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, 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 November 1, 1999
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,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents............. $ 6,598 $ 4,366
Accounts receivable, net.............. 77,976 79,411
Inventories........................... 25,370 28,662
Prepaid expenses and other............ 15,401 14,552
------- -------
Total current assets............... 125,345 126,991
------- -------
Net property, plant and equipment....... 79,576 77,950
Goodwill, less accumulated amortization
of $20,407 in 1999 and $17,323 in
1998................................. 54,422 54,327
Loan issuance costs, less accumulated
amortization of $4,423 in 1999 and
$2,687 in 1998....................... 13,813 15,380
Other assets, less accumulated
amortization of $3,929 in 1999 and
$3,425 in 1998....................... 24,749 31,469
------- -------
$ 297,905 $ 306,117
======= =======
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable...................... $ 1,194 $ 3,438
Accrued expenses...................... 38,749 35,321
Current installments of long-term
obligations......................... 14,800 8,800
Current installments of capital lease
obligations......................... 111 150
Income tax payable.................... 1,451 2,689
------- -------
Total current liabilities.......... 56,305 50,398
------- -------
Long-term obligations, excluding current
installments......................... 490,918 507,055
Capital lease obligations, excluding
current installments................. 287 129
Deferred income taxes, net.............. 9,923 10,123
------- -------
557,433 567,705
------- -------
Commitments and contingencies (Note 6)
Shareholders' deficit:
Common stock; issued and outstanding
70,915 in 1999 and in 1998......... 71 71
Retained deficit..................... (254,986) (259,121)
Accumulated other comprehensive
income............................. (4,613) (2,538)
------- -------
(259,528) (261,588)
------- -------
$ 297,905 $ 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 Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental and service....... $ 60,307 $ 62,865 $183,532 $193,188
Sales and other.......... 19,382 18,183 56,373 51,115
------ ------ ------- -------
Total revenue.......... 79,689 81,048 239,905 244,303
Rental expenses.......... 40,127 40,204 125,678 124,426
Cost of goods sold....... 7,163 6,717 21,895 19,146
------ ------ ------- -------
47,290 46,921 147,573 143,572
------ ------ ------- -------
Gross profit........... 32,399 34,127 92,332 100,731
Selling, general and
administrative expenses.. 17,772 15,458 49,676 49,312
------ ------ ------- -------
Operating earnings..... 14,627 18,669 42,656 51,419
Interest income........... 73 85 234 477
Interest expense.......... (11,748) (12,155) (34,953) (36,473)
Foreign currency loss..... (131) (280) (928) (521)
------ ------ ------- -------
Earnings before income
taxes and minority
interest............ 2,821 6,319 7,009 14,902
Income taxes.............. 1,199 2,528 2,874 5,971
Minority interest in
subsidiary loss........ -- 1 -- 25
------ ------ ------- -------
Net earnings........... $ 1,622 $ 3,792 $ 4,135 $ 8,956
====== ====== ======= =======
Earnings per share..... $ 0.02 $ 0.05 $ 0.06 $ 0.13
====== ====== ======= =======
Earnings per share -
assuming dilution... $ 0.02 $ 0.05 $ 0.06 $ 0.12
====== ====== ======= =======
Average common shares:
Basic (weighted
average outstand-
ing shares)....... 70,915 70,872 70,915 70,872
====== ====== ======= =======
Diluted (weighted
average outstand-
ing shares)....... 73,245 73,264 73,250 73,264
====== ====== ======= =======
</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,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................... $ 4,135 $ 8,956
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation........................... 20,259 19,123
Amortization........................... 5,326 4,463
Provision for uncollectible accounts
receivable........................... 3,499 1,575
Change in assets and liabilities net
of effects from purchase of
subsidiaries:
Increase in accounts receivable, net. (2,660) (1,849)
Decrease (increase) in inventories... 2,955 (3,169)
Decrease in prepaid expenses and
other.............................. (848) 4,168
Decrease in accounts payable......... (2,378) (36,493)
Increase in accrued expenses......... 3,193 1,742
Increase (decrease) in income taxes
payable............................ (1,238) 171
Increase (decrease) in deferred
income taxes, net.................. (200) 1,105
------ ------
Net cash provided (used) by
operating activities........... 32,043 (208)
------ ------
Cash flows from investing activities:
Additions to property, plant, and
equipment................................ (20,485) (22,235)
Increase in inventory to be converted
into equipment for short-term rental..... (1,500) (5,900)
Dispositions of property, plant, and
equipment................................ 1,596 1,813
Businesses acquired in purchase transac-
tions, net of cash acquired.............. (5,054) (2,827)
Decrease (increase) in other assets........ 6,120 (1,546)
------ ------
Net cash used by investing
activities..................... (19,323) (30,695)
------ ------
Cash flows from financing activities:
Repayments of long-term obligations........ (10,137) (28,122)
Borrowings (repayments) of capital lease
obligations.............................. 120 (131)
Proceeds from the sale of stock and exer-
cise of stock options.................... -- 300
Reimbursement of recapitalization costs and
other.................................... -- 2,087
------ ------
Net cash used by financing
activities..................... (10,017) (25,866)
------ ------
Effect of exchange rate changes on cash and
cash equivalents........................... (471) (96)
------ ------
Net increase (decrease) in cash and cash
equivalents................................ 2,232 (56,865)
Cash and cash equivalents, beginning of
period..................................... 4,366 61,754
------ ------
Cash and cash equivalents, end of period..... $ 6,598 $ 4,889
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first nine months for:
Interest................................. $ 27,902 $ 30,901
Income taxes............................. $ 6,385 $ 4,212
</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):
September 30, December 31,
1999 1998
------------ ------------
Finished goods............... $ 8,847 $10,974
Work in progress............. 2,695 4,203
Raw materials, supplies and
parts...................... 23,428 21,585
------ ------
34,970 36,762
Less amounts expected to be
converted into equipment for
short-term rental............ 9,600 8,100
------ ------
Total inventories....... $25,370 $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):
September 30, December 31,
1999 1998
------------- ------------
Senior Credit Facilities:
Revolving bank credit facility.. $ 6,500 $ 10,000
Acquisition credit facility..... 10,000 10,000
Term loans:
Tranche A due 2003........... 111,750 117,000
Tranche B due 2004........... 88,425 89,100
Tranche C due 2005........... 88,425 89,100
------- -------
305,100 315,200
9 5/8% Senior Subordinated Notes
Due 2007......................... 200,000 200,000
------- -------
505,100 515,200
Less: Current installments......... 14,800 8,800
------- -------
490,300 506,400
Other.............................. 618 655
------- -------
$490,918 $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 92% of the Company's variable rate debt
as follows (dollars in millions):
Base
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%
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
--------------------------------
As a result of the interest rate protection agreements, the
Company recorded additional net interest expense of
approximately $204,000 and $71,000 through the nine months ended
September 30, 1999 and 1998, respectively. The fair value of
these agreements at September 30, 1999 was not material.
The Revolving Loans may be repaid and reborrowed throughout
the year. At September 30, 1999, the aggregate availability
under the Revolving Credit and Acquisition Facilities was $80.0
million.
The Term Loans are subject to quarterly amortization
payments which began on March 31, 1998. Commitments under the
Acquisition Facility will expire December 31, 2000 and
Acquisition Facility loans outstanding shall be repayable in
equal quarterly 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 September 30, 1999.
As of December 31, 1999, the minimum EBITDA required under
the Senior Credit Agreement is $100 million on a trailing 12-
month basis. The Senior Credit Agreement anticipated that the
Company would have received Medicare Part B reimbursement
coverage prior to the end of 1999. Without this reimbursement
coverage, and due in part to the dramatic decrease in extended
care rental revenue, the Company could potentially be out of
compliance with its Senior Credit Agreement covenants as of
December 31, 1999. The Company is vigorously pursuing the
issuance of a Medicare Part B reimbursement code for the
V.A.C. with the Health Care Financing Administration. The
Company has recently been informed that decision-making
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
--------------------------------
authority for the establishment of a V.A.C. reimbursement code
has been returned to the Medical Directors of the Durable
Medical Equipment Regional Carriers ("DMERC's"). The Medical
Directors have also indicated their support for a V.A.C.
reimbursement code and criteria.
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.
(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. Net earnings for basic and
diluted calculations do not differ (In thousands, except per
share):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net earnings.............. $ 1,622 $ 3,792 $ 4,135 $ 8,956
====== ====== ====== ======
Average common shares:
Basic (weighted-average
outstanding shares)... 70,915 70,872 70,915 70,872
Dilutive potential
common shares from
stock options......... 2,330 2,392 2,335 2,392
------ ------ ------ ------
Diluted (weighted-
average outstanding
shares)............... 73,245 73,264 73,250 73,264
====== ====== ====== ======
Earnings per share........ $ 0.02 $ 0.05 $ 0.06 $ 0.13
====== ====== ====== ======
Earnings per share -
assuming dilution....... $ 0.02 $ 0.05 $ 0.06 $ 0.12
====== ====== ====== ======
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 $1.6 million, the Company has
no material long-term capital commitments and can adjust the
level of capital expenditures as circumstances warrant.
(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 non-owner 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 net earnings plus foreign
currency translation adjustments recorded in each period. The
Company's comprehensive income for the three months ended
September 30, 1999 and 1998 was approximately $1.7 million and
$4.3 million, respectively, and for the first nine months of
1999 and 1998, was $2.1 million and $8.6 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
adopted in 1998.
The Company identifies its business segments based on
management responsibility within the United States and
geographically for all international units. As of August 1,
1999, KCI New Technologies, Inc. ("NuTech") merged into KCI
Therapeutic Services ("KCI USA"). The Company measures segment
profit as operating profit, which is defined as income before
interest income or expense, foreign currency gains and losses,
income taxes and minority interest. All inter-company
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (continued)
----------------------------------------------
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 Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
-------- ------- -------- --------
Revenue:
KCI USA.............. $ 58,189 $ 61,172 $175,716 $187,087
KCI International.... 20,989 19,464 63,395 56,459
Other (1)............ 511 412 794 757
------- ------- ------- -------
$ 79,689 $ 81,048 $239,905 $244,303
======= ======= ======= =======
Operating Earnings:
KCI USA.............. $ 18,129 $ 21,653 $ 52,984 $ 62,669
KCI International.... 4,244 3,845 12,553 10,736
Other (2)............ (7,746) (6,828) (22,881) (21,986)
------- ------- ------- -------
$ 14,627 $ 18,669 $ 42,656 $ 51,419
======= ======= ======= =======
(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.
