SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
---------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
------------------------- -------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 70,915,008 shares as of October 1, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION> September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents............. $ 4,889 $ 61,754
Accounts receivable, net.............. 81,420 81,238
Inventories........................... 24,661 21,553
Prepaid expenses and other............ 14,277 18,446
------- -------
Total current assets............... 125,247 182,991
------- -------
Property, plant and equipment, net...... 82,570 75,434
Goodwill, less accumulated amortization
of $16,480 in 1998 and $13,989 in
1997.................................. 45,505 45,899
Loan issuance costs, less accumulated
amortization of $2,108 in 1998 and
$382 in 1997.......................... 15,959 17,346
Other assets, less accumulated
amortization of $3,346 in 1998 and
$3,100 in 1997........................ 31,171 29,481
------- -------
$300,452 $351,151
======= =======
Liabilities and Capital Accounts:
Current liabilities:
Accounts payable...................... $ 3,873 $ 40,353
Accrued expenses...................... 43,121 41,334
Income taxes payable.................. 171 --
Current installments of long-term
obligations......................... 7,805 4,800
Current installments of capital lease
obligations......................... 147 139
------- -------
Total current liabilities.......... 55,117 86,626
------- -------
Long-term obligations, excluding current
installments.......................... 498,774 529,901
Capital lease obligations, excluding
current installments.................. 173 312
Deferred income taxes, net.............. 11,115 10,010
------- -------
565,179 626,849
------- -------
Commitments and contingencies (Note 7)
Shareholders' deficit:
Common stock; issued and outstanding
70,915 in 1998 and 70,852 in 1997... 71 71
Accumulated deficit................... (261,941) (273,285)
Cumulative foreign currency trans-
lation adjustment................... (2,857) (2,484)
------- -------
(264,727) (275,698)
------- -------
$300,452 $351,151
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental and service........ $62,865 $61,605 $193,188 $184,730
Sales and other........... 18,183 14,694 51,115 39,781
------ ------ ------- -------
Total revenue........... 81,048 76,299 244,303 224,511
Rental expenses............. 40,204 39,017 124,426 115,633
Cost of goods sold.......... 6,717 6,065 19,146 16,077
------ ------ ------- -------
46,921 45,082 143,572 131,710
------ ------ ------- -------
Gross profit............ 34,127 31,217 100,731 92,801
Selling, general and
administrative expenses... 15,458 15,052 49,312 44,196
------ ------ ------- -------
Operating earnings...... 18,669 16,165 51,419 48,605
Interest income............. 85 474 477 1,426
Interest expense............ (12,155) (32) (36,473) (131)
Foreign currency loss....... (280) -- (521) --
------ ------ ------- -------
Earnings before income
taxes and minority
interest.............. 6,319 16,607 14,902 49,900
Income taxes................ 2,528 6,643 5,971 19,960
Minority interest in
subsidiary loss (gain).... 1 (16) 25 (37)
------ ------ ------- -------
Net earnings............ $ 3,792 $ 9,948 $ 8,956 $ 29,903
====== ====== ======= =======
Earnings per share...... $ 0.05 $ 0.06 $ 0.13 $ 0.18
====== ====== ======= =======
Earnings per share -
assuming dilution..... $ 0.05 $ 0.06 $ 0.12 $ 0.17
====== ====== ======= =======
Average common shares:
Basic (weighted
average outstanding
shares)............. 70,872 169,788 70,872 169,272
====== ======= ======= =======
Diluted (weighted
average outstanding
shares)............. 73,264 176,364 73,264 175,088
====== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION> Nine months ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 8,956 $ 29,903
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation............................... 19,123 15,389
Amortization............................... 4,463 1,755
Provision for uncollectible accounts
receivable............................... 1,575 2,533
Change in assets and liabilities:
Increase in accounts receivable, net..... (1,849) (17,599)
Increase in inventories.................. (3,169) (598)
Decrease (increase) in prepaid expenses
and other.............................. 4,168 (3,693)
Increase (decrease) in accounts payable.. (36,493) 77
Increase in accrued expenses............. 1,742 2,145
Increase (decrease) in income taxes
payable................................ 171 (1,194)
Increase in deferred income taxes, net... 1,105 8,397
------ -------
Net cash provided (used) by operating
activities........................... (208) 37,115
------ -------
Cash flows from investing activities:
Additions to property, plant and equipment..... (22,235) (19,794)
Increase in inventory to be converted into
equipment for short-term rental.............. (5,900) (4,210)
Dispositions of property, plant and equipment.. 1,813 1,809
Businesses acquired in purchase transactions,
net of cash acquired......................... (2,827) (16,903)
Increase in note receivable from principal
shareholder.................................. -- (3,000)
Increase in other assets....................... (1,546) (1,115)
------ ------
Net cash used by investing activities.. (30,695) (43,213)
------ ------
Cash flows from financing activities:
Repayments of long-term obligations............ (28,122) --
Repayments of capital lease obligations........ (131) (307)
Proceeds from the sale of stock and exercise of
stock options................................ 300 3,864
Purchase and retirement of treasury stock...... -- (4,133)
Cash dividends paid to shareholders............ -- (4,789)
Recapitalization costs and other............... 2,087 607
------ ------
Net cash used by financing activities.. (25,866) (4,758)
------ ------
Effect of exchange rate changes on cash and cash
equivalents.................................... (96) (2,654)
------ ------
Net decrease in cash and cash equivalents........ (56,865) (13,510)
Cash and cash equivalents, beginning of period... 61,754 59,045
------ ------
Cash and cash equivalents, end of period......... $ 4,889 $ 45,535
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first nine months for:
Interest..................................... 30,901 111
Income taxes................................. 4,212 9,380
</TABLE>
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the
accounts of Kinetic Concepts, Inc. and all subsidiaries (the
"Company"). The condensed consolidated financial statements
appearing in this quarterly report on Form 10-Q should be read
in conjunction with the financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The foregoing financial information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of
the financial position and results of operations for the interim
periods presented. Interim period operating results are not
necessarily indicative of the results to be expected for the
full fiscal year.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value). Inventories are
comprised of the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Finished goods..................... $ 8,951 $ 8,487
Work in progress................... 5,536 2,743
Raw materials, supplies and parts.. 23,474 17,723
------ ------
37,961 28,953
Less amounts expected to be
converted into equipment for
short-term rental.................. 13,300 7,400
------ ------
Total inventories............. $24,661 $21,553
====== ======
(3) STOCK SPLIT
-----------
During the third quarter, the Company declared a four-for-
one stock split on the outstanding shares of the common stock of
the Company, par value $0.001 per share, payable to the holders
of record of said stock on September 1, 1998. The split was
achieved by means of a three-for-one stock dividend on all
outstanding common shares of the Company. All references in the
consolidated financial statements referring to share and per
share data have been restated to reflect the stock split.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) RECAPITALIZATION
----------------
On November 5, 1997, a substantial interest in the Company
was acquired by Fremont Partners L.P. ("Fremont") and Richard C.
