDA margin represents the ratio of
   EBITDA to total revenues. The ratio of EBITDA to cash interest expense is
   calculated by dividing consolidated cash interest expense into EBITDA for
 the period. EBITDA and pro forma EBITDA for the year ended December 31,
  1996 exclude a one-time gain of $5,180 related to the early repayment of
notes receivable from MEDIQ/PRN that had previously been discounted.  

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1994 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS 

The following unaudited pro forma condensed consolidated statement of 
earnings for the year ended December 31, 1994 gives effect to the dispositions  
of Medical Services and KCIFS as if such dispositions had occurred on January 1,
1994. The pro forma information is based on the historical financial statements 
of the Company, giving effect to the dispositions and the assumptions and       
adjustments set forth in the notes accompanying the unaudited pro forma         
condensed consolidated statement of earnings. This unaudited pro forma statement
may not be indicative of the results that actually would have occurred if the   
dispositions had occurred during the period indicated. The unaudited pro forma  
condensed consolidated statement of earnings should be read in conjunction with 
the Company's Consolidated Financial Statements and the notes thereto appearing 
elsewhere in this Prospectus.                                                   

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED) 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                           DIVISIONS SOLD                              
                                                         ------------------          PRO FORMA         
                                 KINETIC CONCEPTS, INC.  MEDICAL             --------------------------
                                    AND SUBSIDIARIES     SERVICES    KCIFS   ADJUSTMENTS    AS ADJUSTED
                                 ----------------------  --------    ------  -----------    -----------
                                                                                                       
Revenue:                                                                                               
  Rental and service...........         $228,832         $ 34,495    $   --    $    --       $194,337  
  Sales and other..............           40,814            9,351     3,716         --         27,747  
                                        --------         --------    ------    -------       --------  
     Total revenue.............          269,646           43,846     3,716         --        222,084  
Rental expenses................          159,235           24,014        --         --        135,221  
Cost of goods sold.............           19,388            6,814        --         --         12,574  
                                        --------         --------    ------    -------       --------  
     Gross profit..............           91,023           13,018     3,716         --         74,289  
Selling, general and                                                                                   
  administrative expenses......           51,813           14,143     2,017         --         35,653  
Unusual items..................          (84,868)         (10,121)       --         --        (74,747) 
                                        --------         --------    ------    -------       --------  
     Operating earnings........          124,078            8,996     1,699         --        113,383  
Interest expense (income),                                                                             
  net..........................            4,528              310       732     (4,695)(4a)    (1,209) 
                                        --------         --------    ------    -------       --------  
     Earnings before income                                                                            
       taxes, minority interest                                                                        
       and cumulative effect of                                                                        
       change in accounting                                                                            
       principle...............          119,550            8,686       967      4,695        114,592  
Income taxes...................           55,949           12,820       369      1,831(4b)     44,591  
                                        --------         --------    ------    -------       --------  
     Earnings (loss) before                                                                            
       minority interest and                                                                           
       cumulative effect                                                                               
       of change in accounting                                                                         
       principle...............           63,601           (4,134)      598      2,864         70,001  
Minority interest..............               40               --        --         --             40  
Cumulative effect of change in                                                                         
  accounting for inventory.....              742               --        --         --            742  
                                        --------         --------    ------    -------       --------  
     Net earnings (loss).......         $ 64,383         $ (4,134)   $  598    $ 2,864       $ 70,783  
                                        ========         ========    ======    =======       ========  
     Earnings per share........         $   1.46                                             $   1.60  
                                        ========                                             ========  
     Shares used in earnings                                                                           
       per share                                                                                       
       computations............           44,143                                               44,143  
                                        ========                                             ========  

See accompanying notes to unaudited pro forma condensed consolidated statements 
of earnings.
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NOTES TO 1994 UNAUDITED PRO FORMA CONDENSED 
CONSOLIDATED STATEMENT OF EARNINGS

NOTE 1.  DISPOSITION OF MEDICAL SERVICES                                        

  On September 30, 1994, the Company sold certain assets (the "Assets") of
Medical Services to Mediq/PRN Life Support Services-I, Inc. ("MEDIQ/PRN") under 
an Asset Purchase Agreement. Upon consummation of this transaction, MEDIQ/PRN   
acquired the Assets and assumed certain liabilities of Medical Services. The    
sales price was approximately $84.1 million. Medical Services was in the        
business of renting to providers a portfolio of standard-of-care medical        
products such as ventilators, monitors and infusion pumps. In conjunction with  
the sale, the Company and its affiliates agreed not to rent similar products    
manufactured by third parties for five years.                                   

   Gross proceeds included a cash payment of approximately $65.3 million and
promissory notes in the aggregate principal amount of $18.8 million. The net    
proceeds of $72.8 million, pre-tax gain of $8.1 million and after-tax net loss  
of $2.5 million were calculated as follows (in thousands):                      

                                                                [Download Table]
                                                                       
Cash........................................................  $ 65,300 
Notes receivable, net of discount and allowance.............     9,852 
Fees and commissions........................................    (2,329)
                                                              -------- 
  Net proceeds..............................................    72,823 
Equipment and inventory sold................................   (38,959)
Goodwill....................................................   (25,778)
Accounts receivable provision...............................    (2,479)
Capital leases assumed......................................     2,514 
                                                              -------- 
  Pre-tax gain on disposition at September 30, 1994.........     8,121 
Fourth quarter 1994 collection of accounts receivable.......     2,000 
                                                              -------- 
  Pre-tax gain on disposition at December 31, 1994..........    10,121 
Tax expense.................................................   (12,601)
                                                              -------- 
          Net loss on disposition...........................  $ (2,480)
                                                              ======== 

     Tax expense exceeded the pre-tax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill.                                          

  During the fourth quarter of 1994, the Company recognized a $2.0 million
pre-tax gain as a result of the collection of Medical Services' accounts        
receivable which had not been included in the sale. These receivables had been  
reserved at the time of the sale. Partially offsetting this gain, the Company   
recorded post closing adjustments of $1.2 million relating to the operations of 
Medical Services.                                                               

NOTE 2.  DISPOSITION OF KCIFS                                                   

On June 15, 1995, the Company sold KCIFS to Cura Capital Corporation  
("Cura") for cash under a Stock Purchase Agreement. Upon consummation of this   
transaction, Cura acquired all of the outstanding capital stock of KCIFS. Total 
proceeds from the sale were $7.2 million. In addition, the Company and its      
affiliates agreed not to provide lease financing for medical equipment          
manufactured by third parties for a period of three years. KCIFS served as the  
leasing agent for Medical Services, certain assets of which were sold in        
September 1994.                                                                 

NOTE 3.  SALE OF MRD                                                            

  On March 27, 1995, the Company sold the assets of MRD, a subsidiary that
refurbished standard hospital beds and furniture. The assets, operations and    
sales proceeds of MRD were immaterial to the overall operations of the Company  
and, therefore, the unaudited pro forma condensed consolidated statements of    

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NOTES TO 1994 UNAUDITED PRO FORMA CONDENSED 
CONSOLIDATED STATEMENT OF EARNINGS -- (CONTINUED) 

earnings do not contain any adjustment for MRD. In addition, the Company and its
affiliates agreed not to refurbish certain hospital beds and related furniture  
for a period of three years.                                                    

NOTE 4.  PRO FORMA ADJUSTMENTS                                                  

    The unaudited pro forma condensed consolidated statements of earnings give
effect to the following pro forma adjustments:                                  

      (a) To decrease interest expense as a result of the application of
    proceeds from the dispositions to the repayment of indebtedness as if such
   repayment had occurred on January 1, 1994, and to include interest income
which would have been earned under the notes receivable issued in     
connection with the disposition of Medical Services.                  

     (b) To adjust income tax expense used to reflect the consolidated
statutory tax rates.                                                  

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA 

  The selected consolidated financial data set forth below with respect to
the fiscal years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived 
from the Company's audited consolidated financial statements. The selected      
consolidated financial data for the nine months ended September 30, 1996 and    
1997 are derived from the Company's unaudited consolidated financial statements 
which in the opinion of management include all normal, recurring adjustments    
necessary to state fairly the data included therein in accordance with GAAP for 
interim financial information. Interim results are not necessarily indicative of
the results to be expected for the entire fiscal year. The unaudited pro forma  
selected consolidated financial data set forth below with respect to the fiscal 
year ended December 31, 1994 and for the nine months ended September 30, 1996   
and 1997 are derived from the Company's unaudited pro forma condensed           
consolidated statements of earnings. All of the data set forth below should be  
read in conjunction with "Management's Discussion and Analysis of Financial     
Condition and Results of Operations," the Consolidated Financial Statements and 
the notes thereto, and the Unaudited Pro Forma Condensed Consolidated Statements
of Earnings and the notes relating thereto included in this Prospectus.         

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA 

                                                        [Enlarge/Download Table]

                                                                YEAR ENDED DECEMBER 31,                          NINE MONTHS     
                                            ---------------------------------------------------------------         ENDED        
                                                                               PRO                              SEPTEMBER 30,    
                                                                              FORMA                          ------------------- 
                                              1992       1993       1994     1994(1)      1995       1996      1996       1997   
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
                                                                (DOLLARS IN THOUSANDS)                           (UNAUDITED)     
                                                                                                                                 
CONSOLIDATED STATEMENTS OF EARNINGS DATA:                                                                                        
Revenue:                                                                                                                         
  Rental and service......................  $244,905   $232,250   $228,832   $194,337   $206,653   $225,450  $167,523   $184,730 
  Sales and other.........................    33,586     36,622     40,814     27,747     36,790     44,431    32,306     39,781 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
    Total revenue.........................   278,491    268,872    269,646    222,084    243,443    269,881   199,829    224,511 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
Rental expenses...........................   156,682    169,687    159,235    135,221    137,420    146,205   109,263    115,633 
Cost of goods sold........................    18,987     18,666     19,388     12,574     13,729     16,315    11,685     16,077 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
  Gross profit............................   102,822     80,519     91,023     74,289     92,294    107,361    78,881     92,801 
Selling, general and administrative                                                                                              
  expenses................................    47,710     53,279     51,813     35,653     48,502     52,007    38,791     44,196 
Unusual items(2)..........................        --      6,705    (84,868)   (74,747)        --         --        --         -- 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
  Operating earnings......................    55,112     20,535    124,078    113,383     43,792     55,354    40,090     48,605 
Interest income (expense), net............    (7,195)    (5,908)    (4,528)    (1,209)     4,554      9,087     2,937      1,295 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
Earnings before income taxes, minority                                                                                           
  interest, extraordinary item and                                                                                               
  cumulative effect of changes in                                                                                                
  accounting principles...................    47,917     14,627    119,550    114,592     48,346     64,441    43,027     49,900 
Income taxes..............................    19,405      7,175     55,949     44,591     19,905     25,454    17,168     19,960 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
Earnings before minority interest,                                                                                               
  extraordinary item and cumulative                                                                                              
  effects of changes in accounting                                                                                               
  principles..............................    28,512      7,452     63,601     70,001     28,441     38,987    25,859     29,940 
Minority interest.........................        --        560         40         40         --         --        --        (37)
Extraordinary item -- debt extinguishment,                                                                                       
  net.....................................        --       (400)        --         --         --         --        --         -- 
Cumulative effect of change in accounting                                                                                        
  for inventory(3)........................        --         --        742        742         --         --        --         -- 
Cumulative effect of change in accounting                                                                                        
  for income taxes(4).....................        --        450         --         --         --         --        --         -- 
                                            --------   --------   --------   --------   --------   --------  --------   -------- 
  Net earnings............................  $ 28,512   $  8,062   $ 64,383   $ 70,783   $ 28,441   $ 38,987  $ 25,859   $ 29,903 
                                            ========   ========   ========   ========   ========   ========  ========   ======== 
  Earnings per share......................  $   0.63   $   0.18   $   1.46   $   1.60   $   0.63   $   0.86  $   0.56   $   0.68 
                                            ========   ========   ========   ========   ========   ========  ========   ======== 
Shares used in earnings per share                                                                                                
  computations............................    45,060     44,627     44,143     44,143     45,457     45,489    45,923     43,772 
                                            ========   ========   ========   ========   ========   ========  ========   ======== 
Cash flow provided by operations..........  $ 58,007   $ 56,538   $ 96,451              $ 56,782   $ 62,167  $ 40,289   $ 37,115 
                                            --------   --------   --------              --------   --------  --------   -------- 
Cash dividends paid to common                                                                                                    
  shareholders............................  $  6,277   $  6,638   $  6,588              $  6,631   $  6,607  $  4,988   $  4,789 
                                            --------   --------   --------              --------   --------  --------   -------- 
Cash dividends per share paid to common                                                                                          
  shareholders............................  $    .14   $    .15   $    .15              $    .15   $    .15  $    .11   $    .11 
                                            --------   --------   --------              --------   --------  --------   -------- 
Ratio of earnings to fixed charges........      5.7x       2.4x      17.0x                 21.9x      29.4x     27.3x      26.7x 
                                            --------   --------   --------              --------   --------  --------   -------- 

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                                                        [Enlarge/Download Table]

                                                                                DECEMBER 31,                      SEPTEMBER 30,
                                                            ----------------------------------------------------  -------------
                                                              1992       1993       1994       1995       1996        1997     
                                                            --------   --------   --------   --------   --------  -------------
                                                                           (DOLLARS IN THOUSANDS)                  (UNAUDITED) 
                                                                                                                               
CONSOLIDATED BALANCE SHEET DATA:                                                                                               
Working capital............................................ $ 55,473   $ 60,907   $ 90,731   $109,413   $107,334    $111,164   
Total assets............................................... $286,915   $284,573   $232,731   $243,726   $253,393    $286,023   
Long-term obligations -- noncurrent(5)..................... $102,237   $101,889   $  2,636   $     --   $    396    $    340   
Minority interest.......................................... $    990   $     40   $     --   $     --   $     --    $    220   
Redeemable convertible preferred stock..................... $  3,307   $     --   $     --   $     --   $     --    $     --   
Other shareholders' equity................................. $123,813   $125,707   $185,423   $210,324   $211,078    $230,826   
Book value per share(6).................................... $   2.73   $   2.76   $   4.22   $   4.74   $   4.98    $   5.43   

                                                        [Enlarge/Download Table]

                                                                                                                NINE MONTHS     
                                                                                                                   ENDED        
                                                                       YEAR ENDED DECEMBER 31,                 SEPTEMBER 30,    
                                                           ------------------------------------------------  ------------------ 
                                                            1992      1993       1994      1995      1996     1996       1997   
                                                           -------   -------   --------   -------   -------  -------    ------- 
                                                                        (DOLLARS IN THOUSANDS)                  (UNAUDITED)     
                                                                                                                                
DETERMINATION OF RATIO OF EARNINGS TO FIXED CHARGES:                                                                            
Earnings before income taxes, minority interest,                                                                                
  extraordinary item and cumulative effects of changes in                                                                       
  accounting principles................................... $47,917   $14,627   $119,550   $48,346   $64,441  $43,027    $49,900 
Minority interest.........................................      --       560         40        --        --       --        (37)
Fixed charges                                                                                                                   
  Interest expense........................................   8,482     8,819      5,846       509       245      118        126 
  Interest portion of lease expense(7)....................   1,660     1,665      1,635     1,800     2,025    1,515      1,814 
                                                           -------   -------   --------   -------   -------  -------    ------- 
Earnings before fixed charges............................. $58,059   $25,671   $127,071   $50,655   $66,711  $44,660    $51,803 
                                                           =======   =======   ========   =======   =======  =======    ======= 
Fixed charges                                                                                                                   
  Interest................................................ $ 8,482   $ 8,819   $  5,846   $   509   $   245  $   118    $   126 
  Interest portion of rental expenses.....................   1,660     1,665      1,635     1,800     2,025    1,515      1,814 
Preferred stock dividend requirements.....................      49        26         --        --        --       --         -- 
                                                           -------   -------   --------   -------   -------  -------    ------- 
Fixed charges and preferred stock dividends............... $10,191   $10,510   $  7,481   $ 2,309   $ 2,270  $ 1,633    $ 1,940 
                                                           =======   =======   ========   =======   =======  =======    ======= 
  Ratio of earnings to fixed charges......................    5.7x      2.4x      17.0x     21.9x     29.4x    27.3x      26.7x 
                                                           =======   =======   ========   =======   =======  =======    ======= 

---------------                                                                 
(1) The unaudited pro forma selected consolidated financial data is based on the
    historical financial statements of the Company, giving effect to the sale of
    certain assets of the Medical Services and all of the capital stock of KCIFS
as if such sales had been consummated as of January 1, 1994, and giving 
  effect to such other assumptions and adjustments as set forth in the notes
 accompanying the pro forma condensed consolidated statements of earnings.
See the 1994 Unaudited Pro Forma Condensed Consolidated Statement of    
Earnings and the notes thereto included elsewhere in this Prospectus.   

(2) See Note 12 of Notes to Consolidated Financial Statements for information on
unusual items.                                                          

(3) See Note 1 of Notes to Consolidated Financial Statements for information on 
cumulative effect of change in method of accounting for inventory.      

(4) See Note 7 of Notes to Consolidated Financial Statements for information on 
cumulative effect of change in method of accounting for income taxes.   

(5) See Notes 5 and 6 of Notes to Consolidated Financial Statements for         
information concerning the Company's borrowing arrangements and lease   
obligations.                                                            

(6) Based on shares outstanding at end of year or period.                       

(7) Estimated to approximate 15% of lease expense.                              

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

GENERAL                                                                         

    The ongoing health care debate continues to create pressure on health care
providers to control costs, provide cost effective therapies and improve patient
outcomes. Industry trends resulting from these pressures include the            
accelerating migration of patients from acute care facilities into extended care
(e.g., skilled nursing facilities and rehabilitation centers) and home care     
settings, and the consolidation of health care providers and national and       
regional group purchasing organizations. In August 1997, in an effort to reduce 
the federal deficit and lower overall federal healthcare expenditures, Congress 
passed the BBA. The BBA contains a number of provisions which will impact the   
federal reimbursement of health care costs and reduce projected payments under  
the Medicare system by $115 billion over the next five years. The majority of   
the savings are scheduled for the fourth and fifth years of this plan. The      
provisions include (i) a reduction exceeding $30 billion in the level of        
payments made to acute care hospitals under Medicare Part A over the next five  
years (which will be funded primarily through a reduction in future consumer    
price index increases); (ii) a change, beginning July 1, 1998 in the manner in  
which skilled nursing facilities ("SNFs") are reimbursed from a cost-based      
system to a prospective payment system whereby SNFs will receive an all         
inclusive, case-mix adjusted per diem payment for each of their Medicare        
patients; and (iii) a five-year freeze on consumer price index updates for      
Medicare Part B services in the home and the implementation of competitive      
bidding trials for five categories of home care products.                       

Less than 10% of the Company's revenues are received directly from the
Medicare system. However, many of the health care providers who pay the Company 
for its products are reimbursed, either directly or indirectly, by the federal  
government under the Medicare system for the use of those products. The Company 
does not believe that the changes introduced by the BBA will have a substantial 
impact on its hospital customers or the dealers who distribute the Company's    
products in the home health care market. However, changes introduced by the BBA 
may have an impact on the manner in which the Company's extended care customers 
make purchasing and rental decisions. Under a fixed payment system, decisions on
selecting the products and services used in patient care are generally based on 
clinical and cost-effectiveness.                                                

  Industry trends including pricing pressures, the consolidation of health
care providers and national and regional group purchasing organizations and a   
shift in market demand toward lower-priced products such as mattress overlays   
have had the impact of reducing the Company's overall average daily rental rates
on its products. These industry trends, together with the increasing migration  
of patients from acute care to extended and home care settings, have had the    
effect of reducing overall acute care market growth. While the Company expects  
these industry trends to continue, it has successfully addressed these trends   
over the last three years by (i) increasing its marketing efforts beyond its    
existing base of more than 1,300 acute care hospitals to market to an additional
1,900 medium to large hospitals in which the Company has previously had a       
relatively small presence and (ii) introducing new high-end therapies and       
products including the TriaDyne and BariKare beds, the V.A.C. and the PlexiPulse
All-in-1 system. The Company's overall market continues to increase based upon  
demographic trends as most of the Company's patients are over 65 years old.     
Additionally, through its nationwide distribution network, the Company has      
expanded its presence in both the extended and home care settings.              

     Expansion of the Company's national distribution network has allowed KCI to
leverage a relatively fixed field cost structure across a broad range of        
patients and care settings which has resulted in improved operating margins. In 
addition, increasing demand for the Company's products in the extended and home 
care settings has increased utilization of certain of the Company's products    
which were originally developed for acute care settings. Because of cost        
pressures within the health care industry, patients are leaving the acute care  
setting sooner, thereby increasing the demand for the Company's products in the 
extended and home care settings.                                                

    Generally, the Company's customers prefer to rent rather than purchase the
Company's products in order to avoid the ongoing service, storage and           
maintenance requirements and the high initial capital outlays associated with   
purchasing such products, as well as to receive the Company's high-quality      
clinical support. As                                                            

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a result, rental revenues are a high percentage of the Company's overall        
revenues. More recently, sales have increased as a portion of the Company's     
revenues. The Company believes this trend will continue because certain U.S.    
health care providers are purchasing products that are less expensive and easier
to maintain such as medical devices, mattress overlays and mattress replacement 
systems. In addition, international health care providers tend to purchase      
therapeutic surfaces more often than U.S. health care providers.                

RESULTS OF OPERATIONS                                                           

First Nine Months of 1997 Compared to First Nine Months of 1996             

   The following table sets forth, for the periods indicated, the percentage
relationship of each item to total revenue as well as the change in each line   
item as compared to the first nine months of the prior year (dollars in         
thousands):                                                                     

                                                        [Enlarge/Download Table]

                                                       NINE MONTHS ENDED SEPTEMBER 30,    
                                                     ------------------------------------ 
                                                       REVENUE             VARIANCE       
                                                     RELATIONSHIP    INCREASE (DECREASE)  
                                                     ------------    -------------------- 
                                                     1997    1996        $           PCT  
                                                     ----    ----    ---------      ----- 
                                                                                          
Revenue:                                                                                  
  Rental and service................................  82%     84%      $17,207         11%
  Sales and other...................................  18      16         7,475         23 
                                                     ---     ---       -------        --- 
     Total Revenue.................................. 100     100        24,682         12 
                                                     ---     ---       -------        --- 
Rental expenses.....................................  52      55         6,370          6 
Cost of goods sold..................................   7       6         4,392         38 
                                                     ---     ---       -------        --- 
     Gross profit...................................  41      39        13,920         18 
Selling, general and administrative expenses........  20      19         5,405         14 
                                                     ---     ---       -------        --- 
     Operating earnings.............................  21      20         8,515         21 
Interest income, net................................   1       2        (1,642)       (56)
                                                     ---     ---       -------        --- 
     Earnings before income taxes and minority                                            
       interest.....................................  22      22         6,873         16 
Income taxes........................................   9       9         2,792         16 
     Minority interest..............................  --      --            37         -- 
                                                     ---     ---       -------        --- 
     Net earnings...................................  13%     13%      $ 4,044         16%
                                                     ===     ===       =======        === 

    The Company's revenue is derived from three primary markets. The following
table sets forth the amount of revenue derived from each of these markets for   
the periods indicated (dollars in millions):                                    

                                                                [Download Table]

                                                             NINE MONTHS ENDED 
                                                               SEPTEMBER 30,   
                                                             ------------------
                                                              1997       1996  
                                                             -------    -------
                                                                               
Domestic Specialty Surfaces................................   $146.9     $134.4
International..............................................     51.3       51.6
Medical Devices............................................     25.6       13.6
Other......................................................      0.7        0.2
                                                              ------     ------
                                                              $224.5     $199.8
                                                              ======     ======

     Total revenue for the first nine months of 1997 increased by $24.7 million,
or 12.4%, to $224.5 million. Revenue from the Company's domestic specialty      
surface business was $146.9 million, up $12.5 million, or 9.3%, from the nine   
months ended September 30, 1996 as all major product lines grew. Revenue from   
the Company's international operations of $51.3 million declined less than 1.0% 
compared to the nine months ended September 30, 1996 despite unfavorable        
currency exchange rate fluctuations of approximately $4.4 million for the       
period. Revenue from medical device operations in the first nine months of 1997 
was $25.6                                                                       

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million, up $12.0 million, or 88.2%, primarily due to increased rental revenue  
from both the V.A.C. wound closure device and the PlexiPulse.                   

     Rental expenses were 62.6% of total rental revenue in the nine months ended
September 30, 1997 compared to 65.2% in the nine months of 1996. This decrease  
is primarily attributable to the increase in rental revenue, as the majority of 
rental expenses are fixed, combined with certain operating efficiencies         
associated with implementation of the Genesis service delivery system and       
processes. Overall, rental expenses increased $6.4 million, or 5.8% compared to 
the first nine months of 1996.                                                  

   Cost of goods sold increased $4.4 million, or 37.6%, to $16.1 million for
the nine months ended September 30, 1997 from $11.7 million for the nine months 
of 1996. This increase is primarily due to increased sales volumes and lower    
margin sales associated primarily with business acquisitions made in 1997.      

 Gross profit increased $13.9 million, or 17.6%, to $92.8 million in the
nine months ended September 30, 1997 due to the increase in revenue, controlled 
growth in rental expenses and improved sales volumes.                           

 Selling, general and administrative expenses increased $5.4 million, or
13.9%, to $44.2 million in the first nine months of 1997 from $38.8 million in  
the first nine months of 1996. Key investments in marketing programs and        
information systems as well as higher legal and professional fees accounted for 
the majority of this increase.                                                  

Operating earnings for the period increased $8.5 million, or 21.2%, to
$48.6 million compared to $40.1 million in the prior-year resulting largely from
the above-mentioned revenue growth.                                             

   Net interest income for the nine months ended September 30, 1997 was $1.3
million compared to $2.9 million in the prior year. The decrease in interest    
income resulted from lower invested cash balances due to acquisition activities 
in 1997 and the early payment in October 1996 of all remaining notes receivable 
from Mediq/PRN.                                                                 

The Company's effective income tax rate in the first nine months ended
September 30, 1997 was 40%, compared to 39.9% in the first nine months of 1996. 

Net earnings increased $4.0 million, or 15.6%, to $29.9 million in the
first nine months of 1997 from $25.9 million in the first nine months of 1996.  
This increase was due to the relative decrease in rental expenses and the change
in revenue as discussed above.                                                  

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Year Ended December 31, 1996 Compared to Year Ended December 31, 1995       

   The following table sets forth, for the periods indicated, the percentage
relationship of each item to total revenue as well as the change in each line   
item as compared to the prior year (dollars in thousands):                      

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED DECEMBER 31,        
                                                     ------------------------------------ 
                                                       REVENUE             VARIANCE       
                                                     RELATIONSHIP    INCREASE (DECREASE)  
                                                     ------------    -------------------- 
                                                     1996    1995        $           PCT  
                                                     ----    ----    ---------      ----- 
                                                                                          
Revenue:                                                                                  
  Rental and service................................  84%     85%      $18,797          9%
  Sales and other...................................  16      15         7,641         21 
                                                     ---     ---       -------        --- 
     Total Revenue.................................. 100     100        26,438         11 
                                                     ---     ---       -------        --- 
Rental expenses.....................................  54      56         8,785          6 
Cost of goods sold..................................   6       6         2,586         19 
                                                     ---     ---       -------        --- 
     Gross profit...................................  40      38        15,067         16 
Selling, general and administrative expenses........  19      20         3,505          7 
                                                     ---     ---       -------        --- 
     Operating earnings.............................  21      18        11,562         26 
Interest income, net................................   3       2         4,533        100 
                                                     ---     ---       -------        --- 
     Earnings before income taxes...................  24      20        16,095         33 
Income taxes........................................  10       8         5,549         28 
                                                     ---     ---       -------        --- 
     Net earnings...................................  14%     12%      $10,546         37%
                                                     ===     ===       =======        === 

  The following table sets forth, for the periods indicated, the amount of
revenue derived from each of the Company's markets (dollars in thousands):      

                                                                [Download Table]

                                                        YEAR ENDED DECEMBER 31, 
                                                        ------------------------
                                                           1996          1995   
                                                        ----------    ----------
                                                                                
Domestic Specialty Surfaces............................   $181,266      $163,014
International..........................................     68,764        60,689
Medical Devices........................................     19,234        17,151
Other..................................................        617         2,589
                                                          --------      --------
                                                          $269,881      $243,443
                                                          ========      ========

  Total Revenue:  Total revenue in 1996 was $269.9 million, an increase of
$26.4 million or 10.9% from 1995. This increase was primarily attributable to   
growth in the Company's domestic specialty support surface business combined    
with international expansion and penetration. Domestic specialty support surface
revenue includes revenue from acute and extended care facilities as well as     
revenue from the home care segment. Revenue from acute care facilities was up   
$8.1 million, or 7.3%, from the prior year, due in large part to the continued  
success of the TriaDyne, the Company's leading Kinetic Therapy product. Rental  
revenue from Kinetic Therapy products grew 31% in 1996. Revenue from extended   
care settings in 1996 increased 32%, or $12.0 million, primarily due to         
increased patient days and the addition of various new national accounts.       
Revenue in the home care segment, which accounts for 5% of total Company        
revenue, decreased $1.9 million, or 12.8%, from 1995 primarily due to a change  
in Medicare reimbursement policy which had the effect of reducing the number of 
reimbursable patient days in the period. Revenue from the Company's             
international operations increased $8.1 million, or 13.3%, to $68.8 million in  
1996, despite adverse foreign currency exchange fluctuations of approximately $2
million. Strong sales in mattress overlay products accounted for more than half 
of this increase. Revenue growth in the German home care market and further     
penetration in various emerging markets, e.g., Switzerland and Australia, also  
contributed to international revenue growth. Revenue from the Company's two     
primary medical devices, PlexiPulse and the V.A.C., was $19.2 million, an       

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increase of $2.1 million, or 12.3%, from 1995. This increase was substantially  
due to the introduction of the V.A.C. in the United States.                     

     In November 1996, the Company announced that it had been advised by Premier
Purchasing Partners, L.P. ("Premier"), that its bid to be the primary supplier  
for the newly combined group had been awarded to another vendor. Premier is a   
new voluntary group purchasing organization which was formed as a result of the 
merger of three separate group purchasing organizations. Revenue from hospitals 
within Premier for 1996 accounted for approximately 10% of the Company's total  
revenue. Because facilities within Premier are not committed to do business with
the group's primary vendor, it is difficult to predict the ultimate effect of   
the new agreement on revenue and operating profits.                             

Rental Expenses:  Rental expenses for 1996 totaled $146.2 million, an 
increase of $8.8 million, or 6.4%, from the prior year. The addition of extended
care sales representatives, new information systems and international market    
expansion accounted for a majority of the increase. As a percentage of total    
revenue, 1996 rental expenses were 54.2%, down from 56.4% in the prior period.  
This decrease is due primarily to the 1996 revenue increase because most of the 
Company's rental or field expenses are relatively fixed in nature.              

Gross Profit:  Gross profit in 1996 was $107.4 million, an increase of
$15.1 million, or 16.3%, from the year-ago period due substantially to higher   
revenue, as discussed previously, combined with relatively fixed field expenses.
Gross profit margin for 1996, as a percentage of total revenue, was 39.8%, up   
from 37.9% for the prior year. Rental margins improved to 35.1%, up 1.6% from   
1995, while sales margins improved slightly to 63.3%, from 62.7%, as the product
mix continued to shift toward higher margin overlays and disposable products.   

Selling, General and Administrative Expenses:  Selling, general and   
administrative ("SG&A") expenses for 1996 were $52.0 million, an increase of    
$3.5 million, or 7.2%, from 1995. Total SG&A expenses for the prior year also   
included a $2.9 million nonrecurring loss from the sale of KCIFS in June 1995.  
Costs associated with international market expansion, improved information      
systems and marketing, legal and professional activities accounted for a        
substantial part of this increase. As a percentage of total revenue, SG&A       
expenses in 1996 were 19.3%, down slightly from 19.9% in the year-ago period.   

 Operating Earnings:  Operating earnings for 1996 were $55.4 million, an
increase of $11.6 million, or 26.4%, from 1995. The increase was due primarily  
to the growth in revenue combined with the implementation of various initiatives
undertaken to improve efficiencies, e.g., new information systems. As a         
percentage of total revenue, the Company's operating margin improved to 20.5%,  
up more than 2% from 1995.                                                      

  Net Interest Income:  Net interest income for the year was $9.1 million,
which included $5.2 million from the early repayment of all remaining notes     
receivable from MEDIQ/PRN. The notes had an aggregate face value of $10 million 
and had been discounted to a carrying value of $3.2 million, excluding accrued  
interest. The notes were retired for approximately $9 million.                  

   Income Taxes:  The Company's effective income tax rate for 1996 was 39.5%
compared to 41.2% in 1995. This decrease was primarily the result of            
implementing various tax planning initiatives both domestically and overseas.   

Net Earnings:  Net earnings for 1996 were $39.0 million, or $0.86 per 
share, compared to 1995 net earnings of $28.4 million, or $0.63 per share.      
Higher revenue and controlled spending, combined with the one-time increase in  
interest income and a lower overall tax rate accounted for the 37% earnings     
improvement. Average common and common equivalent shares outstanding were       
substantially unchanged year-to-year.                                           

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Year Ended December 31, 1995 Compared to Year Ended December 31, 1994       

   The following table sets forth, for the periods indicated, the percentage
relationship of each item to total revenue as well as the change in each line   
item as compared to the prior year (dollars in thousands):                      

                                                        [Enlarge/Download Table]

                                                            YEAR ENDED DECEMBER 31,       
                                                      ----------------------------------- 
                                                        REVENUE            VARIANCE       
                                                      RELATIONSHIP    INCREASE (DECREASE) 
                                                      ------------    ------------------- 
                                                      1995    1994        $          PCT  
                                                      ----    ----    ----------    ----- 
                                                                                          
Revenue:                                                                                  
  Rental and service................................   85%     85%      $(22,179)    (10)%
  Sales and other...................................   15      15         (4,024)    (10) 
                                                      ---     ---       --------      --  
     Total revenue..................................  100     100        (26,203)    (10) 
                                                      ---     ---       --------      --  
Rental expenses.....................................   56      59        (21,815)    (14) 
Cost of goods sold..................................    6       7         (5,659)    (29) 
                                                      ---     ---       --------      --  
     Gross profit...................................   38      34          1,271       1  
Selling, general and administrative expenses........   20      19         (3,311)     (6) 
Unusual items.......................................   --     (31)        84,868      NM  
                                                      ---     ---       --------      --  
     Operating earnings.............................   18      46        (80,286)    (65) 
Interest income, net................................    2     (1)          9,082     201  
                                                      ---     ---       --------      --  
     Earnings before income taxes, minority interest                                      
       and cumulative effect of change in accounting                                      
       principle....................................   20      45         71,204     (60) 
Income taxes........................................    8      21        (36,044)    (64) 
     Earnings before minority interest and                                                
       cumulative effect of change in accounting                                          
       principle....................................   12      24        (35,160)    (55) 
Minority interest in subsidiary loss................   --      --            (40)     --  
Cumulative effect of change in accounting                                                 
  principle.........................................   --      --           (742)     --  
                                                      ---     ---       --------      --  
     Net earnings...................................   12%     24%      $(35,942)    (56)%
                                                      ===     ===       ========      ==  

  The following table sets forth, for the periods indicated, the amount of
revenue derived from each of the Company's markets (dollars in thousands):      

                                                                [Download Table]

                                                        YEAR ENDED DECEMBER 31, 
                                                        ------------------------
                                                           1995          1994   
                                                        ----------    ----------
                                                                                
Domestic Specialty Surfaces............................   $163,014      $157,756
International..........................................     60,689        46,444
Medical Devices........................................     17,151        13,854
Other(1)...............................................      2,589        51,592
                                                          --------      --------
                                                          $243,443      $269,646
                                                          ========      ========

---------------                                                                 
(1) Consists of revenue of Medical Services, KCIFS and MRD.                     

Unusual Items:  In September 1994, the Company settled a patent       
infringement suit against its principal competitor, Support Systems             
International, Inc. ("SSI"), a predecessor in interest to Hill-Rom, Inc., for   
$84.8 million. In connection with the settlement, SSI agreed to withdraw its    
high-end specialty bed from the market. The comparability of the Company's      
financial results for the years ended December 31, 1995 and 1994 was            
significantly impacted by (1) this settlement and (2) the pre-tax gain of $10.1 
million from the sale of certain assets of Medical Services. Partially          
offsetting these items were certain miscellaneous unusual items, primarily      
dispositions of overstocked inventory and underutilized rental assets and a     
write-down of the carrying                                                      

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value of the assets of MRD which had a negative impact of $6.8 million. The     
following is a summary of the unusual items recorded in 1994 (dollars in        
thousands):                                                                     

                                                                [Download Table]
                                                                      
SSI patent litigation settlement............................  $84,750 
Legal fees related to SSI patent litigation settlement......   (3,154)
Pre-tax gain on sale of Medical Services....................   10,121 
Miscellaneous...............................................   (6,849)
                                                              ------- 
Unusual items in operating earnings.........................  $84,868 
                                                              ======= 

   Each following reference to "on an as adjusted basis" shall mean that the
results for the period have been adjusted to reflect the sales of Medical       
Services and KCIFS as if such sales had occurred on January 1, 1994.            

 Total Revenue:  Total revenue in 1995 was $243.4 million, a decrease of
$26.2 million, or 9.7%, from 1994. This decrease was directly attributable to   
the sale of Medical Services in September 1994. Medical Services generated $43.8
million in revenue during 1994. On an as adjusted basis, total revenue for 1995 
would have increased by $19.9 million, or 9.0%, to $242.0 million from $222.1   
million in 1994 primarily as a result of growth in the Company's international  
operations combined with smaller increases in each of the Company's other       
primary markets. Revenue from acute care facilities increased $1.7 million, or  
1.6%, from 1994, primarily as a result of increased therapy days in the acute   
care setting, due partly to the successful introduction of new products,        
including the BariKare and the TriaDyne, offset by a continuing shift in product
mix toward lower-cost overlays. Revenue from extended care settings in 1995 was 
$37.5 million, an increase of $3.0 million, or 8.7%, from 1994, primarily due to
increased patient days as patients migrated from high-cost, acute care settings 
to lower-cost, extended care settings. Revenue from home care settings increased
$0.6 million or 4.3% from 1994, which reflects the Company's decision to shift  
to an independent dealer network at the beginning of the year. This network     
provides easier access to a larger patient population; however, revenue received
from dealers is less than that which the Company would receive from direct sales
because revenue from dealers is net of dealer service expense. Revenue from the 
Company's international operations was $60.7 million in 1995, up $14.3 million  
or 30.8% from 1994. Increased market penetration and increased product sales    
contributed to this higher international revenue. In addition, international    
operations benefited from favorable currency exchange rate fluctuations which   
accounted for $6.6 million of the revenue increase. Revenue from medical device 
operations was $17.1 million in 1995, an increase of $3.2 million, or 23.0%,    
from 1994, primarily as a result of greater market penetration of the           
PlexiPulse.                                                                     

    Rental Expenses:  Rental expenses for 1995 were $137.4 million, a decrease
of $21.8 million, or 13.7%, from 1994. This decrease was a result of the sale of
Medical Services in September 1994. On an as adjusted basis, rental expenses for
1995 would have been $137.4 million, an increase of $2.2 million, or 1.6%, over 
1994. On an as adjusted basis, as a percentage of total revenue, rental expenses
would have been 56.8% in 1995 compared to 60.9% in 1994. This decrease is       
primarily attributable to the as adjusted increase in revenue, as the majority  
of these costs are relatively fixed, combined with a reduction in field         
headcount and depreciation expense.                                             

    Gross Profit:  Gross profit in 1995 was $92.3 million, an increase of $1.3
million, or 1.4%, over 1994. On an as adjusted basis, gross profit in 1995 would
have been $90.8 million, an increase of $16.5 million, or 22.2%, from 1994. On  
an as adjusted basis, as a percentage of revenue, gross profit margin would have
increased to 37.5% in 1995 from 33.5% in 1994 as a result of the increase in as 
adjusted revenue, the relatively fixed nature of the rental expenses, and the   
reduction in headcount and depreciation expense as discussed above.             