(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.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9) NEW ACCOUNTING PRONOUNCEMENTS (continued)
----------------------------------------
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 outstanding common shares. 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 non-guarantor subsidiaries as
of September 30, 1999 and December 31, 1998 and the related
condensed consolidating statements of earnings for the three and
nine month periods ended September 30, 1999 and 1998 and the
condensed consolidated statements of cash flows for the nine
month periods ended September 30, 1999 and 1998, respectively.
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
September 30, 1999
(in thousands)
(unaudited)
<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
equivlents......... $ -- $ -- $ 9,405 $ (2,807) $ 6,598
Accounts receivable,
net................ -- 66,226 17,635 (5,885) 77,976
Inventories.......... -- 15,340 10,030 -- 25,370
Prepaid expenses and
other.............. -- 12,630 3,987 (1,216) 15,401
------- ------- ------ ------- -------
Total current
assets......... -- 94,196 41,057 (9,908) 125,345
Net property, plant and
equipment............ -- 81,646 9,035 (11,105) 79,576
Goodwill, net.......... -- 49,387 5,035 -- 54,422
Loan issuance costs,
net.................. -- 13,813 -- -- 13,813
Other assets, net...... -- 24,697 52 -- 24,749
Intercompany invest-
ments and advances... (259,528) 463,926 4,032 (208,430) --
------- ------- ------ ------- -------
Total assets..... $(259,528) $ 727,665 $ 59,211 $(229,443) $ 297,905
======= ======= ====== ======= =======
LIABILITIES AND SHARE-
HOLDERS'(DEFICIT)
EQUITY:
Accounts payable....... $ -- $ 2,694 $ 1,307 $ (2,807) $ 1,194
Accrued expenses....... -- 31,787 6,962 -- 38,749
Intercompany payables.. -- 5,704 4,905 (10,609) --
Current installments of
long-term obligations -- 14,800 -- -- 14,800
Current installments of
capital lease obli-
gations.............. -- 111 -- -- 111
Income tax payable..... -- -- 2,667 (1,216) 1,451
------- ------- ------- ------- -------
Total current
liabilities.... -- 55,096 15,841 (14,632) 56,305
------- ------- ------- ------- -------
Long-term obligations,
excluding current
installments......... -- 490,783 135 -- 490,918
Capital lease obliga-
tions, excluding
current installments. -- 284 3 -- 287
Deferred income taxes,
net.................. -- 16,303 -- (6,380) 9,923
------- ------- ------- ------- -------
Total liabilities -- 562,466 15,979 (21,012) 557,433
Shareholders' equity
(deficit)............ (259,528) 165,199 43,232 (208,431) (259,528)
------- ------- ------- ------- -------
Total liabilities
and equity
(deficit)...... $(259,528) $727,665 $ 59,211 $(229,443) $ 297,905
======= ======= ======= ======= =======
</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 equiv-
alents............. $ -- $ -- $ 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 invest-
ments 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
Intercompany payables.. -- 6,151 3,765 (9,916) --
Current installments on
long-term obligations -- 8,800 -- -- 8,800
Current installments
of capital lease
obligations.......... -- 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 obliga-
tions, 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
(deficit)...... $(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 September 30, 1999
(in thousands)
(unaudited)
<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>
Revenue:
Rental and service.... $ -- $ 46,354 $ 13,953 $ -- $ 60,307
Sales and other....... -- 14,802 7,598 (3,018) 19,382
------ ------ ------ ----- ------
Total revenue...... -- 61,156 21,551 (3,018) 79,689
Rental expenses....... -- 29,593 10,534 -- 40,127
Cost of goods sold.... -- 7,311 1,841 (1,989) 7,163
------ ------ ------ ----- ------
-- 36,904 12,375 (1,989) 47,290
------ ------ ------ ----- ------
Gross profit....... -- 24,252 9,176 (1,029) 32,399
Selling, general and
administrative
expenses............ -- 15,866 1,906 -- 17,772
------ ------ ------ ----- ------
Operating earnings -- 8,386 7,270 (1,029) 14,627
Interest income....... -- 46 27 -- 73
Interest expense...... -- (11,748) -- -- (11,748)
Foreign currency gain
(loss).............. -- (161) 30 -- (131)
------ ------ ------ ----- ------
Earnings (loss)
before income
taxes............ -- (3,477) 7,327 (1,029) 2,821
Income taxes.......... -- (1,453) 3,063 (411) 1,199
------ ------ ------ ----- ------
Earnings (loss)
before equity in
earnings of
subsidiaries..... -- (2,024) 4,264 (618) 1,622
Equity in earnings
of subsidiaries.. 1,622 4,264 -- (5,886) --
------ ------ ------ ----- ------
Net earnings....... $ 1,622 $ 2,240 $ 4,264 $ (6,504) $ 1,622
====== ====== ====== ===== ======
</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>
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>