Blum & Associates, L.P. ("RCBA") (collectively, the
"Investors"). 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
purchased 7.8 million shares of newly-issued shares of the
Company's common stock, $0.001 par value per share, at a price
equal to $19.25 per share. The proceeds of the stock purchase,
together with approximately $534.0 million of aggregate proceeds
from certain financings, were used to purchase approximately
31.0 million shares of the Company's common stock from the
selling shareholders at a price of $19.25 per share, net to
seller, and pay all related fees and expenses.
Also pursuant to the Transaction Agreement, the Investors
were merged with and into the Company on January 5, 1998 with
the Company as the surviving corporation of the Merger.
Following 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 total shares outstanding. There is currently one other
shareholder and certain members of management have retained,
and/or have been granted, additional options to purchase common
shares. The transactions have been accounted for as a
recapitalization and as a result, a step-up of assets to fair
market value was not required. The difference between the
payment amount and the net book value of assets acquired and
liabilities assumed was recorded in retained earnings as a cash
distribution to the selling shareholders.
(5) LONG TERM OBLIGATIONS
---------------------
Long-term obligations consist of the following (in
thousands):
September 30, December 31,
1998 1997
------------- ------------
Senior Credit Facilities:
Revolving bank credit facility.. $ -- $ 24,500
Acquisition credit facility..... 10,000 10,000
Term loans:
Tranche A due 2003........... 117,750 120,000
Tranche B due 2004........... 89,325 90,000
Tranche C due 2005........... 89,325 90,000
------- -------
306,400 334,500
9 5/8% Senior Subordinated Notes
Due 2007......................... 200,000 200,000
------- -------
506,400 534,500
Less: Current installments......... 7,805 4,800
------- -------
498,595 529,700
Other.............................. 179 201
------- -------
$498,774 $529,901
======= =======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(5) LONG TERM OBLIGATIONS (continued)
---------------------------------
Senior Credit Facilities
Indebtedness under the Senior Credit Facilities, including
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 bear
interest at a rate based upon (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 at the Company's option, (ii) the
Eurodollar Rate (as defined in the Sr. Credit Facility
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. During the first three months of 1998, the Company
entered into an interest rate swap transaction whereby the
interest rate on $150,000,000 of the term loans is fixed at
5.7575% through January 8, 2001. As a result of this
transaction, the Company recorded additional interest expense of
approximately $71,000 through the nine months ended September
30, 1998.
The Revolving Loans may be repaid and reborrowed. At
September 30, 1998, the aggregate availability under the
Revolving Credit and Acquisition Facilities was $90.0 million.
The Term Loans are subject to quarterly amortization
payments that commenced on March 31, 1998. Commitments under
the Acquisition Facility will expire three years from the
closing of the Bank Credit Agreement 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.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage
ratio and capital expenditures. The Bank Credit Agreement also
contains covenants which, among other things, limit the
incurrence of additional indebtedness, investments, dividends,
asset sales, acquisitions, mergers and consolidations, prepayments
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(5) LONG TERM OBLIGATIONS (continued)
---------------------------------
of other indebtedness, liens and encumbrances and other matters
customarily restricted in such agreements. The Company is in
compliance with the applicable covenants at September 30, 1998.
9 5/8% Senior Subordinated Notes Due 2007
The 9 5/8% Senior Subordinated Notes Due 2007 (the "Notes")
are unsecured obligations of the Company, ranking subordinate in
right of payment to all senior debt of the Company and will
mature on November 1, 2007. Interest on the Notes accrues at
the rate of 9 5/8% per annum and is 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
accrues from and includes 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. In addition, at any time, or from time to time,
the Company may acquire a portion of the Notes through open-
market purchases.
(6) EARNINGS PER SHARE
------------------
The following table sets forth the reconciliation from basic
to diluted average common shares and the calculations of net
earnings per common share. Net earnings for basic and diluted
calculations do not differ and all share and per share data have
been restated to reflect the Company's four-for-one stock split
(see Note 3). (in thousands, except per share):
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net earnings............. $ 3,792 $ 9,948 $ 8,956 $ 29,903
Average common shares:
Basic (weighted-average
outstanding shares).. 70,872 169,788 70,872 169,272
Dilutive potential
common shares from
stock options........ 2,392 6,576 2,392 5,816
------ ------- ------ -------
Diluted (weighted-
average outstanding
shares)........ 73,264 176,364 73,264 175,088
====== ======= ====== =======
Earnings per share....... $ 0.05 $ 0.06 $ 0.13 $ 0.18
====== ======= ====== =======
Earnings per share -
assuming dilution........ $ 0.05 $ 0.06 $ 0.12 $ 0.17
====== ======= ====== =======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) 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. Certain 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.
Other than commitments for new product inventory, including
disposable "for sale" products, of $2.2 million, the Company has
no material long-term capital commitments and can adjust the
level of capital expenditures as circumstances warrant.
(8) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Company adopted Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income", in
the first quarter of 1998. This standard requires disclosure of
total nonowner changes in shareholders' equity, which is defined
as net earnings plus direct adjustments to shareholders' equity
such as equity and cash investment adjustments and foreign
currency translation adjustments. On this basis, these nonowner
changes in shareholders' equity, including net earnings, for the
three months ended September 1998 and 1997 totaled $500,000 and
$2.1 million, respectively and for the first nine months of 1998
and 1997, totaled $372,000 and $5.3 million, respectively.
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
adopted the provisions of Statement No. 131 effective January 1,
1998 and estimates that adoption of these provisions will not
have a material impact on the Company's financial position or
results of operations. Statement No. 131 need not be applied to
interim financial statements in the initial year of its
application.