Selling, General and Administrative Expenses:  Selling, general and   
administrative expenses for 1995 were $48.5 million, a decrease of $3.3 million,
or 6.4%, from 1994 as a result of the sale of Medical Services in September     
1994. On an as adjusted basis, selling, general and administrative expenses     
would have been $44.7 million, an increase of $9.0 million, or 25.3%, in 1995   
from 1994. On an as adjusted basis, as a percentage of revenue, selling, general
and administrative expenses would have been 18.5% in 1995 compared to 16.1% in  
1994. These increases related primarily to common overhead costs, previously    
allocated to Medical Services, which have been absorbed by the Company, and     
costs associated with certain key investments, e.g., improved information       
systems.                                                                        

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Operating Earnings:  Operating earnings for 1995 were $43.8 million, a
decrease of $80.3 million, or 64.7%, from 1994, primarily as a result of the    
one-time benefit of the patent litigation settlement and the sale of Medical    
Services in 1994. On an as adjusted basis, and excluding the patent litigation  
settlement and the other unusual items, operating earnings for 1995 would have  
been $46.1 million, an increase of $7.5 million or 19.4% from 1994. On an as    
adjusted basis, and excluding the patent litigation settlement and the other    
unusual items, as a percentage of revenue, operating earnings would have        
increased to 19.1% for 1995 from 17.4% in 1994 substantially due to the improved
gross profit discussed above.                                                   

Net Interest Income:  Net interest income for 1995 was $4.6 million as
compared to net interest expense of $4.5 million in 1994. This change was a     
result of the repayment of the Company's outstanding long-term debt at the end  
of the third quarter of 1994. On an as adjusted basis, net interest income for  
1995 would have been $4.9 million compared to net interest income of $1.2       
million in 1994. This difference was primarily due to the fact that the 1995    
results include interest income and a reduction in interest expense resulting   
from the additional cash provided by the patent litigation settlement. In       
addition, interest income for 1995 included $1.7 million representing the       
principal received in excess of the discounted value of the MEDIQ/PRN notes.    

   Income Taxes:  The Company's effective income tax rate for 1995 was 41.2%
compared to 46.8% in 1994. This decrease was primarily a result of the          
recognition in 1995 of certain foreign tax credits and the September 1994       
write-off of the goodwill associated with Medical Services.                     

Other:  During 1994, the cumulative losses allocated to the minority  
interest holder of MRD exceeded the balance of such holder's investment. As a   
result, the Company recognized $3.8 million of losses in 1994. These losses and 
the diminished opportunities within the refurbishment business contributed      
towards the Company's decision to liquidate the assets and discontinue the      
operations of MRD. Concurrently, the Company wrote off unamortized goodwill of  
$1.5 million and wrote down inventories to net realizable value.                

Change in Accounting Principle:  During the first quarter of 1994, the
Company recorded the cumulative effect of a change in its inventory accounting  
method which resulted in a one-time after-tax earnings increase of $742,000, or 
$0.02 per share.                                                                

Net Earnings:  Net earnings for 1995 were $28.4 million, or $0.63 per 
share, a decrease of $36.0 million from $64.4 million, or $1.46 per share, in   
1994. This decrease was primarily due to the 1994 benefit from the patent       
litigation settlement and the net loss from the sale of KCIFS in 1995, and      
offset in part by the net loss from the sale of Medical Services and other      
unusual items in 1994. On an as adjusted basis and excluding the effect of the  
patent litigation settlement and other unusual items, net earnings would have   
increased by 38.6% to $29.4 million, or $0.65 per share, in 1995 from $21.2     
million, or $0.48 per share, in 1994. On an as adjusted basis and excluding the 
effect of the patent litigation settlement and other unusual items, as a        
percentage of revenue, net margin would have increased to 12.1% in 1995 from    
9.5% in 1994, primarily as a result of the improvement in gross profit discussed
above.                                                                          

FINANCIAL CONDITION, SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996           

  The change in revenue and expenses experienced by the Company during the
nine months ended September 30, 1997 and other factors resulted in changes to   
the Company's balance sheet as follows:                                         

Cash and cash equivalents were $45.5 million at September 30, 1997, a 
decrease of $13.5 million from December 1996. The cash decrease is primarily    
attributable to business/asset acquisitions totaling $16.9 million and a        
temporary increase in accounts receivable resulting from a recent billing       
systems conversion, offset by lower spending for repurchase of common stock.    

Accounts receivable at September 30, 1997 were $74.9 million, a $16.6 
million or 28.6%, increase from year-end. On January 2, 1997, the Company       
converted to a new billing and accounts receivable system. Implementation       
activities had a negative timing impact on collections for the period. The      
Company expects receivable balances to decrease over time. Business acquisition 
activities during the first nine months of 1997 have also increased accounts    
receivable by approximately $2.4 million.                                       

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    Inventory at September 30, 1997 increased 5.1% to $21.1 million from $20.0
million at December 31, 1996 primarily due to the recent acquisition of Ethos   
Medical Group, which had inventory of approximately $860,000.                   

     Prepaid expenses increased $3.8 million, or 55.3%, to $10.7 million for the
nine months ended September 30, 1997 as compared to the year ended December 31, 
1996. This change primarily resulted from payment timing differences in         
insurance, product development, commissions and vacation accruals related to    
business acquisitions during 1997 which are amortized over the year.            

    Net property, plant and equipment at September 30, 1997 increased 11.2% to
$72.5 million from $65.2 million at December 31, 1996 due in part to asset      
acquisitions such as H.F. Systems. Capital expenditures were $22.2 million      
during the first nine months of 1997 as the Company invested in new products for
its rental fleet and new computer systems. Depreciation and amortization for the
first nine months of 1997 totaled $17.1 million, up 4.0% from the same period in
1996.                                                                           

  Notes receivable consisted of a $3.0 million note received from James R.
Leininger, M.D., the Company's principal shareholder and chairman of the Board  
of Directors. The note is secured by a Deed of Trust/Security Agreement,        
Vendor's Lien and 300,000 shares of KCI Common Stock. The note bears interest at
market rates and has a final maturity of February 3, 2002.                      

   Goodwill increased $14.1 million during the period, to $27.6 million, due
primarily to the Company's four business acquisitions in the period.            

     Accrued expenses at September 30, 1997 increased $3.8 million, or 12.9%, to
$33.6 million from $29.8 million at December 31, 1996. Accruals for payments in 
connection with the H.F. Systems acquisition earn-out along with increases in   
insurance claim reserves, vacation and payroll tax accruals accounted for the   
majority of this increase.                                                      

     Deferred income taxes were $13.5 million at September 30, 1997, an increase
of $8.4 million from December 31, 1996. The increase is primarily attributable  
to tax deferral strategies implemented from December of 1996 through the second 
quarter of 1997.                                                                

LIQUIDITY AND CAPITAL RESOURCES                                                 

Historical                                                                  

  Historically, the Company has financed its operations through internally
generated funds and existing cash reserves. Operating activities generated cash 
of $37.1 million and $40.3 million, respectively, in each of the nine month     
periods ended September 30, 1997 and 1996. For each of the three years ended    
December 31, 1996, 1995 and 1994, operating cash flows were $62.2 million, $56.8
million and $96.5 million, respectively. On an as adjusted basis, excluding the 
effects of the patent litigation settlement and the sale of certain assets of   
the Medical Services Division, operating cash flows for 1994 would have totaled 
approximately $48.5 million.                                                    

     Cash flows used in investing activities were $43.2 million and $8.7 million
for each of the nine month periods ended September 30, 1997 and 1996,           
respectively. Investing activities consist primarily of capital expenditures    
related to the Company's rental products and acquisitions as well as investments
in computer hardware and software. In addition, for the nine months ended       
September 30, 1997, the Company used cash in acquisitions totaling $16.9 million
while the 1996 period included $10.0 million received from the repayment of a   
note receivable from the Company's principal shareholder and Chairman of the    
Board of Directors. For each of the three years ended December 31, 1996, 1995   
and 1994, cash flows used in (provided by) investing activities were $17.6      
million, $42.9 million and $(47.8) million, respectively. On an as adjusted     
basis, excluding the sale of certain assets of Medical Services, cash used in   
investing activities for the year ended December 31, 1994 would have been $17.5 
million.                                                                        

     Cash flows used in financing activities were $4.8 million and $16.6 million
for each of the nine month periods ended September 30, 1997 and 1996,           
respectively. For each of the three years ended December 31, 1996, 1995 and 1994
cash flows used by financing activities were $37.3 million, $5.6 million and    
$112.6                                                                          

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million, respectively. Financing activities for 1994 consisted primarily of the 
Company's $102.6 million pay down of substantially all of its outstanding debt. 

Post-Recapitalization                                                       

  After the Recapitalization, the Company's principal sources of liquidity
are expected to be cash flow from operating activities and borrowings under the 
Revolving Credit Facility and Acquisition Facility. It is anticipated that the  
Company's principal uses of liquidity will be to fund capital expenditures      
related to the Company's rental products, provide needed working capital, meet  
debt service requirements and finance the Company's strategic plans.            

   The New Credit Facilities total $400.0 million and consist of (i) a $50.0
million six-year Revolving Credit Facility, (ii) a $50.0 million six-year       
Acquisition Facility, (iii) a $120.0 million six-year amortizing Term Loan A,   
(iv) a $90.0 million seven-year amortizing Term Loan B and (v) a $90.0 million  
eight-year amortizing Term Loan C, (collectively, "the Term Loans"). The Term   
Loans were fully drawn to finance a portion of the Tender Offer. The Acquisition
Facility was partially drawn to, in effect, finance the RIK acquisition. The    
Acquisition Facility provides the Company with financing to pursue strategic    
acquisition opportunities. The Acquisition Facility will remain available to the
Company for a period of three years at which time it will begin to amortize over
the remaining three years of the facility. The Company has utilized and will    
utilize borrowings under the Revolving Facility to help effect the Tender Offer,
pay related fees and expenses, fund capital expenditures and meet working       
capital needs. See "Description of New Credit Facilities."                      

     The Term Loans are payable in equal quarterly installments(1) subject to an
amortization schedule as follows:                                               

                                                                [Download Table]

                            YEAR                                AMOUNT   
                            ----                                ------   
                                                                         
1998........................................................  $ 4,800,000
1999........................................................  $ 8,800,000
2000........................................................  $16,800,000
2001........................................................  $31,800,000
2002........................................................  $31,800,000
2003........................................................  $36,800,000
2004........................................................  $85,500,000
2005........................................................  $83,700,000

---------------                                                                 

(1) The first three quarterly principal installments for 2004 shall be $450,000 
    with the final installment for that year equal to $84,150,000. For 2005, the
first three installments shall be equal to $225,000 and the final       
installment shall be equal to $83,025,000.                              

    The Term Loans and the Notes are subject to customary terms, covenants and
conditions which may partially restrict the uses of future cash flows by the    
Company. The Company does not expect that these covenants and conditions will   
have a material adverse impact on its operations.                               

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BUSINESS

GENERAL                                                                         

Kinetic Concepts, Inc. is a worldwide leader in innovative therapeutic
systems which prevent and treat the complications of immobility that can result 
from disease, trauma, surgery or obesity. The Company's clinically effective    
therapeutic systems include specialty hospital beds, specialty mattress overlays
and non-invasive medical devices combined with on-site patient care consultation
by the Company's clinically-trained staff. The complications of immobility      
include pressure sores, pneumonia and circulatory problems which can increase   
patient treatment costs by as much as $75,000 and, if left untreated, can result
in death. The Company's therapeutic systems can significantly improve clinical  
outcomes while reducing the cost of patient care by preventing these            
complications or accelerating the healing process, as well as by providing labor
savings. The Company has also been successful in applying its therapeutic       
expertise to bring to market innovative medical devices that treat chronic      
wounds and help prevent blood clots. For the LTM ended September 30, 1997, the  
Company generated unaudited pro forma revenue and EBITDA (as defined) of $308.1 
million and $95.2 million, respectively. From 1994 to 1996, KCI increased       
revenue and EBITDA (excluding divested businesses and other non-recurring gains)
at compound annual growth rates of 10.2% and 10.1%, respectively.               

    The Company designs, manufactures, markets and services its products, many
of which are proprietary. KCI's therapeutic systems are used to treat patients  
across all health care settings including acute care hospitals, extended care   
facilities and patients' homes. Health care providers generally prefer to rent  
rather than purchase the Company's products in order to avoid the ongoing       
service, storage and maintenance requirements and the high initial capital      
outlay associated with purchasing such products, as well as to receive the      
Company's high-quality clinical support. KCI's therapeutic systems typically    
rent for $20 to $175 per day. The Company can deliver its therapeutic systems to
any major domestic trauma center within two hours of notice through its network 
of service centers.                                                             

   Management believes that approximately two-thirds of the patients who use
the Company's therapeutic systems are over the age of 65. Management believes   
that the market for its therapeutic systems will continue to grow due to the    
aging of the population and further market penetration of the Company's         
therapeutic systems resulting from increased pressure on health care providers  
to control costs and improve patient outcomes.                                  

Founded by James R. Leininger, M.D., an emergency room physician, to  
provide better care for his patients, the Company was incorporated in Texas in  
1976. The Company's principal offices are located at 8023 Vantage Drive, San    
Antonio, Texas 78230 and its telephone number is (210) 524-9000.                

THERAPIES                                                                       

The Company's therapeutic systems deliver one or a combination of the 
following therapies:                                                            

Pressure Relief/Pressure Reduction.  The Company's pressure relief and
pressure reduction surfaces provide effective skin care therapy in the treatment
of pressure sores, burns, skin grafts and other skin conditions and help prevent
the formation of pressure sores which develop in certain immobile individuals.  
The Company's beds and mattress overlays reduce the amount of pressure at any   
point on a patient's skin by using surfaces supported by air, silicon beads, or 
a viscous fluid. Some of the products further promote healing through pulsation.

Pulmonary Care.  The Company's pulmonary care systems provide Kinetic 
Therapy to help prevent and treat acute respiratory problems, such as pneumonia,
by reducing the build-up of fluid in the lungs. The United States Centers for   
Disease Control (the "CDC") defines Kinetic Therapy as the lateral rotation of a
patient by at least 40 degrees to each side (a continuous 80 degree arc). KCI is
the only manufacturer of beds which deliver Kinetic Therapy, which the Company  
believes is essential to the prevention or effective treatment of pneumonia in  
immobile patients. Some of the Company's products combine Kinetic Therapy       

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with additional therapies such as percussion and pulsation which help loosen    
mucous buildup and promote circulation.                                         

     Bariatric Care.  The Company offers a line of bariatric care products which
are designed to accommodate obese individuals. These products are used generally
for patients weighing from 250 to 500 pounds, but can accommodate patients      
weighing up to 1,000 pounds. These individuals are often unable to fit into     
standard-sized beds and wheelchairs. The Company's most sophisticated bariatric 
care product can serve as a bed, chair, scale and x-ray table, helps patients   
enter and exit the bed, and contains other features which permit patients to be 
treated safely and with dignity. Moreover, treating obese patients is a         
significant staffing issue for many health care facilities because moving and   
handling these patients increases the risk of worker's compensation claims by   
such personnel. Management believes that these products enable health care      
personnel to treat these patients in a manner which is safer to hospital        
personnel than traditional methods, which can help reduce worker's compensation 
claims. Some of the bariatric products also address complications of immobility 
and obesity such as pressure sores.                                             

     Closure of Chronic Wounds.  The Company is the sole provider of a patented,
non-invasive device which uses negative pressure to promote the healing of      
chronic wounds. The negative pressure is applied through a proprietary foam     
dressing which draws the tissue together, stimulates blood flow, reduces        
swelling and decreases bacterial growth. The device heals wounds more quickly   
than traditional methods and has been effective at closing chronic wounds which 
have, in some cases, been open for years.                                       

  Circulatory Improvement.  The Company offers a non-invasive device which
improves blood circulation, decreases swelling in the lower extremities and     
reduces the incidence of blood clots. The therapy is accomplished by wrapping   
inflatable cuffs around a foot or leg and then automatically inflating and      
deflating them at prescribed intervals. The products are often used by          
individuals who have had hip or knee surgeries, diabetes, or other conditions   
which reduce circulation.                                                       

COMPETITIVE STRENGTHS                                                           

   Management believes the following competitive strengths contribute to the
Company's leading market position and its growth in revenue and EBITDA.         

Effective therapeutic systems.  The Company has focused on therapeutic
systems that are designed to improve patient outcomes and reduce the cost of    
patient care. For example, the Company believes that its Kinetic Therapy systems
can reduce the probability of an immobile patient contracting pneumonia in the  
acute care setting by as much as 50%, and that its pressure relief systems can  
heal pressure sores up to three times faster than traditional methods.          

Proprietary products.  The Company is the only manufacturer of Kinetic
Therapy systems and has the exclusive license to market its vacuum wound closure
technology. The Company has several other therapeutic products under development
which management believes are unique and further believes the use of such       
products will reduce the cost of patient care and yield superior outcomes when  
compared to traditional methods.                                                

    Established service distribution network and broad product line.  With 143
domestic service centers, a fleet of approximately 26,500 surfaces, a clinically
trained sales force that conducts more than 200,000 patient visits annually, and
the ability to deliver therapies to every major domestic trauma center within   
two hours, the Company has a national presence that management believes is a    
significant competitive advantage. The Company believes its network addresses   
the needs of customers by providing nationwide coverage, consistent availability
of a broad range of products and high-quality service.                          

  Industry leadership in clinical research.  KCI's therapeutic systems are
supported by the most extensive collection of published clinical studies in the 
industry. These studies demonstrate the clinical efficacy demanded by health    
care providers and the cost effectiveness of the Company's products.            

Strong management team.  The Company installed a new, experienced     
professional management team beginning in 1994. This team, led by Raymond R.    
Hannigan, President and Chief Executive Officer, has                            

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refocused the Company's strategy toward providing cost-effective,               
clinically-proven outcomes. Management's initiatives have resulted in increased 
revenue, improved profitability, improved efficiencies and enhanced distribution
and information systems. As a result, from 1994 to 1996, KCI increased revenue  
and EBITDA (excluding divested businesses and other non-recurring gains) at     
compound annual growth rates of 10.2% and 10.1%, respectively.                  

BUSINESS STRATEGY                                                               

    The Company intends to continue to grow operating earnings and improve its
market position by pursuing the following strategies:                           

   Increase presence in extended care and home care markets.  Because of the
cost pressures within the health care industry, acute care hospitals are        
discharging patients earlier, thereby increasing the demand for the Company's   
products in the extended and home care settings. KCI provides therapies to      
patients across multiple care settings through its national distribution network
and broad product line which are designed to provide a continuum of care. The   
Company's new marketing programs specifically target national and regional      
extended care providers.                                                        

   Further penetrate the acute care market.  KCI serves over 1,300 medium to
large hospitals and is presently focusing its marketing efforts on an additional
1,900 similarly-sized hospitals in which the Company has had a relatively small 
presence. The Company believes its strong position as the sole manufacturer of  
Kinetic Therapy beds and exclusive provider of its wound closure device will    
help KCI penetrate these new accounts.                                          

 Increase usage of recently introduced products.  The Company intends to
increase revenues by improving market awareness for its most recently introduced
products. The Company's newest products include medical devices for treatment of
chronic wounds, specialty surfaces for obese patients and sophisticated Kinetic 
Therapy beds. The Company believes these unique products have excellent growth  
potential and provide the Company with an opportunity to penetrate competitive  
accounts.                                                                       

   Introduce new products.  Approximately 30% of the Company's 1996 domestic
revenues were generated by products which have been introduced since 1994. One  
of KCI's objectives is to continue to expand revenues by acquiring or developing
new products which improve patient outcomes and reduce the cost of patient care.
In addition, existing products are continuously improved in consultation with   
health care professionals to enhance their features and improve their clinical  
effectiveness.                                                                  

  Expand internationally.  The Company has direct operations in 13 foreign
countries and has 75 independent dealers in other foreign markets. The Company  
intends to continue to expand in growing international markets by establishing  
additional direct operations and expanding its dealership network.              

 Pursue strategic acquisitions.  The Company intends to pursue strategic
fold-in acquisitions, both domestically and internationally, to enhance its     
geographic coverage and broaden its product line. Between January and October   
1997, the Company completed five such acquisitions. For example, the Company's  
acquisition of substantially all of the assets of RIK in October 1997 broadened 
its product line with a new non-powered proprietary support surface.            

CORPORATE ORGANIZATION                                                          

 The Company is organized into four operating divisions: KCI Therapeutic
Services, Inc. ("KCI Therapeutic Services" or "KCTS"), KCI Home Care, KCI       
International, Inc. ("KCI International") and KCI New Technologies, Inc.        
("NuTech").                                                                     

KCI Therapeutic Services                                                    

 KCI Therapeutic Services provides a broad line of therapeutic specialty
support surfaces to patients in acute and sub-acute facilities as well as       
extended care settings. This division consists of approximately 1,000 personnel,
many of whom have a medical or clinical background. Sales are generated by a    
sales force of                                                                  

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approximately 300 individuals who are responsible for new accounts in addition  
to the management and expansion of existing accounts. A portion of this sales   
force is focused exclusively on either the extended care market or the acute    
care market although the majority of the sales force is responsible for sales   
across both settings.                                                           

     KCI Therapeutic Services has a national 24-hour, seven days-a-week customer
service communications system which allows it to quickly and efficiently respond
to its customers' needs. The Company distributes its specialty patient support  
surfaces to acute and extended care facilities through a network of 143 domestic
service centers. The KCTS service centers are organized as profit centers and   
the general managers who supervise the service centers are responsible for both 
sales and service operations. Each center has an inventory of specialty beds and
overlays which are delivered to the individual hospitals or extended care       
facilities on an as-needed basis.                                               

The KCTS sales and support staff is comprised of approximately 250    
employees with medical or clinical backgrounds. The principal responsibility of 
approximately 125 of these clinicians is making product rounds and participating
in treatment protocols. These clinicians educate the hospital staff on issues   
related to patient treatment, assist in the establishment of protocols and      
accumulate outcome data related to the treatment of the patient. The clinical   
staff makes approximately 200,000 patient rounds annually. KCTS accounted for   
approximately 64%, 61% and 53%, respectively, of the Company's total revenue in 
the years ended December 31, 1996, 1995 and 1994.                               

KCI Home Care                                                               

   KCI Home Care rents and sells products that address the unique demands of
the home health care market. In January 1995, KCI Home Care started a transition
from a combined direct/dealer distribution system to distributing its products  
through home medical equipment ("HME") dealers. The Company believes that       
selling through the home care provider network gives it access to a larger      
patient population and improves the overall contribution from this business     
segment despite a reduction in per patient revenue. KCI Home Care accounted for 
approximately 5% of the Company's total revenue in 1996.                        

KCI International                                                           

     KCI International offers the Company's therapies and services in 13 foreign
countries including Germany, Austria, the United Kingdom, Canada, France, the   
Netherlands, Switzerland, Australia, Italy, Denmark, Sweden, Spain and Ireland. 
The Denmark office has recently been expanded to serve all of Scandinavia. In   
addition, relationships with 75 independent distributors in Latin America, the  
Middle East, Asia and Eastern Europe allow KCI International to serve the       
demands of a growing global market. KCI International accounted for             
approximately 25%, 25% and 17%, respectively, of the Company's total revenue in 
1996, 1995 and 1994. See Note 13 of Notes to Consolidated Financial Statements  
for information on foreign and domestic operations.                             

NuTech                                                                      

NuTech manufactures and markets the PlexiPulse and PlexiPulse All-in-1
System. The products are sold through a direct sales force and a limited number 
of independent distributors and rented through an alliance with MEDIQ/PRN, a    
national medical device rental company with a strong portfolio of national      
accounts. NuTech accounted for approximately 6% of the Company's total revenue  
in 1996.                                                                        

THERAPIES/PRODUCTS                                                              

The Company's "Continuum of Care" is focused on treating wound care   
patients, pulmonary patients, large or obese patients and patients with         
circulatory problems by providing innovative, outcome driven therapies across   
multiple care settings. The Company's therapies include Pressure Relief/Pressure
Reduction, Pulmonary Care, Bariatric Care, Closure of Chronic Wounds and        
Circulatory Improvement.                                                        

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Pressure Relief/Pressure Reduction                                          

     The Company's pressure relief products include a variety of framed beds and
overlays such as the KinAir III, TheraPulse, FluidAir Elite, HomeKair, First    
Step TriCell, DynaPulse, First Step Plus, First Step Select, AirWorks Plus,     
Impression, RIK mattress, and RIK overlay. The KinAir III has been shown to     
provide effective skin care therapy in the treatment of pressure sores, burns   
and post operative skin grafts and flaps, and to help prevent the formation of  
pressure sores and certain other complications of immobility. The TheraPulse    
provides a more aggressive form of treatment through continuous pulsating action
which gently massages the skin to help promote capillary and lymphatic          
circulation in patients suffering from severe pressure sores, burns, skin grafts
or flaps, swelling or circulation problems. The FluidAir Elite supports the     
patient on a low-pressure surface of air-fluidized silicon beads providing      
pressure relief for skin grafts or flaps, burns and pressure sores and also has 
built in scales. The HomeKair bed and TriCell overlay are low-cost pressure     
relief products designed to be easily transportable directly to a patient's     
home. The DynaPulse is a pulsating mattress replacement system that helps       
prevent pressure ulcers in patients at high risk for skin breakdown and can also
be used to treat existing pressure ulcers. The First Step family of overlays is 
designed to provide pressure relief and help prevent pressure sores. AirWorks   
Plus is a low-cost overlay which has air chambers which assist in redistributing
pressure for better skin care. Impression is a self-contained for-sale product  
for the prevention of pressure sores which is intended to replace standard      
hospital mattresses. The RIK mattress and the RIK overlay are non-powered       
products that provide pressure relief utilizing a patented viscous fluid and an 
anti-shear layer.                                                               

Pulmonary Care                                                              

The CDC defines Kinetic Therapy as lateral rotation of a patient by at
least 40 degrees on each side (a continuous 80 degree arc). The Company believes
Kinetic Therapy is essential to the prevention or effective treatment of        
pneumonia and other pulmonary complications in immobile patients. The Company's 
Kinetic Therapy products include the TriaDyne, RotoRest, RotoRest Delta, BioDyne
II and Q2 Plus. The TriaDyne, introduced in mid-1995, provides patients in acute
care settings with three distinct therapies on an air suspension surface. The   
TriaDyne applies Kinetic Therapy by rotating the patient up to 40 degrees to    
each side and provides an industry-first feature of simultaneously turning the  
patient's torso and lower body in opposite directions while keeping the patient 
positioned in the middle of the bed. The TriaDyne can also provide percussion   
therapy to the patient's chest to loosen mucous buildup in the lungs and        
pulsating therapy to promote capillary circulation. The TriaDyne is built on    
Stryker Corporation's critical care frame, which is narrow and well suited to an
ICU environment. The TriaDyne offers several other novel features not available 
on other products. The RotoRest Delta is a specialty bed which can rotate a     
patient up to a 62 degree angle on each side for the treatment of pulmonary     
complications and prevention of pneumonia. The RotoRest has been shown to       
improve the care of patients suffering from multiple trauma, spinal cord injury,
severe pulmonary complications, respiratory failure and deep vein thrombosis.   
The BioDyne II combines many of the therapeutic benefits of the KinAir III and  
the RotoRest and is used by patients suffering from pneumonia, coma, stroke and 
chronic neurological disorders.                                                 

Bariatric Care                                                              

 The Company markets a line of therapeutic support surfaces and aids for
patients suffering from obesity, a market that had previously been underserved. 
These products not only provide the proper support needed by obese patients, but
also enable nurses to care for these patients in a dignified manner. Moreover,  
treating obese patients is a significant staffing issue for many health care    
facilities because moving and handling these patients increases the risk of     
worker's compensation claims by nurses. The use of the Company's Bariatric      
products enables hospital staff to treat and move obese patients in a manner    
which is safer to hospital personnel while utilizing fewer hospital personnel.  
The most advanced product in this line is the BariKare, which can serve as a    
bed, chair, scale and x-ray table. This product is used generally for patients  
weighing from 250 to 500 pounds but can be used for patients who weigh up to 850
pounds. The Company believes that the BariKare is the most advanced product of  
its type available today. In 1996, the Company also introduced the FirstStep    
Select Heavy Duty overlay which incorporates pressure-relieving therapy in a    
design that supports                                                            

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patients weighing up to 650 pounds. The Company recently introduced the         
BariAire, which builds into the BariKare the benefits of the First Step Select  
Heavy Duty overlay and adds new features.                                       

Closure of Chronic Wounds                                                   

 The Company manufactures and markets the Vacuum Assisted Closure device
(the "V.A.C."), a non-invasive, active wound closure therapy that utilizes      
negative pressure. The V.A.C. promotes healing in wounds, pressure ulcers and   
grafts that frequently do not respond to traditional methods of treatment.      
Treatment protocols with the V.A.C. call for a proprietary foam material to be  
fitted and placed in or on top of a wound and covered with an airtight,         
occlusive dressing. The foam is attached to a separate vacuum pump. When        
activated, the vacuum pump creates a negative pressure in the wound that draws  
the tissue together. This vacuum action also stimulates blood flow on the       
surface of the wound, reduces edema and decreases bacterial colonization, all of
which stimulate healing. The dressing material is replaced every 48 hours and   
fitted to accommodate the decreasing size of the wound over time. This is a     
significant improvement over the traditional method for treating wounds which   
requires the nursing staff to clean and dress a serious wound every 8 to 12     
hours.                                                                          

Circulatory Improvement                                                     

 The PlexiPulse and PlexiPulse All-in-1 System are non-invasive vascular
assistance devices that aid venous return by pumping blood from the lower       
extremities to help prevent deep vein thrombosis ("DVT") and re-establish       
microcirculation. The pumping action is created by compressing specific parts of
the foot or calf with specially designed inflatable cuffs that are connected to 
a separate pump unit. The cuffs are wrapped around the foot and/or calf and are 
inflated in timed increments by the pump. The intermittent inflation compresses 
a group of veins in the lower limbs and boosts the velocity of blood flowing    
back toward the heart. This increased velocity has been proven to significantly 
decrease formation of DVT in non-ambulatory post-surgical and post-trauma       
patients. The PlexiPulse is effective in preventing DVT, reducing edema and     
improving lower limb blood circulation.                                         

PRODUCT SUPPORT                                                                 

As both private and government reimbursement programs continue to move
towards systems where facilities receive a fixed payment to cover all medical   
expenses based only upon the patient's initial diagnosis, actuarial information 
becomes more critical to predict patient outcomes and to develop appropriate    
pricing structures. The collection of this valuable data is central to KCI's    
effort of proving cost effective patient outcomes.                              

     At the foundation of KCI's clinical advantage ("The Clinical Advantage") is
an active program of sponsoring independent clinical research. KCI's portfolio  
of over 60 active and completed studies supports the medical efficacy and cost  
effectiveness of utilizing the Company's products and protocols as part of the  
healing and prevention process. In addition, KCI's research is focused on       
providing the outcome data demanded by today's health care provider.            

Health care providers around the world who utilize KCI's therapeutic  
systems experience aspects of The Clinical Advantage every day. Whether it is an
emergency placement of a KCI TriaDyne or the V.A.C., participation in developing
a wound care management program, or daily patient rounds to assist facility     
staff and collect clinical outcome data, trained KCI team members make more than
200,000 regular patient rounds annually. This staff is comprised of over 1,000  
employees with approximately 25% having a medical or clinical background. In    
order for the hospital and KCI to collect and process data on patient outcomes, 
the Company has developed Genesis, Odyssey and PAO2, three proprietary software 
programs.                                                                       

     Genesis is utilized by KCI staff clinicians to assist customers in tracking
asset utilization and patient outcomes. Using hand held computers, KCI          
clinicians make regular rounds to document the effect of KCI products on a      
patient's overall outcome. At the facility's direction, this information is     
entered into a central database and analyzed to determine the effectiveness of  
specific treatment protocols.                                                   

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  Odyssey and PAO2 are sold to KCI customers to enable them to standardize
the information collected on their Wound Management and Pulmonary Management    
Protocols, respectively. Health care providers utilize both Odyssey and PAO2 as 
tools to document and track wound and pulmonary management programs, including  
the resultant patient outcome and the cost of achieving that outcome. Facilities
collect data on their wound and pulmonary patients, and periodically share this 
information with KCI for inclusion in a national database. KCI compiles the     
information and can generate reports comparing a facility's program or patient  
results with those of similar programs or patients on an internal, regional or  
national basis. This information enables each facility to continuously improve  
its wound and pulmonary management programs, achieving the best outcome at the  
lowest total cost of care.                                                      

   KCI's integrated clinical database consisting of the Genesis, Odyssey and
PAO2 information platforms combined with an extensive clinical field presence   
and clinically proven therapies and protocols define KCI's unique product       
support advantage in the marketplace -- The Clinical Advantage.                 

COMPETITION                                                                     

The Company believes that the principal competitive factors within its
markets are product efficacy, clinical outcomes, service and cost of care.      
Furthermore, the Company believes that a national presence with full            
distribution capabilities is important to serve large, sophisticated national   
and regional health care group purchasing organizations ("GPOs") and providers. 

     The Company contracts with both proprietary and voluntary GPOs. Proprietary
GPOs own all of the hospitals which they represent and, as a result, can ensure 
complete compliance with a national agreement. Voluntary GPOs negotiate         
contracts on behalf of member hospital organizations but cannot ensure that     
their members will comply with the terms of a national agreement. Approximately 
47% of the Company's total revenue during 1996 was generated under national     
agreements with GPOs in the acute and extended care settings.                   

     In November 1996, the Company announced that it had been advised by Premier
Purchasing Partners, L.P., that its bid to be the primary supplier for the newly
combined group had been awarded to another vendor. Premier is a new voluntary   
group purchasing organization which was formed as a result of the merger of     
three separate group purchasing organizations. Revenue from hospitals within    
Premier for 1996 accounted for approximately 10% of the Company's total revenue.
Because facilities within Premier are not committed to do business with the     
group's primary vendor, it is difficult to predict the ultimate effect of the   
new agreement on revenue and operating profits.                                 

The Company competes on a national level with Hill-Rom, Kendall and   
Invacare and on a regional and local level with numerous other companies. The   
Company competes principally with Invacare in the home care segment. NuTech     
competes primarily with Kendall International in the foot and leg compression   
market. In the U.S. specialty surface market and certain international markets, 
the Company competes principally with Hill-Rom.                                 

RESEARCH AND DEVELOPMENT                                                        

 The focus of the Company's research and development program has been to
develop new products and make technological improvements to existing products.  
Since January 1994, the Company has introduced a number of new products         
including: the TriaDyne, the BariKare, the TriCell, the First Step Select Heavy 
Duty, the FluidAir Elite, the PlexiPulse All-in-1 System, the BariAire, the     
Pedidyne and The V.A.C., a product developed from technology licensed to the    
Company. Expenditures for research and development represented approximately 2% 
of the Company's total expenditures in 1996. The Company intends to continue its
research and development efforts.                                               

MANUFACTURING                                                                   

The Company's manufacturing processes for its specialty beds, mattress
overlays, and medical devices include the manufacture of certain components, the
purchase of certain other components from suppliers and                         

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the assembly of these components into a completed product. Mechanical components
such as blower units, electrical displays and air flow controls consist of a    
variety of customized subassemblies which are purchased from suppliers and      
assembled by the Company. The Company believes it has an adequate source of     
supply for each of the components used to manufacture its products.             

PROPERTIES                                                                      

 The Company's corporate headquarters are currently located in a 170,000
square foot building in San Antonio, Texas which was purchased by the Company in
January 1992. The Company utilizes 89,000 square feet of the building with the  
remaining space being leased to unrelated entities.                             

 The Company conducts its manufacturing, shipping, receiving and storage
activities in a 153,000 square foot facility in San Antonio, Texas, which was   
purchased by the Company in January 1988. In 1989, the Company completed the    
construction of a 17,000 square foot addition to the facility which is utilized 
as office space. The Company also owns a 37,000 square foot building in San     
Antonio, Texas which houses the Company's engineering center and currently      
serves as the NuTech division headquarters. In 1992, the Company purchased a    
35,000 square foot facility in San Antonio, Texas which is used for storage. The
Company maintains additional storage at two leased facilities in San Antonio,   
Texas. In 1994, the Company purchased a facility in San Antonio, Texas which has
been provided to a charitable organization to provide housing for families of   
cancer patients. The facility is built on 6.7 acres and consists of a 15,000    
square foot building and 2,500 square foot house. In June 1997, the Company     
acquired a 28 acre tract of land adjacent to its corporate headquarters. There  
are three buildings on the land which contain an aggregate of 40,000 square     
feet.                                                                           

The Company leases approximately 143 domestic distribution centers,   
including each of its seven regional headquarters, which range in size from     
1,500 to 18,000 square feet.                                                    

PATENTS AND TRADEMARKS                                                          

    The Company seeks patent protection in the United States and abroad. As of
October 1, 1997, the Company had 59 issued U.S. patents relating to its         
specialized beds, mattresses and related products. The Company also has 32      
pending U.S. Patent applications. Many of the Company's specialized beds,       
products and services are offered under trademarks and service marks. The       
Company has 28 registered trademarks and service marks in the United States     
Patent and Trademark Office.                                                    

EMPLOYEES                                                                       

   As of October 1, 1997, the Company had approximately 2,100 employees. The
Company's employees are not represented by labor unions and the Company         
considers its employee relations to be good.                                    

GOVERNMENT REGULATION                                                           

United States.  The Company's products are subject to regulation by   
numerous governmental authorities, principally the United States Food and Drug  
Administration ("FDA") and corresponding state and foreign regulatory agencies. 
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations       
promulgated thereunder, the FDA regulates the clinical testing, manufacture,    
labeling, distribution and promotion of medical devices. Noncompliance with     
applicable requirements can result in, among other things, fines, injunctions,  
civil penalties, recall or seizure of products, total or partial suspension of  
production, failure of the government to grant premarket clearance or premarket 
approval for devices, withdrawal of marketing clearances or approvals, and      
criminal prosecution. The FDA also has the authority to request repair,         
replacement or refund of the cost of any device manufactured or distributed by  
the Company that violates statutory or regulatory requirements.                 

In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by   
the FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification, and        
adherence to QSRs)                                                              

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although many Class I devices are exempt from certain FDA requirements. Class II
devices are subject to general and special controls (e.g., performance          
standards, postmarket surveillance, patient registries, and FDA guidelines).    
Generally, Class III devices are high risk devices that receive greater FDA     
scrutiny to ensure their safety and effectiveness (e.g., life-sustaining,       
life-supporting and implantable devices, or new devices which have been found   
not to be substantially equivalent to legally marketed devices). Before a new   
medical device can be introduced in the market, the manufacturer must generally 
obtain FDA clearance ("510(k) Clearance") or Premarket Approval ("PMA"). All of 
the Company's current products have been classified as Class I or Class II      
devices, which typically are legally marketed based upon 510(k) Clearance. The  
FDA has announced plans to evaluate its classification system and reclassify or 
exempt many devices that are currently classified as Class I devices. 510(k)    
Clearance will generally be granted if the submitted information establishes    
that the proposed device is "substantially equivalent" to a legally marketed    
medical device. The FDA recently has been requiring a more rigorous             
demonstration of substantial equivalence than in the past.                      

   A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be     
supported by valid scientific evidence which typically includes extensive       
testing and manufacturing information, including preclinical and clinical trial 
data, to demonstrate the safety and effectiveness of the device. The FDA's      
review of a PMA application generally takes one to two years from the date the  
PMA is accepted for filing, but it may take significantly longer.               

