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 June 30, 1999
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 August 1, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION> June 30, December 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.............. $ 5,875 $ 4,366
Accounts receivable, net............... 81,560 79,411
Inventories............................ 27,811 28,662
Prepaid expenses and other............. 11,517 14,552
------- -------
Total current assets................ 126,763 126,991
------- -------
Net property, plant and equipment........ 78,443 77,950
Goodwill,less accumulated amortization of
$19,017 in 1999 and $17,323 in 1998.... 54,016 54,327
Loan issuance costs, less accumulated
amortization of $3,844 in 1999 and
$2,687 in 1998......................... 14,335 15,380
Other assets, less accumulated
amortization of $3,703 in 1999 and
$3,425 in 1998......................... 24,800 31,469
------- -------
$ 298,357 $ 306,117
======= =======
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable....................... $ 2,840 $ 3,438
Accrued expenses....................... 31,527 35,321
Current installments of long-term
obligations.......................... 12,800 8,800
Current installments of capital lease
obligations.......................... 153 150
Income tax payable..................... 1,722 2,689
------- -------
Total current liabilities........... 49,042 50,398
------- -------
Long-term obligations, excluding current
installments........................... 499,983 507,055
Capital lease obligations, excluding
current installments................... 266 129
Deferred income taxes, net............... 10,320 10,123
------- -------
$ 559,611 $ 567,705
------- -------
Commitments and contingencies (Note 6)
Shareholders' deficit:
Common stock; issued and outstanding
70,915 in 1999 and in 1998........... 71 71
Retained deficit....................... (256,608) (259,121)
Accumulated other comprehensive income. (4,717) (2,538)
------- -------
(261,254) (261,588)
------- -------
$ 298,357 $ 306,117
======= =======
</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 Six months ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental and service....... $ 60,710 $ 65,078 $123,225 $130,323
Sales and other.......... 19,295 16,280 36,991 32,932
------ ------ ------- -------
Total revenue.......... 80,005 81,358 160,216 163,255
Rental expenses............ 42,514 42,079 85,551 84,222
Cost of goods sold......... 7,533 6,070 14,732 12,429
------ ------ ------- -------
50,047 48,149 100,283 96,651
------ ------ ------- -------
Gross profit........... 29,958 33,209 59,933 66,604
Selling, general and
administrative expenses.. 16,404 17,649 31,904 33,854
------ ------ ------- -------
Operating earnings..... 13,554 15,560 28,029 32,750
Interest income............ 50 143 161 392
Interest expense........... (11,538) (12,015) (23,205) (24,318)
Foreign currency loss...... (440) (79) (797) (241)
------ ------ ------ ------
Earnings before income
taxes and minority
interest............. 1,626 3,609 4,188 8,583
Income taxes............... 650 1,453 1,675 3,443
Minority interest in
subsidiary loss.......... -- 22 -- 24
------ ------ ------ ------
Net earnings........... $ 976 $ 2,178 $ 2,513 $ 5,164
====== ====== ====== ======
Earnings per share..... $ 0.01 $ 0.03 $ 0.04 $ 0.07
====== ====== ====== ======
Earnings per share -
assuming dilution.. $ 0.01 $ 0.03 $ 0.03 $ 0.07
====== ====== ====== ======
Average common shares:
Basic (weighted
average outstanding
shares............. 70,915 70,852 70,915 70,852
====== ====== ====== ======
Diluted (weighted
average outstanding
shares)............ 73,233 73,300 73,239 73,304
====== ====== ====== ======
</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> Six months ended
June 30,
----------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................. $ 2,513 $ 5,164
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation............................. 13,292 12,584
Amortization............................. 3,130 2,928
Provision for uncollectible accounts
receivable............................. 1,868 1,125
Change in assets and liabilities net of
effects from purchase of subsidiaries:
Decrease (increase) in accounts
receivable, net...................... (4,563) 1,393
Decrease (increase) in inventories..... 536 (3,327)
Decrease in prepaid expenses and other. 3,035 5,161
Decrease in accounts payable........... (745) (33,836)
Decrease in accrued expenses........... (4,031) (3,605)
Decrease in income taxes payable....... (967) --
Increase in deferred income taxes, net. 197 279
------ ------
Net cash provided (used) by operating
activities......................... (14,265) (12,134)
------ ------
Cash flows from investing activities:
Additions to property, plant, and equipment.. (14,768) (12,891)
Increase in inventory to be converted
into equipment for short-term rental....... (370) (8,300)
Dispositions of property, plant, and
equipment.................................. 1,064 1,012
Businesses acquired in purchase transactions,
net of cash acquired....................... (1,459) (2,827)
Decrease (increase) in other assets.......... 6,355 (1,138)
------ ------
Net cash used by investing
activities......................... (9,178) (24,144)
------ ------
Cash flows from financing activities:
Repayments of long-term obligations.......... (3,072) (18,417)
Borrowings (repayments) of capital lease
obligations................................ 141 (90)
Reimbursement of recapitalization costs and
other...................................... -- 2,087
------ ------
Net cash used by financing activities (2,931) (16,420)
------ ------
Effect of exchange rate changes on cash and
cash equivalents............................. (647) (229)
------ ------
Net increase (decrease) in cash and cash
equivalents.................................. 1,509 (52,927)
Cash and cash equivalents, beginning of period. 4,366 61,754
------ ------
Cash and cash equivalents, end of period....... $ 5,875 $ 8,827
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first six months for:
Interest.................................. $ 21,555 $ 24,220
Income taxes.............................. $ 4,471 $ 2,850
</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. Certain reclassifications of amounts related
to the prior year have been made to conform with the 1999
presentation.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value). Inventories are
comprised of the following (in thousands):
June 30, December 31,
1999 1998
---------- ------------
Finished goods............... $10,191 $10,974
Work in progress............. 3,360 4,203
Raw materials, supplies and
parts...................... 22,730 21,585
------ ------
36,281 36,762
Less amounts expected to be
converted into equipment for
short-term rental............ 8,470 8,100
------ ------
Total inventories...... $27,811 $28,662
====== ======
(3) DISPOSITIONS
------------
In February 1999, the Company liquidated the assets and
discontinued the operations of KCI Insurance Company Co., Ltd.
(the "Captive") resulting in the return of cash to the Company
of approximately $5.2 million which was used to pay down a
portion of the long-term credit facility and other liabilities.