During 1997, the Securities and Exchange Commission issued
expanded disclosure requirements of accounting policies for
derivative financial instruments and the exposure to market
risk. The new rules require enhanced descriptions of specific
aspects of a registrant's accounting polices for derivatives as
well as qualitative and quantitative disclosures about each type
of market risk. The increased policy disclosures on derivatives
were effective for all public companies for periods ending after
June 15, 1997.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) NEW ACCOUNTING PRONOUNCEMENTS (continued)
-----------------------------------------
The qualitative and quantitative market risk disclosures must be
provided in all filings that include audited financial
statements for fiscal years ending after June 15, 1998. The
Company expects compliance with these requirements will not have
a material impact on the Company's consolidated results of
operations, financial position, or cash flows.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which must be adopted in years beginning
after June 15, 1999. The Company expects to adopt the new
Statement effective January 1, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The Company has not yet
determined what the effect of Statement 133 will be on the
earnings and financial position of the Company.
(9) SUBSEQUENT EVENT
-----------------
On November 6, 1998 the Company acquired certain assets
related to its medical devices business from Beirsdorf-Jobst
A.G. The assets were acquired for a total purchase price of
$14.5 million, subject to certain terms and conditions. The
acquired assets consist of DVT prophylaxis medical devices,
related disposables, equipment, technology and other intangible
assets. The acquisition was funded through the Company's
revolving credit line.
(10) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
------------------------------------------------------
Kinetic Concepts, Inc. 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) serve as guarantors. Certain other subsidiaries
(the nonguarantor subsidiaries) not guarantee such debt. Each
subsidiary guarantor is a wholly-owned subsidiary of the Company
and has fully and unconditionally guaranteed the debt
securities.
The following tables present the condensed consolidating
balance sheets of Kinetic Concepts, Inc. as a parent company,
its guarantor subsidiaries and its nonguarantor subsidiaries as
of September 30, 1998 and December 31, 1997 and the related
condensed consolidating statements of earnings for the three and
nine month periods ended September 30,1998 and 1997 and the
condensed consolidated statements of cash flows for the nine
month periods ended September 30, 1998 and 1997, respectively.
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
September 30, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION> Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents........ $ -- $ (3,616) $ 8,505 $ -- $ 4,889
Accounts receivable,
net................ -- 72,736 15,372 (6,688) 81,420
Inventories......... -- 15,175 9,486 -- 24,661
Prepaid expenses and
other.............. 2,009 8,408 3,860 -- 14,277
------- ------- ------ ------- --------
Total current
assets......... 2,009 92,703 37,223 (6,688) 125,247
Net property, plant
and equipment....... -- 82,899 9,680 (10,009) 82,570
Goodwill, net........ -- 40,080 5,425 -- 45,505
Loan issuance costs,
net................. -- 15,959 -- -- 15,959
Other assets, net.... -- 31,121 50 -- 31,171
Intercompany
investments and
advances............ (266,736) 459,346 4,429 (197,039) --
------- ------- ------ ------- -------
Total assets..... $(264,727) $722,108 $56,807 $(213,736) $300,452
======= ======= ====== ======= =======
LIABILITIES AND
CAPITAL ACCOUNTS:
Accounts payable..... $ -- $ 1,814 $ 2,059 $ -- $ 3,873
Accrued expenses..... -- 35,982 7,139 -- 43,121
Income taxes payable. -- 134 37 -- 171
Current installments
of long-term
obligations......... -- 7,805 -- -- 7,805
Intercompany payables -- 5,969 5,854 (11,823) --
Current installments
of capital lease
obligations......... -- 147 -- -- 147
-------- ------- ------ -------- -------
Total current
liabilities.... -- 51,851 15,089 (11,823) 55,117
-------- ------- ------ -------- -------
Long-term
obligations,
excluding current
installments........ -- 498,774 -- -- 498,774
Capital lease
obligations,
excluding current
installments........ -- 138 35 -- 173
Deferred income taxes,
net................. -- 15,990 -- (4,875) 11,115
------- ------- ------ ------- -------
Total liabilities -- 556,753 15,124 (16,698) 565,179
Shareholders' equity
(deficit)........... (264,727) 155,355 41,683 (197,038) (264,727)
------- ------- ------ ------- -------
Total
liabilities and
equity (deficit) $(264,727) $722,108 $56,807 $(213,736) $ 300,452
======= ======= ====== ======= =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents........ $ -- $ 44,439 $17,315 $ -- $ 61,754
Accounts receivable,
net................ -- 75,932 15,002 (9,696) 81,238
Inventories......... -- 12,006 9,547 -- 21,553
Prepaid expenses and
other.............. 2,010 14,851 1,585 -- 18,446
------- ------- ------ -------- --------
Total current
assets......... 2,010 147,228 43,449 (9,696) 182,991
Net property, plant
and equipment...... -- 76,811 9,065 (10,442) 75,434
Goodwill, net........ -- 40,081 5,818 -- 45,899
Loan issuance costs,
net................ -- 17,346 -- -- 17,346
Other assets, net.... -- 29,354 127 -- 29,481
Intercompany
investments and
advances........... (276,832) 460,984 1,511 (185,663) --
------- ------- ------ ------- -------
Total assets..... $(274,822) $771,804 $59,970 $(205,801) $351,151
======= ======= ====== ======= =======
LIABILITIES AND
CAPITAL ACCOUNTS:
Accounts payable..... $ -- $ 38,157 $ 2,196 $ -- $ 40,353
Accrued expenses..... -- 35,643 5,691 -- 41,334
Income tax payable... -- -- 648 (648) --
Current installments
on long-term
obligations........ -- 4,800 -- -- 4,800
Intercompany payables 876 423 9,761 (11,060) --
Current installments
of capital lease
obligations........ -- 139 -- -- 139
-------- ------- ------ ------- -------
Total current
liabilities.... 876 79,162 18,296 (11,708) 86,626
-------- ------- ------ ------- -------
Long-term
obligations
excluding current
installments....... -- 529,901 -- -- 529,901
Capital lease
obligations,
excluding current
installments....... -- 256 56 -- 312
Deferred income taxes,
net................ -- 18,440 -- (8,430) 10,010