    If human clinical trials of a device are required, and the device presents
a "significant risk," the sponsor of the trial (usually the manufacturer or the 
distributor of the device) will have to file an Investigational Device Exemption
("IDE") application prior to commencing human clinical trials. If the device    
presents a "nonsignificant risk" to the patient, a sponsor may begin the        
clinical trial after obtaining approval for the study by one or more appropriate
Institutional Review Boards ("IRBs") without the need for FDA approval. Sponsors
of clinical trials are permitted to sell investigational devices distributed in 
the course of the study provided such compensation does not exceed recovery of  
the costs of manufacture, research, development and handling.                   

 The Company has submitted four 510(k) notices for new devices which are
currently pending FDA review. The Company also has several 510(k) notifications 
pending for modifications to certain of its currently marketed products. Because
the determination of whether a new 510(k) notification must be submitted for a  
device modification is subjective, companies sometimes provide information to   
the FDA to update their 510(k) files without formally submitting a premarket    
notification. In certain circumstances, the FDA allows continued marketing of a 
modified device while a 510(k) is pending. There can be no assurance, however,  
that the FDA will allow the Company to continue to market any of these devices  
pending marketing clearance from the FDA or that the Company will obtain 510(k) 
clearance for these devices on a timely basis, if at all. The FDA's failure to  
grant any necessary regulatory clearances or approvals or to allow continued    
marketing of devices pending clearance could have a material adverse effect on  
the Company's business, financial condition and results of operations.          

The Company has also made other modifications to its devices which the
Company believes do not require the submission of new 510(k) notices. There can 
be no assurance, however, that the FDA would agree with any of the Company's    
determinations and would not require the Company to submit a new 510(k) notice  
for any of the changes made to the Company's devices. If the FDA requires the   
Company to submit a new 510(k) notice for any device modification, the Company  
may be prohibited from marketing the modified device until the 510(k) notice is 
cleared by the FDA. There can be no assurance that the Company will obtain      
premarket clearance or approval on a timely basis, if at all, for any device for
which it has filed or may in the future file a submission.                      

The Company is sponsoring several clinical trials which have been     
determined by IRBs at the participating institutions to be "nonsignificant risk"
studies. There can be no assurance, however, that the FDA would agree with these
determinations and not require the Company to obtain the FDA approval of the    
IDEs before continuing the studies.                                             

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All devices manufactured or distributed by the Company are subject to 
pervasive and continuing regulation by the FDA and certain state agencies,      
including record keeping requirements and mandatory reporting of certain adverse
experiences resulting from use of the devices. Labeling and promotional         
activities are subject to regulation by the FDA and, in certain circumstances,  
by the Federal Trade Commission. Current FDA enforcement policy prohibits the   
marketing of approved medical devices for unapproved uses and the FDA           
scrutinizes the advertising of medical devices to ensure that unapproved uses of
medical devices are not promoted.                                               

 Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Quality     
System Regulation ("QSR") (formerly Good Manufacturing Practices) requirements, 
which include design, testing, control and documentation requirements.          
Manufacturers must also comply with MDR requirements that a company report      
certain device-related incidents to the FDA. The Company is subject to routine  
inspection by the FDA and certain state agencies for compliance with QSR        
requirements, MDR requirements and other applicable regulations. The Company is 
also subject to numerous federal, state and local laws relating to such matters 
as safe working conditions, manufacturing practices, environmental protection,  
fire hazard control and disposal of hazardous or potentially hazardous          
substances. Changes in existing requirements or adoption of new requirements    
could have a material adverse effect on the Company's business, financial       
condition, and results of operations. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the     
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.           

 On October 6, 1997, at the conclusion of an inspection of the Company's
principal manufacturing facility, FDA issued the Company a Form 483 which       
identified eight observations of conditions that the FDA believed to be in      
violation of the FDA's QSR and MDR requirements. Several of these observations  
concerned the Company's TransportAir device and were similar to previous FDA    
inspectional observations that became the basis of a Warning Letter issued to   
the Company in August of 1995. Specifically, the FDA's Form 483 stated, among   
other things, that the Company had not provided solutions for or verified the   
implementation of solutions to quality assurance problems concerning            
malfunctions of the TransportAir, and that the Company had failed to submit     
Medical Device Reports for a number of incidents involving the TransportAir. The
TransportAir device, which provides an auxiliary air supply for the Company's   
KinAir, BioDyne and TheraPulse product lines, permits those bed products to be  
moved while in full inflation mode. The TransportAir is the subject of a pending
510(k) notice and has been marketed without specific premarket clearance on the 
product on a stand-alone basis since 1986.                                      

     The Company submitted a written response to the FDA's Form 483 observations
on November 20, 1997. However, there can be no assurance that the FDA will agree
with the Company's response or that, regardless of the Company's response, the  
FDA will not invoke any of its regulatory or enforcement authorities against the
Company. In addition to other regulatory and enforcement actions, the FDA may   
issue the Company a Warning Letter which could have an adverse effect on the    
Company's ability to obtain Certificates for Products for Export until the FDA's
inspectional observations are corrected to the agency's satisfaction. Federal   
agencies could also be advised of the issuance of the Warning Letter which may  
be taken into account when considering the award of federal contracts to the    
Company. The FDA may also determine that reinspection of the Company's facility 
is necessary before the agency determines that the Company's response to the    
Form 483 is adequate.                                                           

 The Company has begun modifying its TransportAir devices to address the
problems that the Company has encountered. If the FDA determines that there is a
reasonable probability that the TransportAir would cause serious, adverse health
consequences or death, the FDA could order the Company to recall the            
TransportAir and not allow redistribution of the device until the Company has   
verified that it has implemented appropriate corrective actions. Alternatively, 
the FDA could consider the distribution of the modified version of the          
TransportAir to be a voluntary recall and require the Company to assure that the
modification has been fully implemented and that its customers are adequately   
notified of the need for the modification. In addition, because the TransportAir
is not specifically the subject of a cleared 510(k) notice, FDA could require   
the Company to discontinue marketing the device until it is cleared by FDA. The 
failure of the Company to be                                                    
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able to market the TransportAir would prevent the Company from supplying an     
alternative power supply for three of its principal products which could have a 
material adverse effect on the Company's ability to market those devices. Any   
regulatory or enforcement action invoked by FDA could have a material adverse   
effect upon the Company.                                                        

 Fraud and Abuse Laws.  The Company is subject to federal and state laws
pertaining to health care fraud and abuse. In particular, certain federal and   
state laws prohibit manufacturers, suppliers, and providers from offering or    
giving or receiving kickbacks or other remuneration in connection with the      
ordering or recommending purchase or rental of health care items and services.  
The federal anti-kickback statute provides both civil and criminal penalties    
for, among other things, offering or paying any remuneration to induce someone  
to refer patients to, or to purchase, lease, or order (or arrange for or        
recommend the purchase, lease, or order of), any item or service for which      
payment may be made by Medicare or certain federally-funded state health care   
programs (e.g., Medicaid). This statute also prohibits soliciting or receiving  
any remuneration in exchange for engaging in any of these activities. The       
prohibition applies whether the remuneration is provided directly or indirectly,
overtly or covertly, in cash or in kind. Violations of the law can result in    
numerous sanctions, including criminal fines, imprisonment, and exclusion from  
participation in the Medicare and Medicaid programs.                            

These provisions have been broadly interpreted to apply to certain    
relationships between manufacturers and suppliers, such as the Company, and     
hospitals, skilled nursing facilities ("SNFs"), and other potential purchasers  
or sources of referral. Under current law, courts and the Office of Inspector   
General ("OIG") of the United States Department of Health and Human Services    
("HHS") have stated, among other things, that the law is violated where even one
purpose (as opposed to a primary or sole purpose) of a particular arrangement is
to induce purchases or patient referrals.                                       

   The OIG has taken certain actions which suggest that arrangements between
manufacturers/suppliers of durable medical equipment or medical supplies and    
SNFs (or other providers) may be under continued scrutiny. An OIG enforcement   
initiative, Operation Restore Trust ("ORT"), has targeted an investigation of   
fraud and abuse in a number of states (i.e., California, Florida, Illinois, New 
York, and Texas), focusing specifically on the long-term care, home health, and 
DME industries. ORT's funding has officially ended and the Inspector General has
announced plans to implement an "ORT-Plus" program in other states in           
conjunction with other federal law enforcement bodies. Furthermore, in August   
1995, the OIG issued a Special Fraud Alert describing certain relationships     
between SNFs and suppliers that the OIG viewed as abusive under the statute.    
These initiatives create an environment in the industry in which the Company    
operates in which there will continue to be significant scrutiny for compliance 
with federal and state fraud and abuse laws.                                    

 Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the 
purchase or rental of medical equipment and supplies. State laws vary in scope  
and have been infrequently interpreted by courts and regulatory agencies, but   
may apply to all health care items or services, regardless of whether Medicaid  
or Medicaid funds are involved.                                                 

The Company is also subject to federal and state laws prohibiting the 
presentation (or the causing to be presented) of claims for payment (by         
Medicare, Medicaid, or other third party payors) that are determined to be      
false, fraudulent, or for an item or service that was not provided as claimed.  
In one case, a major DME manufacturer paid more than $4 million to settle       
allegations that it had "caused to be presented" false Medicare claims through  
advice that its sales force allegedly gave to customers concerning the          
appropriate reimbursement coding for its products.                              

ISO Certification.  Due to the harmonization efforts of a variety of  
regulatory bodies worldwide, certification of compliance with the ISO 9000      
series of International Standards ("ISO Certification") has become particularly 
advantageous and, in certain circumstances necessary for many companies in      
recent years. Beginning in June of 1998, ISO Certification is expected to be    
required for all manufacturers selling and distributing products within the     
European Economic Community. Anticipating such requirements, the Company began  
preparing for ISO Certification in 1995 and, in early 1997, began working with  
an accredited body that has been authorized to grant ISO Certification. Based   
upon preliminary assessments, the Company                                       
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expects to attain such certification in the first quarter of 1998. Failure to   
obtain ISO Certification by June of 1998 may have an adverse effect on the      
Company, particularly on the Company's sale and distribution of products within 
the European Economic Community.                                                

Other Laws.  The Company owns and leases property that is subject to  
environmental laws and regulations. The Company also is subject to numerous     
federal, state and local laws and regulations relating to such matters as safe  
working conditions, manufacturing practices, fire hazard control and the        
handling and disposal of hazardous or potentially hazardous substances.         

   International.  Sales of medical devices outside of the United States are
subject to regulatory requirements that vary widely from country to country.    
Premarket clearance or approval of medical devices is required by certain       
countries. The time required to obtain clearance or approval for sale in a      
foreign country may be longer or shorter than that required for clearance or    
approval by the FDA and the requirements may vary. Failure to comply with       
applicable regulatory requirements can result in loss of previously received    
approvals and other sanctions and could have a material adverse effect on the   
Company's business, financial condition or results of operations.               

REIMBURSEMENT                                                                   

The Company's products are rented and sold principally to hospitals,  
extended care facilities and HME providers who receive reimbursement for the    
products and services they provide from various public and private third-party  
payors, including the Medicare and Medicaid programs and private insurance      
plans. The Company also directly bills third party payors, including Medicare   
and Medicaid, and receives reimbursement from these payors. In such cases,      
Medicare beneficiaries are billed twenty percent (20%) for coinsurance. As a    
result, demand and payment for the Company's products is dependent in part on   
the reimbursement policies of these payors. The manner in which reimbursement is
sought and obtained for any of the Company's products varies based upon the type
of payor involved and the setting in which the product is furnished and utilized
by patients.                                                                    

     Medicare.  Medicare is a federally-funded program that reimburses the costs
of health care furnished primarily to the elderly and disabled. Medicare is     
composed of two parts: Part A and Part B. The Medicare program has established  
guidelines for the coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by Medicare, a health   
care item or service furnished to a Medicare beneficiary must be reasonable and 
necessary for the diagnosis or treatment of an illness or injury or to improve  
the functioning of a malformed body part. This has been interpreted to mean that
the item or service must be safe and effective, not experimental or             
investigational (except under certain limited circumstances involving devices   
furnished pursuant to an FDA-approved clinical trial), and appropriate. Specific
Medicare guidelines have not currently been established addressing under what   
circumstances, if any, Medicare coverage would be provided for the use of the   
PlexiPulse or the V.A.C.                                                        

     The methodology for determining the amount of Medicare reimbursement of the
Company's products varies based upon, among other things, the setting in which a
Medicare beneficiary receives health care items and services. The recently      
enacted BBA will significantly impact the manner in which Medicare reimbursement
is funded over the next five years. Most of the Company's products are furnished
in a hospital, skilled nursing facility or the beneficiary's home.              

     Hospital Setting.  With the establishment of the prospective payment system
in 1983, acute care hospitals are now generally reimbursed by Medicare for      
inpatient operating costs based upon prospectively determined rates. Under the  
prospective payment system ("PPS"), acute care hospitals receive a predetermined
payment rate based upon the Diagnosis-Related Group ("DRG") into which each     
Medicare beneficiary is assigned, regardless of the actual cost of the services 
provided. Certain additional or "outlier" payments may be made to a hospital for
cases involving unusually long lengths of stay or high costs. However, outlier  
payments based upon length of stay are gradually being phased out and will be   
eliminated effective with fiscal year 1998. Furthermore, pursuant to regulations
issued in 1991, and subject to a ten-year transition period, the capital costs  
of acute care hospitals (such as the cost of purchasing or renting the Company's
specialty beds) are also reimbursed by Medicare pursuant to an add-on to the    
DRG-based payment amount.                                                       
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Accordingly, acute care hospitals generally do not receive direct Medicare      
reimbursement under PPS for the distinct costs incurred in purchasing or renting
the Company's products. Rather, reimbursement for these costs is deemed to be   
included within the DRG-based payments made to hospitals for the treatment of   
Medicare-eligible inpatients who utilize the products. Since PPS rates are      
predetermined, and generally paid irrespective of a hospital's actual costs in  
furnishing care, acute care hospitals have incentives to lower their inpatient  
operating costs by utilizing equipment and supplies that will reduce the length 
of inpatient stays, decrease labor, or otherwise lower their costs.             

    The principal manner in which the BBA impacts Medicare Part A in the acute
care setting is that it has reduced the annual DRG payment updates to be paid   
over the next five years by more than $40.0 billion. In addition, the BBA       
authorizes HCFA to enact regulations which are designed to restrain certain     
hospital reimbursement activities which are perceived to be abusive or          
fraudulent.                                                                     

Certain specialty hospitals (e.g., long-term care, rehabilitation and 
children hospitals) also use the Company's products. Such specialty hospitals   
currently are exempt from the PPS and, subject to certain cost ceilings, are    
reimbursed by Medicare on a reasonable cost basis for inpatient operating and   
capital costs incurred in treating Medicare beneficiaries. Consequently,        
long-term care hospitals may receive separate Medicare reimbursement for        
reasonable costs incurred in purchasing or renting the Company's products;      
however, Medicare reimbursement for such hospitals are expected to be reduced by
$3.5 billion over the next five years. There can be no assurance that a         
prospective payment system will not be instituted for such hospitals in future  
legislation.                                                                    

Skilled Nursing Facility Setting.  Skilled Nursing Facility Settings  
("SNFs") which purchase or rent the Company's products may be reimbursed        
directly under Medicare Part A for some portion of their incurred costs.        
Generally speaking, only the costs of treatment during the first 100 days of a  
qualifying spell of illness are subject to Medicare reimbursement. The costs    
incurred by SNFs in furnishing care to Medicare beneficiaries are categorized as
either routine costs or ancillary costs. Routine costs are those costs which are
incurred for items and services routinely furnished to all patients (e.g.,      
general nursing services, items stocked in gross supply). Ancillary costs are   
considered those costs which are incurred for items or services ordered to treat
a condition of a specific patient and which are not generally furnished to most 
patients. Ancillary costs are not subject to the routine cost limits. Given the 
current routine cost limits, SNFs may be more inclined to purchase or rent      
products which are reimbursed by Medicare as ancillary items or services than if
these products were reimbursed as routine items or services. At present, the    
Company's specialty beds are classified under Medicare Part A as ancillary      
items. HCFA currently interprets the definition of ancillary items to include   
certain support surfaces such as low air loss mattress replacements, bed overlay
systems and air fluidized therapy. Neither The V.A.C. nor the PlexiPulse have   
yet been classified as ancillary items when furnished in a SNF setting.         

 On July 1, 1998, the manner in which SNFs are reimbursed under Medicare
Part A will change dramatically. On that date, reimbursement for SNFs under     
Medicare Part A will change from a cost-based system to a prospective payment   
system. The new payment system will be based on resource utilization groups     
("RUGs"). Under the RUGs system, a SNF Medicare patient will be assigned to a   
RUGs category upon admission to the SNF. The RUGs category to which the patient 
will be assigned will depend upon the level of care and resources the patient   
requires. The SNF will receive a fixed per diem payment based upon the RUGs     
category assigned to each Medicare patient. The per diem payments made to the   
SNFs will be based upon a blend of their actual costs and a national average    
cost (which is subject to local wage-based adjustments). Initially, 75% of a    
SNF's per diem will be based on its costs and 25% of the per diem will be based 
on national average cost. At the end of a four-year phase-in period, all per    
diem payments will be based on the national average cost. Because the RUG's     
system provides SNFs with fixed cost reimbursement, SNFs may be less inclined   
than they have in the past to use products which had previously been reimbursed 
as ancillary costs. Because the Company believes its products are both cost     
effective and efficacious, the Company believes that it will be able to rent and
sell its products effectively under the RUGs system.                            

Home Setting.  The Company's products are also provided to Medicare   
beneficiaries in home care settings. Medicare reimburses beneficiaries, or      
suppliers accepting assignment, for the purchase or rental of                   

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DME for use in the beneficiary's home or a home for the aged (as opposed to use 
in a hospital or skilled nursing facility setting). So long as the Medicare Part
B coverage criteria are met, certain of the Company's products, including air   
fluidized beds, air-powered flotation beds and alternating air mattresses, are  
reimbursed in the home setting under the DME category known as "Capped Rental   
Items." Pursuant to the fee schedule payment methodology for this category,     
Medicare pays a monthly rental fee (for a period not to exceed fifteen months)  
equal to 80% of the established allowable charge for the item. Guidelines       
concerning under what circumstances, if any, the V.A.C. or the PlexiPulse will  
be covered and reimbursed by DME have not been established. Under the BBA, there
will be a five-year freeze on consumer price index updates for Medicare Part B  
Services in the home care setting.                                              

     Medicaid.  The Medicaid program is a cooperative federal/state program that
provides medical assistance benefits to qualifying low income and               
medically-needy persons. State participation in Medicaid is optional and each   
state is given discretion in developing and administering its own Medicaid      
program, subject to certain federal requirements pertaining to payment levels,  
eligibility criteria and minimum categories of services. The Medicaid program   
finances approximately 50% of all care provided in skilled nursing facilities   
nationwide. The Company sells or rents its products to SNFs for use in          
furnishing care to Medicaid recipients. SNFs, or the Company, may seek and      
receive Medicaid reimbursement directly from states for the incurred costs.     
However, the method and level of reimbursement, which generally reflects        
regionalized average cost structures and other factors, varies from state to    
state.                                                                          

Private Payors.  Many private payors, including indemnity insurers,   
employer group health insurance programs and managed care plans, presently      
provide coverage for the purchase and rental of the Company's products. The     
scope of coverage and payment policies varies among private payors. Furthermore,
many such payors are investigating or implementing methods for reducing health  
care costs, such as the establishment of capitated or prospective payment       
systems.                                                                        

The Company believes that government and private efforts to contain or
reduce health care costs are likely to continue. These trends may lead          
third-party payors to deny or limit reimbursement for the Company's products,   
which could negatively impact the pricing and profitability of, or demand for,  
the Company's products.                                                         

LEGAL PROCEEDINGS                                                               

On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit 
against the Company in the United States District Court for the Western District
of Texas. Novamedix manufactures the principal product which directly competes  
with the PlexiPulse. The suit alleges that the PlexiPulse infringes several     
patents held by Novamedix, that the Company breached a confidential relationship
with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive    
relief and monetary damages. Initial discovery in this case has been            
substantially completed. Although it is not possible to reliably predict the    
outcome of this litigation or the damages which could be awarded, the Company   
believes that its defenses to these claims are meritorious and that the         
litigation will not have a material adverse effect on the Company's business,   
financial condition or results of operations.                                   

 On August 16, 1995, the Company filed a civil antitrust lawsuit against
Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom. The suit was
filed in the United States District Court for the Western District of Texas. The
suit alleges that Hill-Rom used its monopoly power in the standard hospital bed 
business to gain an unfair advantage in the specialty hospital bed business.    
Specifically, the allegations set forth in the suit include a claim that        
Hill-Rom required hospitals and purchasing groups to agree to exclusively rent  
specialty beds in order to receive substantial discounts on products over which 
they have monopoly power -- hospital beds and head wall units. The suit further 
alleges that Hill-Rom engaged in activities which constitute predatory pricing  
and refusals to deal. Hill-Rom has filed an answer denying the allegations in   
the suit. Although discovery is just beginning and it is not possible to        
reliably predict the outcome of this litigation or the damages which might be   
awarded, the Company believes that its claims are meritorious.                  

On October 31, 1996 the Company received a counterclaim which had been
filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company
filed in 1995. The counterclaim alleges that the                                
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Company's antitrust lawsuit and other actions were designed to enable KCI to    
monopolize the specialty therapeutic surface market. Although it is not possible
to reliably predict the outcome of this litigation, the Company believes that   
the counterclaim is without merit.                                              

 On December 24, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries,
Inc., filed a lawsuit against the Company alleging that the Company's TriaDyne  
bed infringes a patent issued to Hill-Rom. This suit was filed in the United    
States District Court for the District of South Carolina. Substantive discovery 
in the case has not begun. Based upon its preliminary investigation, the Company
does not believe that the TriaDyne bed infringes any valid claims of the        
Hill-Rom patent or that this lawsuit will have a material adverse impact on the 
Company's business.                                                             

   The Company is a party to several lawsuits arising in the ordinary course
of its business, including three other lawsuits alleging patent infringement by 
the Company, and the Company is contesting adjustments proposed by the Internal 
Revenue Service to prior years' tax returns. Provisions have been made in the   
Company's financial statements for estimated exposures related to these lawsuits
and adjustments. In the opinion of management, the disposition of these matters 
will not have a material adverse effect on the Company's business, financial    
condition or results of operations. See "Risk Factors -- Patent Litigation."    

    The manufacturing and marketing of medical products necessarily entails an
inherent risk of product liability claims. The Company currently has certain    
product liability claims pending for which provision has been made in the       
Company's financial statements. Management believes that resolution of these    
claims will not have a material adverse effect on the Company's business,       
financial condition or results of operations. The Company has not experienced   
any significant losses due to product liability claims and management believes  
that the Company currently maintains adequate liability insurance coverage.     

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS                                                

Set forth below are the names, ages and positions of the directors and
executive officers of the Company, together with certain other key personnel.   

                                                        [Enlarge/Download Table]

                 NAME                   AGE                        POSITION                      
                 ----                   ---                        --------                      
                                                                                                 
Robert Jaunich II...................... 57   Chairman of the Board                               
Raymond R. Hannigan.................... 58   Director, President and Chief Executive Officer     
James R. Leininger, M.D................ 53   Director                                            
James T. Farrell....................... 33   Director                                            
N. Colin Lind.......................... 41   Director                                            
Jeffrey W. Ubben....................... 36   Director                                            
Dennis E. Noll......................... 43   Senior Vice President, General Counsel and Secretary
Christopher M. Fashek.................. 48   President, KCI Therapeutic Services                 
Frank DiLazzaro........................ 39   President, KCI International                        
Richard C. Vogel....................... 43   Vice President and General Manager, NuTech          
Michael C. Wells....................... 45   Vice President and General Manager, KCI             
                                             Home Care                                           
Michael J. Burke....................... 50   Vice President, Manufacturing                       
Martin J. Landon....................... 38   Vice President, Accounting and Corporate Controller 

 Robert Jaunich II became a director and Chairman of the Board after the
consummation of the Tender Offer. Mr. Jaunich is a Managing Director of Fremont 
Partners where he shares management responsibility for the $605 million         
investment fund. He is also a Managing Director and a member of the Board of    
Directors and Executive Committee of The Fremont Group. Prior to joining the    
Fremont Group in 1991, he was Executive Vice President and a member of the Chief
Executive Office of Jacobs Suchard AG a Swiss-based chocolate, sugar            
confectionery and coffee company. He currently serves as a director of CNF      
Transportation, Inc. and as Chairman of the Managing General Partner of Crown   
Pacific Partners, L.P.                                                          

     Raymond R. Hannigan joined the Company as its President and Chief Executive
Officer in November 1994 and has served as a director of the Company since 1994.
From January 1991 to November 1994, Mr. Hannigan was the President of the       
International Division of Sterling Winthrop Consumer Health Group (a            
pharmaceutical company with operations in over 40 countries), a wholly-owned    
subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr. Hannigan was the
President of Sterling Drug International.                                       

James R. Leininger, M.D. is the founder of the Company and served as  
Chairman of the Board of Directors from 1976 until 1997. From January 1990 to   
November 1994, Dr. James Leininger served as President and Chief Executive      
Officer of the Company. From 1975 until October 1986, Dr. James Leininger was   
also the Chairman of the Emergency Department of the Baptist Hospital System in 
San Antonio, Texas.                                                             

 James T. Farrell became a director after the consummation of the Tender
Offer. Mr. Farrell is a Managing Director of Fremont Partners. Before joining   
The Fremont Group in 1991, he was an associate at ESL Partners, a private       
investment partnership. In 1985, he began his career at Copley Real Estate      
Advisors. Mr. Farrell is a former director of Coldwell Banker Corporation. He   
also serves as a director of the nonprofit Pacific Research Institute.          

     N. Colin Lind became a director after the consummation of the Tender Offer.
Mr. Lind is a Managing Director of Richard C. Blum & Associates, L.P. Before    
joining RCBA in 1986 he was a Vice President at R. H. Chappell Co., an          
investment concern focused on development stage companies, and was previously a 
Vice President of Research for two regional brokerage firms, Davis Skaggs, Inc. 
and Wheat First Securities. He has previously been a director of two public     
companies and seven venture capital backed companies.                           

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 Jeffrey W. Ubben became a director after the consummation of the Tender
Offer. Mr. Ubben is a Managing Director of Richard C. Blum & Associates, L.P.   
Before joining RCBA in 1995 he was manager of the $5 billion Fidelity Value Fund
and had been employed by Fidelity for a period of nine years.                   

    Dennis E. Noll joined the Company in February 1992 as its Senior Corporate
Counsel and was appointed Vice President, General Counsel and Secretary in      
January 1993. Mr. Noll was promoted to Senior Vice President in September 1995. 
Prior to joining the Company in February 1992, Mr. Noll was a shareholder of the
law firm of Cox & Smith Incorporated.                                           

 Christopher M. Fashek joined the Company in February 1995 as President,
KCTS. Prior to joining the Company, he served as General Manager, Sterling      
Winthrop, New Zealand since February 1993, and served as Vice President Sales of
Sterling Health USA from 1989 until February 1993.                              

    Frank DiLazzaro joined the Company in 1988 as General Manager, KCI Medical
Canada. Mr. DiLazzaro served as Vice President, KCI International, Inc. from    
June 1989 to December 1992. Mr. DiLazzaro has served as President, KCI          
International, Inc. since January 1993 and was Vice President, Marketing from   
April 1993 to September 1995.                                                   

Richard C. Vogel joined the Company as its Vice President and General 
Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr. Vogel served as         
Executive Vice President of Vestar, Inc., a California-based biotechnology      
company.                                                                        

  Michael C. Wells joined the Company as Regional Vice President, KCTS, in
August 1994 and served in that role until June 1996 when he was promoted to the 
position of Vice President and General Manager, KCI Home Care. Prior to joining 
the Company, he served in Sales Management and Infusion Management roles from   
1988 to August 1994 with Homedco, which currently operates today as the Apria   
Healthcare Group. From 1978 to 1988, Mr. Wells held Marketing and Sales         
Management positions with Baxter Healthcare, formerly American Hospital Supply  
Corporation.                                                                    

  Michael J. Burke joined the Company in September 1995 as Vice President,
Manufacturing. Prior to joining the Company, Mr. Burke worked for Sterling      
Winthrop, Inc., a Division of Eastman Kodak Company, for 25 years, where he     
served as Vice President, Manufacturing and as General Manager, Sterling Health 
HK/China since 1992.                                                            

Martin J. Landon joined the Company in May 1994 as Senior Director of 
Corporate Development and was promoted to Vice President, Accounting and        
Corporate Controller in October 1994. From 1987 to May 1994, Mr. Landon worked  
for Intelogic Trace, Inc., most recently serving as Vice President and Chief    
Financial Officer.                                                              

EXECUTIVE COMPENSATION                                                          

  The information set forth in this section relates to the Chief Executive
Officer and the four highest paid executive officers of the Company other than  
the CEO (collectively with the CEO, the "named executive officers") as of       
December 31, 1996. It is expected that, following the consummation of the       
Transactions, the Company will provide its executives with compensation         
(including cash compensation and benefits) comparable to the compensation       
previously provided to them as executives of KCI, with such additions and       
modifications as may be negotiated by the Company and management.               

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COMPENSATION SUMMARY                                                            

   The following table shows all the cash compensation paid or to be paid by
the Company or its subsidiaries, as well as certain other compensation paid or  
accrued, during the fiscal years indicated, to the named executive officers for 
such period in all capacities in which they served:                             

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                        LONG-TERM COMPENSATION            
                                                            ----------------------------------------------
                                   ANNUAL COMPENSATION                        SECURITIES                  
                               ---------------------------   OTHER ANNUAL     UNDERLYING      ALL OTHER   
 NAME AND PRINCIPAL POSITION   YEAR   SALARY($)   BONUS($)  COMPENSATION(1)    OPTIONS     COMPENSATION(2)
 ---------------------------   ----   ---------   --------  ---------------   ----------   ---------------
                                                                                                          
Raymond R. Hannigan........... 1996    $275,000   $175,000                        12,000       $4,888     
  Chief Executive Officer &    1995     250,000    172,500      $39,204           12,000        1,836     
  President                    1994      33,173     23,777                     1,000,000(3)          0    
Peter A. Leininger, M.D....... 1996    $177,122   $ 86,000                         8,000       $2,551     
  Director and Executive       1995     165,436     85,554      $37,717            8,000        1,585     
  Vice President               1994     151,352    115,000                        11,520(4)      1,621    
Bianca A. Rhodes.............. 1996    $200,000   $106,000                       123,000(5)     $1,193    
  Chief Financial Officer &    1995     184,000    105,984                        83,000(3)        556    
  Senior Vice President(6)     1994     165,958    133,000                         7,440          530     
Frank DiLazzaro............... 1996    $168,000   $ 86,000                        78,000(5)     $  884    
  President, KCI               1995     156,000     85,536                         8,000        1,012     
  International, Inc.          1994     144,200    106,050                        63,130(4)      1,085    
Christopher M. Fashek......... 1996    $193,000   $115,800                       123,000(5)     $1,647    
  Chief Executive Officer and  1995     165,000     77,760                        83,000          421     
  President, KCI Therapeutic                                                                              
  Services                                                                                                

---------------                                                                 
(1) The column entitled "Other Annual Compensation" includes $26,849 paid to Mr.
Hannigan in 1995 for reimbursement of relocation expenses and a personal
benefit received by Dr. Peter A. Leininger for certain transportation   
   expenses. Except with respect to personal benefits received by Mr. Hannigan
 and Dr. Peter Leininger in fiscal 1995, the personal benefits provided to
   each of the named executive officers under various Company programs did not
exceed 10% of the individual's combined salary and bonus for the year.  

(2) The "All Other Compensation" column for 1996 includes the Company's         
   contribution to the Company's Employee Stock Ownership Plan of $242 for Dr.
Peter A. Leininger, Ms. Rhodes and Mr. DiLazzaro, which was credited in 
 1996, a Company contribution of $500 to the Company's 401(k) plan for Dr.
   Peter Leininger and Ms. Rhodes, and a premium for term life insurance in an
amount which ranged from $141 to $4,381 depending on the age of the     
executive officer and similar amounts for 1995 and 1994.                

(3) The referenced stock options for Mr. Hannigan and Ms. Rhodes include stock  
 options covering 440,000 and 75,000 shares of Common Stock, respectively,
granted to them by Dr. James R. Leininger.                              

(4) The stock options granted to Dr. Peter Leininger and Mr. DiLazzaro in fiscal
   1994 included stock options covering 4,080 and 47,530 Shares, respectively,
   which were granted pursuant to a repricing plan. The table does not reflect
the cancellation of stock options covering 6,200 and 21,270 Shares,     
respectively, in connection with the repricing plan.                    

(5) The stock options granted to Ms. Rhodes and Messrs. DiLazzaro and Fashek in 
  fiscal 1996 include stock options granted pursuant to the Senior Executive
    Stock Option Plan covering 115,000, 70,000 and 115,000 Shares, respectively.
A senior executive stock option plan and grants thereunder were         
    preliminarily approved by the Board of Directors on October 27, 1995 and the
final form of the Senior Executive Stock Option Plan, and the grants    
    thereunder, were finally approved on December 5, 1996. The plan was approved
by the Company's shareholders on May 13, 1997.                          

(6) Ms. Rhodes is no longer employed by the Company.                            

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EMPLOYMENT ARRANGEMENT                                                          

Effective November 14, 1994, Raymond R. Hannigan agreed to serve as   
President and Chief Executive Officer of the Company with an annual salary of   
$250,000 and the right to participate in the Company's Management Incentive     
Bonus Plan with an annual target bonus of $125,000. Upon commencement of his    
employment, Mr. Hannigan also received a non-qualified option to purchase       
560,000 Shares at an exercise price of $4.50 per share, which was the fair      
market value on the date he agreed to serve in such capacities. In addition to  
other benefits, the Company and Mr. Hannigan agreed that in the event that Mr.  
Hannigan's employment is terminated for any reason other than malfeasance or    
acts of moral turpitude, he will receive as severance an amount equal to one    
year's salary and auto allowance.                                               

EQUITY BASED PLANS                                                              

Prior to the Transactions, the Company maintained an employee stock   
ownership plan (the "ESOP") and an employee stock purchase plan (the "ESPP").   
The Company made contributions of Shares into participants' accounts under the  
ESOP. The ESPP allowed participants to purchase Shares at a discount through    
payroll deductions. The Company's Board of Directors has voted to terminate both
the ESOP and the ESPP.                                                          

   Prior to the consummation of the Tender Offer, the Company maintained the
1997 Stock Incentive Plan (the "1997 Plan"), the 1995 Senior Executive Stock    
Option Plan (the "1995 Plan"), the 1988 Directors Stock Option Plan (the        
"Directors Plan"), and the 1987 Key Contributor Stock Option Plan (the "1987    
Plan" and together with the 1997 Plan, the 1995 Plan and the Directors Plan, the
"Old Plans"). The Old Plans granted participants options to purchase Shares (the
"Old Options") at defined exercise prices. As of December 1, 1996, exercise     
prices for the Old Options ranged from $3.00 to $17.00.                         

   In conjunction with the consummation of the Tender Offer, the Old Options
that had not yet vested were accelerated and became fully exercisable. The Old  
Options, with the exception of options granted under the 1997 Plan, may, until  
the termination of the notice period, be exercised for Shares or exchanged for  
cash. Old Options granted under the 1997 Plan may be exercised until the end of 
the notice period, or exchanged for cash until the termination of the 90 day    
Change of Control Period (as defined in the 1997 Plan). Certain executives will 
exchange their Old Options for options ("Exchange Options") granted under the   
Company Management Equity Plan (the "MEP"). Old Options that are not exercised  
or exchanged will be cancelled at the end of their respective notice periods.   

THE MANAGEMENT EQUITY PLAN                                                      

  In conjunction with the Transactions, the Company adopted the MEP, under
which the Company may grant awards of nonqualified stock options (the "New      
Options") to certain employees of the Company and its subsidiaries, subject to  
the execution of an award agreement (the "Agreement") by each such employee. The
MEP also provides for the exchange of Old Options for Exchange Options and the  
retention of Shares held prior to the effective date of the MEP, with such      
Shares becoming subject to the terms of the MEP and considered management Shares
(the "Management Shares"). Management Shares and Options are sometimes referred 
to as "Awards".                                                                 

 Administration.  The MEP is administered by a Committee of the Board of
Directors (the "Committee"). The Committee has authority to adopt rules to carry
out the purposes of the MEP, and to interpret, administer and apply the terms of
the MEP. The Committee's determinations will be final and binding with respect  
to all matters relating to the MEP.                                             

Eligible Persons.  The Chief Executive Officer of the Company will    
recommend for approval by the Board of Directors the individuals to whom Awards 
may be granted (the "Participants") and determine the number and form of Awards 
to be granted to each Participant. The Board of Directors will determine Awards 
granted to the Chief Executive Officer.                                         

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  Agreement.  The terms and conditions of each grant or sale of Awards are
combined in an Agreement (the "Agreement") in a form approved by the Committee, 
which contains terms and conditions not inconsistent with the MEP and which     
incorporate the MEP by reference.                                               

Restrictions on Transfer.  The MEP provides that no Management Share, 
Option or Share received upon the exercise of an Option (an "Option Share")     
whose terms are governed by the MEP may be sold, transferred, assigned, pledged 
or otherwise encumbered or disposed of to any third party other than the        
Company, except as provided in the MEP or Agreement, or to a Permitted          
Transferee (as defined in the MEP). Each Permitted Transferee (other than the   
Company) will, as a condition to the transfer, execute an agreement pursuant to 
which it will become a party to the Agreement applicable to the transferor.     

     Number of Shares Issuable.  The maximum number of Shares that may be issued
in connection with Awards granted under the MEP (together with any Shares issued
in connection with Management Shares and Options) is 6.5% of the initial Shares 
outstanding as of the Effective Time, subject to adjustment. Any Management     
Shares forfeited or repurchased by the Company or any Option that expires or is 
surrendered without being exercised in full, may again be available for issuance
in connection with future grants or offerings of Awards.                        

     Options.  Options entitle the Participants to purchase Shares, upon payment
of the relevant Option Price. Each Agreement relating to an Option will specify 
the relevant Option Price. Exchange Options will retain the exercise price of   
the relevant Old Option. Each New Option will vest and become exercisable in 20%
installments on each of the first five anniversaries of the consummation of the 
Tender Offer and will generally be exercisable for a period of seven years,     
unless the Committee determines otherwise and so sets forth in the applicable   
Agreement. If a Participant's employment is terminated due to death, disability 
or retirement, all Options granted to such Participant will vest on the date of 
such termination. If a Sale of Stock or a Sale of Assets (as such terms are     
defined in the MEP) is completed within three years of the effective date of the
MEP, all outstanding, unvested Options will vest immediately upon such          
completion. If an IPO or a Sale by Fremont/RCBA (as such terms are defined in   
the MEP) is completed within three years of the effective date of the MEP, half 
of all outstanding, unvested Options will vest immediately upon such completion.

Upon termination of a Participant's employment with the Company, all  
unvested Options held by such Participant will terminate and be cancelled and   
all vested Options will be exercisable until the earlier of (i) 30 days         
following the Participant's termination of employment or status (or 180 days, if
the termination is due to the death, disability or retirement of such           
Participant), (ii) the Company's exercise of its call rights under the MEP and  
(iii) the exercise of the Participant's put rights under the MEP. Upon the      
expiration of such period or exercise of such call right or put right, any such 
vested Option not theretofore exercised will be cancelled, and the shares of    
Common Stock that had been subject thereto will be available for grants of      
further Awards under the MEP.                                                   

A Participant will have no rights as a stockholder with respect to any
Shares issuable upon exercise of an Option until a certificate evidencing such  
shares has been issued to such Participant.                                     