The obligations remaining under the Captive as of that date have
been assumed by the Company. The Company did not recognize any
gain or loss as a result of this transaction.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS
---------------------
Long-term obligations consist of the following (in thousands):
June 30, December 31,
1999 1998
--------- ------------
Senior Credit Facilities:
Revolving bank credit facility.. $ 11,500 $ 10,000
Acquisition credit facility..... 10,000 10,000
Term loans:
Tranche A due 2003........... 113,500 117,000
Tranche B due 2004........... 88,650 89,100
Tranche C due 2005........... 88,650 89,100
------- -------
312,300 315,200
9 5/8% Senior Subordinated Notes
Due 2007......................... 200,000 200,000
------- -------
512,300 515,200
Less: Current installments......... 12,800 8,800
------- -------
499,500 506,400
Other.............................. 483 655
------- -------
$499,983 $507,055
======= =======
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" or (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. In December 1998, the Company entered into three
interest rate protection agreements which effectively fix the
base borrowing rate on 90% of the Company's variable rate debt
as follows (dollars in millions):
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
---------------------------------
Annual
Swap Interest
Maturity Amount Rate
---------- ------- ----------
01/08/2002 $150.0 5.5775%
12/29/2000 95.0 4.8950%
12/31/1999 35.0 4.8550%
As a result of interest rate protection agreements put in
place during the prior year, the Company recorded additional net
interest expense of approximately $241,000 and $45,000, through
the six months ended June 30, 1999, and 1998, respectively. The
fair value of these agreements at June 30, 1999 was not
material.
The Revolving Loans may be repaid and reborrowed. At June
30, 1999, the aggregate availability under the Revolving Credit
and Acquisition Facilities was $78.5 million.
The Term Loans are subject to quarterly amortization
payments which began 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.
Indebtedness of the Company under the Senior Credit
Agreement is guaranteed by certain of the 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
subsidiaries, (ii) a first priority perfected pledge of all
capital stock of the Company's domestic subsidiaries and (iii) a
first priority perfected pledge of up to 65% of the capital
stock of foreign subsidiaries owned directly by the Company or
its domestic subsidiaries.
The 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, liens and
encumbrances and other matters customarily restricted in such
agreements. The Company is in compliance with the applicable
covenants at June 30, 1999.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
---------------------------------
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 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. In addition, at any time, or from time to time,
the Company may acquire a portion of the Notes through open-
market purchases.
(5) 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. During the third quarter of 1998,
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 condensed consolidated
financial statements referring to share and per share data have
been restated to reflect the stock split. Net earnings for basic
and diluted calculations do not differ (In thousands, except per
share):
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
------- -------- ------- --------
Net earnings.............. $ 976 $ 2,178 $ 2,513 $ 5,164
====== ====== ====== =======
Average common shares:
Basic (weighted-average
outstanding shares)... 70,915 70,852 70,915 70,852
Dilutive potential
common shares from
stock options........ 2,318 2,448 2,324 2,452
------ ------ ------ ------
Diluted (weighted-
average outstanding
shares).............. 73,233 73,300 73,239 73,304
====== ====== ====== ======
Earnings per share....... $ 0.01 $ 0.03 $ 0.04 $ 0.07
====== ====== ====== ======
Earnings per share -
assuming dilution........ $ 0.01 $ 0.03 $ 0.03 $ 0.07
====== ====== ====== ======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is party to several lawsuits generally
incidental to its business and is contesting certain adjustments
proposed by the Internal Revenue Service to prior years' tax
returns. 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 dictate.
(7) OTHER COMPREHENSIVE INCOME
--------------------------
The Company adopted Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income", in
the first quarter of 1998. The adoption of this Statement has
had no impact on the net earnings or shareholders' equity
(deficit) of the Company. 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. For KCI, other comprehensive
income consists of foreign currency translation adjustments
recorded in each period. The Company's comprehensive income
(loss) for the second quarters of 1999 and 1998 was
approximately $(59,000) and $2.3 million, respectively, and for
the first half of 1999 and 1998, was $334,000 and $4.3 million,
respectively. The earnings associated with the Company's
investment in its foreign subsidiaries are considered to be
permanently invested and no provision for U.S. federal and state
income taxes on these earnings or translation adjustments has
been made.
(8) SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------
The Company is principally engaged in the sale and rental
of innovative therapeutic systems throughout the United States
and in twelve primary countries internationally. In June 1997,
the FASB issued Statement No. 131 "Disclosures about Segments of
an Enterprise and Related Information", which the Company has
adopted in 1998.
The Company identifies its business segments based on
management responsibility within the United States and
geographically for all international units. The KCI New
Technologies ("Nutech") segment includes all operations related
to the U.S. rental and sale of circulatory devices, namely the
Plexipulse and Plexipulse All-in-One systems. The Company
measures segment profit as operating profit, which is
defined as income
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (continued)
----------------------------------------------
before interest income or expense, foreign currency gains and
losses, income taxes and minority interest. All intercompany
transactions are eliminated in computing revenues, operating
income and assets. Information on segments and a reconciliation
to income before interest, income taxes, foreign currency gains
and losses and minority interest are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------- -------- --------
Revenue:
KCI Therapeutic Services.. $52,534 $56,931 $105,327 $115,306
KCI International......... 21,260 18,983 42,406 36,995
NuTech.................... 6,083 5,303 12,200 10,609
Other (1)................. 128 141 283 345
------ ------ ------- -------
$80,005 $81,358 $160,216 $163,255
====== ====== ======= =======
Operating Earnings:
KCI Therapeutic Services.. $14,716 $17,757 $ 29,504 $ 36,858
KCI International......... 4,233 3,739 8,309 6,891
NuTech.................... 2,409 1,760 4,612 3,455
Other(2).................. (7,804) (7,696) (14,396) (14,454)
------ ------ ------ ------
$13,554 $15,560 $ 28,029 $ 32,750
====== ====== ====== ======
(1) Other revenue consists primarily of contract metal
fabrication income.
(2) General headquarter expenses are not allocated to the
individual segments and include executive, financial,
legal and administrative expenses.
As of August 1, 1999, NuTech's operations have been merged
into KCI Therapeutic Services.
(9) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which must be
adopted in years beginning after June 15, 1999. In June 1999,
FASB Statement No. 137 was issued, which delays the adoption of
Statement No. 133 to June 15, 2000. The Company expects to adopt
the new Statement effective January 1, 2001. The Statement will
require the Company to recognize all derivatives on its 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 its nature, changes in the fair value of the
derivative will either be (i) offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or (ii) 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.
In March 1998, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 98-1, "Accounting For the
Costs of Computer Software Developed or Obtained for Internal
Use." The SOP was effective beginning January 1, 1999. The SOP
requires the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining
software for internal use. The Company does not anticipate that
the adoption of this SOP will have a material impact on the
Company's future earnings or financial position.
(10) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
------------------------------------------------------
In November 1997, 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) do
not guarantee any Company debt. Each guarantor subsidiary 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 June 30, 1999 and December 31, 1998 and the related condensed
consolidating statements of earnings for the three and six month
periods ended June 30, 1999 and 1998 and the condensed
consolidated statements of cash flows for the six month periods
ended June 30, 1999 and 1998, respectively.