------- ------- ------ ------- -------
Total liabilities 876 627,759 18,352 (20,138) 626,849
Shareholders' equity
(deficit).......... (275,698) 144,045 41,618 (185,663) (275,698)
------- ------- ------ ------- -------
Total liabilities
and equity
(deficit)...... $(274,822) $771,804 $59,970 $(205,801) $351,151
======= ======= ====== ======= =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended September 30, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION> Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service.... $ -- $ 50,399 $12,466 $ -- $ 62,865
Sales and other....... -- 15,839 5,933 (3,589) 18,183
----- ------ ------ ----- ------
Total revenue..... -- 66,238 18,399 (3,589) 81,048
Rental expenses....... -- 29,233 10,971 -- 40,204
Cost of goods sold.... -- 5,397 3,225 (1,905) 6,717
----- ------ ------ ----- ------
-- 34,630 14,196 (1,905) 46,921
----- ------ ------ ----- ------
Gross profit...... -- 31,608 4,203 (1,684) 34,127
Selling, general and
administrative
expenses............ -- 13,711 1,747 -- 15,458
----- ------ ------ ----- ------
Operating earnings -- 17,897 2,456 (1,684) 18,669
Interest income....... -- 46 39 -- 85
Interest expense...... -- (12,155) -- -- (12,155)
Foreign currency gain
(loss).............. -- (6) (275) 1 (280)
----- ------ ------ ----- ------
Earnings before
income taxes and
minority interest -- 5,782 2,220 (1,683) 6,319
Income taxes.......... -- 2,337 911 (720) 2,528
Minority interest..... -- -- (1) -- (1)
----- ------ ------ ----- ------
Earnings before
equity in
earnings of
subsidiaries.... -- 3,445 1,310 (963) 3,792
Equity in earnings
of subsidiaries. 3,792 1,310 -- (5,102) --
----- ------ ------ ----- ------
Net earnings...... $3,792 $ 4,755 $ 1,310 $(6,065) $ 3,792
===== ====== ====== ===== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended September 30, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service.... $ -- $50,311 $11,294 $ -- $61,605
Sales and other....... 18,020 9,120 5,348 (17,794) 14,694
------ ------ ------ ------ ------
Total revenue..... 18,020 59,431 16,642 (17,794) 76,299
Rental expenses....... -- 30,771 10,291 (2,045) 39,017
Cost of goods sold.... 7,068 2,365 3,223 (6,591) 6,065
------ ------ ------ ------ ------
7,068 33,136 13,514 (8,636) 45,082
------ ------ ------ ------ ------
Gross profit...... 10,952 26,295 3,128 (9,158) 31,217
Selling, general and
administrative
expenses............ 1,195 12,372 1,485 -- 15,052
------ ------ ------ ----- ------
Operating earnings
earnings (loss).. 9,757 13,923 1,643 (9,158) 16,165
Interest income....... 135 254 86 -- 475
Interest expense...... (6) (209) -- 182 (33)
------ ------ ------ ------ ------
Earnings (loss)
before income
taxes and
minority
interest........ 9,886 13,968 1,729 (8,976) 16,607
Income taxes.......... 3,899 5,399 755 (3,410) 6,643
Minority interest..... -- -- 16 -- 16
------ ------ ------ ------ ------
Earnings (loss)
before equity
in earnings
(loss) of
subsidiaries.... 5,987 8,569 958 (5,566) 9,948
Equity in earnings
(loss) of
subsidiaries.... 3,960 958 -- (4,918) --
------ ------ ------ ------ ------
Net earnings.......... $ 9,947 $ 9,527 $ 958 $(10,484) $ 9,948
====== ====== ====== ====== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the nine months ended September 30, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION> Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service... $ -- $156,796 $36,392 $ -- $193,188
Sales and other...... -- 42,341 17,332 (8,558) 51,115
----- ------- ------ ------ -------
Total revenue.... -- 199,137 53,724 (8,558) 244,303
Rental expenses...... -- 91,996 32,430 -- 124,426
Cost of goods sold... -- 14,399 9,269 (4,522) 19,146
----- ------- ------ ------ -------
-- 106,395 41,699 (4,522) 143,572
----- ------- ------ ------ -------
Gross profit..... -- 92,742 12,025 (4,036) 100,731
Selling, general and
administrative
expenses........... -- 37,556 11,756 -- 49,312
----- ------- ------ ------ -------
Operating earnings
(loss)......... -- 55,186 269 (4,036) 51,419
Interest income...... -- 303 174 -- 477
Interest expense..... -- (36,473) -- -- (36,473)
Foreign currency gain
(loss)............. -- 408 (930) 1 (521)
----- ------- ------ ------ ------
Earnings (loss)
before income
taxes and
minority interest -- 19,424 (487) (4,035) 14,902
Income taxes......... -- 7,851 (200) (1,680) 5,971
Minority interest.... -- -- (25) -- (25)
----- ------- ------ ------ ------
Earnings (loss)
before equity
in earnings
(loss) of
subsidiaries... -- 11,573 (262) (2,355) 8,956
Equity in
earnings (loss)
of subsidiaries 8,956 (262) -- (8,694) --
----- ------- ------ ------ ------
Net earnings
(loss)......... $8,956 $ 11,311 $ (262) $(11,049) $ 8,956
===== ======= ====== ====== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the nine months ended September 30, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental and service.. $ -- $150,699 $34,031 $ -- $184,730
Sales and other..... 32,018 23,991 15,065 (31,293) 39,781
------ ------- ------ ------ -------
Total revenue.... 32,018 174,690 49,096 (31,293) 224,511
Rental expenses..... -- 91,263 30,453 (6,083) 115,633
Cost of goods sold.. 20,633 6,014 8,785 (19,355) 16,077
------ ------- ------ ------ -------
20,633 97,277 39,238 (25,438) 131,710
------ ------- ------ ------ -------
Gross profit..... 11,385 77,413 9,858 (5,855) 92,801
Selling, general and
administrative
expenses.......... 4,593 31,110 8,493 -- 44,196
------ ------- ------ ------ -------
Operating earnings
(loss)......... 6,792 46,303 1,365 (5,855) 48,605
Interest income..... 225 980 216 -- 1,421
Interest expense.... (52) (631) -- 557 (126)
------ ------- ------ ------ -------
Earnings (loss)
before income
taxes and
minority interest 6,965 46,652 1,581 (5,298) 49,900
Income taxes........ 2,747 18,035 689 (1,511) 19,960
Minority interest... -- -- 37 -- 37
------ ------- ------ ------ -------
Earnings (loss)
before equity
in earnings
(loss) of
subsidiaries... 4,218 28,617 855 (3,787) 29,903
Equity in earnings
(loss) of
subsidiaries... 25,684 855 -- (26,539) --
------ ------ ------ ------ -------
Net earnings(loss) $29,902 $ 29,472 $ 855 $(30,326) $ 29,903
====== ====== ====== ====== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the nine months ended September 30, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings (loss).. $ 8,956 $ 11,311 $ (262) $(11,049) $ 8,956
Adjustments to
reconcile net
earnings (loss) to
net cash provided