    Management Shares.  Management Shares may be granted for no consideration,
offered for sale at a purchase price determined by the Committee in its sole    
discretion at the time of offering and set forth in the applicable Agreement, or
received in exchange for Shares held by a Participant prior to the effective    
date of the MEP. Any offer to sell Management Shares will expire no later than  
60 days following the date of such offer. Participants have all rights of a     
stockholder as to the Management Shares, including the right to receive         
dividends and the right to vote in accordance with the Company's Articles of    
Incorporation, subject to restrictions set forth in the MEP and the applicable  
Agreement.                                                                      

Call Rights.  If, prior to the completion of an IPO, a Participant's  
employment with the Company is terminated for any reason or an Involuntary      
Transfer occurs (as such term is defined in the MEP), the Company has the right 
to repurchase all Management Shares, vested Options and Option Shares held by   
such Participant or his Permitted Transferee under the MEP during the 60-day    
period following such termination. The Company's call right will become null and
void subsequent to the completion of an IPO.                                    

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The purchase price to be paid with respect to any call right will be  
determined as of the first Valuation Date (as such term is defined in the MEP)  
coincident with or following the date of termination or Involuntary Transfer.   
The consideration to be paid in respect to Management Shares, vested Options and
Option Shares surrendered for cancellation will be the aggregate Applicable     
Management Share Value, Applicable Option Value or Applicable Option Share Value
(as such terms are defined in the MEP), determined as of the first Valuation    
Date coincident with or following the date of termination or Involuntary        
Transfer, of the Shares issuable upon exercise of such vested Options over the  
aggregate Option price of such Option.                                          

The Applicable Management Share Value is defined, as of a date of     
determination, as the Public Value of the Shares if the Company is a Public     
Company and the Fair Market Value of the Shares if the Company is not a Public  
Company (as such terms are defined in the MEP), provided, however, that if the  
Company is not a Public Company and the date of determination falls prior to the
fifth anniversary of the effective date of the MEP, the Applicable Management   
Share Value will not exceed the lesser of the Fair Market Value of such         
Management Share or $19.25 plus 7% compounded annually on each anniversary of   
the last day of the Tender Offer (the "Tender Date"). The Applicable Option     
Share Value is defined, as of a date of determination, as the Public Value of   
the Shares if the Company is a Public Company and the Fair Market Value of the  
Shares if the Company is not a Public Company, provided, however, that if the   
Company is not a Public Company, and such date falls prior to the fifth         
anniversary of the Effective Time and the Option Share was obtained through the 
exercise of an Exchange Option, the Applicable Option Share Value will not      
exceed the lesser of (A) the Fair Market Value or (B) the sum of (1) $19.25 less
the exercise price of such underlying Exchange Option (the "Spread") plus 7% of 
the Spread compounded annually on each anniversary of the Tender Date and (2)   
the exercise price of such Option plus 7% of the exercise price compounded      
annually on each anniversary of the date of exercise. The Applicable Option     
Value is defined, as of a date of determination, as the Public Value of the     
Shares if the Company is a Public Company and the Fair Market Value of the      
Shares if the Company is not a Public Company, provided, however, that if the   
Company is not a Public Company, such date of determination falls prior to the  
fifth anniversary of the effective date and the Option to be valued is an       
Exchange Option, the Applicable Option Value will not exceed the lesser of (A)  
the Fair Market Value of the Shares underlying such Exchange Option less the    
exercise price of such Exchange Option or (B) the Spread plus 7% of the Spread  
compounded annually on each anniversary of the Tender Date. The Company will    
give notice of the purchase price to be paid within a reasonable time from the  
date of determination of such price. The Company's call right will become null  
and void subsequent to the completion of an IPO.                                

Put Rights.  If, prior to the completion of an IPO, a Participant's   
employment with the Company is terminated for any reason, the Participant has   
the right to have the Company repurchase any Management Shares, vested Options  
and Option Shares beneficially owned by such Participant or his Permitted       
Transferees during the 60-day period immediately following the termination. The 
purchase price to be paid with respect to any put right will be determined as of
the first Valuation Date coincident with or following the date of termination.  
The consideration to be paid in respect to Management Shares, vested Options and
Option Shares surrendered for cancellation will be the aggregate Applicable     
Management Share Value, Applicable Option Value or Applicable Option Share      
Value, determined as of the first Valuation Date coincident with or following   
the date of termination or Involuntary Transfer, of the Shares issuable upon    
exercise of such vested Options over the aggregate Option price of such Option. 
The Participant's put rights will become null and void subsequent to the        
completion of an IPO. The Company retains the right to delay the Participant's  
exercise of his put rights in case of limited financial capability of the       
Company.                                                                        

    Certain Corporate Changes.  In the event of a stock dividend or split, the
Committee may either adjust the number of Options granted pursuant to the MEP   
and to each Participant or adjust the exercise price of any Options so as to    
provide each Participant with a benefit equivalent to that such Participant     
would have been entitled to had the dividend or split not occurred. Upon the    
occurrence of certain Reorganization Events (as defined in the MEP) including   
the merger of the Company with another entity, the sale of substantially all the
assets of the Company or any other change of control of the Company, the        
Committee is authorized to make any adjustments it deems necessary in connection
with the Reorganization Event.                                                  

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   Amendment of the Plan.  The Board of Directors of the Company may, at any
time, alter, amend, suspend or terminate the MEP. No termination or amendment   
may adversely affect a Participant's rights under the MEP without such          
Participant's consent.                                                          

 Termination of the Plan.  The MEP will continue until terminated by the
Board of Directors, and no further Awards will be made thereunder after the date
of such termination.                                                            

OPTION GRANTS IN LAST FISCAL YEAR                                               

The following table sets forth certain information concerning options 
granted during fiscal 1996 to the named executive officers:                     

                                                        [Enlarge/Download Table]

                                               INDIVIDUAL GRANTS                                              
                             ------------------------------------------------------    POTENTIAL REALIZABLE   
                                           % OF TOTAL                                    VALUE AT ASSUMED     
                              NUMBER OF     OPTIONS                                       ANNUAL RATES OF     
                             SECURITIES    GRANTED TO                                STOCK PRICE APPRECIATION 
                             UNDERLYING    EMPLOYEES       EXERCISE                       FOR OPTION TERM     
                               OPTIONS     IN FISCAL        PRICE        EXPIRATION  -------------------------
            NAME             GRANTED(1)       YEAR        ($/SH)(2)         DATE       5%(4)         10%(4)   
            ----             -----------   ----------   --------------   ----------  ----------   ------------
                                                                                                              
Raymond R. Hannigan.........    12,000         .93%        $ 16.50        05/15/06     $124,520     $  315,560
Peter A. Leininger..........     8,000         .62%        $ 16.50        05/15/06     $ 83,013     $  210,373
Bianca A. Rhodes............     8,000        9.56%        $ 16.50        05/15/06     $ 83,013     $  210,373
                               115,000(3)                  $11.125        10/27/05     $808,377     $2,299,990
Frank DiLazzaro.............     8,000        6.07%        $ 16.50        05/15/96     $ 83,013     $  210,373
                                70,000(3)                  $11.125        10/27/05     $492,056     $1,391,244
Christopher M. Fashek.......     8,000        9.56%        $ 16.50        05/15/06     $ 83,013     $  210,373
                               115,000(3)                  $11.125        10/27/05     $808,377     $2,299,990

---------------                                                                 
(1) Except as otherwise noted, the options vest and become exercisable in twenty
    percent (20%) increments on May 15 of each year after the date of grant. The
options are not transferable other than by will or laws of descent and  
distribution or pursuant to a qualified domestic relations order.       

(2) Except with respect to the options discussed in footnote (3) below, the     
 exercise price of all options granted by the Company in 1996 was equal to
   the fair market value of Shares at the close of business on the date of the
grant.                                                                  

(3) The stock options granted to Ms. Rhodes and Messrs. DiLazzaro and Fashek in 
  fiscal 1996 include stock options granted under the Senior Executive Stock
Option Plan covering 115,000, 70,000 and 115,000 shares of Shares,      
respectively. A senior executive stock option plan and grants thereunder
 were preliminarily approved by the Board of Directors on October 27, 1995
    and the final form of the Senior Executive Stock Option Plan, and the grants
    thereunder, were finally approved on December 5, 1996. The grants under this
plan were subject to shareholder approval of the Senior Executive Stock 
   Option Plan which approval was received on May 13, 1997. The exercise price
  of the options granted by the Company under this plan is $11.25 per share.
   The options vest in 25% increments on December 31 of each of the first four
 full calendar years (each such year being a "Vesting Year") following the
   date of the option; provided, however, such portion of the option scheduled
   to vest in such Vesting Year will not vest if (i) the Company has failed to
achieve 100% of the Company's annual plan approved by the Board for such
calendar year or (ii) the average closing price of the Shares during    
December of such Vesting Year does not represent a twenty percent (20%) 
increase over the average price of the Shares during December of the    
preceding calendar year and such event has occurred in two consecutive  
  years; provided, however, if such option holder is employed by the Company
and the option is not fully vested on the date six months prior to the  
 expiration date of such option, the option will then become fully vested.
   Notwithstanding the foregoing, the option may not be exercised prior to the
 third anniversary of the date of grant except in the event of a change in
control or termination of the senior executive's employment without good
 cause. The options are not transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations  
order.                                                                  

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(4) The information in these columns illustrates the value that might be        
realized upon the exercise of the options granted during fiscal 1996    
assuming the specified compound rates of appreciation of Shares over the
    term of the options. The potential realizable value set forth in the columns
 of the foregoing table do not take into account certain provisions of the
options providing for termination of an option following termination of 
   employment, nontransferability or vesting requirements. With respect to the
    options described in footnote (3) above, the options were treated as granted
   on December 5, 1996 for purposes of this calculation, the date on which the
Board of Directors adopted and approved the final form of the Senior    
    Executive Stock Option Plan. The fair market value of Shares at the close of
business on December 5, 1996 was $12.00 per share.                      

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE

   The following table sets forth certain information concerning the options
exercised by each named executive officer during fiscal 1996 and the number and 
value of the options held by the named executive officers at the end of the     
fiscal year ended December 31, 1996.                                            

                                                        [Enlarge/Download Table]

                                                                      NUMBER OF      VALUE OF   
                                                                     UNDERLYING     UNEXERCISED 
                                                                     UNEXERCISED   IN-THE-MONEY 
                                                                       OPTIONS        OPTIONS   
                                            SHARES                    AT FY-END      AT FY-END  
                                           ACQUIRED       VALUE     EXERCISABLE/   EXERCISABLE/ 
                                          ON EXERCISE   REALIZED    UNEXERCISABLE  UNEXERCISABLE
                                          -----------  -----------  -------------  -------------
                                                                                                
Raymond R. Hannigan(2)...................     56,500   $   530,252     627,200      $4,409,800  
                                                                       296,800       2,209,600  
Peter A. Leininger, M.D.(3)..............  1,200,000   $15,150,000      34,228      $  238,648  
                                                                        15,992          64,892  
Bianca A. Rhodes(4)(5)...................     25,000   $   218,750     118,014      $  609,571  
                                                                       170,426         466,099  
Frank DiLazzaro(4).......................     81,300   $   915,166      20,284      $   29,004  
                                                                        80,246         218,154  
Christopher M. Fashek(4).................     16,600   $   163,250      30,350      $   32,344  
                                                                       142,450         427,181  

---------------                                                                 
(1) The values are calculated by subtracting the exercise price from the fair   
  market value of the underlying Common Stock as of December 31, 1996 (based
on a closing price of $12.25 per share on December 31, 1996).           

(2) Dr. James R. Leininger granted Mr. Hannigan an option in fiscal 1994 to     
purchase 440,000 shares of Common Stock at a purchase price of $5.74 per
  share. Mr. Hannigan purchased 56,500 of the shares of Common Stock subject
 to such option during fiscal 1996. The remaining portion of the option to
purchase 340,000 shares of Common Stock is currently exercisable and    
included herein.                                                        

(3) Dr. James R. Leininger granted Dr. Peter A. Leininger an option in 1992 to  
    purchase 1,200,000 shares of Common Stock at a price of $3.50 per share. Dr.
Peter A. Leininger exercised this option in fiscal 1996.                

(4) The options shown for Ms. Rhodes and Messr. DiLazzaro and Fashek include    
   stock options granted under the Senior Executive Stock Option Plan covering
  115,000, 70,000 and 115,000 shares of Common Stock, respectively, of which
    28,750, 17,500 and 28,750, respectively, were exercisable as of December 31,
1996. The Senior Executive Stock Option Plan and grants thereunder were 
    preliminarily approved by the Board of Directors on October 27, 1995 and the
final form of the Senior Executive Stock Option Plan, and the grants    
    thereunder, were finally approved on December 5, 1996. The grants under this
plan were subject to shareholder approval of the Senior Executive Stock 
   Option Plan which approval was received on May 13, 1997. The purchase price
of the options is $11.125 per share.                                    

(5) The options shown for Ms. Rhodes include an option to acquire 75,000 shares 
of Common Stock at a purchase price of $9.125 per share granted to Ms.  
Rhodes by Dr. James R. Leininger, 25,000 of which were exercisable as of
December 31, 1996.                                                      

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PRINCIPAL SHAREHOLDERS

     Based on information received upon request from the persons concerned, each
person known to be the beneficial owner (as defined in Rule 13d-3 promulgated   
under the Exchange Act) of more than five percent of the outstanding Shares,    
each director, named executive officer and all directors and executive officers 
of the Company as a group, owned beneficially as of January 6, 1998 the number  
and percentage of outstanding Shares indicated in the following table:          

                                                        [Enlarge/Download Table]

                                                                     COMMON STOCK         
                                                                  BENEFICIALLY OWNED      
                                                             -----------------------------
                                                             NUMBER OF          PERCENT OF
                    NAMES OF INDIVIDUALS                      SHARES              CLASS   
                    --------------------                     ---------          ----------
                                                                                          
James R. Leininger, M.D..................................... 5,939,220             33.5%  
  8023 Vantage Drive                                                                      
  San Antonio, TX 78230                                                                   
Fremont Partners L.P........................................ 7,029,922             39.7%  
  and certain related parties                                                             
  50 Fremont Street, Suite 3700,                                                          
  San Francisco, CA 94105                                                                 
Richard C. Blum & Associates, L.P........................... 4,644,010             26.2%  
  and certain related parties                                                             
  909 Montgomery St., Suite 400                                                           
  San Francisco, CA 94133                                                                 
Peter A. Leininger, M.D.....................................   158,220(1)           1.0%  
Raymond R. Hannigan.........................................   392,000(2)           1.1%  
James T. Farrell(3).........................................        --                    
Robert Jaunich II(3)........................................        --                    
N. Colin Lind(4)............................................        --                    
Jeffrey W. Ubben(4).........................................        --                    
Christopher M. Fashek.......................................   250,200(5)             *   
Frank DiLazzaro.............................................   178,530(6)             *   
All directors and executive officers as a group(17                                        
  persons).................................................. 7,147,150(3)(4)(7)    45.1%  

---------------                                                                 
*  Less than one (1%) percent                                                 

(1) Includes options to purchase 58,220 Shares.                                 

(2) Includes options to purchase 392,000 Shares.                                

(3) Messrs. Farrell and Jaunich are managing directors of Fremont Partners, L.P.
and certain of its related parties ("Fremont"). The Shares shown do not 
    include the Shares beneficially owned by Fremont. See "Summary -- Summary of
the Transactions."                                                      

(4) Messrs. Lind and Ubben are managing directors of Richard C. Blum &          
Associates, L.P. and certain of its related parties ("RCBA"). The Shares
shown do not include the Shares beneficially owned by RCBA. See         
"Summary -- Summary of the Transactions."                               

(5) Includes options to purchase 250,200 Shares.                                

(6) Includes options to purchase 178,530 Shares.                                

(7) Includes options to purchase 820,030 Shares.                                

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION                                

Dr. James Leininger and certain other parties received approximately  
$265,500,000 for the sale of the 13,792,211 Shares that he tendered in the      
Tender Offer. Additionally, Dr. James Leininger retained a 33.5% interest in the
Company following the Transactions. The directors and executive officers of the 
Company (other than Dr. James Leininger) received an aggregate of approximately 
$37,650,000 for their Shares and Employee Options in the Transactions.          

INDEMNIFICATION AND INSURANCE                                                   

   The Transaction Agreement requires the Company to provide indemnification
to each present and former officer, director, employee or agent of the Company, 
including, without limitation, each Person controlling any of the foregoing     
Persons (the "Indemnified Parties"), against all claims, losses, liabilities,   
damages, judgments, fines, fees, cost or expenses, including, without           
limitation, attorneys' fees and disbursements (collectively, "Costs"), incurred 
in connection with any claim, action, suit proceeding or investigation, whether 
civil, criminal, administrative or investigative, arising out of or pertaining  
to matters existing or occurring at or prior to the Effective Time of the Merger
(including, without limitation, the Transaction Agreement and the transactions  
and actions contemplated thereby and giving effect to the consummation of such  
transactions and actions), whether asserted or claimed prior to, at or after the
Effective Time. After the Transactions, the Company is required to maintain, at 
no expense to the beneficiaries, directors' and officers' liability insurance   
("D&O Insurance") for the Indemnified Parties with respect to matters occurring 
at or prior to the Effective Time, issued by a carrier or carriers assigned a   
claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or higher,   
providing at least the same coverage as the D&O Insurance currently maintained  
by the Company and containing terms and conditions which are not materially less
favorable to the beneficiaries, for a period of at least six years from the     
Effective Time; provided, however, that in no event shall the Company be        
requested to expend pursuant to the Transaction Agreement more than an amount   
per year equal to 200% of current annual premiums paid by the Company for such  
insurance.                                                                      

AGREEMENT AMONG SHAREHOLDERS                                                    

The Company, Fremont, RCBA and Dr. James Leininger entered into an    
agreement upon the consummation of the Tender Offer (the "Agreement Among       
Shareholders") governing the respective obligations and relationship of each    
party as shareholders of the Company. The Agreement Among Shareholders provides 
that until six months after a public offering of Shares, Fremont, RCBA and Dr.  
James Leininger will not sell, transfer, pledge or hypothecate any shares of the
Company then held by them, subject to certain exceptions provided, however, Dr. 
James Leininger is permitted to make any transfers of up to 10.5% of the        
Company's then outstanding Shares.                                              

    The Agreement Among Shareholders provides that (i) if any of Fremont, RCBA
or Dr. James Leininger wishes to sell shares, then such party shall offer to    
include in the proposed sale certain Shares designated by any of the other      
parties and (ii) if Fremont and RCBA propose to sell all (but not less than all)
of the Shares they own, then Fremont and RCBA may require Dr. James Leininger to
include in such sale all of the Shares held by him, unless he holds less than   
10% of the then outstanding shares. Pursuant to the Agreement Among Shareholders
the Company grants to each of Fremont, RCBA and Dr. James Leininger the         
preemptive right to purchase shares of the Company in an amount up to the       
percentage of all outstanding fully diluted stock of the Company owned by such  
party, subject to certain exceptions.                                           

At any time after the fifth anniversary of the Agreement Among        
Shareholders, if there has not been a public offering of the Company's Shares,  
Fremont, RCBA or Dr. Leininger may request that the Company register at least   
33% of the Shares held by such party. In addition, each party will have the     
right to request additional registration of at least 33% of the Shares then held
by such party at any time after one year, but before three years, following the 
completion of a public offering of the Shares. If the Company shall proceed with
a filing of a registration statement in connection with a proposed offer and    
sale of Shares by the Company, the Company will notify Fremont, RCBA and Dr.    
James Leininger and shall include in such registration the number of Shares     
requested by such parties.                                                      

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 The Agreement Among Shareholders further provides that until there is a
public offering of Shares, Fremont, RCBA and Dr. James Leininger will take all  
steps to insure that the Board of Directors of the Company shall have eight     
members and that the Nominating Committee (as defined therein) of the Board of  
Directors will consist of Dr. James Leininger, one director designated by       
Fremont and one director designated by RCBA. The eight-member board will consist
of Dr. James Leininger, the Company's then Chief Executive Officer, two persons 
designated by Fremont, two persons designated by RCBA and two or more           
independent directors designated by the Nominating Committee.                   

THE SHAREHOLDER SUPPORT AGREEMENT                                               

The Investors entered into a shareholder support agreement (the       
"Shareholder Support Agreement") with Dr. James Leininger. Pursuant to the      
Shareholder Support Agreement, Dr. James Leininger agreed, subject to the terms 
and conditions thereof, (i) to grant to the Investors an option to purchase from
him at the Per Share Amount, 4,200,000 Shares owned or controlled by him, which 
option expired upon consummation of the Tender Offer, (ii) to tender 13,792,211 
Shares owned (either beneficially or of record) by Dr. James Leininger pursuant 
to the Offer and (iii) to vote all Shares owned (either beneficially or of      
record) at the time of the shareholder's meeting to approve the Merger.         

TRANSACTION FEES                                                                

  Pursuant to the terms of the Transaction Agreement, upon consummation of
the Merger the Company became obligated to pay transaction fees of $5,119,000 to
Fremont Investor and $3,381,000 to RCBA Investor.                               

OTHER TRANSACTIONS                                                              

     In August 1995, the Company loaned $10 million to Dr. James Leininger. This
loan was secured by a stock pledge agreement covering 1,000,000 Shares owned by 
Dr. James Leininger. The interest on the loan accrued at 7.94% per annum. In    
January 1996, the loan was repaid in full.                                      

    On December 18, 1996, a company controlled by Dr. James Leininger acquired
a tract of land (the "Property") from the Company for $395,000. The Property is 
comprised of approximately 2.2 acres and is adjacent to the Company's corporate 
headquarters. The purchase price was based on the aggregate cost of the Property
to the Company (including acquisition expenses). The Company believes that the  
acreage was transferred to Dr. James Leininger at a price equal to its fair     
market value. In connection with the purchase of the Property, the Company      
loaned Dr. James Leininger $3,000,000 in February 1997 to develop the Property. 
The loan bears interest at a rate equal to the prime rate of Texas Commerce Bank
(but such rate shall not be less than 6.15% or greater than 10.25%) and matures 
on the fifth anniversary of the loan. The loan is non-recourse to Dr. James     
Leininger but is secured by the Property, the improvements on the Property and  
300,000 Shares owned by Dr. James Leininger.                                    

Pursuant to the provisions of the Executive Committee Stock Ownership 
Policy, the Company loaned funds to Christopher M. Fashek, the President of KCI 
Therapeutic Services, Inc. (a wholly-owned subsidiary of the Company), Bianca A.
Rhodes, the Company's Chief Financial Offer at the time and Dennis E. Noll, the 
Company's Senior Vice President and General Counsel. These loans were utilized  
by such executive officers to acquire Shares in order to meet the standards set 
forth in the Company's Executive Committee Stock Ownership Policy. The loans    
bear interest at the applicable federal rate established by the Internal Revenue
Service and have a term of five years. At the option of each such executive     
officer, the loans are repayable on a biweekly basis through payroll deduction  
or in equal installments of principal and interest on an annual basis. The      
initial loans made to Mr. Fashek, Ms. Rhodes and Mr. Noll were $109,821,        
$170,672 and $86,310, respectively, and the outstanding balance of principal and
accrued interest on such loans as of December 31, 1996 were $87,076, $166,003   
and $81,888, respectively. Mr. Noll repaid his loan in February 1997 and Ms.    
Rhodes repaid the principal of her loan in July 1997. The Board has amended the 
Executive Committee Stock Ownership Policy to make the ownership thresholds in  
the policy voluntary and, as a result, the Company will not be making loans to  
executive officers under the policy in the future.                              

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DESCRIPTION OF NEW CREDIT FACILITIES

The Company has entered into New Credit Facilities pursuant to a bank 
credit agreement (the "Bank Credit Agreement") with Bank of America National    
Trust and Savings Association ("Bank of America"), as Administrative Agent, and 
Bankers Trust Company ("Bankers Trust"), as Syndication Agent, and other        
institutions party thereto (the "Banks"), which provides loans of up to $400.0  
million. Loans under the Bank Credit Agreement consist of (i) $120.0 million in 
aggregate principal amount of six-year Tranche A Term Loans, $90.0 million in   
aggregate principal amount of seven-year Tranche B Term Loans and $90.0 million 
in aggregate principal amount of eight-year Tranche C Term Loans (the "Tranche A
Term Loans," the "Tranche B Term Loans," and the "Tranche C Term Loans" are     
referred to collectively as the "Term Loans"), to be used to finance a portion  
of the Recapitalization and to pay related fees and expenses, (ii) a $50.0      
million six-year revolving credit facility (the "Revolving Credit Facility"), of
which $33.0 million was drawn down in connection with the consummation of the   
Tender Offer, and which permits the Company to borrow up to $50.0 million to    
finance a portion of the Recapitalization and related fees and expenses as well 
as the working capital, letters of credit and other general corporate needs and 
(iii) a $50.0 million six-year acquisition facility to finance permitted        
acquisitions and related fees and expenses (the "Acquisition Facility"), of     
which $10.0 was drawn down in connection with the consummation of the Tender    
Offer. This information relating to the Bank Credit Agreement is qualified in   
its entirety by reference to the complete text of the documents to be entered   
into in connection therewith. The following is a description of the general     
terms of the Bank Credit Agreement.                                             

   Indebtedness of the Company under the Bank Credit Agreement is guaranteed
by certain of the domestic subsidiaries of the Company and is secured by (i) a  
first priority security interest in all, subject to certain customary           
exceptions, of the tangible and intangible assets of the Company and its        
domestic subsidiaries, including, without limitation, intellectual property and 
real estate owned by the Company and its domestic subsidiaries, (ii) a first    
priority perfected pledge of all capital stock of the Company's domestic        
subsidiaries and (iii) a first priority perfected pledge of up to 65% of the    
capital stock of foreign subsidiaries owned directly by the Company or its      
domestic subsidiaries.                                                          

    Indebtedness under the Revolving Credit Facility (other than certain loans
under the Revolving Credit Facility designated in foreign currency), the Term   
Loans and the Acquisition Facility initially bears interest at a rate based     
upon, at the Company's option, either (i) the Base Rate (defined as the higher  
of (x) the rate of interest publicly announced by Bank of America as its        
"reference rate" and (y) the federal funds effective rate from time to time plus
0.50%), plus 1.25% in respect of the Tranche A Term Loans, the loans under the  
Revolving Credit Facility (the "Revolving Loans") and the loans under the       
Acquisition Facility (the "Acquisition Loans"), 1.50% in respect of the Tranche 
B Term Loans and 1.75% in respect of the Tranche C Term Loans, or (ii) the      
Eurodollar Rate (as defined in the Bank Credit Agreement) for one, two, three or
six months, in each case plus 2.25% in respect of Tranche A Term Loans,         
Revolving Loans and Acquisition Loans, 2.50% in respect of Tranche B Term Loans 
and 2.75% in respect of the Tranche C Term Loans. Certain Revolving Loans       
designated in foreign currency will initially bear interest at a rate based upon
the cost of funds for such loans, plus 2.25% or 2.50%, depending on the type of 
foreign currency. Performance-based reductions of the interest rates under the  
Term Loans, the Revolving Loans and the Acquisition Loans are available. The    
Company is expected to obtain interest rate protection for not less than 50% of 
the amount of the Term Loans no later than 90 days after the closing of the Bank
Credit Agreement.                                                               

     The Term Loans are subject to quarterly amortization payments commencing on
March 31, 1998. Commitments under the Acquisition Facility will expire December 
31, 2000 and the Acquisition Facility loans outstanding shall be repayable in   
equal quarterly amortization payments commencing March 31, 2001. In addition,   
the Bank Credit Agreement provides for mandatory repayments, subject to certain 
exceptions, of the Term Loans, the Acquisition Facility and/or the Revolving    
Credit Facility based on certain net asset sales outside the ordinary course of 
business of the Company and its subsidiaries, the net proceeds of certain debt  
and equity issuances and excess cash flows (as defined in the Bank Credit       
Agreement).                                                                     

   The Revolving Loans may be repaid and reborrowed. The Company is required
to pay to the Banks under the Bank Credit Agreement a commitment fee initially  
equal to 0.50% per annum, payable in arrears on a                               

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quarterly basis, on the average daily unused portion of the Revolving Credit    
Facility and Acquisition Facility during such quarter. The Company also is      
required to pay to the Banks participating in the Revolving Credit Facility     
letter of credit fees equal to the applicable margin then in effect with respect
to Eurodollar loans under the Revolving Credit Facility on the face amount of   
each letter of credit outstanding and to the Bank issuing a letter of credit a  
fronting fee of 0.25% on the average daily stated amount of each outstanding    
letter of credit issued by such Bank, in each case payable in arrears on a      
quarterly basis. Bank of America and Bankers Trust will receive and continue to 
receive such other fees as have been separately agreed upon.                    

  The Bank Credit Agreement requires the Company to meet certain financial
tests, including minimum levels of EBITDA (as defined therein), minimum interest
coverage and maximum leverage ratio. The Bank Credit Agreement also contains    
covenants which, among other things, limit the incurrence of additional         
indebtedness, investments, dividends, loans and advances, capital expenditures, 
transactions with affiliates, asset sales, acquisitions, mergers and            
consolidations, prepayments of other indebtedness (including the Notes), liens  
and encumbrances and other matters customarily restricted in such agreements.   

   The Bank Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,  
cross-defaults to certain other indebtedness, certain events of bankruptcy and  
insolvency, failures under ERISA plans, judgment defaults, failure of any       
guaranty, security document security interest or subordination provision        
supporting the Bank Credit Agreement to be in full force and effect and change  
of control of the Company.                                                      

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DESCRIPTION OF NOTES

The Series A Notes were and the Exchange Notes will be issued under an
indenture (the "Indenture"), dated as of November 5, 1997 by and among the      
Company, the Guarantors and Marine Midland Bank, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture does not purport to be 
complete and is subject to, and is qualified in its entirety by reference to,   
the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the      
provisions of the Indenture, including the definitions of certain terms therein 
and those terms made a part of the Indenture by reference to the TIA as in      
effect on the date of the Indenture. A copy of the Indenture may be obtained    
from the Company or the Initial Purchasers. The definitions of certain          
capitalized terms used in the following summary are set forth below under       
"-- Certain Definitions." For purposes of this section, references to the       
"Company" include only the Company and not its Subsidiaries.                    

    The Notes are unsecured obligations of the Company, ranking subordinate in
right of payment to all Senior Debt of the Company.                             

 The Notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee  
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially is the Trustee's corporate trust office. The Company may change any   
Paying Agent and Registrar without notice to holders of the Notes (the          
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,  
interest may be paid at the Trustee's corporate trust office or by check mailed 
to the registered address of Holders. Any Series A Notes that remain outstanding
after the completion of the Exchange Offer, together with the Exchange Notes    
issued in connection with the Exchange Offer, will be treated as a single class 
of securities under the Indenture.                                              

PRINCIPAL, MATURITY AND INTEREST                                                

   The Notes are limited in aggregate principal amount to $300.0 million, of
which $200.0 million were issued in the Offering, and will mature on November 1,
2007. Additional amounts may be issued in one or more series from time to time  
subject to the limitations set forth under "-- Certain Covenants -- Limitation  
on Incurrence of Additional Indebtedness" and the restrictions contained in the 
Credit Agreement. Interest on the Notes accrues at the rate of 9 5/8% per annum 
and will be payable semiannually in cash on each May 1 and November 1,          
commencing on May 1, 1998, to the persons who are registered Holders at the     
close of business on April 15 and October 15, respectively, immediately         
preceding the applicable interest payment date. Interest on the Notes will      
accrue from and including the most recent date to which interest has been paid  
or, if no interest has been paid, from and including the date of issuance.      

  The Notes are not entitled to the benefit of any mandatory sinking fund.

REDEMPTION                                                                      

Optional Redemption.  The Notes will be redeemable, at the Company's  
option, in whole at any time or in part from time to time, on and after November
1, 2002, upon not less than 30 nor more than 60 days' notice, at the following  
redemption prices (expressed as percentages of the principal amount thereof) if 
redeemed during the twelve-month period commencing on November 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:                                                         

                                                                [Download Table]

                            YEAR                              PERCENTAGE
                            ----                              ----------
                                                                        
2002........................................................   104.813% 
2003........................................................   103.208% 
2004........................................................   101.604% 
2005 and thereafter.........................................   100.000% 

  Optional Redemption upon Equity Offerings.  At any time, or from time to
time, on or prior to November 1, 2000, the Company may, at its option, on one or
more occasions use all or a portion of the net                                  

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cash proceeds of one or more Equity Offerings (as defined below) to redeem the  
Notes issued under the Indenture at a redemption price equal to 109.625% of the 
principal amount thereof plus accrued and unpaid interest thereon, if any, to   
the date of redemption; provided that at least 65% of the principal amount of   
Notes originally issued remains outstanding immediately after any such          
redemption. In order to effect the foregoing redemption with the proceeds of any
Equity Offering, the Company shall make such redemption not more than 120 days  
after the consummation of any such Equity Offering.                             

     As used in the preceding paragraph, "Equity Offering" means any offering of
Qualified Capital Stock of the Company.                                         

SELECTION AND NOTICE OF REDEMPTION                                              

In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made 
by the Trustee in compliance with the requirements of the principal national    
securities exchange, if any, on which such Notes are listed or, if such Notes   
are not then listed on a national securities exchange, on a pro rata basis, by  
lot or by such method as the Trustee shall deem fair and appropriate; provided, 
however, that no Notes of a principal amount of $1,000 or less shall be redeemed
in part; provided, further, that if a partial redemption is made with the       
proceeds of an Equity Offering, selection of the Notes or portions thereof for  
redemption shall be made by the Trustee only on a pro rata basis or on as nearly
a pro rata basis as is practicable (subject to DTC procedures), unless such     
method is otherwise prohibited. Notice of redemption shall be mailed by         
first-class mail at least 30 but not more than 60 days before the redemption    
date to each Holder of Notes to be redeemed at its registered address. If any   
Note is to be redeemed in part only, the notice of redemption that relates to   
such Note shall state the portion of the principal amount thereof to be         
redeemed. A new Note in a principal amount equal to the unredeemed portion      
thereof will be issued in the name of the Holder thereof upon cancellation of   
the original Note. On and after the redemption date, interest will cease to     
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the paying agent funds in satisfaction of the applicable     
redemption price pursuant to the Indenture.                                     

SUBORDINATION                                                                   

 The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all         
Obligations on Senior Debt. Upon any payment or distribution of assets of the   
Company of any kind or character, whether in cash, property or securities, to   
creditors upon any liquidation, dissolution, winding up, reorganization,        
assignment for the benefit of creditors or marshaling of assets of the Company  
or in a bankruptcy, reorganization, insolvency, receivership or other similar   
proceeding relating to the Company or its property, whether voluntary or        
involuntary, all Obligations due or to become due upon all Senior Debt shall    
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or    
distribution of any kind or character is made on account of any Obligations on  
the Notes, or for the acquisition of any of the Notes for cash or property or   
otherwise. If any default occurs and is continuing in the payment when due,     
whether at maturity, upon any redemption, by declaration or otherwise, of any   
principal of, interest on, unpaid drawings for letters of credit issued in      
respect of, or regularly accruing fees or commissions with respect to, any      
Senior Debt, no payment or distribution of any kind or character shall be made  
by or on behalf of the Company or any other Person on its or their behalf with  
respect to any Obligations on the Notes or to acquire any of the Notes for cash 
or property or otherwise.                                                       

  In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in   
the instrument creating or evidencing such Designated Senior Debt, permitting   
the holders of such Designated Senior Debt then outstanding to accelerate the   
maturity thereof and if the Representative for the respective issue of          
Designated Senior Debt gives written notice of the event of default to the      
Trustee (a "Default Notice"), then, unless and until all events of default have 
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the respective issue of Designated Senior Debt           
terminating the Blockage Period (as defined below), during the 180 days after   
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any                                                                         
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other Person on its behalf shall (x) make any payment or distribution of any    
kind or character with respect to any Obligations on the Notes or (y) acquire   
any of the Notes for cash or property or otherwise. Notwithstanding anything    
herein to the contrary, in no event will a Blockage Period extend beyond 180    
days from the date the payment on the Notes was due and only one such Blockage  
Period may be commenced within any 360 consecutive days. No event of default    
which existed or was continuing on the date of the commencement of any Blockage 
Period with respect to the Designated Senior Debt shall be, or be made, the     
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,  
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date 
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions under which an event of default  
previously existed or was continuing shall constitute a new event of default for
this purpose).                                                                  

By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including 
the Holders of the Notes, may recover less, ratably, than holders of Senior     
Debt.                                                                           

   As of September 30, 1997, on a pro forma basis after giving effect to the
Transactions and the Acquisitions, the Company and the Guarantors would have had
approximately $342.7 million of Senior Debt outstanding and approximately $57.3 
million of availability under the Credit Agreement.                             

GUARANTEES                                                                      

    Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally, to each Holder and the Trustee, the full and prompt      
performance of the Company's obligations under the Indenture and the Notes,     
including the payment of principal of and interest on the Notes. The Guarantees 
are subordinated to Guarantor Senior Debt on the same basis as the Notes are    
subordinated to Senior Debt. The obligations of each Guarantor are limited to   
the maximum amount which, after giving effect to all other contingent and fixed 
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the          
obligations of such other Guarantor under its Guarantee or pursuant to its      
contribution obligations under the Indenture, will result in the obligations of 
such Guarantor under the Guarantee not constituting a fraudulent conveyance or  
fraudulent transfer under federal or state law. Each Guarantor that makes a     
payment or distribution under a Guarantee shall be entitled to a contribution   
from each other Guarantor in an amount pro rata, based on the net assets of each
Guarantor, determined in accordance with GAAP.                                  

     Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with or into or to other Persons upon the terms  
and conditions set forth in the Indenture. See "Certain Covenants -- Merger,    
Consolidation and Sale of Assets." In the event all of the Capital Stock of a   
Guarantor is sold by the Company and/or by one or more of the Company's         
Restricted Subsidiaries or in the event all or substantially all assets of a    
Guarantor are sold by the Company and/or by one of the Company's Restricted     
Subsidiaries and (i) such sale complies with the provisions set forth in        
"Certain Covenants -- Limitation on Asset Sales" and (ii) such Guarantor is     
released from all of its obligations under the Credit Agreement, the Guarantor's
Guarantee will be automatically and unconditionally released. In addition, any  
Guarantor that is designated as an Unrestricted Subsidiary in accordance with   
the terms of the Indenture will be relieved of its obligations under its        
Guarantee.                                                                      

CHANGE OF CONTROL                                                               

 The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a   
portion of such Holder's Notes pursuant to the offer described below (the       
"Change of Control Offer"), at a purchase price equal to 101% of the principal  
amount thereof plus accrued interest to the date of purchase.                   

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     The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the     
Company covenants to (i) obtain the requisite consents under the Credit         
Agreement (so long as the terms of which provide that a Change of Control would 
result in a default or event of default or would otherwise require repayment)   
and all other Senior Debt (the terms of which provide that a Change of Control  
would result in a default or event of default or would otherwise require        
repayment) to permit the repurchase of the Notes as provided below or (ii) in   
the event a consent is not obtained with respect to such Credit Agreement or any
such other Senior Debt, repay in full and terminate all commitments under       
Indebtedness under such Credit Agreement or such other Senior Debt, as the case 
may be, or offer to repay in full and terminate all commitments under all       
Indebtedness under such Credit Agreement or such other Senior Debt, as the case 
may be, and to repay the Indebtedness owed to each lender which has accepted    
such offer. The Company shall first comply with the covenant in the immediately 
preceding sentence before it shall be required to repurchase Notes pursuant to  
the provisions described below. The Company's failure to comply with the        
covenant described in the first sentence of this paragraph shall be governed by 
clause (iii) and not clause (ii) under "Events of Default" below.               

Within 30 days following the date upon which the Change of Control    
occurred, the Company must send, by first class mail, a notice to each Holder,  
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,  
which must be no earlier than 30 days nor later than 45 days from the date such 
notice is mailed, other than as may be required by law (the "Change of Control  
Payment Date"). Holders electing to have a Note purchased pursuant to a Change  
of Control Offer will be required to surrender the Note, with the form entitled 
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to   
the Paying Agent at the address specified in the notice prior to the close of   
business on the third business day prior to the Change of Control Payment Date. 