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
June 30, 1999
(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......... $ -- $ -- $ 8,130 $ (2,255) $ 5,875
Accounts receivable,
net................ -- 69,666 17,287 (5,393) 81,560
Inventories........... -- 18,106 9,705 -- 27,811
Prepaid expenses and
other............... -- 7,649 4,737 (869) 11,517
------- ------- ------- -------- --------
Total current
assets.......... -- 95,421 39,859 (8,517) 126,763
Net property, plant
and equipment......... -- 80,387 8,905 (10,849) 78,443
Goodwill, net........... -- 48,901 5,115 -- 54,016
Loan issuance cost,net.. -- 14,335 -- -- 14,335
Other assets, net....... -- 24,721 79 -- 24,800
Intercompany investments
and advances.......... (261,254) 461,353 1,327 (201,426) --
------- ------- ------- ------- -------
Total assets......$(261,254) $725,118 $ 55,285 $(220,792) $298,357
======= ======= ======= ======= =======
LIABILITIES AND SHARE-
HOLDERS'(DEFICIT)EQUITY:
Accounts payable........$ -- $ 3,171 $ 1,924 $ (2,255) $ 2,840
Accrued expenses........ -- 24,272 7,255 -- 31,527
Current installments of
long-term obligations. -- 12,800 -- -- 12,800
Intercompany payables... -- 4,925 5,037 (9,962) --
Current installments of
capital lease obli-
gations............... -- 153 -- -- 153
Income tax payable...... -- -- 2,591 (869) 1,722
------- ------- ------- -------- -------
Total current
liabilities..... -- 45,321 16,807 (13,086) 49,042
------- ------- ------- -------- -------
Long-term obligations,
excluding current
installments.......... -- 499,983 -- -- 499,983
Capital lease obli-
gations, excluding
current installments.. -- 256 10 -- 266
Deferred income taxes,
net................... -- 16,600 -- (6,280) 10,320
------- ------- ------- ------- -------
Total liabilities. -- 562,160 16,817 (19,366) 559,611
Shareholders' equity
(deficit)............. (261,254) 162,958 38,468 (201,426) (261,254)
Total liabilities
and equity
(deficit).......$(261,254) $725,118 $ 55,285 $(220,792) $298,357
======= ======= ======= ======= =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents......... $ -- $ -- $ 9,543 $ (5,177) $ 4,366
Accounts receivable,
net................. -- 66,372 17,474 (4,435) 79,411
Inventories........... -- 18,971 9,691 -- 28,662
Prepaid expenses and
other............... -- 11,240 3,312 -- 14,552
------- ------- ------- -------- -------
Total current
assets.......... -- 96,583 40,020 (9,612) 126,991
Net property, plant and
equipment............. -- 79,110 9,717 (10,877) 77,950
Goodwill, net........... -- 49,033 5,294 -- 54,327
Loan issuance cost, net -- 15,380 -- -- 15,380
Other assets, net....... -- 31,417 52 -- 31,469
Intercompany investments
and advances.......... (261,588) 460,361 1,104 (199,877) --
------- ------- ------ ------- -------
Total assets...... $(261,588) $731,884 $ 56,187 $(220,366) $306,117
======= ======= ====== ======= =======
LIABILITIES AND SHARE-
HOLDERS'(DEFICIT)EQUITY:
Accounts payable........ $ -- $ 6,512 $ 2,104 $ (5,178) $ 3,438
Accrued expenses........ -- 27,015 8,306 -- 35,321
Current installments on
long-term obligations. -- 8,800 -- -- 8,800
Intercompany payables... -- 6,151 3,765 (9,916) --
Current installments of
capital lease obli-
gations............... -- 150 -- -- 150
Income tax payable...... -- 1,612 1,077 -- 2,689
-------- ------- ------- -------- -------
Total current
liabilities..... -- 50,240 15,252 (15,094) 50,398
-------- ------- ------- -------- -------
Long-term obligations
excluding current
installments.......... -- 507,055 -- -- 507,055
Capital lease obli-
gations, excluding
current installments.. -- 99 30 -- 129
Deferred income taxes,
net................... -- 15,519 -- (5,396) 10,123
-------- ------- ------- -------- -------
Total liabilities. -- 572,913 15,282 (20,490) 567,705
Shareholders' (deficit)
equity................ (261,588) 158,971 40,905 (199,876) (261,588)
-------- ------- ------- --------- -------
Total liabilities
and equity...... $(261,588) $731,884 $ 56,187 $(220,366) $306,117
======== ======= ======= ======== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended June 30, 1999
(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....... $ -- $ 46,495 $ 13,765 $ -- $ 60,710
Sales and other.......... -- 16,763 6,111 (3,579) 19,295
------ ------- ------- ------ -------
Total revenue........ -- 63,708 19,876 (3,579) 80,005
Rental expenses.......... -- 29,978 12,536 -- 42,514
Cost of goods sold....... -- 6,648 3,004 (2,119) 7,533
------ ------- ------- ------ -------
-- 36,626 15,540 (2,119) 50,047
------ ------- ------- ------ -------
Gross profit......... -- 27,082 4,336 (1,460) 29,958
Selling, general and
administrative expenses -- 15,268 1,136 -- 16,404
------ ------- ------- ------ -------
Operating earnings... -- 11,814 3,200 (1,460) 13,554
Interest income.......... -- 15 35 -- 50
Interest expense......... -- (11,538) -- -- (11,538)
Foreign currency loss.... -- (354) (86) -- (440)
------ ------- ------- ------ -------
Earnings (loss)
before income
taxes.............. -- (63) 3,149 (1,460) 1,626
Income taxes............. -- (83) 1,317 (584) 650
------ ------- ------- ------ -------
Earnings before equity
in earnings of
Subsidiaries....... -- 20 1,832 (876) 976
Equity in earnings of
subsidiaries....... 976 1,832 -- (2,808) --
------ ------- ------- ------ -------
Net earnings......... $ 976 $ 1,852 $ 1,832 $(3,684) $ 976
====== ======= ======= ====== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended June 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..... $ -- $ 52,801 $12,277 $ -- $ 65,078
Sales and other........ -- 13,253 5,957 (2,930) 16,280
----- ------- ------ ------ ------
Total revenue....... -- 66,054 18,234 (2,930) 81,358
Rental expenses.......... -- 31,255 10,824 -- 42,079
Cost of goods sold....... -- 4,581 3,094 (1,605) 6,070
----- ------- ------ ------ ------
-- 35,836 13,918 (1,605) 48,149
----- ------- ------ ------ ------
Gross profit........ -- 30,218 4,316 (1,325) 33,209
Selling, general and
administrative
expenses.............. -- 16,305 1,344 -- 17,649
----- ------- ------ ------ ------
Operating earnings.. -- 13,913 2,972 (1,325) 15,560
Interest income......... -- 85 58 -- 143
Interest expense........ -- (12,015) -- -- (12,015)
Foreign currency gain
(loss)................ -- 292 (371) -- (79)
----- ------- ------ ------ ------
Earnings before
income taxes and
minority interest. -- 2,275 2,659 (1,325) 3,609
Income taxes............ -- 919 1,091 (557) 1,453
Minority interest....... -- -- 22 -- 22
----- ------- ------ ------ ------
Earnings before