(used) by operating
activities.......... (8,956) (6,367) 2,570 3,589 (9,164)
----- ------ ------ ------ ------
Net cash provided
(used) by operating
activities.......... -- 4,944 2,308 (7,460) (208)
Cash flows from
investing activities:
Additions to
property, plant
and equipment.... -- (22,393) (5,709) 5,867 (22,235)
Increase in
inventory to
be converted
into equipment
for short-term
rental........... -- (5,900) -- -- (5,900)
Dispositions of
property, plant
and equipment.... -- 656 1,157 -- 1,813
Businesses
acquired in
purchase trans-
actions, net of
cash acquired.... -- (2,500) (327) -- (2,827)
Decrease
(increase) in
other assets..... -- (1,826) 280 -- (1,546)
----- ------ ------ ------ ------
Net cash used by
investing activities -- (31,963) (4,599) 5,867 (30,695)
Cash flows from
financing activities:
Repayments of notes
payable and long-
term obligations. -- (28,122) -- -- (28,122)
Repayments of
capital lease
obligations...... -- (110) (21) -- (131)
Proceeds from the
sale of stock.... 300 -- -- -- 300
Proceeds (payments)
on intercompany
investments and
advances......... (4,012) 8,918 (6,746) 1,840 --
Recapitalization
costs - fees and
expenses........ 2,087 -- -- -- 2,087
Other............. 1,625 (1,722) 248 (151) --
----- ------ ------ ------ ------
Net cash used by
financing activities -- (21,036) (6,519) 1,689 (25,866)
Effect of exchange
rate changes on cash
and cash equivalents -- -- -- (96) (96)
----- ------ ------ ------ ------
Net decrease in cash
and cash equivalents -- (48,055) (8,810) -- (56,865)
Cash and cash
equivalents,
beginning of period -- 44,439 17,315 -- 61,754
----- ------ ------ ------ ------
Cash and cash
equivalents, end of
period............. $ -- $(3,616) $ 8,505 $ -- $ 4,889
===== ====== ====== ====== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the nine months ended September 30, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings......... $ 29,903 $ 29,471 $ 855 $(30,326) $ 29,903
Adjustments to
reconcile net
earnings to net
cash provided
(used)by operating
activities.......... (33,650) 8,557 4,363 27,942 7,212
------ ------ ------ ------ ------
Net cash provided
(used) by operating
activities.......... (3,747) 38,028 5,218 (2,384) 37,115
Cash flows from
investing activities:
Additions to
property, plant
and equipment.... 923 (14,912) (3,443) (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)
Note - principal
shareholder...... (3,000) -- -- -- (3,000)
Decrease (increase)
in other assets.. 808 534 125 (2,582) (1,115)
------ ------ ------ ------ ------
Net cash used by
investing activities (5,479) (31,017) (1,773) (4,944) (43,213)
Cash flows from
financing activities:
Proceeds
(repayments)
capital lease
obligations...... (40) (208) 3 (62) (307)
Proceeds from the
exercise of stock
options.......... 3,864 -- -- -- 3,864
Proceeds (payments)
on intercompany
investments and
advances......... 21,036 (31,822) 7,966 2,820 --
Purchase and
retirement of
treasury stock... (4,133) -- -- -- (4,133)
Cash dividends paid
to shareholders.. (4,789) -- -- -- (4,789)
Other.............. (5,097) (2,391) (4,855) 12,950 607
------ ------ ------ ------ ------
Net cash provided
(used) by financing
activities......... 10,841 (34,421) 3,114 15,708 (4,758)
Effect of exchange
rate changes on cash
and cash equivalents -- -- -- (2,654) (2,654)
------ ------ ------ ------ ------
Net increase
decrease) in cash
and cash equivalents 1,615 (27,410) 6,559 5,726 (13,510)
Cash and cash
equivalents,
beginning of period. -- 50,286 14,485 (5,726) 59,045
------ ------ ------ ------ ------
Cash and cash
equivalents, end of
period............. $ 1,615 $22,876 $21,044 $ -- $45,535
====== ====== ====== ====== ======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Third Quarter of 1998 Compared to Third Quarter of 1997
- -------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the third quarter of the
prior year ($ in thousands):
Three Months Ended September 30,
--------------------------------
Revenue Increase
Relationship (Decrease)
---------------- ----------------
1998 1997 $ Pct
------- ------- --------- ----
Revenue:
Rental and service........... 78% 81% $ 1,260 2%
Sales and other.............. 22 19 3,489 24%
--- --- ------
Total revenue.............. 100% 100% 4,749 6%
Rental expenses................ 50 51 1,187 3%
Cost of goods sold............. 8 8 652 11%
--- --- ------
Gross profit............... 42 41 2,910 9%
Selling, general and admin-
istrative.................... 19 20 406 3%
--- --- ------
Operating earnings......... 23 21 2,504 15%
Interest income................ -- 1 (389) (82%)
Interest expense............... (15) -- (12,123) --
Foreign currency loss.......... -- -- (280) --
--- --- ------
Earnings before income taxes
and minority interest..... 8 22 (10,288) (62%)
Income taxes.................... 3 9 (4,115) (62%)
Minority interest in subsidiary
loss.......................... -- -- 17 106%
--- --- ------
Net earnings................ 5% 13% $(6,156) (62%)
=== === =======
The Company's revenue is derived from three primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Three months ended
September 30,
------------------
1998 1997
------- -------
Domestic specialty surfaces... $ 48.4 $ 49.0
International surfaces........ 17.5 16.4
Medical devices............... 14.7 10.7
Other......................... .4 .2
------ ------
$ 81.0 $ 76.3
====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the third quarter of 1998 increased $4.7
million, or 6.2%, to $81.0 million from $76.3 million in the third
quarter of 1997. Revenue from the Company's domestic specialty
surface business was $48.4 million, down $600,000, or 1.2%, from
$49.0 million in the third quarter of the prior year. The decreased
revenue was due primarily to lower overall prices resulting from a
change in product mix from framed products to lower cost overlays,
particularly in the extended care market place. Lower average prices
were partly offset by therapy day growth as compared to the prior
year and the addition of RIK Medical which contributed revenue of
$2.2 million in the quarter. Total sales for the quarter of $18.2
million increased $3.5 million, or 23.7%, compared to the year-ago
period. Sales for the period grew as a percentage of total revenue
due to a combination of sales of disposable products associated with
the Company's medical devices and sales of wound care dressings and
related products which the Company introduced in the current year.