  If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control       
purchase price for all the Notes that might be delivered by Holders seeking to  
accept the Change of Control Offer. In the event the Company is required to     
purchase outstanding Notes pursuant to a Change of Control Offer, the Company   
expects that it would seek third party financing to the extent it does not have 
available funds to meet its purchase obligations. However, there can be no      
assurance that the Company would be able to obtain such financing.              

     Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.   
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on 
its property, to make Restricted Payments and to make Asset Sales may also make 
more difficult or discourage a takeover of the Company, whether favored or      
opposed by the management of the Company. Consummation of any such transaction  
in certain circumstances may require redemption or repurchase of the Notes, and 
there can be no assurance that the Company or the acquiring party will have     
sufficient financial resources to effect such redemption or repurchase. Such    
restrictions and the restrictions on transactions with Affiliates may, in       
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While  
such restrictions cover a wide variety of arrangements which have traditionally 
been used to effect highly leveraged transactions, the Indenture may not afford 
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.                                                                    

The Company will comply with the requirements of Rule 14e-1 under the 
Exchange Act and any other securities laws and regulations thereunder to the    
extent such laws and regulations are applicable in connection with the          
repurchase of Notes pursuant to a Change of Control Offer. To the extent that   
the provisions of any securities laws or regulations conflict with the "Change  
of Control" provisions of the Indenture, the Company shall comply with the      
applicable securities laws and regulations and shall not be deemed to have      
breached its obligations under the "Change of Control" provisions of the        
Indenture by virtue thereof.                                                    

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CERTAIN COVENANTS                                                               

The Indenture contains, among others, the following covenants:        

     Limitation on Incurrence of Additional Indebtedness.  The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or          
indirectly, create, incur, assume, guarantee, acquire, become liable,           
contingently or otherwise, with respect to, or otherwise become responsible for 
payment of (collectively, "incur") any Indebtedness (other than Permitted       
Indebtedness); provided, however, that if no Default or Event of Default shall  
have occurred and be continuing at the time of or as a consequence of the       
incurrence of any such Indebtedness, the Company or any of its Restricted       
Subsidiaries may incur Indebtedness (including, without limitation, Acquired    
Indebtedness) if on the date of the incurrence of such Indebtedness, after      
giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage 
Ratio of the Company is greater than 2.0 to 1.0.                                

     Limitation on Restricted Payments.  The Company will not and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)    
declare or pay any dividend or make any distribution (other than dividends or   
distributions payable in Qualified Capital Stock of the Company or warrants,    
options or other rights to acquire Qualified Capital Stock (but excluding any   
debt security or Disqualified Capital Stock convertible into, or exchangeable   
for, Qualified Capital Stock)) on or in respect of shares of the Company's      
Capital Stock to holders of such Capital Stock, (b) purchase, redeem or         
otherwise acquire or retire for value any Capital Stock of the Company or any   
warrants, rights or options to purchase or acquire shares of any class of such  
Capital Stock, (c) make any principal payment on, purchase, defease, redeem,    
prepay, decrease or otherwise acquire or retire for value, prior to any         
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company that is subordinate or junior in right of       
payment to the Notes, or (d) make any Investment (other than Permitted          
Investments) (each of the foregoing actions set forth in clauses (a), (b), (c)  
and (d) being referred to as a "Restricted Payment"), if at the time of such    
Restricted Payment or immediately after giving effect thereto, (i) a Default or 
an Event of Default shall have occurred and be continuing or (ii) the Company is
not able to incur at least $1.00 of additional Indebtedness (other than         
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of     
Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted   
Payments (including such proposed Restricted Payment) made subsequent to the    
Issue Date (the amount expended for such purposes, if other than in cash, being 
the fair market value of such property as determined reasonably and in good     
faith by the Board of Directors of the Company, whose determination shall be    
conclusive) shall exceed the sum, without duplication, of: (u) 50% of the       
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income    
shall be a loss, minus 100% of such loss) of the Company earned subsequent to   
the Issue Date and on or prior to the date the Restricted Payment occurs (the   
"Reference Date") (treating such period as a single accounting period); plus (v)
100% of the aggregate net cash proceeds received by the Company from any Person 
(other than a Subsidiary of the Company) from the issuance and sale subsequent  
to the Issue Date and on or prior to the Reference Date of Qualified Capital    
Stock of the Company; plus (w) 100% of the aggregate net cash proceeds received 
after the Issue Date by the Company from the issuance or sale (other than to a  
Subsidiary of the Company) of debt securities or Disqualified Capital Stock that
have been converted into or exchanged for Qualified Capital Stock of the        
Company, together with (without duplication) any net cash proceeds received by  
the Company at the time of such conversion or exchange; plus (x) to the extent  
not otherwise included in the Consolidated Net Income of the Company, an amount 
equal to the net reduction in Investments (other than reductions in Permitted   
Investments) in Unrestricted Subsidiaries resulting from the payments in cash of
interest on Indebtedness, dividends, repayments of loans or advances or other   
transfers of assets, in each case to the Company or a Restricted Subsidiary or  
from the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary;
plus (y) to the extent not otherwise included in Consolidated Net Income, net   
cash proceeds from sale of Investments which were treated as Restricted         
Payments, but not to exceed the amounts so treated; plus (z) without duplication
of any amounts included in clause (iii)(v) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(v) and (z), any
net cash proceeds from an Equity Offering to the extent used to redeem the      
Notes); plus (aa) $15.0 million.                                                

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    Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or         
redemption payment within 60 days after the date of declaration of such dividend
or redemption payment if the dividend or redemption payment would have been     
permitted on the date of declaration; (2) if no Default or Event of Default     
shall have occurred and be continuing, the acquisition of any shares of Capital 
Stock of the Company, either (i) solely in exchange for shares of Qualified     
Capital Stock of the Company (or warrants, options or other rights to acquire   
Qualified Capital Stock of the Company (but excluding any debt security or      
Disqualified Capital Stock convertible into, or exchangeable for, Qualified     
Capital Stock)) or (ii) through the application of net proceeds of a            
substantially concurrent sale for cash (other than to a Subsidiary of the       
Company) of shares of Qualified Capital Stock of the Company (or warrants,      
options or other rights to acquire Qualified Capital Stock of the Company (but  
excluding any debt security or Disqualified Capital Stock convertible into, or  
exchangeable for, Qualified Capital Stock)); (3) if no Default or Event of      
Default shall have occurred and be continuing, the acquisition of any           
Indebtedness of the Company or of any Guarantor that is subordinate or junior in
right of payment to the Notes or such Guarantor's Guarantee, as the case may be,
either (i) solely in exchange for shares of Qualified Capital Stock of the      
Company (or warrants, options or other rights to acquire Qualified Capital Stock
of the Company (but excluding any debt security or Disqualified Capital Stock   
convertible into, or exchangeable for, Qualified Capital Stock)); or (ii)       
through the application of net proceeds of a substantially concurrent sale for  
cash (other than to a Subsidiary of the Company) of (A) shares of Qualified     
Capital Stock of the Company (or warrants, options or other rights to acquire   
Qualified Capital Stock of the Company (but excluding any debt security or      
Disqualified Capital Stock convertible into, or exchangeable for, Qualified     
Capital Stock)); or (B) Refinancing Indebtedness; (4) the purchase of any       
Subordinated Indebtedness at a purchase price not greater than 101% of the      
principal amount thereof in the event of a Change of Control in accordance with 
provisions similar to the "-- Change of Control" covenant; provided that prior  
to such purchase the Company has made the Change of Control Offer as provided in
such covenant with respect to the Notes and has purchased all Notes validly     
tendered for payment in connection with such Change of Control Offer and that no
Default or Event of Default is in existence prior to or as a result of such     
purchase; (5) so long as no Default or Event of Default shall have occurred and 
be continuing, repurchases by the Company of Common Stock of the Company from   
employees of the Company or any of its Subsidiaries or their authorized         
representatives upon the death, disability or termination of employment of such 
employees, in an amount not to exceed $10.0 million in the aggregate; and (6)   
the acquisition of shares of Capital Stock (or warrants, rights or options to   
acquire Capital Stock of the Company) of the Company in connection with the     
consummation of the Merger. In determining the aggregate amount of Restricted   
Payments made subsequent to the Issue Date in accordance with clause (iii) of   
the immediately preceding paragraph, amounts expended pursuant to clauses       
(2)(ii) and (5) shall be included in such calculation.                          

     Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted    
Payment complies with the Indenture and setting forth in reasonable detail the  
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial       
statements.                                                                     

   Limitation on Asset Sales.  The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the      
Company or the applicable Restricted Subsidiary, as the case may be, receives   
consideration at the time of such Asset Sale at least equal to the fair market  
value of the assets sold or otherwise disposed of (as determined in good faith  
by the Company's Board of Directors), (ii) at least 75% of the consideration    
received by the Company or the Restricted Subsidiary, as the case may be, from  
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition (provided that for purposes of this provision,  
the amount of (x) any liabilities (as shown on the most recent balance sheet of 
the Company or such Restricted Subsidiary or in the notes thereto) of the       
Company or such Restricted Subsidiary that are assumed by the transferee of any 
such assets (other than liabilities that are by their terms pari passu with or  
subordinated to the Notes or the guarantee of the Guarantors, as applicable) and
(y) any securities or other obligations received by the Company or any such     
Restricted Subsidiary from such transferee that are immediately converted by the
Company or such Restricted Subsidiary into cash or Cash Equivalents (or as to   
which the Company or such Restricted Subsidiary has received at or prior to the 
consummation of the Asset Sale a commitment (which may be                       
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subject to customary conditions) from a nationally recognized investment,       
merchant or commercial bank to convert into cash or Cash Equivalents within 180 
days of the consummation of such Asset Sale and which are thereafter actually   
converted into cash or Cash Equivalents within such 180-day period) will be     
deemed to be cash or Cash Equivalents (and shall be deemed to be Net Cash       
Proceeds for purposes of the following provisions as and when reduced to cash or
Cash Equivalents) to the extent of the net cash or Cash Equivalents realized    
thereon), and (iii) upon the consummation of an Asset Sale, the Company shall   
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds      
relating to such Asset Sale within 365 days of receipt thereof either (A) to    
repay or prepay any Senior Debt and, in the case of any Senior Debt under any   
revolving credit facility, effect a permanent reduction in the availability     
under such revolving credit facility, (B) to make an investment in properties   
and assets that replace the properties and assets that were the subject of such 
Asset Sale or in properties and assets that will be used in the business of the 
Company and its Subsidiaries as existing on the Issue Date or in businesses     
which are the same, similar or reasonably related or complementary to the       
businesses in which the Company and its Restricted Subsidiaries are engaged on  
the Issue Date ("Replacement Assets"), or (C) a combination of prepayment and   
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the     
366th day after an Asset Sale or such earlier date, if any, as the Board of     
Directors of the Company or of such Restricted Subsidiary determines not to     
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses 
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net    
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which 
have not been applied on or before such Net Proceeds Offer Trigger Date as      
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding      
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds      
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor  
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds 
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of     
purchase; provided, however, that if at any time any non-cash consideration     
received by the Company or any Restricted Subsidiary of the Company, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such     
non-cash consideration), then such conversion or disposition shall be deemed to 
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be   
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to 
or in excess of $10.0 million resulting from one or more Asset Sales (at which  
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount  
in excess of $10.0 million, shall be applied as required pursuant to this       
paragraph).                                                                     

In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an        
entirety to a Person in a transaction permitted under "-- Merger, Consolidation 
and Sale of Assets," the successor corporation shall be deemed to have sold the 
properties and assets of the Company and its Restricted Subsidiaries not so     
transferred for purposes of this covenant, and shall comply with the provisions 
of this covenant with respect to such deemed sale as if it were an Asset Sale.  
In addition, the fair market value of such properties and assets of the Company 
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash 
Proceeds for purposes of this covenant.                                         

   Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale       
without complying with such paragraphs to the extent (a) the consideration for  
such Asset Sale constitutes Replacement Assets and (b) such Asset Sale is for   
fair market value.                                                              

  Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger 
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may  
elect to tender their Notes in whole or in part in integral multiples of $1,000 
in exchange for cash. To the extent Holders properly tender Notes in an amount  
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be     
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer 
shall remain open for a period of 20 business days or such longer period as may 
be required by law.                                                             

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     If a Net Proceeds Offer is made, there can be no assurance that the Company
will have available funds sufficient to pay the Net Proceeds Offer Amount for   
all the Notes that might be delivered by Holders seeking to accept the Net      
Proceeds Offer. In the event the Company is required to purchase outstanding    
Notes pursuant to a Net Proceeds Offer, the Company expects that it would seek  
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would 
be able to obtain such financing. In addition, the terms of the instruments     
relating to Senior Debt of the Company or a Restricted Subsidiary of the Company
may require the Net Proceeds be used to repay or prepay Senior Debt.            

The Company will comply with the requirements of Rule 14e-1 under the 
Exchange Act and any other securities laws and regulations thereunder to the    
extent such laws and regulations are applicable in connection with the          
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the    
provisions of any securities laws or regulations conflict with the "Asset Sale" 
provisions of the Indenture, the Company shall comply with the applicable       
securities laws and regulations and shall not be deemed to have breached its    
obligations under the "Asset Sale" provisions of the Indenture by virtue        
thereof.                                                                        

    Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries.  The Company will not, and will not cause or permit any of its    
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the       
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or  
any other Restricted Subsidiary of the Company; or (c) transfer any of its      
property or assets to the Company or any other Restricted Subsidiary of the     
Company, except for such encumbrances or restrictions existing under or by      
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment  
provisions of any contract or any lease governing a leasehold interest of any   
Restricted Subsidiary of the Company; (4) any instrument governing Acquired     
Indebtedness, which encumbrance or restriction is not applicable to any         
Restricted Subsidiaries, or the properties or assets of any Restricted          
Subsidiaries, other than the Person or such Person's Subsidiaries or the        
properties or assets of the Person so acquired or such Person's Subsidiaries;   
(5) agreements existing on the Issue Date to the extent and in the manner such  
agreements are in effect on the Issue Date; (6) any agreement to sell assets or 
Capital Stock permitted under the Indenture to any Person pending the closing of
such sale; (7) any instrument governing a Permitted Lien, to the extent and only
to the extent such instrument restricts the transfer or other disposition of    
assets subject to such Permitted Lien; (8) restrictions on cash or other        
deposits imposed by customers under contracts entered into in the ordinary      
course of business; (9) customary provisions in joint venture agreements and    
other similar agreements; (10) the documentation relating to Indebtedness of    
Foreign Subsidiaries incurred pursuant to the terms of the Indenture provided   
that such encumbrances or restrictions are not more restrictive than those      
contained in the Credit Agreement; (11) the Credit Agreement; (12) the          
documentation relating to other Indebtedness permitted to be incurred subsequent
to the Issue Date pursuant to the provisions of the covenant described under    
"-- Limitations on Incurrence of Additional Indebtedness"; provided that such   
encumbrances or restrictions are not more restrictive than those contained in   
the Credit Agreement; (13) the documentation relating to Indebtedness of a      
Securitization Entity in connection with a Qualified Securitization Transaction;
provided that such restrictions apply only to such Securitization Entity; (14)  
an agreement governing Indebtedness incurred to Refinance the Indebtedness      
issued, assumed or incurred pursuant to an agreement referred to in clause (2), 
(4), (5) or (11) above; provided, however, that the provisions relating to such 
encumbrance or restriction contained in any such Indebtedness are no less       
favorable to the Company in any material respect as determined by the Board of  
Directors of the Company in their reasonable and good faith judgment than the   
provisions relating to such encumbrance or restriction contained in agreements  
referred to in such clause (2), (4), (5) or (11). Nothing contained in this     
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted     
Subsidiaries" covenant shall prevent the Company or any Subsidiary of the       
Company from creating, incurring, assuming or suffering to exist any Permitted  
Liens.                                                                          

     Limitation on Preferred Stock of Restricted Subsidiaries.  The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock      
(other than to the Company or to a Wholly Owned                                 

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Restricted Subsidiary of the Company) or permit any Person (other than the      
Company or a Wholly Owned Restricted Subsidiary of the Company) to own any      
Preferred Stock of any Restricted Subsidiary of the Company.                    

  Limitation on Liens.  The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,   
assume or permit or suffer to exist any Liens of any kind against or upon any   
property or assets of the Company or any of its Restricted Subsidiaries whether 
owned on the Issue Date or acquired after the Issue Date, or any proceeds       
therefrom, or assign or otherwise convey any right to receive income or profits 
therefrom unless (i) in the case of Liens securing Indebtedness that is         
expressly subordinate or junior in right of payment to the Notes or any         
Guarantee, the Notes and such Guarantee, as the case may be, are secured by a   
Lien on such property, assets or proceeds that is senior in priority to such    
Liens and (ii) in all other cases, the Notes and the Guarantees are equally and 
ratably secured, except for (A) Liens existing as of the Issue Date to the      
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens  
securing the Credit Agreement; (C) Liens securing Senior Debt and Liens securing
Guarantor Senior Debt; (D) Liens securing the Notes and the Guarantees; (E)     
Liens of the Company or a Restricted Subsidiary of the Company on assets of any 
Subsidiary of the Company; (F) Liens securing Refinancing Indebtedness which is 
incurred to Refinance any Indebtedness which has been secured by a Lien         
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens (y) are no less 
favorable to the Holders and are not more favorable to the lienholders with     
respect to such Liens than the Liens in respect of the Indebtedness being       
Refinanced and (z) do not extend to or cover any property or assets of the      
Company or any of its Restricted Subsidiaries not securing the Indebtedness so  
Refinanced; and (G) Permitted Liens.                                            

  Prohibition on Incurrence of Senior Subordinated Debt.  The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
that is senior in right of payment to the Notes or any Guarantee, as the case   
may be, and expressly contractually subordinate in right of payment to any other
Indebtedness of the Company or such Guarantor, as the case may be.              

Merger, Consolidation and Sale of Assets.  The Company will not, in a 
single transaction or series of related transactions, consolidate or merge with 
or into any Person (other than the Merger), or sell, assign, transfer, lease,   
convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of 
the Company to sell, assign, transfer, lease, convey or otherwise dispose of)   
all or substantially all of the Company's assets (determined on a consolidated  
basis for the Company and the Company's Restricted Subsidiaries) whether as an  
entirety or substantially as an entirety to any Person unless: (i) either (1)   
with respect to such a consolidation or merger, the Company shall be the        
surviving or continuing corporation or (2) the Person (if other than the        
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other 
disposition the properties and assets of the Company and of the Company's       
Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")   
(x) shall be a corporation organized and validly existing under the laws of the 
United States or any State thereof or the District of Columbia and (y) shall    
expressly assume, by supplemental indenture (in form and substance satisfactory 
to the Trustee), executed and delivered to the Trustee, the due and punctual    
payment of the principal of, and premium, if any, and interest on all of the    
Notes and the performance of every covenant of the Notes, the Indenture and the 
Registration Rights Agreement on the part of the Company to be performed or     
observed; (ii) immediately after giving effect to such transaction and the      
assumption contemplated by clause (i)(2)(y) above (including giving effect to   
any Indebtedness and Acquired Indebtedness incurred or anticipated to be        
incurred in connection with or in respect of such transaction), the Company or  
such Surviving Entity, as the case may be, shall be able to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to the  
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)        
immediately after giving effect to such transaction and the assumption          
contemplated by clause (i)(2)(y) above (including, without limitation, giving   
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to 
be incurred and any Lien granted in connection with or in respect of the        
transaction), no Default or Event of Default shall have occurred or be          
continuing; and (iv) the Company or the Surviving Entity, as the case may be,   
shall have delivered to the Trustee an officers' certificate and an opinion of  
counsel, each stating that such consolidation, merger, sale, assignment,        
transfer,                                                                       

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lease, conveyance or other disposition and, if a supplemental indenture is      
required in connection with such transaction, such supplemental indenture comply
with the applicable provisions of the Indenture and that all conditions         
precedent in the Indenture relating to such transaction have been satisfied.    

    For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or         
substantially all of the properties or assets of one or more Restricted         
Subsidiaries of the Company, the Capital Stock of which constitutes all or      
substantially all of the properties and assets of the Company, shall be deemed  
to be the transfer of all or substantially all of the properties and assets of  
the Company.                                                                    

   The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in     
accordance with the foregoing, in which the Company is not the continuing       
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall  
succeed to, and be substituted for, and may exercise every right and power of,  
the Company under the Indenture and the Notes with the same effect as if such   
surviving entity had been named as such.                                        

    Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection   
with any transaction complying with the provisions of the "-- Limitation on     
Asset Sales" covenant) will not, and the Company will not cause or permit any   
Guarantor to, consolidate with or merge with or into any Person other than the  
Company or any other Guarantor unless: (i) the entity formed by or surviving any
such consolidation or merger (if other than the Guarantor) or to which such     
sale, lease, conveyance or other disposition shall have been made is a          
corporation organized and existing under the laws of the United States or any   
State thereof or the District of Columbia; (ii) such entity assumes by          
supplemental indenture all of the obligations of the Guarantor on the Guarantee;
and (iii) immediately after giving effect to such transaction, no Default or    
Event of Default shall have occurred and be continuing. Any merger or           
consolidation of a Guarantor with and into the Company (with the Company being  
the surviving entity) or another Guarantor that is a Wholly Owned Restricted    
Subsidiary of the Company need only comply with clause (iv) of the first        
paragraph of this covenant.                                                     

     Limitations on Transactions with Affiliates.  (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,  
enter into or permit to exist any transaction or series of related transactions 
(including, without limitation, the purchase, sale, lease or exchange of any    
property or the rendering of any service) with, or for the benefit of, any of   
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate      
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions 
on terms that are no less favorable than those that might reasonably have been  
obtained in a comparable transaction at such time on an arm's-length basis from 
a Person that is not an Affiliate of the Company or such Restricted Subsidiary. 
All Affiliate Transactions (and each series of related Affiliate Transactions   
which are similar or part of a common plan) involving aggregate payments or     
other property with a fair market value in excess of $1.5 million shall be      
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating 
that such Board of Directors has determined that such transaction complies with 
the foregoing provisions. If the Company or any Restricted Subsidiary of the    
Company enters into an Affiliate Transaction (or a series of related Affiliate  
Transactions related to a common plan) that involves an aggregate fair market   
value of more than $10.0 million, the Company or such Restricted Subsidiary, as 
the case may be, shall, prior to the consummation thereof, obtain a favorable   
opinion as to the fairness of such transaction or series of related transactions
to the Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.                                                               

  (b) The restrictions set forth in clause (a) shall not apply to (i) fees
and compensation paid to and indemnity provided on behalf of, officers,         
directors, employees or consultants of the Company or any Restricted Subsidiary 
of the Company in the ordinary course of business of the Company or such        
Restricted Subsidiary; (ii) transactions exclusively between or among the       
Company and any of its Restricted Subsidiaries or exclusively between or among  
such Restricted Subsidiaries, provided such transactions are not otherwise      
prohibited by the Indenture; (iii) any agreement as in effect as of the Issue   
Date or any amendment thereto or                                                

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any transaction contemplated thereby (including pursuant to any amendment       
thereto) in any replacement agreement thereto so long as any such amendment or  
replacement agreement is not more disadvantageous to the Holders in any material
respect than the original agreement as in effect on the Issue Date; (iv) so long
as no Default or Event of Default has occurred and is continuing, the payment of
amounts owing pursuant to the Management Agreement; (v) so long as no Default or
Event of Default has occurred and is continuing, the payment of amounts owing   
pursuant to the Transaction Agreement; (vi) loans or advances to employees not  
to exceed $5.0 million at any time outstanding; (vii) issuance of employee stock
options approved by the Board of Directors of the Company and the shareholders  
of the Company; (viii) transactions effected as part of a Qualified             
Securitization Transaction; and (ix) Restricted Payments permitted by the       
Indenture.                                                                      

    Additional Subsidiary Guarantees.  If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a     
series of related transactions, any property to any Restricted Subsidiary (other
than a Foreign Subsidiary or Securitization Entity) that is not a Guarantor, or 
if the Company or any of its Restricted Subsidiaries shall organize, acquire or 
otherwise invest in another Restricted Subsidiary (other than a Foreign         
Subsidiary or Securitization Entity) having total assets with a book value in   
excess of $500,000, then such transferee or acquired or other Restricted        
Subsidiary shall within 15 days of the end of the next succeeding fiscal quarter
(unless the book value of such Restricted Subsidiary is in excess of $5.0       
million in which case, contemporaneously with the organization, acquisition or  
other investment in such Restricted Subsidiary, as the case may be) (i) execute 
and deliver to the Trustee a supplemental indenture in form reasonably          
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall  
unconditionally guarantee all of the Company's obligations under the Notes and  
the Indenture on the terms set forth in the Indenture and (ii) deliver to the   
Trustee an opinion of counsel that such supplemental indenture has been duly    
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted           
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all 
purposes of the Indenture.                                                      

     In the event that (i) a Restricted Subsidiary shall be required pursuant to
the preceding paragraph to deliver the documents described above in clauses (i) 
and (ii) of the preceding paragraph (the "Additional Guarantee Documents"), (ii)
the Company would be required to publicly disclose separate financial statements
of such Restricted Subsidiary for the periods required by Rules 3-01 and 3-02 of
Regulation S-X under the Securities Act, (iii) such Restricted Subsidiary is not
a Significant Subsidiary of the Company, and (iv) the Company shall be able to  
incur at least $1.00 of additional Indebtedness (other than Permitted           
Indebtedness) pursuant to the covenant described under "-- Limitation on        
Incurrence of Additional Indebtedness," then such Restricted Subsidiary shall   
not be required to deliver the Additional Guarantee Documents to the Trustee    
until the earlier of (x) one year and three months from the date such Restricted
Subsidiary would otherwise have had to deliver the Additional Guarantee         
Documents and (y) the date such financial statements would not be required to be
publicly disclosed; provided that in no event shall more than one such          
Restricted Subsidiary not be required to deliver the Additional Guarantee       
Documents at any one time pursuant to this paragraph.                           

    Conduct of Business.  The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related  
or complementary to the businesses in which the Company and its Restricted      
Subsidiaries are engaged on the Issue Date.                                     

   Reports to Holders.  The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission, 
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further      
provides that, notwithstanding that the Company may not be subject to the       
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company  
will file with the Commission, to the extent permitted, and provide the Trustee 
and Holders with such annual reports and such information, documents and other  
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA sec. 314(a).                       

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EVENTS OF DEFAULT                                                               

   The following events are defined in the Indenture as "Events of Default":

          (i) the failure to pay interest on any Notes when the same becomes due
   and payable and the default continues for a period of 30 days (whether or
     not such payment shall be prohibited by the subordination provisions of the
Indenture);                                                           

 (ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or    
otherwise (including the failure to make a payment to purchase Notes  
 tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination 
provisions of the Indenture);                                         

          (iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a 
    period of 30 days after the Company receives written notice specifying the
   default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the "Merger,   
    Consolidation and Sale of Assets" covenant, which will constitute an Event
  of Default with such notice requirement but without such passage of time
requirement);                                                         

   (iv) the failure to pay at final maturity (giving effect to any
   applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
     Company (other than a Securitization Entity) and such failure continues for
a period of 30 days or more, or the acceleration of the final stated  
 maturity of any such Indebtedness (which acceleration is not rescinded,
 annulled or otherwise cured within 30 days of receipt by the Company or
such Restricted Subsidiary of notice of any such acceleration) if the 
aggregate principal amount of such Indebtedness, together with the    
   principal amount of any other such Indebtedness in default for failure to
     pay principal at final maturity or which has been accelerated, in each case
with respect to which the 30-day period described above has passed,   
aggregates $20.0 million or more at any time;                         

          (v) one or more judgments which exceeds in the aggregate $20.0 million
(excluding judgments to the extent covered by insurance by a reputable
    insurer as to which the insurer has acknowledged coverage) shall have been
     rendered against the Company or any of its Significant Subsidiaries that is
a Restricted Subsidiary of the Company and such judgments remain      
   undischarged, unvacated, unpaid or unstayed for a period of 60 days after
such judgment or judgments become final and non-appealable;           

         (vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or                                          

        (vii) any of the Guarantees ceases to be in full force and effect or
    any of the Guarantees is declared to be null and void and unenforceable or
any of the Guarantees is found to be invalid or any of the Guarantors 
   denies its liability under its Guarantee (other than by reason of release
of a Guarantor in accordance with the terms of the Indenture).        

    If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the      
Trustee or the Holders of at least 25% in principal amount of outstanding Notes 
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the      
respective Event of Default and that it is a "notice of acceleration" (the      
"Acceleration Notice"), and the same (i) shall become immediately due and       
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an          
acceleration under the Credit Agreement or 5 business days after receipt by the 
Company and the representative under the Credit Agreement of such Acceleration  
Notice. If an Event of Default specified in clause (vi) above with respect to   
the Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding Notes shall   
ipso facto become and be immediately due and payable without any declaration or 
other act on the part of the Trustee or any Holder.                             

The Indenture provides that, at any time after a declaration of       
acceleration with respect to the Notes as described in the preceding paragraph, 
the Holders of a majority in principal amount of the Notes may rescind          
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and cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default    
have been cured or waived except nonpayment of principal or interest that has   
become due solely because of the acceleration, (iii) to the extent the payment  
of such interest is lawful, interest on overdue installments of interest and    
overdue principal, which has become due otherwise than by such declaration of   
acceleration, has been paid, (iv) if the Company has paid the Trustee its       
reasonable compensation and reimbursed the Trustee for its expenses,            
disbursements and advances and (v) in the event of the cure or waiver of an     
Event of Default of the type described in clause (vi) of the description above  
of Events of Default, the Trustee shall have received an officers' certificate  
and an opinion of counsel that such Event of Default has been cured or waived.  
No such rescission shall affect any subsequent Default or impair any right      
consequent thereto.                                                             

  The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences, 
except a default in the payment of the principal of or interest on any Notes.   

   Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the   
Indenture relating to the duties of the Trustee, the Trustee is under no        
obligation to exercise any of its rights or powers under the Indenture at the   
request, order or direction of any of the Holders, unless such Holders have     
offered to the Trustee reasonable indemnity. Subject to all provisions of the   
Indenture and applicable law, the Holders of a majority in aggregate principal  
amount of the then outstanding Notes have the right to direct the time, method  
and place of conducting any proceeding for any remedy available to the Trustee  
or exercising any trust or power conferred on the Trustee.                      

Under the Indenture, the Company is required to provide an officers'  
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such 
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.                                              

LEGAL DEFEASANCE AND COVENANT DEFEASANCE                                        

The Company may, at its option and at any time, elect to have its     
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the    
Company shall be deemed to have paid and discharged the entire indebtedness     
represented by the outstanding Notes, and satisfied all of their obligations    
with respect to the Notes, except for (i) the rights of Holders to receive      
payments in respect of the principal of, premium, if any, and interest on the   
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated, 
destroyed, lost or stolen Notes and the maintenance of an office or agency for  
payments, (iii) the rights, powers, trust, duties and immunities of the Trustee 
and the Company's obligations in connection therewith and (iv) the Legal        
Defeasance provisions of the Indenture. In addition, the Company may, at its    
option and at any time, elect to have the obligations of the Company released   
with respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall  
not constitute a Default or Event of Default with respect to the Notes. In the  
event Covenant Defeasance occurs, certain events (not including non-payment,    
bankruptcy, receivership, reorganization and insolvency events) described under 
"Events of Default" will no longer constitute an Event of Default with respect  
to the Notes.                                                                   

  In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,  
or a combination thereof, in such amounts as will be sufficient, in the opinion 
of a nationally recognized firm of independent public accountants, to pay the   
principal of, premium, if any, and interest on the Notes on the stated date for 
payment thereof or on the applicable redemption date, as the case may be; (ii)  
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee 
confirming that (A) the Company has received from, or there has been published  
by, the Internal Revenue Service a ruling or (B) since the date of the          
Indenture, there has been a change in the applicable federal income tax law, in 
either case to the effect                                                       

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that, and based thereon such opinion of counsel shall confirm that, the Holders 
will not recognize income, gain or loss for federal income tax purposes as a    
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the   
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant   
Defeasance, the Company shall have delivered to the Trustee an opinion of       
counsel in the United States reasonably acceptable to the Trustee confirming    
that the Holders will not recognize income, gain or loss for federal income tax 
purposes as a result of such Covenant Defeasance and will be subject to federal 
income tax on the same amounts, in the same manner and at the same times as     
would have been the case if such Covenant Defeasance had not occurred; (iv) no  
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency      
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not     
result in a breach or violation of, or constitute a default under the Indenture 
or any other material agreement or instrument to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its        
Restricted Subsidiaries is bound; (vi) the Company shall have delivered to the  
Trustee an officers' certificate stating that the deposit was not made by the   
Company with the intent of preferring the Holders over any other creditors of   
the Company or with the intent of defeating, hindering, delaying or defrauding  
any other creditors of the Company or others; (vii) the Company shall have      
delivered to the Trustee an officers' certificate and an opinion of counsel,    
each stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with; (viii) the       
Company shall have delivered to the Trustee an opinion of counsel to the effect 
that (A) the trust funds will not be subject to any rights of holders of Senior 
Debt, including, without limitation, those arising under the Indenture and (B)  
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar  
laws affecting creditors' rights generally; and (ix) certain other customary    
conditions precedent are satisfied.                                             

SATISFACTION AND DISCHARGE                                                      

 The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the   
Notes, as expressly provided for in the Indenture) as to all outstanding Notes  
when (i) either (a) all the Notes theretofore authenticated and delivered       
(except lost, stolen or destroyed Notes which have been replaced or paid and    
Notes for whose payment money has theretofore been deposited in trust or        
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for           
cancellation or (b) all Notes not theretofore delivered to the Trustee for      
cancellation have become due and payable and the Company has irrevocably        
deposited or caused to be deposited with the Trustee funds in an amount         
sufficient to pay and discharge the entire Indebtedness on the Notes not        
theretofore delivered to the Trustee for cancellation, for principal of,        
premium, if any, and interest on the Notes to the date of deposit together with 
irrevocable instructions from the Company directing the Trustee to apply such   
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company; 
and (iii) the Company has delivered to the Trustee an officers' certificate and 
an opinion of counsel stating that all conditions precedent under the Indenture 
relating to the satisfaction and discharge of the Indenture have been complied  
with.                                                                           

MODIFICATION OF THE INDENTURE                                                   

     From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes, 
including curing ambiguities, defects or inconsistencies, to comply with any    
requirements of the Commission in order to effect or maintain qualification     
under TIA or to make any change that will provide any additional benefit to the 
Holders or does not adversely affect rights of any Holder, so long as such      
change does not, in the opinion of the Trustee, adversely affect the rights of  
any of the Holders in any material respect. In formulating its opinion on such  
matters, the Trustee will be entitled to rely on such evidence as it deems      
appropriate, including, without limitation, solely on an opinion of counsel.    
Other modifications and amendments of the Indenture may be made with the consent
of the Holders of a majority in principal amount of the then outstanding Notes  
issued under the Indenture, except that,                                        
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without the consent of each Holder affected thereby, no amendment may: (i)      
reduce the amount of Notes whose Holders must consent to an amendment; (ii)     
reduce the rate of or change or have the effect of changing the time for payment
of interest, including defaulted interest, on any Notes; (iii) reduce the       
principal of or change or have the effect of changing the fixed maturity of any 
Notes, or change the date on which any Notes may be subject to redemption or    
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Notes payable in money other than that stated in the Notes; (v) make any change 
in provisions of the Indenture protecting the right of each Holder to receive   
payment of principal of and interest on such Note on or after the due date      
thereof or to bring suit to enforce such payment, or permitting Holders of a    
majority in principal amount of Notes to waive Defaults or Events of Default;   
(vi) amend, change or modify in any material respect the obligation of the      
Company to make and consummate a Change of Control Offer in the event a Change  
of Control has occurred or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated, or, following the occurrence or    
consummation of a Change of Control or Asset Sale, modify any of the provisions 
or definitions with respect thereto; (vii) modify or change any provision of the
Indenture or the related definitions affecting the subordination or ranking of  
the Notes or any Guarantee in a manner which adversely affects the Holders; or  
(viii) release any Guarantor from any of its obligations under its Guarantee or 
the Indenture otherwise than in accordance with the terms of the Indenture.     

GOVERNING LAW                                                                   

   The Indenture provides that it, the Notes and the Guarantees are governed
by, and construed in accordance with, the laws of the State of New York but     
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required       
thereby.                                                                        

THE TRUSTEE                                                                     

   The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will 
exercise such rights and powers vested in it by the Indenture, and use the same 
degree of care and skill in its exercise as a prudent man would exercise or use 
under the circumstances in the conduct of his own affairs.                      

    The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a      
Guarantor, to obtain payments of claims in certain cases or to realize on       
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee is permitted to engage in other transactions;   
provided that if the Trustee acquires any conflicting interest as described in  
the TIA, it must eliminate such conflict or resign.                             

CERTAIN DEFINITIONS                                                             

  Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all    
such terms, as well as any other terms used herein for which no definition is   
provided.                                                                       

"Acquired Indebtedness" means Indebtedness of a Person or any of its  
Subsidiaries (i) existing at the time such Person becomes a Restricted          
Subsidiary of the Company or at the time it merges or consolidates with the     
Company or any of its Restricted Subsidiaries or (ii) which becomes Indebtedness
of the Company or a Restricted Subsidiary in connection with the acquisition of 
assets from such Person, and in each case not incurred by such Person or its    
Subsidiary in connection with, or in anticipation or contemplation of, such     
Person becoming a Restricted Subsidiary of the Company or such acquisition,     
merger or consolidation.                                                        

   "Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is   
controlled by, or is under common control with, such specified Person. The term 
"control" means the possession, directly or indirectly, of the power to direct  
or cause the direction of the management and policies of a Person, whether      
through the ownership of voting                                                 

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securities, by contract or otherwise; and the terms "controlling" and           
"controlled" have meanings correlative of the foregoing.                        

"Asset Acquisition" means (a) an Investment by the Company or any     
Restricted Subsidiary of the Company in any other Person pursuant to which such 
Person shall become a Restricted Subsidiary of the Company or any Restricted    
Subsidiary of the Company, or shall be merged with or into the Company or any   
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or  
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially   
all of the assets of such Person or comprises any division or line of business  
of such Person or any other properties or assets of such Person other than in   
the ordinary course of business.                                                

"Asset Sale" means any direct or indirect sale, issuance, conveyance, 
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of   
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to   
any Person other than the Company or a Restricted Subsidiary of the Company of  
(a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any   
other property or assets of the Company or any Restricted Subsidiary of the     
Company other than in the ordinary course of business; provided, however, that  
Asset Sales shall not include (i) a transaction or series of related            
transactions for which the Company or its Restricted Subsidiaries receive       
aggregate consideration of less than $1.0 million, (ii) the sale, lease,        
conveyance, disposition or other transfer of all or substantially all of the    
assets of the Company as permitted under "Merger, Consolidation and Sale of     
Assets" or any such disposition that constitutes a Change of Control, (iii)     
sales of accounts receivable, equipment and related assets (including contract  
rights) of the type specified in the definition of "Qualified Securitization    
Transaction" to a Securitization Entity for the fair market value thereof,      
including cash in an amount at least equal to 75% of the fair market value      
thereof, and (iv) transfers of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of          
"Qualified Securitization Transaction" (or a fractional undivided interest      
therein) by a Securitization Entity in a Qualified Securitization Transaction.  
For the purposes of clause (iii), Purchase Money Notes shall be deemed to be    
cash.                                                                           

 "Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.                           

"Board Resolution" means, with respect to any Person, a copy of a     
resolution certified by the Secretary or an Assistant Secretary of such Person  
to have been duly adopted by the Board of Directors of such Person and to be in 
full force and effect on the date of such certification, and delivered to the   
Trustee.                                                                        

     "Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however     
designated and whether or not voting) of corporate stock, including each class  
of Common Stock and Preferred Stock of such Person and (ii) with respect to any 
Person that is not a corporation, any and all partnership or other equity       
interests of such Person.                                                       

    "Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for  
as capital lease obligations under GAAP and, for purposes of this definition,   
the amount of such obligations at any date shall be the capitalized amount of   
such obligations at such date, determined in accordance with GAAP.              