equity in earnings
of subsidiaries... -- 1,356 1,590 (768) 2,178
Equity in earnings
of subsidiaries... 2,178 1,590 -- (3,768) --
----- ------- ------ ------- ------
Net earnings........ $ 2,178 $ 2,946 $ 1,590 $(4,536) $ 2,178
===== ======= ====== ======= ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the six months ended June 30, 1999
(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..... $ -- $ 95,144 $28,081 $ -- $123,225
Sales and other........ -- 30,991 12,299 (6,299) 36,991
------ ------- ------ ------- ------
Total revenue........ -- 126,135 40,380 (6,299) 160,216
Rental expenses.......... -- 60,690 24,861 -- 85,551
Cost of goods sold....... -- 12,471 6,103 (3,842) 14,732
------ ------- ------ ----- -------
-- 73,161 30,964 (3,842) 100,283
------ ------- ------ ----- -------
Gross profit........ -- 52,974 9,416 (2,457) 59,933
Selling, general and
administrative
expenses.............. -- 29,720 2,184 -- 31,904
------ ------- ------ ----- -------
Operating earnings.. -- 23,254 7,232 (2,457) 28,029
Interest income......... -- 57 104 -- 161
Interest expense........ -- (23,205) -- -- (23,205)
Foreign currency loss... -- (727) (70) -- (797)
------ ------- ------ ----- -------
Earnings (loss)
before income
taxes............. -- (621) 7,266 (2,457) 4,188
Income taxes............ -- (381) 3,039 (983) 1,675
------ ------- ------ ----- -------
Earnings (loss)
before equity in
earnings of
subsidiaries...... -- (240) 4,227 (1,474) 2,513
Equity in earnings
of subsidiaries... 2,513 4,227 -- (6,740) --
------ ------- ------ ----- -------
Net earnings........ $ 2,513 $ 3,987 $ 4,227 $(8,214) $ 2,513
===== ===== ===== ===== =====
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the six months ended June 30, 1998
(in thousands)
(unaudited)
</TABLE>
<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.. $ -- $106,397 $23,926 $ -- $130,323
Sales and other..... -- 26,502 11,399 (4,969) 32,932
------ ------- ------ ------ -------
Total revenue -- 132,899 35,325 (4,969) 163,255
Rental expenses..... -- 62,763 21,459 -- 84,222
Cost of goods sold.. -- 9,002 6,044 (2,617) 12,429
------ ------- ------ ------ -------
-- 71,765 27,503 (2,617) 96,651
------ ------- ------ ------ -------
Gross profit...... -- 61,134 7,822 (2,352) 66,604
Selling, general and
administrative
expenses............ -- 31,677 2,177 -- 33,854
------ ------- ------ ------ -------
Operating earnings -- 29,457 5,645 (2,352) 32,750
Interest income....... -- 257 135 -- 392
Interest expense...... -- (24,318) -- -- (24,318)
Foreign currency gain
(loss).............. -- 414 (655) -- (241)
------ ------- ------ ------ -------
Earnings before
income taxes
and minority
interest........ -- 5,810 5,125 (2,352) 8,583
Income taxes.......... -- 2,349 2,102 (1,008) 3,443
Minority interest..... -- -- 24 -- 24
----- ------- ------ ------ -------
Earnings before
equity in
earnings of
subsidiaries.... -- 3,461 3,047 (1,344) 5,164
Equity in earnings
of subsidiaries. 5,164 3,047 -- (8,211) --
----- ------- ------ ------- -------
Net earnings...... $ 5,164 $ 6,508 $ 3,047 $ (9,555) $ 5,164
===== ======= ====== ======= =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the six months ended June 30, 1999
(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............. $ 2,513 $ 3,987 $ 4,227 $ (8,214) $ 2,513
Adjustments to reconcile
net earnings to net
cash provided by
operating activities... (2,513) 6,072 2,070 6,123 11,752
------- ------- ------- ------- -------
Net cash provided by
operating activities... -- 10,059 6,297 (2,091) 14,265
Cash flows from
investing activities:
Additions to property,
plant and equipment.... -- (15,880) (2,472) 3,584 (14,768)
Increase in inventory
to be converted into
equipment for short-
term rental............ -- (370) -- -- (370)
Dispositions of
property, plant and
equipment........... -- 580 484 -- 1,064
Businesses acquired in
purchase transactions,
net of cash acquired... -- (1,459) -- -- (1,459)
Decrease (increase) in
other assets........... -- 6,444 (89) -- 6,355
----- ----- ------ ------ ------
Net cash used by
investing activities... -- (10,685) (2,077) 3,584 (9,178)
Cash flows from financing
activities:
Repayments of notes
payable and long-
term obligations..... -- (3,072) -- -- (3,072)
Borrowing (repayments)
of capital lease
obligations.......... -- 161 (20) -- 141
Proceeds (payments) on
intercompany invest-
ments and advances... 182 4,006 2,575 (6,763) --
Cash dividends paid to
shareholders......... -- -- (5,643) 5,643 --
Other.................. (182) (469) (2,545) 3,196 --
----- ------ ------ ------ ------
Net cash used by financing
activities............... -- 626 (5,633) 2,076 (2,931)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- (647) (647)
----- ------ ------ ------ ------
Net increase (decrease)
in cash and cash
equivalents............ -- -- (1,413) 2,922 1,509
Cash and cash equivalents,
beginning of period.... -- -- 9,543 (5,177) 4,366
Cash and cash equivalents,
end of period.......... $ -- $ -- $ 8,130 $(2,255) $ 5,875
====== ====== ====== ====== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the six months ended June 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............. $ 5,164 $ 6,508 $ 3,047 $(9,555) $ 5,164
Adjustments to reconcile
net earnings net cash
used by operating
activities............. (5,164) (13,779) 1,081 564 (17,298)
----- ------ ------ ----- ------
Net cash used by
operating activities... -- (7,271) 4,128 (8,991) (12,134)
Cash flows from investing
activities:
Additions to property,
plant and equipment.. -- (13,800) (3,092) 4,001 (12,891)
Increase in inventory
to be converted
into equipment for
short-term rental.... -- (8,300) -- -- (8,300)
Dispositions of
property, plant and
equipment............ -- 1,012 -- -- 1,012
Businesses acquired in
purchase trans-
actions, net of cash
acquired............. -- (2,827) -- -- (2,827)
Decrease (increase) in
other assets......... -- (1,168) 30 -- (1,138)
----- ----- ----- ----- ------
Net cash used by
investing activities... -- (25,083) (3,062) 4,001 (24,144)
Cash flows from financing
activities:
Repayments of notes
payable and long-
term obligations..... -- (18,417) -- -- (18,417)
Repayments of capital
lease obligations.... -- (75) (15) -- (90)
Proceeds (payments) on
intercompany invest-
ments and advances... (3,212) 9,223 (2,836) (3,175) --
Recapitalization
costs - fees and
expenses............. 2,087 -- -- -- 2,087
Cash dividends paid to
shareholders......... -- -- (7,832) 7,832 --
Other.................. 1,125 (1,354) (333) 562 --
----- ----- ----- ----- -----