Revenue from the Company's international operations increased
$1.1 million, or 6.7%, to $17.5 million from $16.4 million in the
third quarter of 1997. The international revenue increase reflects
higher therapy days in virtually all of the Company's middle-tier
markets, e.g., the Netherlands, Canada and Switzerland.
Revenue from medical device operations increased $4.0 million,
or 37.4%, to $14.7 million from $10.7 million in the third quarter of
1997, due substantially to growth in V.A.C. rentals in the United
States. Rentals of the V.A.C. device internationally increased
$387,000, or 83.0%, compared to the prior year.
Rental, or field, expenses for the third quarter of 1998
increased $1.2 million, or 3.0%, to $40.2 million from $39.0 million
in 1997. This increase is primarily attributable to increased
equipment depreciation and field labor costs. As a percentage of
rental revenue, rental expenses were 64.0% and 63.3% for the third
quarter of 1998 and 1997, respectively.
Cost of goods sold increased 10.8% to $6.7 million in the third
quarter of 1998 from $6.1 million in the third quarter of 1997. This
increase was directly attributable to increased sales of disposables
associated with the Company's medical devices.
Gross profit increased $2.9 million, or 9.3%, to $34.1 million
in the third quarter of 1998 from $31.2 million in the third quarter
of 1997 due primarily to increased sales volumes and controlled
spending in the field. Gross profit margin for the third quarter, as
a percentage of total revenue, was 42.1%, compared with 40.9% for the
third quarter of 1997.
Selling, general and administrative expenses increased
$400,000, or 2.7%, to $15.5 million in the third quarter of 1998 from
$15.1 million in the third quarter of 1997. This increase was due
primarily to increased sales commission expense and goodwill
amortization associated with 1997 business acquisitions. As a
percentage of total revenue, selling, general and administrative
expenses were 19.1% in the third quarter of 1998 as compared to 19.7%
in the third quarter of 1997.
Operating earnings for the period increased $2.5 million, or
15.5%, to $18.7 million compared to $16.2 million in the third
quarter of 1997 resulting largely from the revenue growth discussed
above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Interest income for the three months ended September 30, 1998
was approximately $85,000 compared to approximately $470,000 in the
prior period. The decrease in interest income resulted from lower
invested cash balances due primarily to acquisition activities in the
first nine months of 1997 and the leveraged recapitalization
transactions completed during the fourth quarter of last year.
Interest expense for the three months ended September 30, 1998
was $12.2 million compared to $32,000 for the third quarter of 1997.
The interest expense increase was due to interest accrued on an
average balance of approximately $511 million in long-term debt
obligations associated with the recapitalization.
Net earnings decreased 61.9% to $3.8 million in the third
quarter of 1998 from $9.9 million in the third quarter of 1997. This
decrease was due substantially to the increase in interest expense as
discussed above.
First Nine Months of 1998 Compared to First Nine Months of 1997
- ---------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the nine months of the prior
year ($ in thousands):
Nine Months Ended September 30,
-------------------------------
Revenue Increase
Relationship (Decrease)
-------------- --------------
1998 1997 $ Pct
------ ------ ------- -----
Revenue:
Rental and service.............. 79% 82% $ 8,458 5%
Sales and other................. 21 18 11,334 28%
--- --- ------
Total revenue............... 100% 100% 19,792 9%
Rental expenses................. 51 52 8,793 8%
Cost of goods goods............. 8 7 3,069 19%
--- --- ------
Gross profit................ 41 41 7,930 9%
Selling, general and
administrative................ 20 20 5,116 12%
--- --- ------
Operating earnings.......... 21 21 2,814 6%
Interest income................. -- 1 (949) (67%)
Interest expense................ (15) -- (36,342) --
Foreign currency loss........... -- -- (521) --
--- --- ------
Earnings before income taxes
and minority interest..... 6 22 (34,998) (70%)
Income taxes.................... 2 9 (13,989) (70%)
Minority interest in subsidiary
loss.......................... -- -- 62 168%
--- --- ------
Net earnings................ 4% 13% $(20,947) (70%)
--- --- ------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
The Company's revenue is derived from three primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Nine months ended
September 30,
-----------------
1998 1997
------- -------
Domestic specialty surfaces... $ 150.0 $ 146.9
International surfaces........ 51.7 48.7
Medical devices............... 41.9 28.2
Other......................... 0.7 0.7
------ ------
$ 244.3 $ 224.5
====== ======
Total revenue in the first nine months of 1998 increased $19.8
million, or 8.8%, to $244.3 million from $224.5 million in the first
nine months of 1997. Revenue from the Company's domestic specialty
surface business was $150.0 million, up $3.1 million, or 2.1%, from
$146.9 million in the first nine months of the prior year. The
increased revenue was due to a combination of revenue from the RIK
Medical acquisition, higher patient therapy days and wound care
product sales partially offset by lower blended price rates. Sales
for the period increased $11.3 million, or 28.5%, due substantially
to sales of disposable products associated with the Company's medical
devices and wound care dressing products.
Revenue from the Company's international operations increased
$3.0 million, or 6.0% to $51.7 million from $48.7 million in the nine
months ended September 30, 1997. The international revenue increase
reflects higher therapy days in virtually all of the Company's middle-
tier markets, e.g., the Netherlands, Canada and Switzerland, which
were partly offset by unfavorable currency exchange rate fluctuations
of approximately $2.3 million and softness in the U.K. market.
Revenue from medical device operations increased $13.7 million,
or 48.6% to $41.9 million from $28.2 million in the nine months ended
September 30, 1997, due substantially to growth in V.A.C. rentals in
the United States. Revenues from the PlexiPulse vascular assistance
device also increased 13.1% during the first nine months of 1998 due
to increased market penetration.
Rental, or field, expenses increased $8.8 million, or 7.6%, to
$124.4 million from $115.6 million in the first nine months of 1997.
This spending increase is primarily attributable to costs associated
with the four business acquisitions completed during 1997 including
increased equipment depreciation and field labor costs. As a
percentage of rental revenue, rental expenses were 64.4% and 62.6%
for the first nine months of 1998 and 1997, respectively.
Cost of goods sold in the first nine months of 1998 increased
19.1% to $19.1 million compared to $16.1 million in the first nine
months of 1997. Cost of goods sold has increased primarily due to
increased sales of disposables associated with the Company's medical
devices.
Gross profit increased $7.9 million, or 8.5%, to $100.7 million
in the first nine months of 1998 from $92.8 million in the first nine
months of 1997 due primarily to increased revenue as discussed above.