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............. -- 14,530 928 -- 15,458
------ ------ ------ ----- ------
Operating earnings.. -- 17,078 3,275 (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. -- 4,963 3,039 (1,683) 6,319
Income taxes........... -- 2,005 1,247 (724) 2,528
Minority interest...... -- -- (1) -- (1)
------ ------ ------ ----- ------
Earnings before
equity in earnings
of subsidiaries... -- 2,958 1,793 (959) 3,792
Equity in earnings
of subsidiaries... 3,792 1,793 -- (5,585) --
------ ------ ------ ----- ------
Net earnings........ $ 3,792 $ 4,751 $ 1,793 $(6,544) $ 3,792
====== ====== ====== ===== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the nine months ended September 30, 1999
(in thousands)
(unaudited)
<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>
Revenue:
Rental and service....... $ -- $141,498 $ 42,034 $ -- $183,532
Sales and other.......... -- 45,793 19,897 (9,317) 56,373
------ ------- ------ ------ -------
Total revenue......... -- 187,291 61,931 (9,317) 239,905
Rental expenses.......... -- 90,283 35,395 -- 125,678
Cost of goods sold....... -- 19,782 7,944 (5,831) 21,895
------ ------- ------ ------ -------
-- 110,065 43,339 (5,831) 147,573
------ ------- ------ ------ -------
Gross profit.......... -- 77,226 18,592 (3,486) 92,332
Selling, general and
administrative expenses -- 45,586 4,090 -- 49,676
------ ------- ------ ------ -------
Operating earnings.... -- 31,640 14,502 (3,486) 42,656
Interest income.......... -- 103 131 -- 234
Interest expense......... -- (34,953) -- -- (34,953)
Foreign currency loss.... -- (888) (40) -- (928)
------ ------- ------ ------ -------
Earnings(loss) before
income taxes........ -- (4,098) 14,593 (3,486) 7,009
Income taxes............. -- (1,834) 6,102 (1,394) 2,874
------ ------- ------ ------ -------
Earnings (loss) before
equity in earnings
of subsidiaries..... -- (2,264) 8,491 (2,092) 4,135
Equity in earnings
of subsidiaries..... 4,135 8,491 -- (12,626) --
------ ------ ------ ------ -------
Net earnings.......... $ 4,135 $ 6,227 $ 8,491 $(14,718) $ 4,135
====== ====== ====== ====== =======
</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>
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>
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 -- 46,207 3,105 -- 49,312
------ ------- ------ ------ -------
Operating earnings.... -- 46,535 8,920 (4,036) 51,419
Interest income.......... -- 303 174 -- 477
Interest expense......... -- (36,473) -- -- (36,473)
Foreign currency gain
(loss)................. -- 408 (930) 1 (521)
------ ------- ------ ------ -------
Earnings before
income taxes and
minority interest... -- 10,773 8,164 (4,035) 14,902
Income taxes............. -- 4,354 3,349 (1,732) 5,971
Minority interest........ -- -- (25) -- (25)
------ ------- ------ ------ -------
Earnings before
equity in earnings
of subsidiaries..... -- 6,419 4,840 (2,303) 8,956
Equity in earnings
of subsidiaries.... 8,956 4,840 -- (13,796) --
------ ------- ------ ------ -------
Net earnings.......... $ 8,956 $ 11,259 $ 4,840 $(16,099) $ 8,956
====== ======= ====== ====== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the nine months ended September 30, 1999
(in thousands) (unaudited)
<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>
Cash flows from
operating activities:
Net earnings........... $ 4,135 $ 6,227 $ 8,491 $(14,718) $ 4,135
Adjustments to
reconcile net
earnings to net
cash provided by
operating activities. (4,135) 19,494 2,944 9,605 27,908
----- ------ ------ ------ ------
Net cash provided by
operating activities. -- 25,721 11,435 (5,113) 32,043
Cash flows from
investing activities:
Additions to
property, plant
and equipment...... -- (22,298) (4,273) 6,086 (20,485)
Increase in
inventory to be
converted into
equipment for
short-term rental.. -- (1,500) -- -- (1,500)
Dispositions of
property, plant
and equipment...... -- 962 634 -- 1,596
Businesses acquired
in purchase
transactions, net
of cash acquired... -- (5,054) -- -- (5,054)
Decrease (increase)
in other assets.... -- 6,213 (93) -- 6,120
----- ------ ------ ------ ------
Net cash used by
investing activities. -- (21,677) (3,732) 6,086 (19,323)
Cash flows from
financing activities:
Borrowings (repay-
ments) of notes
payable and long-
term obligations... -- (10,272) 135 -- (10,137)
Borrowing (repay-
ments) of capital
lease obligations.. -- 146 (26) -- 120
Proceeds (payments)
on intercompany
investments and
advances........... 78 6,474 (262) (6,290) --
Cash dividends paid
to shareholders.... -- -- (5,643) 5,643 --
Other................ (78) (392) (2,045) 2,515 --
----- ------ ------ ------ ------
Net cash used by
financing activi-
ties............... -- (4,044) (7,841) 1,868 (10,017)
Effect of exchange
rate changes on
cash and cash
equivalents........ -- -- -- (471) (471)
----- ------ ------ ------ ------
Net increase
(decrease) in cash
and cash equiva-
lents.............. -- -- (138) 2,370 2,232