Net cash used by
financing activities. -- (10,623) (11,016) 5,219 (16,420)
Effect of exchange rate
changes on cash and
cash equivalents..... -- -- -- (229) (229)
----- ------ ------ ----- ------
Net decrease in cash
and cash equivalents. -- (42,977) (9,950) -- (52,927)
Cash and cash equiva-
lents,beginning of
period................ -- 44,439 17,315 -- 61,754
----- ------ ------ ----- ------
Cash and cash equiva-
lents, end of period. $ -- $ 1,462 $ 7,365 $ -- $ 8,827
===== ====== ====== ===== ======
</TABLE>
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 forward-
looking statements made in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which reflect
management's best judgment based on market and other factors
currently known, involve risks and uncertainties. When used in this
Report, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Second Quarter of 1999 Compared to Second Quarter of 1998
- ----------------------------------------------------------
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 second quarter of the
prior year ($ in thousands):
Three Months Ended June 30,
-----------------------------------
Revenue Variance
Relationship Increase (Decrease)
--------------- -------------------
1999 1998 $ Pct
------- ------ --------- --------
Revenue:
Rental and service......... 76% 80% $ (4,368) (7%)
Sales and other............ 24 20 3,015 19
--- --- -------
Total revenue............ 100% 100% (1,353) (2)
Rental expenses.............. 53 52 435 1
Cost of goods sold........... 10 7 1,463 24
--- --- -------
Gross profit............. 37 41 (3,251) (10)
Selling, general and
administrative expenses.... 20 22 (1,245) (7)
--- --- -------
Operating earnings....... 17 19 (2,006) 13
Interest income.............. -- -- (93) (65)
Interest expense............. 14 15 477 4
Foreign currency loss........ 1 -- (361) nm
--- --- ------
Earnings before income
taxes and minority
interest............... 2 4 (1,983) (55)
Income taxes................. 1 2 (803) (55)
Minority interest in
subsidiary loss............ -- -- (22) nm
--- --- ------
Net earnings............ 1% 2% $(1,202) (55%)
=== === ======
The Company's revenue is derived from three primary operating
units. The following table sets forth, for the periods indicated,
the amount of revenue derived from each of these segments ($ in
millions):
Three months ended Variance
June 30, Inc (Dec)
------------------- ---------
1999 1998 Pct
-------- --------- ---------
KCI Therapeutic Service..... $ 52.5 $ 56.9 (7.7%)
KCI International........... 21.3 19.0 12.1
NuTech...................... 6.1 5.3 15.1
Other....................... 0.1 0.2 --
----- -----
$ 80.0 $ 81.4 (1.7%)
===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the second quarter of 1999 decreased $1.4
million, or 1.7%, to $80.0 million from $81.4 million in the second
quarter of 1998.
KCI Therapeutic Services ("KCTS") revenue was $52.5 million,
down $4.4 million, or 7.7% from $56.9 million in the second quarter
of the prior year. The decreased revenue was due to a $7.5 million,
or 47.6%, decrease in extended care surfaces revenue caused by the
market's negative reaction to the reimbursement provisions of the
Balanced Budget Act of 1997 which resulted in lower patient therapy
days, lower product pricing and a product mix shift from framed
products to overlays in the extended care market, combined with a $1.6
million, or 100%, decline in revenue from V.A.C. Medicare Part B, as
a payor, due to the delay in receiving a V.A.C. reimbursement code.
These revenue decreases were partially offset by a $2.0 million, or
6.8%, increase in acute care surfaces revenue and a $2.9 million, or
52.9%, increase in V.A.C. revenue from payors other than Medicare
Part B. Domestic patient days, overall, were up 5.3% from the prior
year due in part to the increased market penetration of the V.A.C.
wound closure device. The therapy day increase was offset by lower
rental pricing and a product mix shift to lower-cost overlays,
particularly in the extended care marketplace. Sales for the period
grew as a percentage of total revenue due substantially to sales of
disposable products associated with the Company's medical devices.
Higher sales volumes in the period were partly offset by lower overall
prices.
Revenue from the Company's international operating unit
increased 12.1% to $21.3 million from $19.0 million in the second
quarter of 1998. The international revenue increase reflects higher
patient therapy days in virtually all of the Company's markets, and
growth of $900,000, or 57.5%, in the V.A.C. product line partly
offset by unfavorable currency exchange rate fluctuations of approx-
imately $1.5 million.
Revenue from the NuTech segment increased 15.1% to $6.1 million
from $5.3 million in the second quarter of 1998. The increase
was attributable to the acquisition of a product line from Beiersdorf-
Jobst in the fourth quarter of 1998.
Rental, or field, expenses of $42.5 million were 70.0% of total
rental revenue in the second quarter of 1999 compared to 64.7% in the
second quarter of 1998. This increase is primarily attributable to
the decrease in rental revenue, because the majority of the Company's
rental or field expenses are relatively fixed. Overall, field
expenses of $42.5 million increased approximately 1.0% from the prior
year period due to increased equipment depreciation and labor costs.
Cost of goods sold increased 24.1% to $7.5 million in the second
quarter of 1999 from $6.1 million in the second quarter of 1998. Cost
of goods sold has increased primarily due to increased sales of
disposables associated with the Company's medical devices.
Gross profit decreased $3.2 million, or 9.8%, to $30.0 million
in the second quarter of 1999 from $33.2 million in the second
quarter of 1998 due to decreased rental revenue. Gross profit margin
for the second quarter, as a percentage of total revenue, was 37.4%,
down from 40.8% for the second quarter of 1998, due to a combination
of the decrease in rental revenue and lower selling prices for the
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Selling, general and administrative expenses decreased $1.2
million, or 7.1%, to $16.4 million in the second quarter of 1999 from
$17.6 million in the second quarter of 1998. This decrease was due
primarily to lower labor costs in the period partly offset by
increased legal and professional fees. As a percentage of total
revenue, selling, general and administrative expenses were 20.5% in
the second quarter of 1999 as compared with 21.7% in the second
quarter of 1998.