Gross profit margin for the first nine months, as a percentage of
total revenue, was 41.2%, down from 41.3% for the first nine months
of 1997, due substantially to the relative increase in rental
expenses for the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Selling, general and administrative expenses increased $5.1
million, or 11.6%, to $49.3 million in the first nine months of 1998
from $44.2 million in the first nine months of 1997. This increase
was due in part to increased sales commission, goodwill amortization
associated with 1997 business acquisitions, and increased legal and
professional fees resulting from continuing litigation and
systems/process improvement projects including conversion of the
Company's manufacturing and payroll systems to Year 2000 compliant
platforms. As a percentage of total revenue, selling, general and
administrative expenses were 20.2% in the first nine months of 1998
as compared with 19.7% in the first nine months of 1997.
Operating earnings for the period increased $2.8 million, or
5.8%, to $51.4 million compared to $48.6 million in the prior-year as
a result of the revenue growth discussed above.
Interest income for the nine months ended September 30, 1998 was
approximately $500,000 compared to approximately $1.4 million in the
prior period. The decrease in interest income resulted from lower
invested cash balances due primarily to acquisition activities in the
first nine months of 1997 and the leveraged recapitalization
transactions completed during the fourth quarter of the prior year.
Interest expense for the nine months ended September 30, 1998
was $36.5 million compared to $131,000 for the nine months ended
September 30, 1997. The interest expense increase was due to
interest accrued on an average balance of approximately $521 million
in long-term debt obligations associated with the recapitalization.
Net earnings decreased $20.9 million, or 70.0%, to $9.0 million
for the first nine months of 1998. This decrease was due
substantially to the interest expense increase as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the nine months ended September 30, 1998 and other factors
resulted in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $4.9 million at September 30,
1998, a decrease of $56.9 million from December 1997. The cash
decrease is primarily attributable to payments associated with the
recapitalization, including $32.3 million for first quarter 1998
repurchases of common stock, and $28.1 million for the repayment of
long-term debt obligations.
Prepaid expenses and other current assets of $14.3 million
decreased 22.6% as compared to $18.4 million at December 31, 1997.
This change resulted primarily from the refund of all 1997 federal
tax payments as the recapitalization transactions resulted in the
Company recording a current tax receivable for the year ended
December 31, 1997.
Net property, plant and equipment at September 30, 1998
increased 9.5% to $82.6 million from $75.4 million at December 31,
1997. Net capital expenditures were $28.1 million during the first
nine months of 1998, including $5.9 million of additional
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Financial Condition (continued)
- -------------------------------
inventory (raw materials and work-in-progress) to be
converted into equipment for short-term rentals. Depreciation
and amortization, including goodwill, for the first nine months of
1998 totaled $23.6 million, up 37.6% from $17.1 million in the same
period of 1997. Goodwill amortization accounted for $2.5 million of
the year-to-year increase.
Accounts payable and accrued liabilities at September 30, 1998
were $3.9 million and $43.1 million, respectively, compared to $40.4
million and $41.3 million, respectively, at the end of 1997. The
decrease in accounts payable relates primarily to payments for shares
of common stock not tendered as of December 31, 1997. Interest
accrued on long-term debt obligations accounted for the majority of
the increase in accrued liabilities.
Long-term debt obligations, including current maturities,
decreased $28.1 million to $506.6 million as of September 30, 1998
due to the repayment of a portion of the Company's revolving credit
facility in addition to scheduled principal payments.
Market Trends
- -------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities and
rehabilitation centers) and home care settings, the consolidation of
health care providers and national and regional group purchasing
organizations and the growing demand for clinically proven therapies
which lower the total cost of providing care.
The Balanced Budget Act of 1997 (the "BBA") contains a number of
provisions which will impact the federal reimbursement of health care
and reduce projected payments under the Medicare system by $115
billion over the next five years. In this regard, less than 10% of
the Company's revenue is received directly from the Medicare system.
However, many of the health care providers who pay the Company for
its products are reimbursed, either directly or indirectly, by the
Federal government under the Medicare system for the use of those
products. The Company does not believe that the changes introduced
by the BBA will have a material impact on our hospital customers or
the dealers we partner with in home health care. However, the
changes to the Medicare system introduced by the BBA has had an
impact on the manner in which the Company's extended care customers
make purchasing decisions. As the Company's extended care customers
attempt to understand the impact of the changes on their respective
businesses their initial reaction has been to lower their average
daily cost by changing the overall product mix to lower cost products
in their respective facilities. These changes have impacted revenue
in the short term. The Company is introducing programs to its
extended care customers which it believes will address this trend.
The Company's market continues to increase based upon
demographic trends as most of the Company's patients are over 50
years old. Further, its broad product line and national distribution
system enable it to compete effectively in the changing healthcare
environment, particularly in light of consolidation of providers and
purchasing groups.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends (continued)
- -------------------------
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will continue
because certain U.S. health care providers are purchasing disposables
associated with the Company's growing installed base of medical
devices and select low-end products that are less expensive and
easier to maintain. In addition, international health care providers
tend to purchase products more often than U.S. health care providers.
Legal Proceedings
- -----------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for
the Western District of Texas. Novamedix manufactures the principal
product which directly competes with the PlexiPulse. The suit alleges
that the PlexiPulse infringes several patents held by Novamedix, that
the Company breached a confidential relationship with Novamedix and a
variety of ancillary claims. Novamedix seeks injunctive relief and
monetary damages. Initial discovery in this case has been
substantially completed. Although it is not possible to 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 has not been completed 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 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 26, 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc., filed a lawsuit against the Company alleging that
the Company's TriaDyne bed infringes a patent issued to Hill-Rom.
This suit was filed in the United States District Court for the
District of South Carolina. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
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 in Tax Court. Provisions have been made in
the Company's financial statements for estimated exposures related to
these lawsuits and adjustments. In the opinion of management, the
disposition of these matters will not have a material adverse effect
on the Company's business, financial condition or results of
operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain product liability claims pending for which
provision has been made in the Company's financial statements.
Management believes that resolution of these claims will not have a
material adverse effect on the Company's business, financial
condition or results of operations. The Company has not experienced
any significant losses due to product liability claims and management
believes that the Company currently maintains adequate liability
insurance coverage.
Liquidity and Capital Resources
- --------------------------------
At September 30, 1998, the Company had current assets of $125.2
million and current liabilities of $55.1 million resulting in a
working capital surplus of $70.1 million, compared to a surplus of
$96.4 million at December 31, 1997.
During the first nine months of 1998, the Company made net
capital expenditures of $28.1 million, including inventory to be
converted into equipment for short term rentals of $5.9 million.