  "Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any    
agency thereof and backed by the full faith and credit of the United States, in 
each case maturing within one year from the date of acquisition thereof; (ii)   
marketable direct obligations issued by any state of the United States of       
America or any political subdivision of any such state or any public            
instrumentality thereof maturing within one year from the date of acquisition   
thereof and, at the time of acquisition, having one of the four highest ratings 
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's         
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more    
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)     
certificates of deposit or bankers' acceptances maturing within one year from   
the date of acquisition thereof issued by any bank organized under the laws of  
the United                                                                      

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States of America or any state thereof or the District of Columbia or any U.S.  
branch of a foreign bank having at the date of acquisition thereof combined     
capital and surplus of not less than $100.0 million; (v) repurchase obligations 
with a term of not more than seven days for underlying securities of the types  
described in clause (i) above entered into with any bank meeting the            
qualifications specified in clause (iv) above; (vi) investments in money market 
funds which invest substantially all their assets in securities of the types    
described in clauses (i) through (v) above; and (vii) investments made by       
Foreign Subsidiaries in local currencies in instruments issued by or with       
entities of such jurisdiction having correlative attributes to the foregoing.   

  "Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d) 
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether  
or not otherwise in compliance with the provisions of the Indenture); (ii) the  
approval by the holders of Capital Stock of the Company of any plan or proposal 
for the liquidation or dissolution of the Company (whether or not otherwise in  
compliance with the provisions of the Indenture); (iii) any Person or Group     
(other than any of the Permitted Holders(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of  
the aggregate ordinary voting power represented by the issued and outstanding   
Capital Stock of the Company; or (iv) the first day on which a majority of the  
members of the Board of Directors of the Company are not Continuing Directors.  

   "Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting 
or non-voting) of such Person's common stock, whether outstanding on the Issue  
Date or issued after the Issue Date, and includes, without limitation, all      
series and classes of such common stock.                                        

  "Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the    
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with  
GAAP for such period (other than income taxes attributable to extraordinary,    
unusual or nonrecurring gains or losses or taxes attributable to sales or       
dispositions outside the ordinary course of business), (B) Consolidated Interest
Expense, (C) the aggregate depreciation and amortization (including amortization
of goodwill and other intangibles) of such Person and its Restricted            
Subsidiaries for such period, and (D) other non-cash charges of such Person and 
its Restricted Subsidiaries for such period, less any non-cash charges          
increasing Consolidated Net Income during such period and less the amount of all
cash payments made by such Person or any of its Restricted Subsidiaries during  
such period to the extent such payments relate to non-cash charges that were    
added back in determining Consolidated EBITDA for such period or any prior      
period, all as determined on a consolidated basis for such Person and its       
Restricted Subsidiaries in accordance with GAAP.                                

"Consolidated Fixed Charge Coverage Ratio" means, with respect to any 
Person, the ratio of Consolidated EBITDA of such Person during the four full    
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of   
the transaction giving rise to the need to calculate the Consolidated Fixed     
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of 
such Person for the Four Quarter Period. In addition to and without limitation  
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and    
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro   
forma basis for the period of such calculation to (i) the incurrence or         
repayment of any Indebtedness of such Person or any of its Restricted           
Subsidiaries (and the application of the proceeds thereof) giving rise to the   
need to make such calculation and any incurrence or repayment of other          
Indebtedness (and the application of the proceeds thereof), other than the      
incurrence or repayment of Indebtedness in the ordinary course of business for  
working capital purposes pursuant to working capital facilities, occurring      
during the Four Quarter Period or at any time subsequent to the last day of the 
Four Quarter Period and on or prior to the Transaction Date, as if such         
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any     
Asset Sales or Asset Acquisitions (including, without limitation, any Asset     
Acquisition giving rise to the need to make such calculation as a result of such
Person or                                                                       
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one of its Restricted Subsidiaries (including any Person who becomes a          
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming 
or otherwise being liable for Acquired Indebtedness and also including any      
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included   
only to the extent includable pursuant to the definition of "Consolidated Net   
Income") attributable to the assets which are the subject of the Asset          
Acquisition or Asset Sale during the Four Quarter Period) occurring during the  
Four Quarter Period or at any time subsequent to the last day of the Four       
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale,  
Asset Acquisition (including the incurrence, assumption or liability for any    
such Acquired Indebtedness) occurred on the first day of the Four Quarter       
Period. If such Person or any of its Restricted Subsidiaries directly or        
indirectly guarantees Indebtedness of a third Person, the preceding sentence    
shall give effect to the incurrence of such guaranteed Indebtedness as if such  
Person or any Restricted Subsidiary of such Person had directly incurred or     
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating     
"Consolidated Fixed Charges" for purposes of determining the denominator (but   
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)      
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest  
on such Indebtedness in effect on the Transaction Date; (2) if interest on any  
Indebtedness actually incurred on the Transaction Date may optionally be        
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in  
effect on the Transaction Date will be deemed to have been in effect during the 
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on      
Indebtedness determined on a fluctuating basis, to the extent such interest is  
covered by agreements relating to Interest Swap Obligations, shall be deemed to 
accrue at the rate per annum resulting after giving effect to the operation of  
such agreements.                                                                

"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of    
Preferred Stock of such Person (other than dividends paid in Qualified Capital  
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is   
one minus the then current effective consolidated federal, state and local tax  
rate of such Person, expressed as a decimal.                                    

   "Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest      
expense of such Person and its Restricted Subsidiaries for such period          
determined on a consolidated basis in accordance with GAAP, including without   
limitation, (a) any amortization of debt discount, (b) the net costs under      
Interest Swap Obligations, (c) all capitalized interest and (d) the interest    
portion of any deferred payment obligation, but excluding amortization or       
write-off of deferred financing costs; and (ii) the interest component of       
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or      
accrued by such Person and its Restricted Subsidiaries during such period as    
determined on a consolidated basis in accordance with GAAP.                     

"Consolidated Net Income" means, with respect to any Person, for any  
period, the aggregate net income (or loss) of such Person and its Restricted    
Subsidiaries for such period on a consolidated basis, determined in accordance  
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains  
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax    
items classified as extraordinary or nonrecurring gains, (c) the net income of  
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or  
consolidated with the referent Person or any Restricted Subsidiary of the       
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary 
of the referent Person to the extent that the declaration of dividends or       
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person  
in which the referant Person has an interest, other than a Restricted Subsidiary
of the referent Person, except to the extent of cash dividends or distributions 
paid to the referent Person or to a Restricted Subsidiary of the referent Person
by such Person, (f) any restoration to income of any contingency reserve in     
accordance with GAAP, except to the extent that provision for such reserve was  
made out of Consolidated Net Income accrued at any time following the Issue     
Date, (g) income or loss attributable to discontinued operations (including,    
without limitation, operations disposed of during                               

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such period whether or not such operations were classified as discontinued), and
(h) in the case of a successor to the referent Person by consolidation or merger
or as a transferee of the referent Person's assets, any earnings of the         
successor corporation prior to such consolidation, merger or transfer of assets.

   "Continuing Directors" means, as of the date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of  
Directors on the date of the Indenture or (ii) was nominated for election or    
elected to such Board of Directors with the approval of a majority of the       
Continuing Directors who were members of such Board at the time of such         
nomination or election.                                                         

"Credit Agreement" means the Credit Agreement to be dated on or about 
November 3, 1997, among the Company, certain subsidiary borrowers from time to  
time parties thereto, the lenders party thereto in their capacities as lenders  
thereunder and Bank of America National Trust and Savings Association, as       
Administrative Agent, and Bankers Trust Company, as Syndication Agent, together 
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be      
amended (including any amendment and restatement thereof), supplemented,        
restated or otherwise modified from time to time, including any agreement (and  
related documents) extending the maturity of, refinancing, replacing or         
otherwise restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the       
"Limitation on Incurrence of Additional Indebtedness" covenant above) or adding 
Restricted Subsidiaries of the Company as additional borrowers or guarantors    
thereunder) all or any portion of the Indebtedness under such agreement (and    
related documents) or any successor or replacement agreement (and related       
documents) and whether by the same or any other agent, lender or group of       
lenders.                                                                        

 "Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the     
Company or any Restricted Subsidiary of the Company against fluctuations in     
currency values.                                                                

   "Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.

    "Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least     
$25.0 million and is specifically designated in the instrument evidencing such  
Senior Debt as "Designated Senior Debt" by the Company.                         

     "Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or   
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or  
is redeemable at the sole option of the holder thereof on or prior to the final 
maturity date of the Notes.                                                     

  "Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.                                      

     "fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under 
undue pressure or compulsion to complete the transaction. Fair market value     
shall be determined by the Board of Directors of the Company acting reasonably  
and in good faith and shall be evidenced by a Board Resolution of the Board of  
Directors of the Company delivered to the Trustee.                              

"Fremont" means Fremont Partners, L.P. and its Affiliates.            

   "Foreign Subsidiary" means any Restricted Subsidiary of the Company which
(i) is not organized under the laws of the United States, any state thereof or  
the District of Columbia and (ii) conducts substantially all of its business    
operations in a country other than the United States of America.                

"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American  
Institute of Certified Public Accountants and statements and pronouncements of  
the Financial Accounting Standards Board or in such other statements by such    
other                                                                           

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entity as may be approved by a significant segment of the accounting profession 
of the United States, as in effect from time to time.                           

     "Guarantor" means (i) the domestic Subsidiaries of the Company on the Issue
Date and (ii) each of the Company's Restricted Subsidiaries that in the future  
executes a supplemental indenture in which such Restricted Subsidiary agrees to 
be bound by the terms of the Indenture as a Guarantor; provided that any Person 
constituting a Guarantor as described above shall cease to constitute a         
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture.                                                               

"Guarantor Senior Debt" means with respect to any Guarantor, (i) the  
principal of, premium, if any, and interest (including any interest accruing    
subsequent to the filing of a petition of bankruptcy or the commencement of any 
bankruptcy, insolvency, reorganization, receivership or other similar proceeding
at the rate provided for in the documentation with respect thereto, whether or  
not such interest is an allowed claim under applicable law) and fees and        
expenses (including costs of collection), indemnity obligations on, and all     
other amounts and obligations owing in respect of, any Indebtedness of a        
Guarantor, whether outstanding on the Issue Date or thereafter created, incurred
or assumed, unless, in the case of any particular Indebtedness, the instrument  
creating or evidencing the same or pursuant to which the same is outstanding    
expressly provides that such Indebtedness shall not be senior in right of       
payment to the Guarantee of such Guarantor. Without limiting the generality of  
the foregoing, "Guarantor Senior Debt" shall also include the principal of,     
premium, if any, interest (including any interest accruing subsequent to the    
filing of a petition of bankruptcy or the commencement of any bankruptcy,       
insolvency, reorganization, receivership or other similar proceeding at the rate
provided for in the documentation with respect thereto, whether or not such     
interest is an allowed claim under applicable law) on, and all other amounts    
owing in respect of, (x) all monetary obligations of every nature of the Company
or such Guarantor under the Credit Agreement, including, without limitation,    
obligations to pay principal and interest, reimbursement obligations under      
letters of credit, fees, commissions, expenses and indemnities, (y) all Interest
Swap Obligations of such Guarantor and (z) all obligations of such Guarantor    
under Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt"     
shall not include (i) any Indebtedness of such Guarantor to a Subsidiary of such
Guarantor or any Affiliate of such Guarantor or any of such Affiliate's         
Subsidiaries, (ii) Indebtedness of such Guarantor to, or guaranteed by such     
Guarantor on behalf of, any shareholder, director, officer or employee of such  
Guarantor or any Restricted Subsidiary of such Guarantor (including, without    
limitation, amounts owed for compensation), (iii) Indebtedness to trade         
creditors and other amounts incurred in connection with obtaining goods,        
materials or services, (iv) Indebtedness represented by Disqualified Capital    
Stock, (v) any liability for federal, state, local or other taxes owed or owing 
by such Guarantor, (vi) Indebtedness incurred in violation of the Indenture     
provisions set forth under "Limitation on Incurrence of Additional              
Indebtedness," (but, as to any such obligation, no such violation shall be      
deemed to exist for purposes of this clause (vi) if the holder(s) of such       
Indebtedness or their representative and the Trustee shall have received an     
officers' certificate of the Company to the effect that the incurrence of such  
Indebtedness does not (or, in the case of revolving credit Indebtedness or other
Indebtedness available to be borrowed under the Credit Agreement after the date 
of the initial borrowing thereunder, that the incurrence of the entire committed
amount thereof at the date on which the initial borrowing thereunder is made    
would not) violate such provisions of the Indenture), (vii) Indebtedness which, 
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (viii) any       
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of such Guarantor.                                       

   "Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such 
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such  
Person issued or assumed as the deferred purchase price of property, all        
conditional sale obligations and all Obligations under any title retention      
agreement (but excluding trade accounts payable and other accrued liabilities   
arising in the ordinary course of business that are not overdue by 90 days or   
more or are being contested in good faith by appropriate proceedings), (v) all  
Obligations for the reimbursement of any obligor on any letter of credit,       
banker's acceptance or similar credit transaction, (vi) guarantees and other    
contingent obligations in respect                                               

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of Indebtedness of other Persons of the type referred to in clauses (i) through 
(v) above and clause (viii) below, (vii) all Obligations of any other Person of 
the type referred to in clauses (i) through (vi) which are secured by any Lien  
on any property or asset of such Person, the amount of such Obligation being    
deemed to be the lesser of the fair market value of such property or asset or   
the amount of the Obligation so secured, (viii) all Obligations under Currency  
Agreements and Interest Swap Obligations of such Person and (ix) all            
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the        
"maximum fixed repurchase price" of any Disqualified Capital Stock which does   
not have a fixed repurchase price shall be calculated in accordance with the    
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock  
were purchased on any date on which Indebtedness shall be required to be        
determined pursuant to the Indenture, and if such price is based upon, or       
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of   
Directors of the issuer of such Disqualified Capital Stock.                     

    "Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or        
indirect material financial interest in the Company and (ii) which, in the      
judgment of the Board of Directors of the Company, is otherwise independent and 
qualified to perform the task for which it is to be engaged, and may include a  
commercial or investment banking, appraisal or accounting firm.                 

     "Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such    
Person is entitled to receive from time to time periodic payments calculated by 
applying either a floating or a fixed rate of interest on a stated notional     
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and 
shall include, without limitation, interest rate swaps, caps, floors, collars   
and similar agreements.                                                         

     "Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or    
capital contribution to (by means of any transfer of cash or other property to  
others or any payment for property or services for the account or use of        
others), or any purchase or acquisition by such Person of any Capital Stock,    
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude extensions of trade credit by  
the Company and its Restricted Subsidiaries on commercially reasonable terms in 
accordance with normal trade practices of the Company or such Restricted        
Subsidiary, as the case may be. For the purposes of the "Limitation on          
Restricted Payments" covenant, (i) "Investment" shall include and be valued at  
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary        
(proportionate to the Company's equity interest in such Subsidiary) and shall   
exclude, and the aggregate amount of all Restricted Payments made as Investments
since the Issue Date shall exclude and be reduced by, the fair market value of  
the net assets of any Unrestricted Subsidiary (proportionate to the Company's   
equity interest in such Subsidiary) at the time that such Unrestricted          
Subsidiary is designated a Restricted Subsidiary, such exclusion and reduction  
not to exceed the amount of Investments previously made by the referant person  
and its Restricted Subsidiaries and treated as Restricted Payments and (ii) the 
amount of any Investment shall be the original cost of such Investment, without 
any adjustments for increases or decreases in value, or write-ups, write-downs  
or write-offs with respect to such Investment, reduced by the payment of        
dividends or distributions in connection with such Investment or any other      
amounts received in respect of such Investment; provided that no such payment of
dividends or distributions or receipt of any such other amounts shall reduce the
amount of any Investment if such payment of dividends or distributions or       
receipt of any such amounts would be included in Consolidated Net Income. If the
Company or any Restricted Subsidiary of the Company sells or otherwise disposes 
of any Common Stock of any direct or indirect Restricted Subsidiary of the      
Company such that, after giving effect to any such sale or disposition, it      
ceases to be a Subsidiary of the Company, the Company shall be deemed to have   
made an Investment on the date of any such sale or disposition equal to the fair
market value of the Capital Stock of such Restricted Subsidiary not sold or     
disposed of.                                                                    

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"Issue Date" means the date of original issuance of the Notes.        

    "Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give  
any security interest).                                                         

"Management Agreement" means a management agreement to be entered into
among the Company, Fremont and RCBA and which provides for the payment or       
accrual of not more than $2,000,000 of compensation annually beginning on       
November 1 and ending on October 31 of the following year.                      

  "Merger" means the merger of Freemont and RCBA with and into the Company
pursuant to the Transaction Agreement.                                          

    "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred  
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of   
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale      
(including, without limitation, legal, accounting and investment banking fees   
and sales commissions), (b) taxes paid or payable after taking into account any 
reduction in consolidated tax liability due to available tax credits or         
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that 
is required to be repaid in connection with such Asset Sale and (d) appropriate 
amounts (determined by the Company in good faith) to be provided by the Company 
or any Restricted Subsidiary, as the case may be, as a reserve, against any post
closing adjustments or liabilities associated with such Asset Sale and retained 
by the Company or any Restricted Subsidiary, as the case may be, after such     
Asset Sale, including, without limitation, pension and other post-employment    
benefit liabilities, liabilities related to environmental matters and           
liabilities under any indemnification obligations associated with such Asset    
Sale.                                                                           

     "Non-Recourse Indebtedness" means Indebtedness secured only by an asset and
which is expressly stated to be without recourse to the Company or its          
Restricted Subsidiaries from the date of incurrence of such Indebtedness.       

"Obligations" means all obligations for principal, premium, interest, 
penalties, fees, commissions, indemnifications, reimbursements, damages and     
other liabilities payable under the documentation governing any Indebtedness.   

"Permitted Holder(s)" means RCBA and Fremont.                         

     "Permitted Indebtedness" means, without duplication, each of the following:

      (i) Indebtedness under the Notes offered hereby and the Guarantees
thereof;                                                              

     (ii) Indebtedness incurred pursuant to the Credit Agreement in an
 aggregate principal amount at any time outstanding not to exceed $400.0
million, less (x) the aggregate amount of any Indebtedness of         
   Securitization Entities in Qualified Securitization Transactions incurred
at a time that the Company is not able to incur at least $1.00 of     
     additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "-- Limitation on Incurrence of Additional   
Indebtedness", provided that the Company may elect in writing to the  
Trustee to have the amount of said reduction resulting from such      
Indebtedness incurred in connection with a Qualified Securitization   
     Transaction to be reduced by an amount (the "Transferred Reduction Amount")
 up to the then remaining amount of Permitted Indebtedness that could be
incurred pursuant to clause (xiii) below, and in the event of such    
election, the amount of Permitted Indebtedness that can be incurred   
pursuant to clause (xiii) will be reduced by the Transferred Reduction
     Amount, (y) the amount of all scheduled principal payments actually made by
 the Company and (z) the amount of all required permanent prepayments of
    Indebtedness under the Credit Agreement actually made with the proceeds of
an Asset Sale;                                                        

     (iii) Indebtedness incurred by Foreign Subsidiaries not to exceed
     $20.0 million (or the equivalent amount thereof, at the time of incurrence,
in other foreign currencies);                                         

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          (iv) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled  
     amortization payments or permanent mandatory prepayments when actually paid
or permanent reductions thereon;                                      

         (v) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap   
Obligations of any Restricted Subsidiary of the Company covering      
  Indebtedness of such Restricted Subsidiary; provided, however, that such
   Interest Swap Obligations are entered into to protect the Company and its
     Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional  
principal amount of such Interest Swap Obligation does not exceed the 
     principal amount of the Indebtedness to which such Interest Swap Obligation
relates;                                                              

   (vi) Indebtedness under Currency Agreements; provided that such
     Currency Agreements do not increase the Indebtedness of the Company and its
    Restricted Subsidiaries outstanding other than as a result of fluctuations
  in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;                                      

       (vii) Indebtedness of a Restricted Subsidiary of the Company to the
  Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the 
   Company, in each case subject to no Lien (other than a Lien in connection
 with the Credit Agreement and Permitted Liens which are not consensual)
   held by a Person other than the Company or a Restricted Subsidiary of the
    Company; provided that if as of any date any Person other than the Company
or a Restricted Subsidiary of the Company owns or holds any such      
    Indebtedness or holds a Lien in respect of such Indebtedness (other than a
    Lien in connection with the Credit Agreement and Permitted Liens which are
   not consensual), such date shall be deemed the incurrence of Indebtedness
     not constituting Permitted Indebtedness by the issuer of such Indebtedness;

        (viii) Indebtedness of the Company to a Restricted Subsidiary of the
     Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien (other than a Lien in 
connection with the Credit Agreement and Permitted Liens which are not
consensual); provided that (a) any Indebtedness of the Company to any 
  Restricted Subsidiary of the Company (other than a Restricted Subsidiary
    which is a Guarantor) is unsecured and subordinated, pursuant to a written
   agreement, to the Company's obligations under the Indenture and the Notes
    and (b) if as of any date any Person other than a Restricted Subsidiary of
    the Company owns or holds any such Indebtedness or any Person holds a Lien
   in respect of such Indebtedness (other than a Lien in connection with the
   Credit Agreement and Permitted Liens which are not consensual), such date
   shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;                                          

  (ix) Indebtedness arising from the honoring by a bank or other
     financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence; 

(x) Indebtedness of the Company or any Restricted Subsidiary
represented by performance bonds, warranty or contractual service     
     obligations, standby letters of credit or appeal bonds, in each case to the
   extent incurred in the ordinary course of business of the Company or such
   Restricted Subsidiary in accordance with customary industry practices, in
amounts and for the purposes customary in the Company's industry;     

       (xi) the incurrence by a Securitization Entity of Indebtedness in a
     Qualified Securitization Transaction that is not recourse to the Company or
any Subsidiary of the Company (except for Standard Securitization     
Undertakings);                                                        

(xii) Refinancing Indebtedness; and                         

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    (xiii) additional Indebtedness of the Company and its Restricted
   Subsidiaries in an aggregate principal amount not to exceed $75.0 million
 at any one time outstanding (which may be Indebtedness under the Credit
Agreement in addition to that permitted by clause (ii)).              

"Permitted Investments" means (i) Investments by the Company or any   
Restricted Subsidiary of the Company in any Person that is or will become       
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the    
Company, (ii) Investments in the Company by any Restricted Subsidiary of the    
Company; provided that any Indebtedness evidencing such Investment is unsecured 
and subordinated, pursuant to a written agreement, to the Company's obligations 
under the Notes and the Indenture; (iii) investments in cash and Cash           
Equivalents; (iv) loans and advances to employees and officers of the Company   
and its Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $5.0 million at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary  
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (vi) Investments in Unrestricted Subsidiaries 
not to exceed $10.0 million at any one time outstanding; (vii) Investments in   
securities of trade creditors or customers received pursuant to any plan of     
reorganization or similar arrangement upon the bankruptcy or insolvency of such 
trade creditors or customers; (viii) Investments made by the Company or its     
Restricted Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the "Limitation on Asset Sales" covenant; 
(ix) Investments existing on the date of the Indenture; (x) accounts receivable,
advances, loans, guarantees or extensions of credit created or acquired in the  
ordinary course of business, consistent with past or industry practice; (xi) any
Investment by the Company or a Wholly Owned Restricted Subsidiary of the Company
in a Securitization Entity or any Investment by a Securitization Entity in any  
other Person in connection with a Qualified Securitization Transaction; provided
that any Investment in a Securitization Entity is in the form of a Purchase     
Money Note or an equity interest; and (xii) Investments committed to by the     
Company or its Restricted Subsidiaries on the Issue Date not to exceed $1.5     
million in the aggregate.                                                       

"Permitted Liens" means the following types of Liens:                 

      (i) Liens for taxes, assessments or governmental charges or claims
 either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
     shall have set aside on its books such reserves as may be required pursuant
to GAAP;                                                              

    (ii) statutory, contractual and common law Liens of landlords to
secure rent payments and Liens of carriers, warehousemen, mechanics,  
   suppliers, materialmen, repairmen and other Liens imposed by law incurred
 in the ordinary course of business for sums not yet delinquent or being
     contested in good faith, if such reserve or other appropriate provision, if
    any, as shall be required by GAAP shall have been made in respect thereof;

   (iii) Liens incurred or deposits made in the ordinary course of
   business in connection with workers' compensation, unemployment insurance
    and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past 
    practice in connection therewith, or to secure the performance of tenders,
  statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar    
   obligations (exclusive of obligations for the payment of borrowed money);

         (iv) judgment Liens securing judgments not giving rise to an Event of
Default;                                                              

  (v) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or  
  encumbrances in respect of real property not interfering in any material
    respect with the ordinary conduct of the business of the Company or any of
its Restricted Subsidiaries;                                          

      (vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or 
assets which is not leased property subject to such Capitalized Lease 
Obligation;                                                           

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       (vii) purchase money Liens to finance property or assets (including
  the cost of construction) of the Company or any Restricted Subsidiary of
     the Company acquired in the ordinary course of business; provided, however,
    that (A) the related purchase money Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any property or
 assets of the Company or any Restricted Subsidiary of the Company other
  than the property and assets so acquired or constructed and (B) the Lien
securing such Indebtedness shall be created within 180 days of such   
acquisition or construction;                                          

    (viii) Liens upon specific items of inventory or other goods and
 proceeds of any Person securing such Person's obligations in respect of
  bankers' acceptances issued or created for the account of such Person to
 facilitate the purchase, shipment or storage of such inventory or other
goods;                                                                

 (ix) Liens securing reimbursement obligations with respect to
  commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof; 

          (x) Liens encumbering deposits made to secure obligations arising from
     statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and 
set-off;                                                              

     (xi) Liens securing Interest Swap Obligations which Interest Swap
  Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;                                                            

(xii) Liens securing Indebtedness under Currency Agreements;

      (xiii) Liens securing Acquired Indebtedness incurred in accordance
  with the "Limitation on Incurrence of Additional Indebtedness" covenant;
     provided that (A) such Liens secured such Acquired Indebtedness at the time
     of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in     
 connection with, or in anticipation of, the incurrence of such Acquired
   Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
     Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such  
  Indebtedness became Acquired Indebtedness of the Company or a Restricted
     Subsidiary of the Company and are no more favorable to the lienholders than
  those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;                                                              

(xiv) Liens arising under the Indenture;                    

     (xv) leases or subleases granted to others that do not materially
     interfere with the business of the Company and its Restricted Subsidiaries;

        (xvi) Liens in connection with any filing of Uniform Commercial Code
financing statements regarding leases;                                

        (xvii) Liens securing Non-Recourse Indebtedness incurred pursuant to
the Indenture;                                                        

         (xviii) Liens arising from a bank or financial institution honoring a
check or draft inadvertently drawn against insufficient funds in the  
ordinary course of business; and                                      

      (xix) Liens on assets transferred to a Securitization Entity or on
  assets of a Securitization Entity, in either case incurred in connection
with a Qualified Securitization Transaction.                          

"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust or joint venture, or a           
governmental agency or political subdivision thereof.                           

     "Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect  
to dividends or redemptions or upon liquidation.                                

  "Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any  
Subsidiary of the Company in connection with a                                  

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Qualified Securitization Transaction to a Securitization Entity, which note     
shall be repaid from cash available to the Securitization Entity, other than    
amounts required to be established as reserves pursuant to agreements, amounts  
paid to investors in respect of interest, principal and other amounts owing to  
such investors, amounts paid in connection with the purchase of newly generated 
receivables or newly acquired equipment and amounts paid for administrative     
costs in the ordinary course of business.                                       

    "Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.                                                                  

   "Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries 
pursuant to which the Company or any or its Subsidiaries may sell, convey or    
otherwise transfer to (a) a Securitization Entity (in the case of a transfer by 
the Company or any of its Subsidiaries) and (b) any other Person (in the case of
a transfer by a Securitization Entity), or may grant a security interest in, any
accounts receivable or equipment (whether now existing or arising or acquired in
the future) of the Company or any of its Subsidiaries, and any assets related   
thereto including, without limitation, all collateral securing such accounts    
receivable and equipment, all contracts and contract rights and all guarantees  
or other obligations in respect of such accounts receivable and equipment,      
proceeds of such accounts receivable and equipment and other assets (including  
contract rights) which are customarily transferred or in respect of which       
security interests are customarily granted in connection with asset             
securitization transactions involving accounts receivable and equipment.        

"RCBA" means Richard C. Blum & Associates, Inc. and its Affiliates.   

"Refinance" means, in respect of any security or Indebtedness, to     
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or  
to issue a security or Indebtedness in exchange or replacement for, such        
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"    
shall have correlative meanings.                                                

"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than  
pursuant to clause (ii), (iii), (v), (vi), (vii), (viii), (ix), (x), (xi) or    
(xiii) of the definition of Permitted Indebtedness), in each case that does not 
(1) result in an increase in the aggregate principal amount of Indebtedness of  
such Person as of the date of such proposed Refinancing (plus the amount of any 
premium required to be paid under the terms of the instrument governing such    
Indebtedness or the amount of any premium reasonably determined to be necessary 
to accomplish such refinancing and plus the amount of reasonable expenses       
incurred by the Company and any Restricted Subsidiary in connection with such   
Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to     
Maturity that is less than the Weighted Average Life to Maturity of the         
Indebtedness being Refinanced or (B) a final maturity earlier than the final    
maturity of the Indebtedness being Refinanced; provided that (x) if such        
Indebtedness being Refinanced is Indebtedness solely of the Company or any      
Restricted Subsidiary or is Indebtedness solely of the Company and any          
Restricted Subsidiary or Restricted Subsidiaries, then such Refinancing         
Indebtedness shall be Indebtedness solely of the Company or such Restricted     
Subsidiary or the Company and such Restricted Subsidiary or Restricted          
Subsidiaries, as the case may be, and (y) if such Indebtedness being Refinanced 
is subordinate or junior to the Notes, then such Refinancing Indebtedness shall 
be subordinate to the Notes at least to the same extent and in the same manner  
as the Indebtedness being Refinanced.                                           

 "Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that (a) if,  
and for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times constitute
the holders of a majority in outstanding principal amount of such Designated    
Senior Debt in respect of any Designated Senior Debt and (b) the administrative 
agent (or any successor thereto) shall be a Representative of the lenders under 
the Credit Agreement.                                                           

   "Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.           

   "Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the       
leasing to the Company or a Restricted Subsidiary of any                        
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property, whether owned by the Company or any Restricted Subsidiary at the Issue
Date or later acquired, which has been or is to be sold or transferred by the   
Company or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of    
such Property.                                                                  

   "Securitization Entity" means a Wholly Owned Restricted Subsidiary of the
Company (or another Person in which the Company or any Subsidiary of the Company
makes an Investment and to which the Company or any Subsidiary of the Company   
transfers accounts receivable or equipment and related assets) which engages in 
no activities other than in connection with the financing of accounts receivable
or equipment and which is designated by the Board of Directors of the Company   
(as provided below) as a Securitization Entity (a) no portion of the            
Indebtedness or any other Obligations (contingent or otherwise) of which (i) is 
guaranteed by the Company or any Subsidiary of the Company (excluding guarantees
of Obligations (other than the principal of, and interest on, Indebtedness)     
pursuant to Standard Securitization Undertakings), (ii) is recourse to or       
obligates the Company or any Subsidiary of the Company in any way other than    
pursuant to Standard Securitization Undertakings or (iii) subjects any property 
or asset of the Company or any Subsidiary of the Company, directly or           
indirectly, contingently or otherwise, to the satisfaction thereof, other than  
pursuant to Standard Securitization Undertakings, (b) with which neither the    
Company nor any Subsidiary of the Company has any material contract, agreement, 
arrangement or understanding other than on terms no less favorable to the       
Company or such Subsidiary than those that might be obtained at the time from   
Persons that are not Affiliates of the Company, other than fees payable in the  
ordinary course of business in connection with servicing receivables of such    
entity, and (c) to which neither the Company nor any Subsidiary of the Company  
has any obligation to maintain or preserve such entity's financial condition or 
cause such entity to achieve certain levels of operating results. Any such      
designation by the Board of Directors of the Company shall be evidenced to the  
Trustee by filing with the Trustee a certified copy of the resolution of the    
Board of Directors of the Company giving effect to such designation and an      
officer's certificate certifying that such designation complied with the        
foregoing conditions.                                                           

"Senior Debt" means the principal of, premium, if any, and interest   
(including any interest accruing subsequent to the filing of a petition of      
bankruptcy or the commencement of any bankruptcy, insolvency, reorganization,   
receivership or other similar proceeding at the rate provided for in the        
documentation with respect thereto, whether or not such interest is an allowed  
claim under applicable law) and fees and expenses (including costs of           
collection), indemnity obligations on, and all other amounts and obligations    
owing in respect of, any Indebtedness of the Company, whether outstanding on the
Issue Date or thereafter created, incurred or assumed, unless, in the case of   
any particular Indebtedness, the instrument creating or evidencing the same or  
pursuant to which the same is outstanding expressly provides that such          
Indebtedness shall not be senior in right of payment to the Notes. Without      
limiting the generality of the foregoing, "Senior Debt" shall also include the  
principal of, premium, if any, interest (including any interest accruing        
subsequent to the filing of a petition of bankruptcy or the commencement of any 
bankruptcy, insolvency, reorganization, receivership or other similar proceeding
at the rate provided for in the documentation with respect thereto, whether or  
not such interest is an allowed claim under applicable law) on, and all other   
amounts owing in respect of, (x) all monetary obligations of every nature of the
Company under the Credit Agreement, including, without limitation, obligations  
to pay principal and interest, reimbursement obligations under letters of       
credit, guaranteed obligations, fees, commissions, expenses and indemnities, (y)
all Interest Swap Obligations and (z) all obligations under Currency Agreements,
in each case whether outstanding on the Issue Date or thereafter incurred.      
Notwithstanding the foregoing, "Senior Debt" shall not include (i) any          
Indebtedness of the Company to a Subsidiary of the Company or any Affiliate of  
the Company or any of such Affiliate's Subsidiaries, (ii) Indebtedness of the   
Company to, or guaranteed by the Company on behalf of, any shareholder,         
director, officer or employee of the Company or any Subsidiary of the Company   
(including, without limitation, amounts owed for compensation), (iii)           
Indebtedness to trade creditors and other amounts incurred in connection with   
obtaining goods, materials or services, (iv) Indebtedness represented by        
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owed or owing by the Company, (vi) Indebtedness incurred in violation of  
the Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness" (but, as to any such obligation, no such violation shall be deemed
to exist for purposes of this clause (vi) if the holder(s) of such Indebtedness 
or their representative and the                                                 
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Trustee shall have received an officers' certificate of the Company to the      
effect that the incurrence of such Indebtedness does not (or, in the case of    
revolving credit Indebtedness or other Indebtedness available to be borrowed    
under the Credit Agreement after the date of the initial borrowing thereunder,  
that the incurrence of the entire committed amount thereof at the date on which 
the initial borrowing thereunder is made would not) violate such provisions of  
the Indenture), (vii) Indebtedness which, when incurred and without respect to  
any election under Section 1111(b) of Title 11, United States Code, is without  
recourse to the Company and (viii) any Indebtedness which is, by its express    
terms, subordinated in right of payment to any other Indebtedness of the        
Company.                                                                        

   "Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.                                     

   "Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the  
Company which are reasonably customary in an accounts receivable or equipment   
securitization transaction.                                                     

"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes     
entitled to be cast in the election of directors under ordinary circumstances   
shall at the time be owned, directly or indirectly, by such Person or (ii) any  
other Person of which at least a majority of the voting interest under ordinary 
circumstances is at the time, directly or indirectly, owned by such Person.     

     "Transaction Agreement" means the transaction agreement dated as of October
2, 1997 among Fremont Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company
as in effect on the Issue Date.                                                 

  "Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated  
an Unrestricted Subsidiary by the Board of Directors of such Person in the      
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the    
Company or any Restricted Subsidiary of the Company that is not a Subsidiary of 
the Subsidiary to be so designated; provided that (x) the Company certifies to  
the Trustee that such designation complies with the "Limitation on Restricted   
Payments" covenant and (y) each Subsidiary to be so designated and each of its  
Subsidiaries has not at the time of designation, and does not thereafter,       
create, incur, issue, assume, guarantee or otherwise become directly or         
indirectly liable with respect to any Indebtedness pursuant to which the lender 
has recourse to any of the assets of the Company or any of its Restricted       
Subsidiaries (other than the assets of such Restricted Subsidiary to be         
designated an Unrestricted Subsidiary and its Subsidiaries). In the event that  
any Restricted Subsidiary is designated an Unrestricted Subsidiary in accordance
with the above provisions, the Guarantee of such Subsidiary will be released.   
The Board of Directors may designate any Unrestricted Subsidiary to be a        
Restricted Subsidiary only if (x) immediately after giving effect to such       
designation, the Company is able to incur at least $1.00 of additional          
Indebtedness (other than Permitted Indebtedness) in compliance with the         
"Limitation on Incurrence of Additional Indebtedness" covenant, unless such     
designated Subsidiary shall, at the time of designation, have no Indebtedness   
outstanding other than Permitted Indebtedness, and (y) immediately before and   
immediately after giving effect to such designation, no Default or Event of     
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the      
Trustee a copy of the Board Resolution giving effect to such designation and an 
officers' certificate certifying that such designation complied with the        
foregoing provisions.                                                           

     "Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding  
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining      
installment, sinking fund, serial maturity or other required payment of         
principal, including payment at final maturity, in respect thereof, by (ii) the 
number of years (calculated to the nearest one-twelfth) which will elapse       
between such date and the making of such payment.                               

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 "Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other 
than, in the case of a foreign Restricted Subsidiary, directors' qualifying     
shares or an immaterial amount of shares required to be owned by other Persons  
pursuant to applicable law) are owned by such Person or any Wholly Owned        
Restricted Subsidiary of such Person.                                           

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CERTAIN TAX CONSIDERATIONS

The following is a summary of certain United States federal income tax
consequences related to the Exchange Offer and associated with the acquisition, 
ownership, and disposition of the Notes. The following summary does not discuss 
all of the aspects of federal income taxation that may be relevant to a         
prospective holder of the Notes in light of his or her particular circumstances,
or to certain types of holders which are subject to special treatment under the 
federal income tax laws (including persons who hold the Notes as part of a      
conversion, straddle or hedge, dealers in securities, insurance companies,      
tax-exempt organizations, financial institutions, broker-dealers and S          
corporations). Further, this summary pertains only to holders that are citizens 
or residents of the United States, corporations, partnerships or other entities 
created in or under the laws of the United States or any state thereof, or      
estates or trusts the income of which is subject to United States federal income
taxation regardless of its source. In addition, this summary does not describe  
any tax consequences under state, local, or foreign tax laws.                   

  This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations (the "Regulations"), rulings and             
pronouncements issued by the Internal Revenue Service ("IRS") and judicial      
decisions now in effect, all of which are subject to change at any time by      
legislative, judicial or administrative action. Any such changes may be applied 
retroactively in a manner that could adversely affect the holders of the Notes. 
The Company has not sought and will not seek any rulings from the IRS or        
opinions from counsel with respect to the matters discussed below. There can be 
no assurance that the IRS will not take positions concerning the tax            
consequences of the Exchange Offer or the valuation, purchase, ownership or     
disposition of the Notes which are different from those discussed herein.       