Operating earnings for the period decreased $2.0 million, or
12.9%, to $13.6 million compared to $15.6 million in the prior-year
quarter. This decrease in operating earnings is primarily due to a
decrease in extended care and V.A.C. Medicare Part B revenue, net
of related expenses, of $8.0 million; partially offset by (i) an
increase in acute care revenue, net of related expenses of $1.9
million; (ii) an increase in V.A.C. revenue from non-Medicare Part B
payors, net of related expenses, of $2.1 million; and (iii) a $2.0
million net increase in other operations, including an increase in
international operations combined with expense reductions during the
quarter.
Interest expense for the three months ended June 30, 1999 was
$11.6 million compared to $12.0 million for the second quarter of
1998. The interest expense decrease was due to repayments of long-
term obligations made since the first quarter of 1998.
Net earnings for the second quarter of 1999 decreased $1.2
million, or 55.2%, from the prior year to $1.0 million due
substantially to the decrease in operating earnings discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
First Six Months of 1999 Compared to First Six Months of 1998
- --------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first six months of the
prior year ($ in thousands):
Six Months Ended June 30,
----------------------------------------
Revenue Variance
Relationship Increase (Decrease)
----------------- -------------------
1999 1998 $ Pct
------- -------- --------- --------
Revenue:
Rental and service.......... 77% 80% $ (7,098) (5%)
Sales and other............. 23 20 4,059 12
--- --- -----
Total revenue........... 100% 100% (3,039) (2)
Rental expenses............... 54 51 1,329 2
Cost of goods sold............ 9 8 2,303 19
--- --- -----
Gross profit............ 37 41 (6,671) (10)
Selling, general and
administrative expenses..... 20 21 (1,950) (6)
--- --- -----
Operating earnings...... 17 20 (4,721) (14)
Interest income............... -- -- (231) (59)
Interest expense.............. 14 15 1,113 5
Foreign currency loss......... -- -- (556) nm
--- --- -----
Earnings before income
taxes and minority
interest.............. 3 5 (4,395) (51)
Income taxes.................. 1 2 (1,768) (51)
Minority interest in
subsidiary loss............. -- -- (24) nm
--- --- -----
Net earnings............ 2% 3% $(2,651) (51%)
=== === =====
The Company's revenue is divided between three primary operating
units. The following table sets forth, for the periods indicated,
the amount of revenue derived from each of these segments ($ in
millions):
Six months ended Variance
June 30, Inc (Dec)
---------------- ---------
1999 1998 Pct
------- ------- ---------
KCI Therapeutic Services.. $ 105.3 $ 115.3 (8.7%)
KCI International......... 42.4 37.0 14.6
NuTech.................... 12.2 10.6 15.1
Other..................... 0.3 0.4 --
----- -----
$ 160.2 $ 163.3 (1.9%)
===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the first six months of 1999 decreased $3.1
million, or 1.9%, to $160.2 million from $163.3 million in the first
six months of 1998. Revenue from KCTS was $105.3 million, down $10.0
million, or 8.7% from $115.3 million in the first six months of the
prior year. The decreased revenue was due to a decrease in extended
care surfaces revenue of $13.7 million, or 45.8%, caused by the
market's negative reaction to the reimbursement provisions of the
Balanced Budget Act of 1997 which resulted in lower patient therapy
days, lower product pricing and a product mix shift from framed
products to overlays in the extended care market, combined with a $4.4
million, or 100%, decline in revenue from V.A.C. Medicare Part B; as
a payor, due to the delay in receiving a V.A.C. reimbursement code.
These revenue decreases were partially offset by a $2.5 million, or
4.0%, increase in acute care surfaces revenue and a $6.4 million, or
69.1%, increase in V.A.C. revenue from payors other than Medicare
Part B. Domestic patient days, overall, were up 4.4% from the prior
year due in part to the increased market penetration of the V.A.C.
wound closure device. The therapy day increase was offset by lower
prices and a product mix shift to lower-cost overlays, parti-
cularly in the extended care marketplace. Sales for the period
increased $4.1 million, or 12.3%, due substantially to sales of
disposable products associated with the Company's medical devices.
Revenue from the Company's international operating unit
increased 14.6% to $42.4 million from $37.0 million in the first six
months of 1998. The international revenue increase reflects higher
patient therapy days in virtually all of the Company's markets, and
growth of $2.0 million, or 68.6%, in the V.A.C. product line partly
offset by unfavorable currency exchange rate fluctuations of approx-
imately $2.0 million.
Revenue from the NuTech segment increased 15.1% to $12.2 million
from $10.6 million in the first six months of 1998. The increase
was attributable to the acquisition of a product line from Beiersdorf-
Jobst in the fourth quarter of 1998.
Rental, or field, expenses of $85.6 million were 69.4% of total
rental revenue in the first six months of 1999 compared to 64.6% in
the first six months of 1998. This increase is primarily
attributable to the decrease in rental revenue, because the majority
of the Company's rental or field expenses are relatively fixed.
Overall, field expenses of $85.6 million increased approximately $1.3
million, or 1.6%, from the prior year period due, in part, to
increased equipment depreciation.
Cost of goods sold increased 18.5% to $14.7 million in the first
six months of 1999 from $12.4 million in the first six months of
1998. Cost of goods sold has increased primarily due to increased
sales of disposables associated with the Company's medical devices.
Sales margins decreased slightly during the first half of 1999 due
primarily to lower selling prices.
Gross profit decreased $6.7 million, or 10.0%, to $59.9 million
in the first six months of 1999 from $66.6 million in the first six
months of 1998 due to the decline in rental revenue. Gross profit
margin for the first six months, as a percentage of total revenue,
was 37.4%, down from 40.8% for the first six months of 1998, due
substantially to the decrease in rental revenue for the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Selling, general and administrative expenses decreased $2.0
million, or 5.8%, to $31.9 million in the first six months of 1999
from $33.9 million in the first six months of 1998. This decrease was
due primarily to lower labor costs in the period. As a percentage of
total revenue, selling, general and administrative expenses were
19.9% in the first six months of 1999 as compared with 20.7% in the
first six months of 1998.
Operating earnings for the period decreased $4.7 million, or
14.4%, to $28.0 million compared to $32.7 million in the prior-year
period. This decrease is primarily due to a decrease in extended
care, home care and V.A.C. Medicare Part B revenue, net of related
expenses of $15.7 million; partially offset by (i) an increase in
acute care revenue, net of related expenses, of $2.3 million; (ii)an
increase in V.A.C. revenue from non-Medicare Part B payors, net of
related expenses, of $4.7 million; (iii) expense reductions of $1.1
million, net of non-recurring consulting fees of $1.4 million; (iv) a
$2.9 million net increase in other operations, including increases
in both international and NuTech operations.
Interest income for the six months ended June 30, 1999 was
approximately $161,000 compared to $392,000 in the prior period.
The decrease in interest income resulted from lower invested cash
balances due primarily to acquisition activities since the first
quarter of 1998.