Cash and cash equiva-
lents, beginning of
period............. -- -- 9,543 (5,177) 4,366
----- ------ ------ ------ ------
Cash and cash equiva-
lents, end of
period............. $ -- $ -- $ 9,405 $ (2,807) $ 6,598
===== ====== ====== ====== ======
</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
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>
Cash flows from
operating activities:
Net earnings........... $ 8,956 $ 11,259 $ 4,840 $(16,099) $ 8,956
Adjustments to
reconcile net
earnings to net cash
provided (used) by
operating activities. (8,956) (7,853) 2,570 5,075 (9,164)
----- ------ ------ ------ ------
Net cash provided
(used) by operating
activities.......... -- 3,406 7,410 (11,024) (208)
Cash flows from invest-
ing activities:
Additions to
property, plant
and equipment..... -- (22,393) (5,709) 5,867 (22,235)
Increase in inven-
tory to be con-
verted 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) 14,072 (3,197) (6,863) --
Recapitalization
costs - fees and
expenses........... 2,087 -- -- -- 2,087
Cash dividends paid
to shareholders.... -- -- (8,651) 8,651 --
Other................ 1,625 (1,722) 248 (151) --
----- ------ ------ ------ ------
Net cash used by
financing activities. -- (15,882) (11,621) 1,637 (25,866)
Effect of exchange
rate changes on cash
and cash equivalents. -- -- -- (96) (96)
----- ------ ------ ------ ------
Net decrease in cash
and cash equivalents. -- (44,439) (8,810) (3,616) (56,865)
Cash and cash equiva-
lents, beginning of
period............... -- 44,439 17,315 -- 61,754
----- ------ ------ ------ ------
Cash and cash equiva-
lents, end of period. $ -- $ -- $ 8,505 $ (3,616) $ 4,889
===== ====== ====== ====== ======
</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 currently known market and other
factors, 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
Third Quarter of 1999 Compared to Third 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 third quarter of the
prior year ($ in thousands):
Three Months Ended September 30,
------------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1999 1998 $ Pct
--------- --------- -------- ---------
Revenue:
Rental and service......... 76% 78% $(2,558) (4%)
Sales and other............ 24 22 1,199 7
--- --- -----
Total revenue............ 100% 100% (1,359) (2)
Rental expenses.............. 50 50 (77) --
Cost of goods sold........... 9 8 446 7
--- --- -----
Gross profit............. 41 42 (1,728) (5)
Selling, general and
administrative expenses.... 22 19 2,314 15
--- --- -----
Operating earnings....... 19 23 (4,042) (22)
Interest income.............. -- -- (12) (14)
Interest expense............. (15) (15) 407 3
Foreign currency loss........ -- -- 149 53
--- --- -----
Earnings before income
taxes and minority
interest............... 4 8 (3,498) (55)
Income taxes................. 2 3 1,329 53
Minority interest in
subsidiary loss............ -- -- (1) nm
--- --- -----
Net earnings............. 2% 5% $(2,170) (57%)
=== === =====
The Company's revenue is derived from two primary operating
segments. The following table sets forth, for the periods indicated,
the amount of revenue derived from each of these segments ($ in
millions):
Three months ended Variance
September 30, Inc (Dec)
----------------------- ------------
1999 1998 Pct
--------- ------------ ------------
KCI USA................... $ 58.2 $ 61.2 (5%)
KCI International......... 21.0 19.5 8%
Other..................... 0.5 0.3 nm
---- ----
$ 79.7 $ 81.0 (2%)
==== ====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Total revenue in the third quarter of 1999 decreased $1.3
million, or 1.6%, to $79.7 million from $81.0 million in the third
quarter of 1998.
KCI USA revenue was $58.2 million, down $3.0 million, or 4.9%
from $61.2 million in the third quarter of the prior year. The
decreased revenue was due to a $5.0 million, or 39.3%, decrease in
extended care surface revenue which resulted from the extended care
market's reaction to the Balanced Budget Act of 1997. The market's
reaction was characterized by lower patient therapy days, lower
product pricing and a product mix shift from framed products to
overlays. In addition, there was a $612,000 decline in V.A.C. revenue
from Medicare Part B due to the delay in receiving a V.A.C.
reimbursement code. These revenue decreases were partially offset by
a $2.9 million, or 42.8%, increase in V.A.C. revenue from payors
other than Medicare Part B. Domestic patient days, overall, were
3.0% lower than the prior year due to the extended care decline which
were partially offset by the increased market penetration of the
V.A.C. and a 1.8% increase in acute care patient days. Sales for the
period grew as a percentage of total revenue due, for the most part,
to increased sales of disposable products associated with the
Company's medical devices. Higher sales volumes in the period were
partially offset by lower overall sale prices.