TAX CONSEQUENCES OF THE EXCHANGE OFFER                                          

  An exchange of the Series A Notes for the Exchange Notes pursuant to the
Exchange Offer should not be treated as a significant modification of the Series
A Notes; accordingly, an Exchange Note should be treated as a continuation of   
the corresponding Series A Note and an exchanging holder should not recognize   
any gain or loss as a result of participating in the Exchange Offer. In         
addition, an exchanging holder's basis in an Exchange Note should be equal to   
the basis of the corresponding Series A Note and the holding period for an      
Exchange Note would include such holder's holding period for the corresponding  
Series A Note.                                                                  

   The Exchange Offer will not have any federal income tax consequences to a
non-exchanging holder.                                                          

Each exchanging holder should consult with his or her individual tax  
advisor concerning any foreign, state or local tax consequences of the Exchange 
Offer as well as to the effect of his or her particular facts and circumstances 
on the matters discussed herein.                                                

TAXATION OF ACCRUED STATED INTEREST ON NOTES                                    

Accrued stated interest paid on a Note will generally be taxable to a 
holder as ordinary interest income at the time it accrues or is received, in    
accordance with the holder's regular method of accounting for federal income tax
purposes.                                                                       

  The Company will annually furnish to certain record holders of the Notes
and the IRS information with respect to any stated interest accruing during the 
calendar year as may be required under applicable Regulations.                  

MARKET DISCOUNT                                                                 

     If a holder purchases a Note, other than in connection with the Offering or
the Exchange Offer, for less than the stated redemption price of the Note at    
maturity, the difference is considered "market discount," unless such difference
is "de minimis," i.e., less than one-fourth of one percent of the stated        
redemption price of the Note at maturity multiplied by the number of complete   
years to maturity (after the holder acquires the Note). Under market discount   
rules, any gain realized by the holder on a taxable disposition of a Note having
"market discount," as well as any partial principal payment made with respect to
such a Note, will be treated as ordinary income to the extent of the then       
"accrued market discount" of the Note. The rules concerning the                 
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calculation of "accrued market discount" are set forth in the paragraph         
immediately below. In addition, a holder of such a Note may be required to defer
the deduction of all or a portion of the interest expense on any indebtedness   
incurred to purchase or carry a Note having "market discount."                  

     Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Note, unless the holder elects, irrevocably, to accrue     
market discount on a constant interest rate method. The constant interest rate  
method generally accrues interest at times and in amounts equivalent to the     
result which would have occurred had the market discount been original issue    
discount computed from the date of the holder's acquisition of the Note through 
the maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by   
the holder.                                                                     

Accrual of market discount will not cause the accrued amounts to be   
included currently in a holder's taxable income, in the absence of a disposition
of, or principal payment on, the Note. Nevertheless, a holder may elect to      
currently include market discount in income as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the  
acquisition of a Note which would otherwise be deferred would be currently      
deductible to the extent otherwise permitted by the Code. The election to       
include market discount in income currently, once made, applies to all market   
discount obligations acquired by such holder on or after the first day of the   
first taxable year to which the election applies and all subsequent years unless
revoked with the consent of the IRS. Accrued market discount which is included  
in a holder's gross income will increase the adjusted tax basis of the Note in  
the hands of the holder.                                                        

ACQUISITION PREMIUM                                                             

    If a subsequent holder acquires a Note for an amount which is greater than
the stated redemption price of the Note at maturity, such holder will be        
considered to have purchased such Note with "amortizable bond premium" equal to 
the amount of such excess. The holder may elect to amortize the premium using a 
constant yield method employing six month compounding over the period from the  
acquisition date to the maturity date of the Note. Amortized amounts may be     
offset only against interest paid with respect to the Note and will reduce the  
holder's adjusted tax basis in the Note to the extent so used. Once made, an    
election to amortize and offset interest on the Note may be revoked only with   
the consent of the IRS and will apply to all Notes held by the holder on the    
first day of the taxable year to which the election relates and to subsequent   
taxable years and to all Notes subsequently acquired by the holder.             

SALE, EXCHANGE OR OTHER TAXABLE DISPOSITION OF THE NOTES                        

    The sale, redemption or other taxable disposition of a Note will result in
the recognition of gain or loss to the holder in an amount equal to the         
difference between (i) the amount of cash and fair market value of property     
received (except to the extent attributable to the payment of accrued stated    
interest) in exchange therefore and (ii) the holder's adjusted tax basis in such
Note. A holder's initial tax basis in a Note purchased by such holder will be   
equal to the issue price of the Note.                                           

    Any gain or loss on the sale, redemption or other taxable disposition of a
Note will be capital gain or loss, except to the extent of any "accrued market  
discount," assuming a purchaser of the Note holds such security as a "capital   
asset" (generally property held for investment) within the meaning of Section   
1221 of the Code. In the case of an individual holder, such capital gain        
generally will be subject to a maximum federal tax rate of 20% if the individual
has held the Note for more than 18 months, or 28% if the individual has held the
Note for more than one year and up to 18 months. The deductibility of capital   
losses is subject to certain limitations. Payments on such disposition for      
accrued stated interest not previously included in income will be treated as    
ordinary interest income. Prospective holders should consult their own tax      
advisors in this regard.                                                        

PURCHASE OR REDEMPTION OF NOTES                                                 

    Effect of Change of Control and Asset Sale.  Upon a Change of Control, the
Company is required to offer to redeem all outstanding Notes for a price equal  
to 101% of the principal amount thereof plus accrued and unpaid stated interest.
See "Description of Notes -- Change of Control." Under the Regulations, such a  
Change of Control redemption requirement will not affect the yield or maturity  
date of the Notes unless, based                                                 
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on all the facts and circumstances as of the issue date, it is more likely than 
not that a Change of Control giving rise to the redemption will occur. Upon     
certain asset sales, the Company will be obligated to offer to repurchase the   
Notes at one hundred percent (100%) of the principal amount thereof plus accrued
and unpaid interest to the date of redemption. The Company will not treat the   
Change of Control or the asset sale redemption provisions of the Notes as       
affecting the calculation of the yield to maturity of any Note.                 

     Optional Redemption.  The Company, at its option, may redeem part or all of
the Notes at any time on or after November 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of redemption. In    
addition, if the Company consummates an Equity Offering on or before November 1,
2000, the Company may, at its option, use all or a portion of the proceeds from 
such Equity Offering to redeem up to thirty-five percent (35%) of the aggregate 
principal amount of the Notes originally issued in the Offering at a redemption 
price equal to 109.625%, together with accrued and unpaid interest to the date  
of redemption; provided, however, that, after giving effect to any such         
redemption, at least 65% of the aggregate principal amount of the Notes         
originally issued remains outstanding. See "Description of Notes -- Redemption."
For purposes of determining whether the Notes are issued with any "original     
issue discount," the Regulations generally provide that an issuer will be       
treated as exercising any such option if its exercise would lower the yield of  
the debt instrument. A redemption of Notes at the optional redemption prices,   
however, would increase rather than decrease the effective yield of the debt    
instrument as calculated from the issue date.                                   

The Company does not currently intend to exercise any of the options  
described above with respect to the Notes. Should the Company exercise an option
and redeem a Note, the holder of the Note would be required to treat any amount 
paid by the Company which exceeds the Note's then principal balance and all     
accrued and unpaid interest thereon as an amount received in exchange for the   
Note.                                                                           

BACKUP WITHHOLDING                                                              

   The backup withholding rules require a payor to deduct and withhold a tax
if (i) the payee fails to properly furnish a taxpayer identification number     
("TIN") to the payor, (ii) the IRS notifies the payor that the TIN furnished by 
the payee is incorrect, (iii) the payee has failed to report properly the       
receipt of "reportable payments" and the IRS has notified the payor that        
withholding is required, or (iv) there has been a failure of the payee to       
certify under a penalty of perjury that a payee is not subject to withholding   
under Section 3406 of the Code. As a result, if any one of the events discussed 
above occurs with respect to a holder of Notes, the Company, its paying agent or
other withholding agent will be required to withhold a tax equal to 31% of any  
"reportable payment" made in connection with the Notes to such holder. A        
"reportable payment" includes, among other things, amounts paid in respect of   
interest or original issue discount and amounts paid through brokers in         
retirement of securities. Any amounts withheld from a payment to a holder under 
the backup withholding rules will be allowed as a refund or credit against such 
holder's federal income tax, provided, that the required information is         
furnished to the IRS. Certain holders (including, among others, corporations and
certain tax-exempt organizations) are not subject to the backup withholding     
rules.                                                                          

THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW, WHICH IS SUBJECT TO     
CHANGE, POSSIBLY WITH RETROACTIVE EFFECT. PROSPECTIVE HOLDERS ARE URGED TO      
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE 
EXCHANGE OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS.                                                               

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BOOK-ENTRY; DELIVERY AND FORM 

  The Certificates representing the Exchange Notes will be issued in fully
registered form, without coupons and will be deposited with, or on behalf of,   
the Depositary, and registered in the name of Cede & Co., as the Depository's   
nominee in the form of a global Exchange Note certificate (the "Global          
Certificate") or will remain in the custody of the Trustee.                     

  Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only by the Depositary to its nominee to such Depositary 
or another nominee of the Depositary or by the Depositary or its nominee to a   
successor of the Depositary or a nominee of such successor.                     

The Company understands that the Depositary is a limited-purpose trust
company which was created to hold securities for its participating organizations
(the "Participants") and to facilitate the clearance and settlement of          
transactions in such securities between Participants through electronic         
book-entry changes in accounts of its Participants. Participants include        
securities brokers and dealers (including the Initial Purchasers), banks, trust 
companies, clearing corporations and certain other organizations. Access to the 
Depository's book-entry system is also available to others, such as banks,      
brokers, dealers and trust companies that clear through or maintain a custodial 
relationship with a Participant, either directly or indirectly ("indirect       
participants"). Persons who are not Participants may beneficially own securities
held by the Depositary through Participants or indirect participants.           

  Pursuant to procedures established by the Depositary (i) upon deposit of
the Global Certificate, the Depositary will credit the accounts of Participants 
with portions of the principal amount of the Global Certificate and (ii)        
ownership of the Exchange Notes will be shown on, and the transfer of ownership 
thereof will be effected only through, records maintained by the Depositary     
(with respect to the interest of the Depository's participants), the            
Depository's Participants and the Depository's indirect participants.           

   The laws of some jurisdictions require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the      
ability to transfer interests in the Global Certificate will be limited to such 
extent.                                                                         

 So long as the nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or holder of 
the Exchange Notes for all purposes under the Indenture. Except as provided     
below, the owners of interests in the Global Certificate will not be entitled to
have Exchange Notes registered in their names, will not receive or be entitled  
to receive physical delivery of Exchange Notes in definitive form and will not  
be considered the owners or holders thereof under the Indenture. As a result,   
the ability of a person having a beneficial interest in Exchange Notes          
represented by the Global Certificate to pledge such interest to persons or     
entities that do not participate in the Depository's system or to otherwise take
actions in respect to such interest may be affected by the lack of a physical   
certificate evidencing such interest.                                           

Neither the Company, the Trustee nor any paying agent will have any   
responsibility or liability for any aspect of the records relating to or        
payments made on account of interests in the Global Certificate or for          
maintaining, supervising or reviewing any records relating to such interests.   

     Principal and interest payments on the Global Certificate registered in the
name of the Depository's nominee will be made by the Company or through a paying
agent to the Depository's nominee as the registered owner of the Global         
Certificate. Under the terms of the Indenture, the Company and the Trustee will 
treat the persons in whose names the Exchange Notes are registered as the owners
of such Exchange Notes for the purpose of receiving payments of principal and   
interest on such Exchange Notes and for all other purposes whatsoever.          
Therefore, neither the Company, the Trustee nor any paying agent has any direct 
responsibility or liability for the payment of principal or interest on the     
Exchange Notes to owners of interests in the Global Certificate. The Depositary 
has advised the Company and the Trustee that its present practice is, upon      
receipt of any payment of principal or interest, to credit immediately the      
account of the Participants with payments in amounts proportionate to their     
respective holdings in principal amount of interests in the Global Certificate  
as shown on the records of the Depositary. Payments by Participants and indirect
participants to owners of interests in the Global Certificate will be governed  
by standing instructions and customary practices,                               
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as is now the case with securities held for the accounts of customers in bearer 
form or registered in "street name," and will be the responsibility of such     
Participants or indirect participants.                                          

If the Depositary is at any time unwilling or unable to continue as   
depositary and a successor depositary is not appointed by the Company within 90 
calendar days, the Company will issue Exchange Notes in certificated form in    
exchange for the Global Certificate. In addition, the Company may at any time   
determine not to have the Exchange Notes represented by a Global Certificate,   
and, in such event, will issue Exchange Notes in certificated form in exchange  
for the Global Certificate. In either instance, an owner of an interest in the  
Global Certificate would be entitled to physical delivery of such Exchange Notes
in certificated form. Exchange Notes so issued in certificated form will be     
issued in denominations of $1,000 and integral multiples thereof and will be    
issued in registered form only.                                                 

  Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or its nominee in identifying the beneficial owners or the related   
Exchange Notes, and each such person may conclusively rely on, and shall be     
protected in relying on, instructions from the Depositary or its nominee for all
purposes (including with respect to the registration and delivery, and the      
respective principal amounts, of the Exchange Notes to be issued).              

AVAILABLE INFORMATION 

The Company and the Guarantors have filed with the Commission a       
Registration Statement on Form S-4 (the "Exchange Offer Registration Statement",
which term shall encompass all amendments, exhibits, annexes and schedules      
thereto) pursuant to the Securities Act and the rules and regulations           
promulgated thereunder, covering the Exchange Notes being offered hereby. This  
Prospectus does not contain all the information set forth in the Exchange Offer 
Registration Statement. For further information with respect to the Company and 
the Exchange Offer, reference is made to the Exchange Offer Registration        
Statement. Statements made in this Prospectus as to the contents of any         
contract, agreement or other document referred to are not necessarily complete. 
With respect to each such contract, agreement or other document filed as an     
exhibit to the Exchange Offer Registration Statement, reference is made to the  
exhibit for a more complete description of the document or matter involved, and 
each such statement shall be deemed qualified in its entirety by such reference.
The Exchange Offer Registration Statement, including the exhibits thereto, can  
be inspected and copied at the public reference facilities maintained by the    
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at 
the Regional Offices of the Commission at 7 World Trade Center, New York, New   
York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite    
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,           
Washington, D.C. 20549, at prescribed rates.                                    

The Company was until recently subject to the informational reporting 
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange  
Act"), and in accordance therewith filed reports, proxy and information         
statements and other information with the Commission. Such material filed by the
Company with the Commission may be inspected by anyone without charge at the    
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450   
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the  
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,   
New York 10048. Copies of such material may also be obtained at the Public      
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth    
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The      
Commission maintains a Web site that contains reports, proxy and information    
statements and other information regarding registrants that file electronically 
with the Commission. The address of such site is http://www.sec.gov.            

  As a result of filing the Exchange Offer Registration Statement with the
Commission, the Company and the Guarantors will become subject to the           
informational requirements of the Exchange Act, and in accordance therewith will
be required to file periodic reports and other information with the Commission. 
The obligation of the Company and the Guarantors to file periodic reports and   
other information with the Commission will be suspended if the Notes are held of
record by fewer than 300 holders as of the beginning of any fiscal year of the  
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Company and the Guarantors other than the fiscal year in which the Exchange     
Offer Registration Statement is declared effective.                             

 In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so long
as the Series A Notes or the Exchange Notes remain outstanding, it will file    
with the Commission and distribute to holders of the Series A Notes or the      
Exchange Notes, as applicable, copies of the financial information that would   
have been contained in annual reports and quarterly reports, including          
management's discussion and analysis of financial condition and results of      
operations, that the Company would have been required to file with the          
Commission pursuant to the Exchange Act. Such financial information shall       
include annual reports containing consolidated financial statements and notes   
thereto, together with an opinion thereon expressed by an independent public    
accounting firm, as well as quarterly reports containing unaudited condensed    
consolidated financial statements for the first three quarters of each fiscal   
year. The Company will also make such reports available to prospective          
purchasers of the Series A Notes or the Exchange Notes, as applicable,          
securities analysts and broker-dealers upon their request. In addition, the     
Company has agreed that for so long as any of the Series A Notes remain         
outstanding it will make available to any prospective purchaser of the Series A 
Notes or beneficial owner of the Series A Notes in connection with any sale     
thereof the information required by Rule 144A(d)(4) under the Securities Act,   
until such time as the Company has either exchanged the Series A Notes for      
securities identical in all material respects which have been registered under  
the Securities Act or until such time as the holders thereof have disposed of   
such Series A Notes pursuant to an effective registration statement filed by the
Company.                                                                        

INDEPENDENT ACCOUNTANTS 

    The consolidated balance sheets of the Company as of December 31, 1995 and
1996, and the related consolidated statements of earnings, cash flows, and      
shareholders' equity for each of the years in the three year period ended       
December 31, 1996 included in this Prospectus have been audited by KPMG Peat    
Marwick LLP, independent certified public accountants, as stated in their report
appearing herein. The report of KPMG Peat Marwick LLP covering the December 31, 
1994 financial statements refers to a change in the method of applying overhead 
to inventory in 1994.                                                           

LEGAL MATTERS 

   The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Cox & Smith Incorporated, San Antonio, Texas.                    

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INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
Financial Statements:                                             
  Report of Independent Auditors............................  F-2 
  Consolidated Balance Sheets as of December 31, 1996 and         
     1995...................................................  F-3 
  Consolidated Statements of Earnings for the Years Ended         
     December 31, 1996, 1995 and 1994.......................  F-4 
  Consolidated Statements of Cash Flows for the Years Ended       
     December 31, 1996, 1995                                      
     and 1994...............................................  F-5 
  Consolidated Statements of Shareholders' Equity for the         
     Years Ended December 31, 1996, 1995 and 1994...........  F-6 
  Notes to Consolidated Financial Statements................  F-7 
Interim Financial Statements (Unaudited):                         
  Condensed Consolidated Balance Sheet as of September 30,        
     1997 (Unaudited).......................................  F-32
  Condensed Consolidated Statements of Earnings for the           
     Three Months and Nine Months Ended September 30, 1997        
     and 1996 (Unaudited)...................................  F-33
  Condensed Consolidated Statements of Cash Flows for the         
     Nine Months Ended September 30, 1997 and 1996                
     (Unaudited)............................................  F-34
Notes to Condensed Consolidated Financial Statements              
  (Unaudited)...............................................  F-35

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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                                                                

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CONSOLIDATED BALANCE SHEETS 

KINETIC CONCEPTS, INC. AND SUBSIDIARIES 
(IN THOUSANDS)

                                                                [Download Table]

                                                                 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.
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CONSOLIDATED STATEMENT OF EARNINGS

KINETIC CONCEPTS, INC. AND SUBSIDIARIES 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                 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.
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CONSOLIDATED STATEMENTS OF CASH FLOWS 

KINETIC CONCEPTS, INC. AND SUBSIDIARIES 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                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.

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
THREE YEARS ENDED DECEMBER 31, 1996 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                                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.

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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.                               

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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                          

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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.                                                                 

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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):                     

                                                                [Download Table]
                                                                       
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    

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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):                

                                                                [Download Table]

                                                           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):          

                                                                [Download Table]

                                                              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):                  

                                                                [Download Table]

                                                              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):

                                                                [Download Table]

                                                             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
                                                         ========    ========

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

Accrued expenses consist of the following (in thousands):             

                                                                [Download Table]

                                                                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.                                                                   

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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:                                                                 

                                                                [Download Table]

                                                            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):

                                                                [Download Table]

                                                         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):                                       

                                                        [Enlarge/Download Table]

                                                        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
                                                      =======      ======      =======

                                                        [Enlarge/Download Table]

                                                        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
                                                      =======      ======      =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

                                                                [Download Table]

                                                       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:                                                                      

                                                        [Enlarge/Download Table]

                                                          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 
                                                       =======    =======     ======= 

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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:                                 

                                                                [Download Table]

                                                                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.                                        

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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.   

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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):                                                                   

                                                                [Download Table]

                                                            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.                                                                        

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

   The following table summaries information about stock options outstanding
at December 31, 1996 (shares in thousands):                                     

                                                        [Enlarge/Download Table]

                                                  WEIGHTED                                  
                                                  AVERAGE    WEIGHTED               WEIGHTED
                                      OPTIONS    REMAINING   AVERAGE     OPTIONS    AVERAGE 
             RANGE OF               OUTSTANDING   CONTRACT   EXERCISE  EXERCISABLE  EXERCISE
          EXERCISE PRICES           AT 12/31/96  LIFE (YRS)   PRICE    AT 12/31/96   PRICE  
          ---------------           -----------  ----------  --------  -----------  --------
                                                                                            
$ 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):

                                                        [Enlarge/Download Table]

                                               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):            

                                                        [Enlarge/Download Table]

                                                             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       
                                                             ======     =================   

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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):              

                                                        [Enlarge/Download Table]

                                                             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):           

                                                                [Download Table]

                                                              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                                            

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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.

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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:            

                                                        [Enlarge/Download Table]

                                                          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  
                                                                                        ========  

                                                        [Enlarge/Download Table]

                                                          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  
                                                                                        ========  

                                                        [Enlarge/Download Table]

                                                          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  
                                                                                        ========  

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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:                                                                          

                                                        [Enlarge/Download Table]

                                                           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

                                                        [Enlarge/Download Table]

                                                           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.                       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

NOTE 15:  SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS   
(UNAUDITED)                                                                     

Kinetic Concepts, Inc. has issued $200 million in subordinated debt   
securities to finance a tender offer to purchase certain of its common shares   
outstanding. In connection with the issuance of these securities, certain of its
subsidiaries (the guarantor subsidiaries) have jointly and severally guaranteed 
such debt securities. Certain other subsidiaries (the nonguarantor subsidiaries)
will not guarantee such debt. Separate financial statements and other           
disclosures concerning the subsidiary guarantors are not deemed material to     
investors.                                                                      

    The following tables present the unaudited condensed consolidating balance
sheets of Kinetic Concepts, Inc. as a parent company, its guarantor subsidiaries
and its nonguarantor subsidiaries as of December 31, 1996 and 1995 and the      
related unaudited condensed consolidating statements of earnings and cash flows 
for each year in the three-year period ended December 31, 1996.                 

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1996 
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                               KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS                        
                                   PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                      BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                               ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                             
ASSETS                                                                                                                       
Current assets:                                                                                                              
  Cash and equivalents.......         $                  $ 50,286       $14,485         $  (5,726)            $ 59,045       
  Accounts receivable, net...            5,174             39,996        13,072                (1)              58,241       
  Inventories................           13,944                334        10,605            (4,841)              20,042       
  Prepaid expenses and                                                                                                       
     other...................            2,677              3,214           969                --                6,860       
                                      --------           --------       -------         ---------             --------       
          Total current                                                                                                      
            assets...........           21,795             93,830        39,131           (10,568)             144,188       
  Net property, plant and                                                                                                    
     equipment...............           12,965             76,143         9,571           (33,455)              65,224       
  Goodwill, net..............            3,375              3,829         6,337                --               13,541       
  Other assets, net..........           10,848             21,470           325            (2,203)              30,440       
  Intercompany investments                                                                                                   
     and advances............          279,773            200,399            --          (480,172)                  --       
                                      --------           --------       -------         ---------             --------       
          Total Assets.......         $328,756           $395,671       $55,364         $(526,398)            $253,393       
                                      ========           ========       =======         =========             ========       
LIABILITIES AND CAPITAL                                                                                                      
  ACCOUNTS                                                                                                                   
  Accounts payable...........         $  7,635           $    509       $ 1,556         $  (5,726)            $  3,974       
  Intercompany payables......          102,044             41,683         9,894          (153,621)                  --       
  Current installments of                                                                                                    
     capital lease                                                                                                           
     obligations.............              118                 --            --                --                  118       
  Accrued expenses...........            5,422             17,947         5,561               862               29,792       
  Income taxes payable.......            2,111                            2,294            (1,435)               2,970       
                                      --------           --------       -------         ---------             --------       
          Total current                                                                                                      
            liabilities......          117,330             60,139        19,305          (159,920)              36,854       
                                      --------           --------       -------         ---------             --------       
  Capital leases obligations,                                                                                                
     excluding current                                                                                                       
     installment.............              348                 --            48                --                  396       
  Deferred income taxes......               --             12,120            --            (7,055)               5,065       
                                      --------           --------       -------         ---------             --------       
          Total                                                                                                              
            Liabilities......          117,678             72,259        19,353          (166,975)              42,315       
                                      --------           --------       -------         ---------             --------       
  Stockholders' Equity.......          211,078            323,412        36,011          (359,423)             211,078       
                                      --------           --------       -------         ---------             --------       
          Total Liabilities                                                                                                  
            and Equity.......         $328,756           $395,671       $55,364         $(526,398)            $253,393       
                                      ========           ========       =======         =========             ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1995 
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                              KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS                        
                                  PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                     BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                              ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                            
ASSETS                                                                                                                      
Current assets:                                                                                                             
  Cash and equivalents.......        $     --           $ 41,142       $13,837         $  (2,580)            $ 52,399       
  Accounts receivable, net...           4,216             40,379        11,437                --               56,032       
  Inventories................          14,884              3,993         5,290            (5,313)              18,854       
  Note receivable from                                                                                                      
     principal shareholder...              --             10,291            --                --               10,291       
  Prepaid expenses and                                                                                                      
     other...................           1,591              2,656           647               (29)               4,865       
                                     --------           --------       -------         ---------             --------       
          Total current                                                                                                     
            assets...........          20,691             98,461        31,211            (7,922)             142,441       
  Net property, plant and                                                                                                   
     equipment...............           7,314             88,888         7,879           (41,805)              62,276       
  Notes receivable...........              --              3,187            --                --                3,187       
  Goodwill, net..............           4,050              4,060         5,858                --               13,968       
  Other assets, net..........          10,970             13,303            --            (2,419)              21,854       
  Intercompany investments                                                                                                  
     and advances............         228,758                 --            --          (228,758)                  --       
                                     --------           --------       -------         ---------             --------       
          Total Assets.......        $271,783           $207,899       $44,948         $(280,904)            $243,726       
                                     ========           ========       =======         =========             ========       
LIABILITIES AND CAPITAL                                                                                                     
  ACCOUNTS                                                                                                                  
  Accounts payable...........        $  3,625           $    185       $ 1,229         $  (2,527)            $  2,512       
  Intercompany payables......          52,172             71,938         4,530          (128,640)                  --       
  Accrued expenses...........           5,662             14,636         6,686              (494)              26,490       
  Income taxes payable.......              --                886         2,736               404                4,026       
                                     --------           --------       -------         ---------             --------       
          Total current                                                                                                     
            liabilities......          61,459             87,645        15,181          (131,257)              33,028       
                                     --------           --------       -------         ---------             --------       
Capital leases obligations,                                                                                                 
  excluding current                                                                                                         
  installment................              --                 --            55               (55)                  --       
Deferred income taxes........              --              5,258            --            (4,884)                 374       
                                     --------           --------       -------         ---------             --------       
          Total                                                                                                             
            liabilities......          61,459             92,903        15,236          (136,196)              33,402       
                                     --------           --------       -------         ---------             --------       
Stockholders' Equity.........         210,324            114,996        29,712          (144,708)             210,324       
                                     --------           --------       -------         ---------             --------       
          Total Liabilities                                                                                                 
            and Equity.......        $271,783           $207,899       $44,948         $(280,904)            $243,726       
                                     ========           ========       =======         =========             ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                              KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS        HISTORICAL      
                                  PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                     BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                              ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                            
Revenue:                                                                                                                    
  Service and rental.........        $    --            $176,135       $49,315         $     --              $225,450       
  Sales and other............         54,716              10,989        18,768          (40,042)               44,431       
                                     -------            --------       -------         --------              --------       
          Total revenue......         54,716             187,124        68,083          (40,042)              269,881       
Rental expenses..............             --             110,198        45,851           (9,844)              146,205       
Cost of goods sold...........         33,774                  --         9,027          (26,486)               16,315       
                                     -------            --------       -------         --------              --------       
                                      33,774             110,198        54,878          (36,330)              162,520       
                                     -------            --------       -------         --------              --------       
     Gross profit............         20,942              76,926        13,205           (3,712)              107,361       
Selling, general and                                                                                                        
  administrative expenses....         22,615              38,218         3,101          (11,927)               52,007       
                                     -------            --------       -------         --------              --------       
     Operating income........         (1,673)             38,708        10,104            8,215                55,354       
Interest income (expense),                                                                                                  
  net........................           (713)              8,703           334              763                 9,087       
                                     -------            --------       -------         --------              --------       
     Earnings before income                                                                                                 
       taxes.................         (2,386)             47,411        10,438            8,978                64,441       
Income tax...................           (788)             19,059         3,862            3,321                25,454       
                                     -------            --------       -------         --------              --------       
     Earnings before equity                                                                                                 
       in earnings of                                                                                                       
       subsidiaries..........         (1,598)             28,352         6,576            5,657                38,987       
     Equity in earnings of                                                                                                  
       subsidiaries..........         40,585               6,576            --          (47,161)                   --       
                                     -------            --------       -------         --------              --------       
     Net earnings............        $38,987            $ 34,928       $ 6,576         $(41,504)             $ 38,987       
                                     =======            ========       =======         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                              KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS        HISTORICAL      
                                  PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                     BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                              ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                            
Revenue:                                                                                                                    
  Service and rental.........        $     --           $160,214       $46,439         $     --              $206,653       
  Sales and other............          91,737             12,244        13,393          (80,584)               36,790       
                                     --------           --------       -------         --------              --------       
          Total revenue......          91,737            172,458        59,832          (80,584)              243,443       
Rental expenses..............                            134,137        40,453          (37,170)              137,420       
Cost of goods sold...........          47,258              2,869         6,517          (42,915)               13,729       
                                     --------           --------       -------         --------              --------       
                                       47,258            137,006        46,970          (80,085)              151,149       
                                     --------           --------       -------         --------              --------       
     Gross profit............          44,479             35,452        12,862             (499)               92,294       
Selling, general and                                                                                                        
  administrative expenses....          11,115             12,219         3,647           21,521                48,502       
                                     --------           --------       -------         --------              --------       
     Operating income........          33,364             23,233         9,215          (22,020)               43,792       
Interest income (expense),                                                                                                  
  net........................          (4,040)             6,195           287            2,112                 4,554       
                                     --------           --------       -------         --------              --------       
     Earnings before income                                                                                                 
       taxes.................          29,324             29,428         9,502          (19,908)               48,346       
Income tax...................          11,436             11,477         4,751           (7,759)               19,905       
                                     --------           --------       -------         --------              --------       
     Earnings before equity                                                                                                 
       in earnings of                                                                                                       
       subsidiaries..........          17,888             17,951         4,751          (12,149)               28,441       
     Equity in earnings of                                                                                                  
       subsidiaries..........          10,554              4,751            --          (15,305)                   --       
                                     --------           --------       -------         --------              --------       
     Net earnings............        $ 28,442           $ 22,702       $ 4,751         $(27,454)             $ 28,441       
                                     ========           ========       =======         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                              KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS        HISTORICAL      
                                  PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                     BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                              ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                            
Revenue:                                                                                                                    
  Service and rental.........        $     --           $192,612       $36,220         $     --              $228,832       
  Sales and other............          43,763             23,438         9,143          (35,530)               40,814       
                                     --------           --------       -------         --------              --------       
          Total revenue......          43,763            216,050        45,363          (35,530)              269,646       
Rental expenses..............                            171,563        34,342          (46,670)              159,235       
Cost of goods sold...........          28,784             11,635         3,611          (24,642)               19,388       
                                     --------           --------       -------         --------              --------       
                                       28,784            183,198        37,953          (71,312)              178,623       
                                     --------           --------       -------         --------              --------       
     Gross profit............          14,979             32,852         7,410           35,782                91,023       
Selling, general and                                                                                                        
  administrative expenses....          11,272             21,588         2,365           16,588                51,813       
Unusual items................         (81,596)            (8,872)                         5,600               (84,868)      
                                     --------           --------       -------         --------              --------       
     Operating income........          85,303             20,136         5,045           13,594               124,078       
Interest income (expense),                                                                                                  
  net........................          (5,225)            (8,958)        4,256            5,399                (4,528)      
                                     --------           --------       -------         --------              --------       
     Earnings before income                                                                                                 
       taxes.................          80,078             11,178         9,301           18,993               119,550       
Income tax...................          36,369              5,048         5,116            9,416                55,949       
Minority interest............              --                 40            --               --                    40       
Cumulative effect of                                                                                                        
  accounting change..........             742                 --            --               --                   742       
                                     --------           --------       -------         --------              --------       
     Earnings before equity                                                                                                 
       in earnings of                                                                                                       
       subsidiaries..........          44,451              6,170         4,185            9,577                64,383       
     Equity in earnings of                                                                                                  
       subsidiaries..........          19,932              4,186            --          (24,118)                   --       
                                     --------           --------       -------         --------              --------       
     Net earnings............        $ 64,383           $ 10,356       $ 4,185         $(14,541)             $ 64,383       
                                     ========           ========       =======         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                               KINETIC CONCEPTS, INC.                    NON-       RECLASSIFICATIONS                        
                                   PARENT COMPANY       GUARANTOR      GUARANTOR           AND         KINETIC CONCEPTS, INC.
                                      BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                               ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                             
CASH FLOWS FROM OPERATING                                                                                                    
  ACTIVITIES:                                                                                                                
Net earnings.................         $ 38,987           $ 34,928      $  6,576         $(41,504)             $ 38,987       
Adjustments to reconcile net                                                                                                 
  earnings to net cash                                                                                                       
  provided by operating                                                                                                      
  activities:................          (32,912)            30,697        (5,031)          30,426                23,180       
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED BY                                                                                                         
  OPERATING ACTIVITIES.......            6,075             65,625         1,545          (11,078)               62,167       
CASH FLOWS FROM INVESTING                                                                                                    
  ACTIVITIES:                                                                                                                
  Additions to property,                                                                                                     
     plant and equipment.....           (8,474)           (13,261)      (10,017)           3,969               (27,783)      
  Decrease in inventory to be                                                                                                
     converted into equipment                                                                                                
     for short-term rental...              700                 --            --               --                   700       
  Dispositions of property,                                                                                                  
     plant and equipment.....               --                132         5,268               --                 5,400       
  Businesses acquired in                                                                                                     
     purchase transactions,                                                                                                  
     net of cash acquired....               --             (1,146)           --               --                (1,146)      
  Excess principal repayment                                                                                                 
     on discounted notes                                                                                                     
     receivable..............               --              5,180            --               --                 5,180       
  Note repaid from principal                                                                                                 
     shareholder.............               --             10,000            --               --                10,000       
  Decrease (increase) in                                                                                                     
     other assets............               23             (6,796)       (1,227)          (1,960)               (9,960)      
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  INVESTING ACTIVITIES.......           (7,751)            (5,891)       (5,976)           2,009               (17,609)      
CASH FLOWS FROM FINANCING                                                                                                    
  ACTIVITIES:                                                                                                                
  Borrowings (repayments) of                                                                                                 
     capital lease                                                                                                           
     obligations.............              466                 --            (6)              (3)                  457       
  Proceeds from the exercise                                                                                                 
     of stock options........            4,264                 --            --               --                 4,264       
  Proceeds (payments) on                                                                                                     
     intercompany investments                                                                                                
     and advances............           39,442            (51,565)        5,565            6,558                    --       
  Purchase and retirement of                                                                                                 
     treasury stock..........          (35,241)                --            --               --               (35,241)      
  Cash dividends paid to                                                                                                     
     shareholders............           (6,607)                --            --               --                (6,607)      
  Other......................             (648)               975          (480)               3                  (150)      
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  FINANCING ACTIVITIES.......            1,676            (50,590)        5,079            6,558               (37,277)      
Effect of exchange rate                                                                                                      
  changes on cash and cash                                                                                                   
  equivalents................               --                 --            --             (635)                 (635)      
                                      --------           --------      --------         --------              --------       
Net increase in cash and cash                                                                                                
  equivalents................               --              9,144           648           (3,146)                6,646       
Cash and cash equivalents,                                                                                                   
  beginning of year..........               --             41,142        13,837           (2,580)               52,399       
                                      --------           --------      --------         --------              --------       
CASH AND CASH EQUIVALENTS,                                                                                                   
  END OF YEAR................         $     --           $ 50,286      $ 14,485         $ (5,726)             $ 59,045       
                                      ========           ========      ========         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                               KINETIC CONCEPTS, INC.                               RECLASSIFICATIONS                        
                                   PARENT COMPANY       GUARANTOR    NON-GUARANTOR         AND         KINETIC CONCEPTS, INC.
                                      BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                               ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                             
CASH FLOWS FROM OPERATING                                                                                                    
  ACTIVITIES:                                                                                                                
Net earnings.................         $ 28,442           $ 22,702       $ 4,751         $(27,454)             $ 28,441       
Adjustments to reconcile net                                                                                                 
  earnings to net cash                                                                                                       
  provided by operating                                                                                                      
  activities.................          (16,632)            44,747         6,740           (6,514)               28,341       
                                      --------           --------       -------         --------              --------       
NET CASH PROVIDED BY                                                                                                         
  OPERATING ACTIVITIES.......           11,810             67,449        11,491          (33,968)               56,782       
CASH FLOWS FROM INVESTING                                                                                                    
  ACTIVITIES:                                                                                                                
Additions to property, plant                                                                                                 
  and equipment..............              225            (65,148)       (7,632)          36,451               (36,104)      
Increase in inventory to be                                                                                                  
  converted into equipment                                                                                                   
  for short-term rental......           (1,000)                --            --               --                (1,000)      
Dispositions of property,                                                                                                    
  plant and equipment........              209                669         2,353               --                 3,231       
Proceeds from sale of                                                                                                        
  divisions..................               --              7,182            --               --                 7,182       
Decrease in finance lease                                                                                                    
  receivable, net............               --                 --            --              339                   339       
Decrease (increase) in other                                                                                                 
  assets.....................           (5,012)            (9,002)          117           (2,634)              (16,531)      
                                      --------           --------       -------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  INVESTING ACTIVITIES.......           (5,578)           (66,299)       (5,162)          34,156               (42,883)      
CASH FLOWS FROM FINANCING                                                                                                    
  ACTIVITIES:                                                                                                                
Borrowings (repayments) of                                                                                                   
  notes payable and long-term                                                                                                
  obligations................              (95)            (7,805)          (68)           7,168                  (800)      
Borrowings (repayments) of                                                                                                   
  capital lease                                                                                                              
  obligations................               --                 --            55             (119)                  (64)      
Proceeds from the exercise of                                                                                                
  stock options..............            4,919                 --            --               --                 4,919       
Proceeds (payments) on                                                                                                       
  intercompany investments                                                                                                   
  and advances...............           (2,596)            16,121        (4,620)          (8,905)                   --       
Purchase and retirement of                                                                                                   
  treasury stock.............           (2,849)                --            --               --                (2,849)      
Cash dividends paid to                                                                                                       
  shareholders...............           (6,631)                --            --               --                (6,631)      
Other........................            1,020             (2,855)        1,203              447                  (185)      
                                      --------           --------       -------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  FINANCING ACTIVITIES.......           (6,232)             5,461        (3,430)          (1,409)               (5,610)      
Effect of exchange rate                                                                                                      
  changes on cash and cash                                                                                                   
  equivalents................               --                 --            --              869                   869       
                                      --------           --------       -------         --------              --------       
Net increase in cash and cash                                                                                                
  equivalents................               --              6,611         2,899             (352)                9,158       
Cash and cash equivalents,                                                                                                   
  beginning of year..........               --             34,531        10,938           (2,228)               43,241       
                                      --------           --------       -------         --------              --------       
CASH AND CASH EQUIVALENTS,                                                                                                   
  END OF YEAR................         $     --           $ 41,142       $13,837         $ (2,580)             $ 52,399       
                                      ========           ========       =======         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                               KINETIC CONCEPTS, INC.                    NON-       RECLASSIFICATIONS                        
                                   PARENT COMPANY       GUARANTOR      GUARANTOR           AND         KINETIC CONCEPTS, INC.
                                      BORROWER         SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS        AND SUBSIDIARIES   
                               ----------------------  ------------  -------------  -----------------  ----------------------
                                                                                                                             