Interest expense for the six months ended June 30, 1999 was
$23.2 million compared to $24.3 million for the first six months of
1998. The interest expense decrease was due to repayments of long-
term obligations made since the first quarter of 1998.
Net earnings for the first six months of 1999 decreased $2.7
million, or 51.3%, from the prior year to $2.5 million due to the
decrease in operating earnings as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the six months ended June 30, 1999 and other factors resulted
in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $5.9 million at June 30, 1999, an
increase of $1.5 million from December 31, 1998. The cash increase
is primarily attributable to net earnings during the six months
combined with controlled capital spending.
Net accounts receivable at June 30, 1999 increased $2.1 million,
or 2.7%, to $81.6 million from $79.4 million at December 31, 1998.
This increase is primarily due to a $1.5 million increase in KCI
International receivables related to revenue growth combined with an
increase in receivables related to third party payors, including
Medicare and Medicaid reimbursement, which have longer collection
periods.
Prepaid expenses and other current assets of $11.5 million
decreased 20.9% as compared to $14.6 million at December 31, 1998.
This change resulted primarily from a favorable litigation settlement
and a decrease in prepaid vacation.
Other assets at June 30, 1999 were $24.8 million, a $6.7
million, or 21.2%, decrease from year-end. This decrease is
primarily attributable to the liquidation of the assets of KCI
Insurance Co., Ltd. during the first quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Financial Condition (continued)
- -------------------------------
Accrued expenses at June 30, 1999 were $31.5 million compared to
$35.3 million at the end of 1998. This decrease was due to a
decrease in vacation accruals and accruals related to the liquidation
of KCI Insurance Company.
Long-term debt obligations, including the current maturities,
decreased $3.1 million to $512.8 million as of June 30, 1999 due to
the repayment of a portion of the Company's revolving credit
facility, in addition to scheduled principal payments, made as a
result of the liquidation of the assets of KCI Insurance Co., Ltd.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1999 the Company had current assets of $126.8
million and current liabilities of $49.0 million resulting in a
working capital surplus of $77.8 million, compared to a surplus of
$76.6 million at December 31, 1998.
During the first six months of 1999, the Company made net
capital expenditures of $14.1 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
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 Recapitalization and pay related fees and expenses. The
Company increased borrowings under this facility by $1.5 million in
the first six months of 1999, and will borrow funds from this
facility as needed to fund capital expenditures and meet working
capital needs. The Revolving Facility will remain available to the
Company until December 31, 2003, subject to certain terms and
conditions.
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 June 30, 1999, the Acquisition Facility and the
Revolving Credit Facility had balances of $10.0 million and $11.5
million, respectively. Accordingly, the aggregate availability under
these two facilities was $78.5 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- --------------------------------------------
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 June 30, 1999.
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 any 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%
As of June 30, 1999, the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
At June 30, 1999, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Known Trends or Uncertainties
- -----------------------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control
costs as a result of the Balanced Budget Act of 1997, 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 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.
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.
Reimbursement
- -------------
The implementation of a prospective payment system for extended
care facilities has changed the way skilled nursing facilities buy
and rent the Company's products. The effect of this change has been
to sharply reduce the Company's rental revenues in the extended care
market. The Company believes that in the long term, under a fixed
payment system, decisions on selecting the products and services used
in patient care will be based on clinical and cost effectiveness.
The Company's innovative and extensive product continuum which
significantly improves clinical outcomes while reducing the cost of
patient care should allow it to compete effectively in this
environment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Reimbursement (continued)
- -------------------------
The Company currently rents and sells the V.A.C. in all care
settings and market acceptance of this product has been better than
expected. This is evidenced by the significant revenue growth
experienced in the four years that the product has been available
domestically. However, the Company has not received a Medicare Part
B reimbursement code, and an associated coverage policy, for the
V.A.C. in the home care setting. As a result, in 1999, the Company
has incurred costs associated with the use of V.A.C. in the home, for
Medicare patients, but has not recognized any revenue due to the
continuing lack of a reimbursement code and coverage criteria.
Although we believe we will receive a Medicare Part B reimbursement
code for the V.A.C., the Company has recently discontinued the
placement of the V.A.C. for Medicare Part B patients until such time
as an appropriate reimbursement code has been received. The Company
continues to vigorously pursue this reimbursement coverage.
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. 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.
The Company is a party to several lawsuits arising in the
ordinary course of its business, 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- ----------------------------
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.
Year 2000 Issue
- ---------------
The Year 2000 issue arose as a result of computer software
programs being written using two digits rather than four digits to
define the date field. Certain of the Company's existing computer
programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result
in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions or engage in other normal business activities.
Based on a recent assessment, the Company has determined that it
needs to modify or replace key portions of its software so that its
information technology ("IT") systems will function properly with
respect to dates beyond December 31, 1999. The Company presently
believes that through its conversion to the Oracle applications
platform and with modifications to other existing software, the
Year 2000 issue may be mitigated. However, if such modifications and
conversions are not made properly or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and
implementation.
Assessment
- ----------
The Company has completed its assessment of all IT systems that
could be significantly affected by the Year 2000. The completed
assessment indicated that most of the Company's significant IT
systems could be affected, particularly the general ledger, billing
and manufacturing inventory systems. That assessment also indicated
that software and hardware used in production, distribution and time
and attendance systems also are at risk. However, based on a review
of its product line, the Company has determined that the products it
has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe that
the Year 2000 presents a material exposure as it relates to the
Company's products. In addition, the Company has gathered
information about the Year 2000 compliance status of its significant
suppliers and customers and continues to monitor their compliance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Year 2000 Issue (continued)
- ---------------------------
Remediation
- -----------
The Company is 85% complete on the remediation phase for its IT
systems and expects to complete software modifications and/or
replacements no later than October 31, 1999. Once software
modifications or replacements are completed, the systems are tested
for compliance. These phases can run concurrently for different
systems. To date, the Company has completed
installations/modifications on all mission-critical domestic systems.
Internationally, the Company is installing new integrated software
applications which are expected to be completed by the end of October
1999.
Testing
- -------
Testing is in process or has been completed for all systems for
which the remediation phase has been completed. To date, this
testing has identified the need for certain additional program
modifications. The additional modifications have been made and the
upgraded systems will be retested during the third quarter. Testing
of the remaining international systems should be completed during the
fourth quarter of 1999. An integration test will also be performed
at that time.
Implementation
- --------------
Many applications and systems have been put into production.
These include servers, personal computers and various software
programs. Applications and systems are put into production once they
have been tested. All affected applications and systems should be in
production by the end of November, 1999.
The Company believes that it has completed the assessment of all
major non-information technology based systems. Remediation plans
have been developed, where necessary, and implementation has been
completed. Testing of the remediation steps will be completed during
the second quarter.