Revenue from the Company's international operating unit
increased 7.7% to $21.0 million from $19.5 million in the third
quarter of 1998. The international revenue increase reflects higher
patient therapy days in virtually all of the Company's markets, and
growth of $1.1 million, or 57.5%, in the V.A.C. product line. On a
local currency basis, revenue increased $3.5 million compared to the
same period one year ago.
Rental, or field, expenses of $40.1 million represented 66.5% of
total rental revenue in the third quarter of 1999 compared to 64.0%
in the third 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 $40.1 million were essentially flat with
the prior year period.
Cost of goods sold increased 6.6% to $7.2 million in the third
quarter of 1999 from $6.7 million in the third quarter of 1998. Cost
of goods sold has increased primarily due to increased sales of
disposables associated with the Company's medical devices. Sales
margins were consistent year-to-year at 63% for the three month
periods.
Gross profit decreased $1.7 million, or 5.1%, to $32.4 million
in the third quarter of 1999 from $34.1 million in the third quarter
of 1998 due to decreased rental revenue. Gross profit margin for the
third quarter, as a percentage of total revenue, was 40.7%, down from
42.1% for the third quarter of 1998, due to the decrease in rental
revenue as discussed previously.
Selling, general and administrative expenses increased $2.3
million, or 15.0%, to $17.8 million in the third quarter of 1999 from
$15.5 million in the third quarter of 1998. This increase was due
primarily to an increase in legal and professional fees of $893,000
and increased provisions for bad debt of $1.6 million resulting
primarily from the delay in receiving a Medicare Part B code. As a
percentage of total revenue, selling, general and administrative
expenses were 22.3% in the third quarter of 1999 compared to 19.1% in
the third quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Operating earnings for the period decreased 21.7% to $14.6
million compared to $18.7 million in the prior-year quarter. The
decrease in operating earnings is primarily due to the decrease in
extended care and V.A.C. Medicare Part B revenue, net of related
expenses, of $6.6 million which were partially offset by an increase
in V.A.C. revenue from non-Medicare Part B payors, net of related
expenses, of $2.0 million; and a $600,000 net increase in other
operations, including international.
Interest expense for the three months ended September 30, 1999
was $11.7 million compared to $12.2 million for the third quarter of
1998. The interest expense decrease was due to repayments of long-
term obligations made since the third quarter of 1998.
Net earnings for the third quarter of 1999 decreased $2.2
million, or 57.2%, from the prior year to $1.6 million due
substantially to the decrease in operating earnings discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
First Nine Months of 1999 Compared to First Nine Months of 1998
- ---------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first nine months of the
prior year ($ in thousands):
Nine Months Ended September 30,
-----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1999 1998 $ Pct
--------- --------- --------- ---------
Revenue:
Rental and service......... 77% 79% $ (9,656) (5%)
Sales and other............ 23 21 5,258 10
--- --- -----
Total revenue............ 100% 100% (4,398) (2)
Rental expenses.............. 52 51 1,252 1
Cost of goods sold........... 9 8 2,749 14
--- --- -----
Gross profit............. 39 41 (8,399) (8)
Selling, general and
administrative expenses.... 21 20 364 1
--- --- -----
Operating earnings....... 18 21 (8,763) (17)
Interest income.............. -- -- (243) (51)
Interest expense............. (15) (15) 1,520 4
Foreign currency loss........ -- -- (407) (78)
--- --- -----
Earnings before income
taxes and minority
interest............... 3 6 (7,893) (53)
Income taxes................. 1 2 3,097 52
Minority interest in
subsidiary loss............ -- -- (25) nm
--- --- -----
Net earnings............. 2% 4% $ (4,821) (54%)
=== === =====
The Company's revenue is divided between two primary operating
segments. The following table sets forth, for the periods indicated,
the amount of revenue derived from each of these segments ($ in
millions):
Nine months ended Variance
September 30, Inc (Dec)
--------------------- ------------
1999 1998 Pct
--------- ---------- ------------
KCI USA................... $ 175.7 $ 187.1 (6%)
KCI International......... 63.4 56.5 12%
Other..................... 0.8 0.7 nm
----- -----
$ 239.9 $ 244.3 (2%)
===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Total revenue in the first nine months of 1999 decreased $4.4
million, or 1.8%, to $239.9 million from $244.3 million in the first
nine months of 1998. Revenue from KCI USA was $175.7 million, down
$11.4 million, or 6.1% from $187.1 million in the first nine months
of the prior year. The decreased revenue was due to a decrease in
extended care surface revenue of $18.7 million, or 43.9%, which
resulted from the extended care market's negative reaction to the
Balanced Budget Act of 1997. This reaction was characterized by lower
patient therapy days, lower product pricing and a product mix shift
from framed products to overlays. In addition, there was a $5.0
million decline in V.A.C. revenue from Medicare Part B due to the
delay in receiving a V.A.C. reimbursement code. These revenue
decreases were partially offset by a $9.4 million, or 58.3%, increase
in V.A.C. revenue from payors other than Medicare Part B and a 2%
increase in acute care surfaces revenue. Domestic patient days,
overall, were up 2.0% from the prior year due in part to the
increased market penetration of the V.A.C. combined with higher acute
care days. The therapy day increase was offset by lower prices and a
product mix shift to lower-cost overlays, particularly in the
extended care marketplace. Sales for the period increased $5.3
million, or 10.3%, due substantially to sales of disposable products
associated with the Company's medical devices.