CASH FLOWS FROM OPERATING                                                                                                    
  ACTIVITIES:                                                                                                                
Net earnings.................         $ 64,383           $ 10,356      $  4,185         $(14,541)             $ 64,383       
Adjustments to reconcile net                                                                                                 
  earnings to net cash                                                                                                       
  provided by operating                                                                                                      
  activities:                           (6,206)            38,343           276             (345)               32,068       
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED BY                                                                                                         
  OPERATING ACTIVITIES.......           58,177             48,699         4,461          (14,886)               96,451       
CASH FLOWS FROM INVESTING                                                                                                    
  ACTIVITIES:                                                                                                                
Additions to property, plant                                                                                                 
  and equipment..............           (4,832)           (25,413)       (4,801)          21,232               (13,814)      
Decrease in inventory to be                                                                                                  
  converted into equipment                                                                                                   
  for short-term rental......            4,250                 --            --               --                 4,250       
Dispositions of property,                                                                                                    
  plant and equipment........              497              2,372            --               --                 2,869       
Proceeds from sale of                                                                                                        
  divisions..................               --             65,300            --               --                65,300       
Increase in finance lease                                                                                                    
  receivable, net............               --             (1,561)           --               --                (1,561)      
Decrease (increase) in other                                                                                                 
  assets.....................           (1,505)             9,690           111          (17,526)               (9,230)      
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  INVESTING ACTIVITIES.......           (1,590)            50,388        (4,690)           3,706                47,814       
CASH FLOWS FROM FINANCING                                                                                                    
  ACTIVITIES:                                                                                                                
Borrowings (repayments) of                                                                                                   
  notes payable and long-term                                                                                                
  obligations................               95           (103,399)           68              611              (102,625)      
Borrowings (repayments) of                                                                                                   
  capital lease                                                                                                              
  obligations................             (176)            (4,778)          (61)           2,633                (2,382)      
Proceeds from the exercise of                                                                                                
  stock options..............              915                 --            --               --                   915       
Proceeds (payments) on                                                                                                       
  intercompany investments                                                                                                   
  and advances...............          (51,838)            38,690           472           12,676                    --       
Purchase and retirement of                                                                                                   
  treasury stock.............           (1,157)                --            --               --                (1,157)      
Cash dividends paid to                                                                                                       
  shareholders...............           (6,588)                --            --               --                (6,588)      
Other........................            2,162              2,841         1,440           (7,234)                 (791)      
                                      --------           --------      --------         --------              --------       
NET CASH PROVIDED (USED) BY                                                                                                  
  FINANCING ACTIVITIES.......          (56,587)           (66,646)        1,919            8,686              (112,628)      
Effect of exchange rate                                                                                                      
  changes on cash and cash                                                                                                   
  equivalents................               --                 --            --            1,324                 1,324       
                                      --------           --------      --------         --------              --------       
Net increase in cash and cash                                                                                                
  equivalents................               --             32,441         1,690           (1,170)               32,961       
Cash and cash equivalents,                                                                                                   
  beginning of year..........               --              2,090         9,248           (1,058)               10,280       
                                      --------           --------      --------         --------              --------       
CASH AND CASH EQUIVALENTS,                                                                                                   
  END OF YEAR................         $     --           $ 34,531      $ 10,938         $ (2,228)             $ 43,241       
                                      ========           ========      ========         ========              ========       

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                              SEPTEMBER 30,  DECEMBER 31,
                                                                  1997           1996    
                                                              -------------  ------------
                                                               (UNAUDITED)               
                                                                                         
                                          ASSETS                                         
Current assets:                                                                          
  Cash and cash equivalents.................................    $ 45,535       $ 59,045  
  Accounts and notes receivable, net........................      74,875         58,241  
  Inventories...............................................      21,068         20,042  
  Prepaid expenses and other................................      10,653          6,860  
                                                                --------       --------  
          Total current assets..............................     152,131        144,188  
                                                                --------       --------  
Net property, plant and equipment...........................      72,535         65,224  
Notes receivable............................................       3,100             --  
Goodwill, less accumulated amortization of $13,202 in 1997                               
  and $12,021 in 1996.......................................      27,649         13,541  
Other assets, less accumulated amortization of $2,942 in                                 
  1997 and $2,837 in 1996...................................      30,608         30,440  
                                                                --------       --------  
                                                                $286,023       $253,393  
                                                                ========       ========  
                           LIABILITIES AND SHAREHOLDERS' EQUITY                          
Current liabilities:                                                                     
  Accounts payable..........................................    $  5,423       $  3,974  
  Current installments of capital lease obligations.........         137            118  
  Accrued expenses..........................................      33,631         29,792  
  Income taxes payable......................................       1,776          2,970  
                                                                --------       --------  
          Total current liabilities.........................      40,967         36,854  
                                                                --------       --------  
Capital lease obligations, net of current installments......         340            396  
Deferred income taxes, net..................................      13,462          5,065  
Other.......................................................         208             --  
                                                                --------       --------  
                                                                  54,977         42,315  
                                                                --------       --------  
Minority interest...........................................         220             --  
Shareholders' equity:                                                                    
  Common stock; issued and outstanding 42,486 in 1997 and                                
     42,355 in 1996 ........................................          42             42  
  Retained earnings.........................................     235,579        210,816  
  Cumulative foreign currency translation adjustment........      (4,721)           555  
  Notes receivable from officers............................         (74)          (335) 
                                                                --------       --------  
                                                                 230,826        211,078  
                                                                --------       --------  
                                                                $286,023       $253,393  
                                                                ========       ========  

See accompanying notes to condensed consolidated financial statements.
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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                   THREE MONTHS ENDED   NINE MONTHS ENDED  
                                                     SEPTEMBER 30,        SEPTEMBER 30,    
                                                   ------------------  --------------------
                                                    1997       1996      1997        1996  
                                                   -------    -------  --------    --------
                                                                                           
Revenue:                                                                                   
  Rental and service.............................. $61,605    $56,638  $184,730    $167,523
  Sales and other.................................  14,694     11,332    39,781      32,306
                                                   -------    -------  --------    --------
     Total revenue................................  76,299     67,970   224,511     199,829
Rental expenses...................................  39,017     36,405   115,633     109,263
Cost of goods sold................................   6,065      3,856    16,077      11,685
                                                   -------    -------  --------    --------
                                                    45,082     40,261   131,710     120,948
                                                   -------    -------  --------    --------
     Gross profit.................................  31,217     27,709    92,801      78,881
Selling, general and administrative expenses......  15,052     14,080    44,196      38,791
                                                   -------    -------  --------    --------
     Operating earnings...........................  16,165     13,629    48,605      40,090
Net interest income...............................     442      1,063     1,295       2,937
                                                   -------    -------  --------    --------
     Earnings before income taxes and minority                                             
       interest...................................  16,607     14,692    49,900      43,027
Income taxes......................................   6,643      5,834    19,960      17,168
Minority interest.................................      16         --        37          --
                                                   -------    -------  --------    --------
     Net earnings................................. $ 9,948    $ 8,858  $ 29,903    $ 25,859
                                                   =======    =======  ========    ========
     Earnings per common and common equivalent                                             
       share...................................... $  0.23    $  0.19  $   0.68    $   0.56
                                                   =======    =======  ========    ========
     Shares used in earnings per share                                                     
       computations...............................  44,091     45,553    43,772      45,923
                                                   =======    =======  ========    ========

See accompanying notes to condensed consolidated financial statements.
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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED) 

                                                                [Download Table]

                                                              NINE MONTHS ENDED  
                                                                SEPTEMBER 30,    
                                                              ------------------ 
                                                               1997       1996   
                                                              -------    ------- 
                                                                                 
Cash flows from operating activities:                                            
  Net earnings..............................................  $29,903    $25,859 
  Adjustments to reconcile net earnings to net cash provided                     
     by operating activities:                                                    
     Depreciation and amortization..........................   17,144     16,487 
     Provision for uncollectible accounts receivable........    2,533      2,327 
     Change in assets and liabilities:                                           
       Increase in accounts receivable......................  (17,599)    (3,159)
       Increase in inventories..............................     (598)    (2,174)
       Increase in prepaid and other assets.................   (3,693)    (4,696)
       Increase in accounts payable.........................       77      1,460 
       Increase in accrued expenses.........................    2,145      2,604 
       Increase (decrease) in income taxes payable..........   (1,194)       968 
       Increase in deferred income taxes....................    8,397        613 
                                                              -------    ------- 
          Net cash provided by operating activities.........   37,115     40,289 
                                                              -------    ------- 
Cash flows from investing activities:                                            
  Additions to property, plant, and equipment...............  (19,794)   (18,287)
  Increase in inventory to be converted into equipment for                       
     short-term rental......................................   (4,210)      (850)
  Dispositions of property, plant, and equipment............    1,809      1,400 
  Business acquired in purchase transactions, net of cash                        
     acquired...............................................  (16,903)        -- 
  Decrease (increase) in note receivable from principal                          
     shareholder............................................   (3,000)    10,000 
  Increase in other assets..................................   (1,115)      (961)
                                                              -------    ------- 
          Net cash used by investing activities.............  (43,213)    (8,698)
                                                              -------    ------- 
Cash flows from financing activities:                                            
  Proceeds (repayments) of capital lease obligations........     (307)       488 
  Proceeds from the exercise of stock options...............    3,864      4,694 
  Purchase and retirement of treasury stock.................   (4,133)   (16,599)
  Cash dividends paid to shareholders.......................   (4,789)    (4,988)
  Other.....................................................      607       (147)
                                                              -------    ------- 
          Net cash used by financing activities.............   (4,758)   (16,552)
                                                              -------    ------- 
Effect of exchange rate changes on cash and cash                                 
  equivalents...............................................   (2,654)      (457)
                                                              -------    ------- 
Net increase (decrease) in cash and cash equivalents........  (13,510)    14,582 
Cash and cash equivalents, beginning of year................   59,045     52,399 
                                                              -------    ------- 
Cash and cash equivalents, end of period....................  $45,535    $66,981 
                                                              =======    ======= 
Supplemental disclosure of cash flow information:                                
  Cash paid during the first nine months for:                                    
     Interest...............................................      111        112 
     Income taxes...........................................    9,380     10,544 

See accompanying notes to condensed consolidated financial statements.
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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 

(1) BASIS OF PRESENTATION                                                       

   The financial statements presented herein include the accounts of Kinetic
Concepts, Inc. and all subsidiaries (the "Company"). The condensed consolidated 
financial statements appearing in this quarterly report on Form 10-Q should be  
read in conjunction with the financial statements and notes thereto included in 
the Company's latest annual report. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally 
accepted accounting principles have been condensed or omitted. The foregoing    
financial information reflects all adjustments (consisting only of normal       
recurring adjustments) which are, in the opinion of management, necessary for a 
fair presentation of the financial position and results of operations for the   
interim periods presented. Interim period operating results are not necessarily 
indicative of the results to be expected for the full fiscal year.              

(2) INVENTORY COMPONENTS                                                        

     Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value). Inventories are comprised of the following (in          
thousands):                                                                     

                                                                [Download Table]

                                                    SEPTEMBER 30,  DECEMBER 31,
                                                        1997           1996    
                                                    -------------  ------------
                                                                               
Finished goods.....................................    $ 8,414       $ 5,586   
Work in progress...................................      3,333         1,893   
Raw materials, supplies and parts..................     18,081        17,113   
                                                       -------       -------   
                                                        29,828        24,592   
Less amounts expected to be converted into                                     
  equipment for short-term rental..................      8,760         4,550   
                                                       -------       -------   
          Total inventories........................    $21,068       $20,042   
                                                       =======       =======   

(3) NOTES RECEIVABLE                                                            

Notes receivable includes a $3.0 million note received from James R.  
Leininger, M.D., the principal shareholder and chairman of the Company's Board  
of Directors, the proceeds of which were used to finance a construction project 
for Home Dome, L.L.C., a third party affiliated with Dr. Leininger. The note    
carries a variable interest rate which will fluctuate between 6.25% and 10.25%  
per annum, and requires quarterly interest payments beginning May 3, 1997.      
Monthly principal payments commence March 3, 1998 based on a 20-year note       
amortization. The note has a final maturity date of February 3, 2002, at which  
time the entire amount of unpaid principal and interest shall be due. The note  
is secured by 300,000 shares of the Company's Common Stock and a mortgage on the
property under construction.                                                    

(4) ACQUISITIONS/DISPOSITIONS                                                   

 On July 31, 1997, the Company acquired the outstanding capital stock of
Equi-Tron Mfg., Inc. located in Ontario, Canada, for approximately $3.2 million 
in cash plus other consideration. Equi-Tron Mfg., Inc. manufactures a line of   
products for bariatric patients used primarily in the home care market.         

On April 18, 1997, the Company acquired 80% of the outstanding capital
stock of Ethos Medical Group, Ltd. located in Athlone, Ireland, for             
approximately $2.3 million in cash plus other consideration. Ethos manufactures 
the Keene Roto Rest(R) trauma bed and other medical devices and rents specialty 
support surfaces to caregivers throughout Ireland. Ethos Medical's operating    
results are not expected to have a material impact on the Company's results of  
operations for 1997. The operating results of Equi-Tron Mfg., Inc. are not      
expected to have a material impact on the Company's results of operations for   
1997.                                                                           

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

    On February 1, 1997, the Company acquired the assets of H.F. Systems, Inc.
of Los Angeles. H.F. Systems offers a complete line of therapeutic specialty    
support surfaces primarily to the California extended care marketplace. The     
Company acquired the assets of H.F. Systems in a single transaction for         
approximately $8.0 million in cash plus other consideration. H.F. Systems will  
be integrated into Kinetic Concepts' extensive distribution system and, as a    
result, the Company expects to benefit from the elimination of certain redundant
expenses. H.F. Systems recorded revenue of approximately $7.0 million for 1996  
and is not expected to have a material impact on the Company's results of       
operations for 1997.                                                            

   On January 3, 1997 the Company purchased from Trac Medical, Inc., a North
Carolina corporation, all assets and technology rights to the "Access" patient  
care device, an environmental control system arm which is mountable on hospital 
beds. The Company purchase price of the Access device was approximately $2.0    
million in cash plus other consideration.                                       

(5) SHARES USED IN EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE COMPUTATIONS 

    The weighted average number of common and common equivalent shares used in
the computation of earnings per share is as follows (in thousands):             

                                                        [Enlarge/Download Table]

                                                         THREE MONTHS ENDED  NINE MONTHS ENDED 
                                                           SEPTEMBER 30,       SEPTEMBER 30,   
                                                         ------------------  ------------------
                                                          1997       1996     1997       1996  
                                                         -------    -------  -------    -------
                                                                                               
Average outstanding common shares.......................  42,447     43,966   42,318     44,209
Average common equivalent shares-dilutive effect of                                            
  option shares.........................................   1,644      1,587    1,454      1,714
                                                          ------     ------   ------     ------
Shares used in earnings per share computations..........  44,091     45,553   43,772     45,923
                                                          ======     ======   ======     ======

  Earnings per common and common equivalent share are computed by dividing
net earnings by the weighted average number of common and dilutive common       
equivalent shares outstanding during the period. Dilutive common equivalent     
shares consist of stock options (using the treasury stock method). Earnings per 
share computed on a fully diluted basis is not presented as it is not           
significantly different from earnings per share computed on a primary basis.    

(6) COMMITMENTS AND CONTINGENCIES                                               

The Company is party to several lawsuits generally incidental to its  
business and is contesting certain adjustments proposed by the Internal Revenue 
Service to prior years' tax returns. Provisions have been made in the           
accompanying financial statements for estimated exposures related to these      
lawsuits and adjustments. In the opinion of management, the disposition of these
items will not have a material effect on the Company's financial statements.    

(7) NEW PRONOUNCEMENTS                                                          

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,    
1997. At that time, the Company will be required to change the method currently 
used to compute earnings per share and to restate all prior periods. Under the  
new requirements for calculating primary ("basic") earnings per share, the      
dilutive effect of stock options will be excluded. The impact is expected to    
result in an increase in basic earnings per share for the nine month periods    
ended September 30, 1997 and September 30, 1996 of $0.01 and $0.01 per share,   
respectively. The impact of Statement 128 on the calculation of fully diluted   
earnings per share for these periods is not expected to be material.            

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income" which is effective for      
fiscal years beginning after December 15, 1997. This new pronouncement          
establishes standards for the reporting and display of comprehensive income and 
its components in a full set of general purpose financial statements. Under the 
provisions of Statement No. 130, all revenue, expenses, gains and losses        
recognized during the period are included in income, regardless of whether they 
are considered to be results of operations of the period. Items required by     
accounting standards to be reported as direct adjustments to paid-in-capital,   
retained earnings or other non-income equity accounts are not to be included as 
components of comprehensive income. The Company plans to adopt the provisions of
Statement No. 130 effective with the fiscal year beginning January 1, 1998, and 
estimates that any impact on the Company's results of operations or financial   
position will not be material.                                                  

 Also, effective for periods beginning after December 15, 1997, the FASB
issued Statement No. 131, "Disclosures about Segments of an Enterprise and      
Related Information". This statement establishes standards for the way that     
public companies report information about operating segments in annual financial
statements as well as interim financial reports. It also establishes standards  
for related disclosures about products and services, geographic areas and major 
customers. Operating segments are components of an enterprise about which       
separate financial information is available that is evaluated regularly by the  
chief operating decision maker in deciding how to allocate resources and in     
assessing performance. The Company plans to adopt the provisions of Statement   
No. 131 effective with the fiscal year beginning January 1, 1998 and estimates  
that adoption of these provisions will not have a material adverse impact on the
Company's financial position or results of operations.                          

(8) SUBSEQUENT EVENTS                                                           

   Subsequent to September 30, 1997, the Company consummated the acquisition
of substantially all of the assets of RIK Medical, L.L.C. ("RIK"), a Delaware   
limited liability company. The Company paid approximately $23.3 million for the 
acquisition plus an earn-out of up to $2.0 million. RIK is a manufacturer of    
non-powered therapeutic support surfaces based in Boulder, Colorado. The RIK    
products incorporate several unique and patented components and features.       

  Subsequent to September 30, 1997, the Company and Fremont Partners, L.P.
and Richard C. Blum & Associates, L.P. (the "Investors") entered into a         
Transaction Agreement (the "Transaction Agreement") pursuant to which the       
Investors will participate in the recapitalization (the "Recapitalization") of  
the Company. The Transaction Agreement provides, among other things, that the   
Investors would purchase in the aggregate 8,083,712 newly-issued shares of the  
Company's common stock, $.001 par value per share, at a per Share price equal to
$19.25 (the "Stock Purchase"). The proceeds of the Stock Purchase, together with
approximately $540.2 million of aggregate proceeds from certain financings, will
be used by the Company to (i) purchase all of the Shares tendered to the Company
pursuant to the terms of that certain Offer to Purchase dated October 8, 1997   
(the "Tender Offer") at a price of $19.25 per Share, net to seller in cash and  
(ii) pay all related fees and expenses.                                         

 The Transaction Agreement provides that, among other things, as soon as
practicable after the consummation of the Stock Purchase, the purchase of Shares
pursuant to the Tender Offer, the satisfaction of the other conditions set forth
in the Transaction Agreement, and in accordance with the requirements of the    
Delaware General Corporation Law and the Revised Uniform Limited Partnership Act
of the State of Delaware (together, "Delaware Law") and the Texas Business      
Corporation Act ("Texas Law"), the Investors will be merged with and into the   
Company (the "Merger") with the Company as the surviving corporation of the     
Merger. The consummation of the Merger is subject to the satisfaction or waiver 
of certain conditions including the approval of the Transaction Agreement and   
the Merger by the requisite vote of the shareholders of the Company. Under the  
Company's articles of incorporation and Texas Law, the affirmative vote of the  
holders of two-thirds of the outstanding Shares is required to approve the      
Transaction Agreement and the Merger. If the Tender Offer is consummated, the   
Investors and Dr. James Leininger will be able to effect the Merger without the 
affirmative vote of any other shareholder.                                      
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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED) 

(9) SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL                    
STATEMENTS (UNAUDITED)                                                          

Kinetic Concepts, Inc. has issued $200 million in subordinated debt   
securities to finance a tender offer to purchase certain of its common shares   
outstanding. In connection with the issuance of these securities, certain of its
subsidiaries (the guarantor subsidiaries) have jointly and severally guaranteed 
such debt securities. Certain other subsidiaries (the nonguarantor subsidiaries)
will not guarantee such debt. Separate financial statements and other           
disclosures concerning the subsidiary guarantors are not deemed material to     
Investors.                                                                      

    The following tables present the unaudited condensed consolidating balance
sheets of Kinetic Concepts, Inc. as a parent company, its guarantor subsidiaries
and its nonguarantor subsidiaries as of September 30, 1997 and 1996 and the     
related unaudited condensed consolidating statements of earnings and cash flows 
for the nine-month periods ended September 30, 1997 and 1996.                   

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                 KINETIC                                                           KINETIC    
                                              CONCEPTS, INC.                                 RECLASSIFICATIONS  CONCEPTS, INC.
                                              PARENT COMPANY    GUARANTOR     NON-GUARANTOR         AND              AND      
                                                 BORROWER      SUBSIDIARIES   SUBSIDIARIES     ELIMINATIONS      SUBSIDIARIES 
                                              --------------   ------------   -------------  -----------------  --------------
                                                                                                                              
                                                            ASSETS                                                            
Current assets:                                                                                                               
  Cash and cash equivalents..................    $  1,615        $ 22,876        $21,044         $                 $ 45,535   
  Accounts receivable and note receivable,                                                                                    
     net.....................................         268          60,763         13,844                             74,875   
  Inventories................................      18,157           2,292          9,658            (9,039)          21,068   
  Prepaid expenses and other.................       6,076           2,807          1,770                             10,653   
                                                 --------        --------        -------         ---------         --------   
          Total current assets...............     262,116          88,738         46,316            (9,039)         152,131   
  Net property, plant and equipment..........      13,918          73,882          8,625           (23,890)          72,535   
  Notes receivable...........................       3,000             100                                             3,100   
  Goodwill, net..............................       2,869          18,831          5,949                             27,649   
  Other assets, net..........................       9,915          22,080            121            (1,508)          30,608   
  Intercompany investments and advances......     242,282         267,443          5,060          (514,785)                   
                                                 --------        --------        -------         ---------         --------   
          Total Assets.......................    $298,100        $471,074        $66,071         $(549,222)        $286,023   
                                                 ========        ========        =======         =========         ========   
                                               LIABILITIES AND CAPITAL ACCOUNTS                                               
Accounts payable.............................    $  2,828        $    604        $ 1,991         $                 $  5,423   
Intercompany payables........................      59,906         122,107         11,359          (193,372)                   
Current installments of capital lease                                                                                         
  obligations................................         137                                                               137   
Accrued expenses.............................       4,115          24,321          5,694              (499)          33,631   
Income taxes payable.........................                         889          3,404            (2,517)           1,776   
                                                 --------        --------        -------         ---------         --------   
          Total current liabilities..........      66,986         147,921         22,448          (196,388)          40,967   
                                                 --------        --------        -------         ---------         --------   
Capital leases obligations, net of current                                                                                    
  installments...............................         289                             51                                340   
Deferred income taxes, net...................                      18,924                           (5,462)          13,462   
Other........................................                                        208                                208   
                                                 --------        --------        -------         ---------         --------   
          Total Liabilities..................      67,275         166,845         22,707          (201,850)          54,977   
                                                 --------        --------        -------         ---------         --------   
Minority interest............................                                        220                                220   
Stockholders' Equity.........................     230,825         304,229         43,144          (347,372)         230,826   
                                                 --------        --------        -------         ---------         --------   
          Total Liabilities and Equity.......    $298,100        $471,074        $66,071         $(549,222)        $286,023   
                                                 ========        ========        =======         =========         ========   

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                          KINETIC                                                                      
                                       CONCEPTS, INC.                               RECLASSIFICATIONS      KINETIC     
                                       PARENT COMPANY   GUARANTOR    NON-GUARANTOR         AND          CONCEPTS, INC. 
                                          BORROWER     SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS     AND SUBSIDIARIES
                                       --------------  ------------  -------------  -----------------  ----------------
                                                                                                                       
ASSETS                                                                                                                 
Current assets:                                                                                                        
  Cash and cash equivalents...........    $              $ 55,230       $13,215         $  (1,464)         $ 66,981    
  Accounts receivable, net............       5,246         38,942        12,751                              56,939    
  Inventories.........................      15,488            162        11,940            (6,490)           21,100    
  Prepaid expenses and other..........       5,257          2,876         1,429                               9,562    
                                          --------       --------       -------         ---------          --------    
          Total current assets........      25,991         97,210        39,335            (7,954)          154,582    
  Net property, plant and equipment...      12,389         77,445         9,452           (33,898)           65,388    
  Notes receivable....................                      3,187                                             3,187    
  Goodwill, net.......................       3,544          3,836         6,464                              13,844    
  Other assets, net...................       9,574         12,847                            (993)           21,428    
  Intercompany investments and                                                                                         
     advances.........................     291,835                                       (291,835)                     
                                          --------       --------       -------         ---------          --------    
          Total Assets................    $343,333       $194,525       $55,251         $(334,680)         $258,429    
                                          ========       ========       =======         =========          ========    
LIABILITIES AND CAPITAL ACCOUNTS                                                                                       
  Accounts payable....................    $  3,640       $    386       $ 1,336         $  (1,464)         $  3,898    
  Intercompany payables...............     114,325         19,307        12,062          (145,694)                     
  Accrued expenses....................       5,924         17,864         5,844              (574)           29,058    
  Income taxes payable................                      5,256         2,006            (2,671)            4,591    
                                          --------       --------       -------         ---------          --------    
          Total current liabilities...     123,889         42,813        21,248          (150,403)           37,547    
                                          --------       --------       -------         ---------          --------    
  Capital leases obligations..........         494                           49                                 543    
  Deferred income taxes, net..........                      7,819                          (6,430)            1,389    
  Other...............................                                                                                 
                                          --------       --------       -------         ---------          --------    
          Total Liabilities...........     124,383         50,632        21,297          (156,833)           39,479    
                                          --------       --------       -------         ---------          --------    
  Stockholders' Equity................     216,950        143,893        33,954          (177,847)          218,950    
                                          --------       --------       -------         ---------          --------    
          Total Liabilities and                                                                                        
            Equity....................    $341,333       $194,525       $55,251         $(334,680)         $258,429    
                                          ========       ========       =======         =========          ========    

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                 KINETIC                                                         HISTORICAL   
                              CONCEPTS, INC.                               RECLASSIFICATIONS      KINETIC     
                              PARENT COMPANY   GUARANTOR    NON-GUARANTOR         AND          CONCEPTS, INC. 
                                 BORROWER     SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS     AND SUBSIDIARIES
                              --------------  ------------  -------------  -----------------  ----------------
                                                                                                              
Revenue:                                                                                                      
  Rental and Service.........    $              $150,699       $34,031         $                  $184,730    
  Sales and other............     32,018          23,991        15,065          (31,293)            39,781    
                                 -------        --------       -------         --------           --------    
          Total revenue......     32,018         174,690        49,096          (31,293)           224,511    
Rental expenses..............                     91,263        30,453           (6,083)           115,633    
Cost of goods sold...........     20,633           6,014         8,785          (19,355)            16,077    
                                 -------        --------       -------         --------           --------    
                                  20,633          97,277        39,238          (25,438)           131,710    
                                 -------        --------       -------         --------           --------    
     Gross profit............     11,385          77,413         9,858           (5,855)            92,801    
Selling, general and                                                                                          
  administrative expenses....      4,593          36,925         2,678                              44,196    
                                 -------        --------       -------         --------           --------    
     Operating earnings......      6,792          40,488         7,180           (5,855)            48,605    
Net interest income..........        173             349           216              557              1,295    
                                 -------        --------       -------         --------           --------    
  Earnings before income                                                                                      
     taxes and minority                                                                                       
     interest................      6,965          40,837         7,396           (5,298)            49,900    
Income tax...................      2,747          15,787         3,285           (1,859)            19,960    
Minority interest............                                      (37)                                (37)   
                                 -------        --------       -------         --------           --------    
  Earnings before equity in                                                                                   
     earnings of                                                                                              
     subsidiaries............      4,219          25,049         4,074           (3,439)            29,123    
  Equity in earnings of                                                                                       
     subsidiaries............     25,684           4,074                        (29,758)                      
                                 -------        --------       -------         --------           --------    
Net earnings.................    $29,903        $ 29,123       $ 4,074         $(33,197)          $ 29,903    
                                 =======        ========       =======         ========           ========    

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                      KINETIC                                                         HISTORICAL   
                                   CONCEPTS, INC.                               RECLASSIFICATIONS      KINETIC     
                                   PARENT COMPANY   GUARANTOR    NON-GUARANTOR         AND          CONCEPTS, INC. 
                                      BORROWER     SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS     AND SUBSIDIARIES
                                   --------------  ------------  -------------  -----------------  ----------------
                                                                                                                   
Revenue:                                                                                                           
  Rental and service..............    $              $130,554       $36,969         $                  $167,523    
  Sales and other.................      31,149          8,273        14,035          (21,151)            32,306    
                                      --------       --------       -------         --------           --------    
          Total revenue...........      31,149        138,827        51,004          (21,151)           199,829    
Rental expenses...................                     82,091        34,788           (7,616)           109,263    
Cost of goods sold................      24,598            554         6,494          (19,961)            11,685    
                                      --------       --------       -------         --------           --------    
                                        24,598         82,645        41,282          (27,577)           120,948    
                                      --------       --------       -------         --------           --------    
     Gross profit.................       6,551         56,182         9,722            6,426             78,881    
Selling, general and                                                                                               
  administrative expenses.........      16,280         20,318         2,193                              38,791    
  Operating earnings..............      (9,729)        35,864         7,529            6,426             40,090    
Interest income (expense), net....      (4,407)         6,607           170              567              2,937    
                                      --------       --------       -------         --------           --------    
  Earnings before income taxes....     (14,136)        42,471         7,699            6,993             43,027    
Income tax........................      (5,513)        16,351         3,465            2,865             17,168    
                                      --------       --------       -------         --------           --------    
  Earnings before equity in                                                                                        
     earnings of subsidiaries.....      (8,623)        26,120         4,234            4,128             25,859    
  Equity in earnings of                                                                                            
     subsidiaries.................      34,482          4,234                        (38,716)                      
                                      --------       --------       -------         --------           --------    
  Net earnings....................    $ 25,859       $ 30,354       $ 4,234         $(34,588)          $ 25,859    
                                      ========       ========       =======         ========           ========    

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED) 
(THOUSANDS) 

                                                        [Enlarge/Download Table]

                                          KINETIC                                                                      
                                       CONCEPTS, INC.                               RECLASSIFICATIONS      KINETIC     
                                       PARENT COMPANY   GUARANTOR    NON-GUARANTOR         AND          CONCEPTS, INC. 
                                          BORROWER     SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS     AND SUBSIDIARIES
                                       --------------  ------------  -------------  -----------------  ----------------
                                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                  
Net earnings..........................    $ 29,903       $ 29,123       $ 4,074         $(33,197)          $ 29,903    
Adjustments to reconcile net earnings                                                                                  
  to net cash provided by operating                                                                                    
  activities..........................     (33,650)         5,337         4,363           31,162              7,212    
                                          --------       --------       -------         --------           --------    
Net cash provided by operating                                                                                         
  activities..........................      (3,747)        34,460         8,437           (2,035)            37,115    
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                  
  Additions to property, plant and                                                                                     
     equipment........................         923        (14,910)       (3,445)          (2,362)           (19,794)   
  Increase in inventory to be                                                                                          
     converted into equipment for                                                                                      
     short-term rental................      (4,210)                                                          (4,210)   
  Dispositions of property, plant and                                                                                  
     equipment........................                        264         1,545                               1,809    
  Businesses acquired in purchase                                                                                      
     transactions, net of cash                                                                                         
     acquired.........................                    (16,903)                                          (16,903)   
  Decrease in note receivable from                                                                                     
     principal shareholder............      (3,000)                                                          (3,000)   
  Decrease (increase) in other                                                                                         
     assets...........................         808            534           125           (2,582)            (1,115)   
                                          --------       --------       -------         --------           --------    
Net cash used in investing                                                                                             
  activities..........................      (5,479)       (31,015)       (1,775)          (4,944)           (43,213)   
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                  
  Proceeds (repayments) of capital                                                                                     
     lease obligations................        (248)                           3              (62)              (307)   
  Proceeds from the exercise of stock                                                                                  
     options..........................       3,864                                                            3,864    
  Proceeds (payments) on intercompany                                                                                  
     investments and advances.........      21,036        (28,257)        4,748            2,473                       
  Purchase and retirement of treasury                                                                                  
     stock............................      (4,133)                                                          (4,133)   
  Cash dividends paid to                                                                                               
     shareholders.....................      (4,789)                                                          (4,789)   
  Other...............................      (4,889)        (2,598)       (4,854)          12,948                607    
                                          --------       --------       -------         --------           --------    
Net cash provided (used) by financing                                                                                  
  activities..........................      10,841        (30,855)         (103)          15,359             (4,758)   
Effect of exchange rate changes on                                                                                     
  cash and cash equivalents...........                                                    (2,654)            (2,654)   
                                          --------       --------       -------         --------           --------    
Net increase in cash and cash                                                                                          
  equivalents.........................       1,615        (27,410)        6,559            5,726            (13,510)   
  Effect of Unusual Items                                                                                              
Cash and cash equivalents, beginning                                                                                   
  of period...........................                     50,286        14,485           (5,726)            59,045    
                                          --------       --------       -------         --------           --------    
Cash and cash equivalents, end of                                                                                      
  period..............................    $  1,615       $ 22,876       $21,044         $                  $ 45,535    
                                          ========       ========       =======         ========           ========    

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KINETIC CONCEPTS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATING GUARANTOR, NONGUARANTOR AND 
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                          KINETIC                                                                      
                                       CONCEPTS, INC.                               RECLASSIFICATIONS      KINETIC     
                                       PARENT COMPANY   GUARANTOR    NON-GUARANTOR         AND          CONCEPTS, INC. 
                                          BORROWER     SUBSIDIARIES  SUBSIDIARIES     ELIMINATIONS     AND SUBSIDIARIES
                                       --------------  ------------  -------------  -----------------  ----------------
                                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                  
Net earnings..........................    $ 25,859       $ 30,354       $ 4,234         $(34,588)          $ 25,859    
Adjustments to reconcile net earnings                                                                                  
  to net cash provided by operating                                                                                    
  activities..........................     (37,368)        31,682        (7,856)          27,972             14,430    
                                          --------       --------       -------         --------           --------    
Net cash (used in) provided by                                                                                         
  operating activities................     (11,509)        62,036        (3,622)          (6,616)            40,289    
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                  
  Additions to property, plant, and                                                                                    
     equipment........................      (5,750)        (8,841)       (4,962)           1,266            (18,287)   
  Increase in inventory to be                                                                                          
     converted into equipment for                                                                                      
     short-term rental................        (850)                                                            (850)   
  Dispositions of property, plant and                                                                                  
     equipment........................                                    1,400                               1,400    
  Decrease (increase) in note                                                                                          
     receivable from principal                                                                                         
     shareholder......................                     10,000                                            10,000    
  Decrease (increase) in other                                                                                         
     assets...........................       1,289            746          (970)          (2,026)              (961)   
                                          --------       --------       -------         --------           --------    
Net cash (used in) provided by                                                                                         
  investing activities................      (5,311)         1,905        (4,532)            (760)            (8,698)   
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                  
  Proceeds (repayments) of capital                                                                                     
     lease obligations................         494                           (6)                                488    
  Proceeds from the exercise of stock                                                                                  
     options..........................       4,694                                                            4,694    
  Proceeds (payments) on intercompany                                                                                  
     investments and advances.........      33,558        (48,230)        7,730            6,942                       
  Purchase and retirement of treasury                                                                                  
     stock............................     (16,599)                                                         (16,599)   
  Cash dividends paid to                                                                                               
     shareholders.....................      (4,988)                                                          (4,988)   
  Other...............................        (339)        (1,623)         (192)           2,007               (147)   
                                          --------       --------       -------         --------           --------    
Net cash provided (used) by financing                                                                                  
  activities..........................      16,820        (49,953)        7,532            8,949            (16,552)   
Effect of exchange rate changes on                                                                                     
  cash and cash equivalents...........                                                      (457)              (457)   
                                          --------       --------       -------         --------           --------    
Net increase in cash and cash                                                                                          
  equivalents.........................                     14,088          (622)           1,116             14,582    
Cash and cash equivalents, beginning                                                                                   
  of period...........................                     41,142        13,837           (2,580)            52,399    
                                          --------       --------       -------         --------           --------    
Cash and cash equivalents, end of                                                                                      
  period..............................    $              $ 55,230       $13,215         $ (1,464)          $ 66,981    
                                          ========       ========       =======         ========           ========    

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======================================================                          

  NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS  
IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH         
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED 
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A      
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN     
WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR           
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER
OF TRANSMITTAL OR BOTH TOGETHER NOR ANY EXCHANGE OF SECURITIES MADE HEREUNDER   
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.                     

------------------------

TABLE OF CONTENTS 

                                                                [Download Table]

                                        PAGE
                                        ----
                                            
Summary...............................    5 
Risk Factors..........................   18 
Purpose of the Exchange Offer.........   27 
Resale of the Exchange Notes..........   28 
Plan of Distribution..................   28 
The Exchange Offer....................   29 
Exchange Agent........................   35 
Use of Proceeds.......................   36 
Capitalization........................   37 
Unaudited Pro Forma Condensed               
  Consolidated Financial Statements...   38 
Selected Historical Consolidated            
  Financial Data......................   48 
Management's Discussion and Analysis        
  of Financial Condition and Results        
  of Operations.......................   50 
Business..............................   60 
Management............................   75 
Executive Compensation................   76 
Principal Shareholders................   83 
Certain Relationships and Related           
  Transactions........................   84 
Description of New Credit                   
  Facilities..........................   86 
Description of Notes..................   88 
Certain Tax Considerations............  117 
Book-Entry; Delivery and Form.........  120 
Available Information.................  121 
Independent Accountants...............  122 
Legal Matters.........................  122 
Index to Financial Statements.........  F-1 

    UNTIL MAY 12, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT             
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.    
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN   
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR           
SUBSCRIPTIONS.                                                                  

======================================================                          
======================================================                          
KINETIC CONCEPTS, INC.

OFFER TO EXCHANGE 
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING 
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A

KCILOGO 
------------------------

PROSPECTUS
------------------------

February 11, 1998 

======================================================                          

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424B3’ Filing		Date		First		Last			Other Filings
		11/1/07		13		88			4
		11/1/02		1		119
		2/3/02		58		157
		3/31/01		86					10-Q
		12/31/00		86					10-K
		11/1/00		1		119
		7/1/98		50		72
		5/12/98		3		167
		5/1/98		1		88
		3/31/98		86					10-K,  10-Q
		3/3/98		1		157
Filed on:		2/12/98
		2/11/98		1		167
		1/6/98		83
		1/5/98		26
		1/1/98		159
		12/31/97		158					10-K
		12/15/97		159
		11/30/97		43
		11/20/97		22		69
		11/6/97		1
		11/5/97		1		88
		11/3/97		106					SC 13E3/A,  SC 13E4/A
		10/8/97		9		159			SC 13D/A,  SC 13E3,  SC 13E4
		10/6/97		22		69			SC 13D/A
		10/2/97		9		115
		10/1/97		8		67
		9/30/97		2		165			10-Q
		7/31/97		157
		5/13/97		77		82			DEF 14A
		5/3/97		157
		4/18/97		157
		2/5/97		124
		2/1/97		43		158
		1/3/97		158
		1/2/97		57
		12/31/96		16		151			10-K
		12/30/96		141
		12/26/96		142
		12/24/96		74
		12/18/96		85
		12/5/96		77		82
		12/1/96		78
		10/31/96		73		142
		9/30/96		16		166			10-Q
		7/1/96		76
		12/31/95		48		152			10-K,  DEF 14A
		10/27/95		77		82
		8/16/95		73		142
		6/15/95		46		131
		3/27/95		46		131
		1/1/95		139
		12/31/94		17		153			10-K,  10-K/A
		11/14/94		78
		9/30/94		46		132			10-Q,  8-K
		1/1/94		17		141
		12/31/93		48		128
		12/31/92		48
		2/21/92		73		142
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