Third Parties and Related Systems
- ---------------------------------
The Company's third party payor ("claims") billing system
interfaces directly with certain third party payor programs. The
Company believes that its billing software is Year 2000 compliant and
is in the process of testing the interfaces to ensure that the
Company's claims billing interface systems are Year 2000 compliant by
the end of September, 1999.
In addition, the Company has surveyed its significant suppliers
and large customers that do not share information systems with the
Company. To date, the Company is not aware of any significant
customer or supplier with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity or capital
resources. However, the Company has no means of ensuring that all
third parties will be ready for the Year 2000. There can be no
guarantee that the inability of a significant customer or supplier to
complete their Year 2000 readiness program in a timely manner would
not materially impact the operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Year 2000 Issue (continued)
- ---------------------------
Costs
- -----
The total cost of the Year 2000 project is estimated at $7.7
million and is being funded through operating cash flows. Of this
total, $6.5 million will be used to purchase new software that will
be capitalized and the remaining $1.2 million will be expensed as
incurred. Through June 30, 1999, the Company incurred approximately
$7.3 million ($1.0 million expensed and $6.3 million capitalized for
new software), related to the assessment of the Year 2000 issue,
development of a modification plan, preliminary software
modifications, purchase update of new software, where necessary, and
testing of implemented systems.
Risks and Contingency Plan
- --------------------------
Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. As noted
above, however, the Company has not yet completed all necessary
phases of the Year 2000 program. The Company is in the process of
determining the risks it would face in the event certain aspects
of its Year 2000 remediation program failed. It is also developing
contingency plans for all mission-critical processes not yet
completed. Under a "worst case" scenario, the Company's
international operations would be unable to deliver, track and bill
for products due to internal system failures and the Company, as a
whole, would be unable to deliver key products due to the inability
of external vendors to deliver such products. Alternative suppliers
are being identified and inventory levels of certain key products
and/or components may be temporarily increased. While virtually all
internal systems can be replaced with manual systems on a temporary
basis, the failure of any mission-critical system will have at least
a short-term negative effect on operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to various market risks, including
fluctuations in interest rates and variability in currency exchange
rates. The Company has established policies, procedures and internal
processes governing its management of market risks and the use of
financial instruments to manage its exposure to such risks.
Interest Rate Risk
- ------------------
At June 30, 1999, approximately $313 million of the Company's
long-term debt bore interest at variable rates. These variable-rate
facilities bear interest at a stated rate based upon a Base Rate
(defined as the higher of (i) the rate of interest publicly
announced by Bank of America as its "reference rate" or (ii) the
federal funds effective rate from time to time plus 0.50%) or the
Eurodollar Rate (as defined) for one, two, three or six months plus
associated credit risk factors from 1.50% to 2.75% depending on the
base rate and maturity (see Note 4 to the Company's condensed
consolidated financial statements).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
- --------------------------------------------------------------------
Interest Rate Risk (continued)
- -----------------------------
In an effort to minimize the risk of adverse interest rate
fluctuations, the Company has entered into three interest rate
protection agreements which effectively fix the base borrowing rate
on 90% of the Company's variable rate debt as follows (dollars in
millions):
Annual
Swap Interest
Maturity Amount Rate
---------- ------ --------
01/08/2002 $150.0 5.5775%
12/29/2000 95.0 4.8950%
12/31/1999 35.0 4.8550%
As a result of these interest rate protection agreements, the
Company believes that movements in short term interest rates would
not materially affect the financial position of the Company.
Foreign Currency and Market Risk
- --------------------------------
The Company has direct operations in Western Europe, Canada and
Australia and distributor relationships in many other parts of the
world. The Company's foreign operations are measured in their local
currencies. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in the foreign markets in which the
Company has operations. Exposure to this variability is managed
primarily through the use of natural hedges, whereby funding
obligations and assets are both managed in the local currency. The
Company maintains no other derivative instruments to mitigate the
exposure to translation and/or transaction risk. International
operations reported operating profit of $8.3 million for the six
months ended June 30, 1999. It is estimated that the result of a 10%
fluctuation in the value of the dollar relative to these foreign
currencies at June 30, 1999 would change the Company's net income for
the six months ended June 30, 1999 by approximately $575,000. The
Company's analysis does not consider the implications that such
fluctuations could have on the overall economic activity that could
exist in such an environment in the U.S. or the foreign countries or
on the results of operations of these foreign entities.
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 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Annual
Report on Form 10-K/A dated December 31,
1994, and incorporated herein by reference).
10.2 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 Annual Report on Form
10-K/A dated December 31, 1994, and
incorporated herein by reference).
10.3 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 Annual Report on Form
10-K/A dated December 31, 1994, and
incorporated herein by reference).
10.4 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).
10.5 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).
Exhibits (continued)
--------------------
10.6 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).
10.7 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).
10.8 Director Equity Agreement, dated May 12,
1998, between the Company and Charles N.
Martin (filed as Exhibit 10.8 on Form 10-K
for the year ended December 31, 1998, and
incorporated herein by reference).
10.9 Director Equity Agreement, dated May 12,
1998, between the Company and Donald E. Steen
(filed as Exhibit 10.9 on Form 10-K for the
year ended December 31, 1998, and
incorporated herein by reference).
10.10 Letter, dated June 4, 1998, from the Company
to William M. Brown outlining the terms of
his employment (filed as Exhibit 10.10 on
Form 10-K for the year ended December 31,
1998, and incorporated herein by reference).
10.11 Supplier Agreement, dated December 1, 1998,
between Novation, LLC and Kinetic Concepts,
Inc. (filed as Exhibit 10.11 on Form 10-K for
the year ended December 31, 1998, and
incorporated herein by reference).
21.1 List of Subsidiaries (filed as Exhibit 21.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, 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 R. HANNIGAN
-----------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /s/ WILLIAM M. BROWN
--------------------
William M. Brown
Vice President and
Chief Financial Officer
Date: August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,874,716
<SECURITIES> 0
<RECEIVABLES> 84,883,190
<ALLOWANCES> 3,298,544
<INVENTORY> 27,811,289
<CURRENT-ASSETS> 126,763,031
<PP&E> 213,975,464
<DEPRECIATION> 135,532,692
<TOTAL-ASSETS> 298,356,602
<CURRENT-LIABILITIES> 49,041,442
<BONDS> 499,765,605
0
0
<COMMON> 70,915
<OTHER-SE> (261,324,884)
<TOTAL-LIABILITY-AND-EQUITY> 298,356,602
<SALES> 36,991,213
<TOTAL-REVENUES> 160,215,891
<CGS> 14,731,450
<TOTAL-COSTS> 117,455,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,868,233
<INTEREST-EXPENSE> 23,204,942
<INCOME-PRETAX> 4,188,131
<INCOME-TAX> 1,675,252
<INCOME-CONTINUING> 2,512,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,512,879
<EPS-BASIC> $0.04
<EPS-DILUTED> $0.03
</TABLE>