Revenue from the Company's international operating unit
increased 12.2% to $63.4 million from $56.5 million in the first nine
months of 1998. The international revenue increase reflects higher
patient therapy days in virtually all of the Company's markets, and
growth of $3.1 million, or 64.1%, in the V.A.C. product line. On a
local currency basis, revenue increased $10.8 million compared to the
same period a year ago.
Rental, or field, expenses of $125.7 million were 68.5% of total
rental revenue in the first nine months of 1999 compared to 64.4% in
the first nine 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 $125.7 million increased approximately
$1.3 million, or 1.0%, from the prior year period due, in part, to
increased equipment depreciation.
Cost of goods sold increased 14.4% to $21.9 million in the first
nine months of 1999 from $19.1 million in the first nine 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 nine months of 1999
due primarily to lower sales prices and the fact that the Company
continued to place the V.A.C. on Medicare Part B patients until
August of 1999 despite the lack of a unique reimbursement code.
Gross profit decreased $8.4 million, or 8.3%, to $92.3 million
in the first nine months of 1999 from $100.7 million in the first
nine months of 1998 due substantially to the decline in rental
revenue. Gross profit margin for the first nine months, as a
percentage of total revenue, was 38.5%, down from 41.2% for the first
nine months of 1998, due primarily to the decrease in rental revenue
for the period.
Selling, general and administrative expenses increased $365,000,
or 0.7%, to $49.7 million in the first nine months of 1999 from $49.3
million in the first nine months of 1998. This increase was due
primarily to increased legal and professional fees, partially offset
by lower labor costs in the period. As a percentage of total revenue,
selling, general and administrative expenses were 20.7% in the first
nine months of 1999 as compared with 20.2% in the first nine months
of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Operating earnings for the period decreased $8.8 million, or
17.0%, to $42.7 million compared to $51.4 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 $22.8 million; partially offset by (i) an increase in
V.A.C. revenue from non-Medicare Part B payors, net of related
expenses, of $10.3 million; (ii) a $1.5 million net increase in
international operations; and (iii) miscellaneous cost reductions of
approximately $2.2 million.
Interest income for the nine months ended September 30, 1999 was
approximately $234,000 compared to $477,000 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 nine months ended September 30, 1999
was $35.0 million compared to $36.5 million for the first nine 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 nine months of 1999 decreased $4.8
million, or 53.8%, from the prior year to $4.1 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 nine months ended September 30, 1999 and other factors
resulted in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $6.6 million at September 30,
1999, an increase of $2.2 million from December 31, 1998. The cash
increase is primarily attributable to net earnings during the nine
months combined with controlled capital spending.
Net accounts receivable at September 30, 1999 decreased $1.4
million, or 1.8%, to $78.0 million from $79.4 million at December 31,
1998. This decrease was primarily due to additional reserves for
uncollectible accounts, partially offset by a $1.5 million increase
in KCI International receivables related to revenue growth and an
increase in receivables related to third party payors, including
Medicare and Medicaid, which have longer collection periods.
Other assets at September 30, 1999 were $24.7 million, a $6.7
million, or 21.4%, 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.
Accrued expenses at September 30, 1999 were $38.7 million
compared to $35.3 million at the end of 1998. This increase was due
to accrued interest expense recorded during the first nine months of
1999 on the $200 million in subordinated notes.
Long-term debt obligations, including the current maturities,
decreased $10.1 million to $505.7 million as of September 30, 1999
due to the repayment of a portion of the Company's revolving credit
facility made as a result of the liquidation of the assets of KCI
Insurance Co., Ltd. and scheduled principal payments on the Company's
long-term debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999 the Company had current assets of $125.3
million and current liabilities of $56.3 million resulting in a
working capital surplus of $69.0 million, compared to a surplus of
$76.6 million at December 31, 1998.
During the first nine months of 1999, the Company made net
capital expenditures of $20.4 million. Other than commitments for new
product inventory, including disposable "for sale" products, of $1.6
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 flow 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.
Although the Company decreased borrowings under this facility by $3.5
million in the first nine months of 1999, it has borrowed 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 September 30, 1999, the Acquisition Facility and the
Revolving Credit Facility had balances of $10.0 million and $6.5
million, respectively. Additionally, the Company has two outstanding
letters of credit totaling $3.5 million benefiting KCI Insurance Co.,
Ltd. Accordingly, the aggregate availability under these two
facilities was $80.0 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 Senior 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, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Liquidity and Capital Resources (continued)
- ------------------------------------------
As of December 31, 1999, the minimum EBITDA required under the
Senior Credit Agreement is $100 million on a trailing 12-month basis.