Other than commitments for new product inventory, including
disposable "for sale" products, of $2.2 million, the Company has no
material long-term capital commitments and can adjust the level of
capital expenditures as circumstances warrant.
The Company's principal sources of liquidity are expected to be
cash flows from operating activities and borrowings under the Senior
Credit Facilities. 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 Senior Credit Facilities originally totaled $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, and
scheduled principal payments totaling $3.6 million were made in a
timely manner. The Acquisition Facility was partially drawn to, in
effect, finance the RIK Medical acquisition. The Acquisition
Facility provides the Company with financing to pursue strategic
acquisition opportunities, and will remain available to the Company
until December 31, 2000, at which time it will begin to amortize over
the remaining three years of the facility. The Company originally
utilized borrowings under the Revolving Facility to help effect the
Tender Offer and pay related fees
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
and expenses. While the Company reduced borrowings under this
facility by $24.5 million in the first nine months of 1998, it has
utilized and will utilize borrowings to fund capital expenditures and
meet working capital needs.
The Term Loans and the Notes are subject to customary terms,
covenants and conditions which partially restrict the uses of future
cash flow by the Company. The Company does not expect that these
covenants and conditions will have a material adverse impact on its
operations. At September 30, 1998, the Acquisition Facility had a
balance of $10.0 million. The Revolving Credit Facility was fully
available at September 30, 1998. Accordingly, the aggregate
availability under these two facilities was $90.0 million.
The Senior Credit Agreement requires the Company to meet certain
financial tests, including minimum levels of EBITDA (as defined
therein), minimum interest coverage, maximum leverage ratio and
capital expenditures. 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 Company is in
compliance with the applicable covenants at September 30, 1998.
The Senior 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.
As part of the Recapitalization transactions, the Company issued
$200.0 million of Senior Subordinated Notes (the "Notes") due 2007.
The Notes are unsecured obligations of the Company, ranking
subordinate in right of payment to all senior debt of the Company and
will mature on November 1, 2007.
The Notes are not entitled to the benefit of any mandatory
sinking fund. 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.
Year Percentage
---- ----------
2002.................................. 104.813%
2003.................................. 103.208%
2004.................................. 101.604%
2005 and thereafter................... 100.000%
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
As of September 30, 1998 the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
At September 30, 1998, the Company was committed to purchase
approximately $2.2 million of inventory associated with new products
over the remainder of this year. The Company did not have any other
material purchase commitments.
Year 2000 Issue
- ---------------
During the third quarter of 1998, the Company completed the
implementation and testing of an Oracle manufacturing application and
conversion to a Year 2000 compliant payroll system. The Company will
continue to utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000
modifications. The Company anticipates completing the Year 2000
project by no later than June 30, 1999, at which time the conversion
of all international subsidiary financial platforms will be completed
and which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at
$7.0 million and is being funded through operating cash flows. Also,
$6.0 million of this total will be used to purchase new software that
will be capitalized and the remaining $1.0 million will be expensed
as incurred. Through September 30, 1998, the Company has incurred
approximately $5.8 million ($900,000 expensed and $4.9 million
capitalized for new software), related to the assessment of the Year
2000 issue, development of a modification plan, preliminary software
modifications and purchase of new software, where necessary.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
Exhibit Description
------- -----------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by
reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company,
Inc. (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed
as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery
trucks (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1,
1989 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein
by reference).
EXHIBITS (continued)
--------------------
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form 8-
K dated October 17, 1994, and incorporated
herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic
Services, Inc. and Voluntary Hospitals of
America, Inc.(filed as Exhibit 10.18 to the
Company's Amended Annual Report on Form 10-
K/A, dated January 23, 1996, for the year
ended December 31, 1994, and incorporated
herein by reference).
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P. (filed as Exhibit 10.19 to the Company's
Amended Annual Report on Form 10-K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.20 KCI Management 1994 Incentive Program (filed
as Exhibit 10.20 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
10.21 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment (filed as Exhibit
10.23 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan (filed as
Exhibit 10.24 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes (filed as
Exhibit 10.25 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
EXHIBITS (continued)
--------------------
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1995 and incorporated herein by reference).
10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).
10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.33 Asset Purchase Agreement dated January 3,
1997 by and among Trac Medical, Inc., a North
Carolina corporation, Terry Williams, David
Mattis, George Parrish and KCI Therapeutic
Services, Inc., a Delaware corporation(filed
as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.34 Asset Purchase Agreement dated January 27,
1997 by and among Hydrothermic Floatation
Systems, Inc., a California corporation, Y.
Jeremy Levy and KCI Therapeutic Services,
Inc., a Delaware corporation (filed as
Exhibit 10.34 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.35 Agreement for the sale and purchase of 80% of
the issued share capital of Ethos Medical
Group Limited by KCI International, Inc.
dated April 18, 1997 (filed as Exhibit 10.35
to the Company's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997 and
incorporated herein by reference.)
10.36 Asset Purchase Agreement made as of July 31,
1997 between KCI Equi-Tron, Inc. as Purchaser
and James H. Alexander, Elleanor Alexander
and Scott Alexander as vendors (filed as
Exhibit 10.36 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by
reference.)
10.37 Transaction Agreement, dated as of October 2,
1997, among Fremont Purchaser II, Inc., RCBA
Purchaser I, L.P. and the Company (filed as
Exhibit (c)(1) to the Company's Schedule 13E-
3 dated October 8, 1997, and incorporated
herein by reference.)
EXHIBITS (continued)
--------------------
10.38 Kinetic Concepts, Inc. Management Equity Plan
(filed as Exhibit (c)(4) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
10.39 Management Equity Agreement for Raymond R.
Hannigan, dated October 2, 1997 (filed as
Exhibit (c)(6) to the Company's Schedule 13E-
3 dated October 8, 1997, and incorporated
herein by reference.)
10.40 Offer to Purchase, dated October 8, 1997
(filed as Exhibit (d)(1) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
10.41 Kinetic Concepts Management Equity Plan
effective October 1, 1997 (filed as Exhibit
10.33 on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.)
22.1 List of Subsidiaries (filed as Exhibit 22.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.)
*27.1 Financial Data Schedule.
Note: (*) Exhibits filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /s/ RAYMOND HANNIGAN
---------------------
Raymond Hannigan
President and Chief Executive Officer
By: /s/ WILLIAM M.BROWN
---------------------
William M. Brown
Vice President and
Chief Financial Officer
Date: November 13, 1998
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