The Senior Credit Agreement anticipated that the Company would have
received Medicare Part B reimbursement coverage prior to the end of
1999. Without this reimbursement coverage, and due in part to the
dramatic decrease in extended care rental revenue, the Company might
be out of compliance with its Senior Credit Agreement covenants as of
December 31, 1999. The Company is vigorously pursuing the issuance
of a Medicare Part B reimbursement code for the V.A.C. with the
Health Care Financing Administration. See Known Trends or
Uncertainties - Reimbursement for further discussion of Medicare
reimbursement for the V.A.C.
The Senior Credit Agreement also 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 September 30, 1999, the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
At September 30, 1999, the Company was committed to purchase
approximately $1.6 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.
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will continue
because customers 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 with respect to 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.
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 as evidenced by the revenue growth experienced during the
time that the product has been available domestically. In the home
care setting, however, Medicare coverage guidelines have not been
established addressing under what circumstances, if any, Medicare
reimbursement will be provided for the V.A.C. The Company has placed
the V.A.C. in the home care setting since April 1996. Although the
Company believes it will receive a Medicare Part B reimbursement
code for the V.A.C. in the next several months, the Company has
discontinued the placement of the V.A.C. for Medicare Part B patients
until such time as an appropriate reimbursement code has been
received. In addition, pending the receipt of Medicare reimbursement
coverage, the Company has established a reserve to equal 100% of the
revenue recognized for prior placements. The Company continues to
vigorously pursue this reimbursement coverage. If the Company
obtains reimbursement coverage for the V.A.C., it may be able to
recognize revenue and recoup earnings for placement of the V.A.C.
on Medicare Part B patients which occurred prior to the issuance
of a reimbursement code. Although the Company believes it will be
able to recoup a substantial amount of revenue for such placements,
the timing and amount, if any, of such reimbursement cannot be
predicted at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
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
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
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.
Based on a recent assessment, the Company determined that it
needed 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. While there can be no
guarantee that the Year 2000 will not impact the Company's
operations, the Company presently believes that through its
conversion to the Oracle applications platform and with modifications
to other mission-critical software, the Year 2000 issue will not have
a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involved 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 by the Year 2000 issue, 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 were 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.
Remediation
- -----------
The Company has substantially completed the remediation phase
for its IT systems. To date, the Company has completed
installations/modifications on all mission-critical domestic and
international systems.
Testing
- -------
Testing is in process or has been completed for all systems for
which remediation has been completed. To date, this testing has
identified the need for certain additional program modifications.
The additional modifications have been made and tested. An
integration test has also been performed on the domestic systems.
The Company has substantially completed the testing phase of all
system modifications.
Implementation
- --------------
To the best of the Company's knowledge, all affected
applications and systems have been placed into production. These
include servers, personal computers and various software programs.
Applications and systems are put into production once they have been
tested.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Year 2000 Issue (continued)
- --------------------------
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
has completed testing of the interfaces to ensure that the Company's
claims billing interface systems are Year 2000 compliant.
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.
Costs
- -----
The total cost of the Year 2000 project is estimated to be $8.6
million and is being funded through operating cash flows. Of this
total, $7.2 million will be used to purchase new software that will
be capitalized and the remaining $1.4 million will be expensed as
incurred. Through September 30, 1999, the Company incurred
approximately $8.6 million ($1.4 million expensed and $7.2 million
capitalized for new software) related to the assessment of the Year
2000 issue, development of a modification plan, preliminary software
modifications, purchasing of new software 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 a
precaution, however, the Company is in the process of determining the
risks it could face in the event certain aspects of its Year 2000
remediation program failed. 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.
All contingency planning, approval and testing should be finalized
during the fourth quarter.
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 September 30, 1999, approximately $305.7 million of the
Company's long-term debt bore interest at variable rates. These
variable-rate facilities bore 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).
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 92% of the Company's variable rate debt as follows (dollars in
millions):
Base
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 does not maintain any derivative instruments to mitigate its
exposure to translation and/or transaction risk. International
operations reported operating profit of $12.6 million for the nine
months ended September 30, 1999. It is estimated that a 10%
fluctuation in the value of the dollar relative to these foreign
currencies at September 30, 1999 would change the Company's net
income for the nine months ended September 30, 1999 by approximately
$860,000. 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 its foreign
subsidiaries.
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: November 12, 1999
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<INVENTORY> 25,369,886
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<DEPRECIATION> 138,114,870
<TOTAL-ASSETS> 298,192,627
<CURRENT-LIABILITIES> 56,592,195
<BONDS> 490,722,190
0
0
<COMMON> 70,915
<OTHER-SE> (259,599,187)
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<SALES> 56,373,362
<TOTAL-REVENUES> 239,905,216
<CGS> 21,895,055
<TOTAL-COSTS> 175,354,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,499,010
<INTEREST-EXPENSE> 34,952,708
<INCOME-PRETAX> 7,009,117
<INCOME-TAX> 2,873,738
<INCOME-CONTINUING> 4,135,380
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,135,380
<EPS-BASIC> $0.06
<EPS-DILUTED> $0.06
</TABLE>
