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 March 31, 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 May 1, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents............... $ 7,663 $ 4,366
Accounts receivable, net................ 81,218 79,411
Inventories............................. 29,497 28,662
Prepaid expenses and other.............. 15,760 14,552
------- -------
Total current assets................. 134,138 126,991
------- -------
Net property, plant and equipment......... 77,082 77,950
Goodwill, less accumulated amortization
of $18,137 in 1999 and $17,323 in 1998.. 53,245 54,327
Loan issuance costs, less accumulated
amortization of $3,266 in 1999 and
$2,687 in 1998.......................... 14,801 15,380
Other assets, less accumulated
amortization of $3,564 in 1999 and
$3,425 in 1998.......................... 26,014 31,469
------- -------
$305,280 $306,117
======= =======
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable........................ $ 2,896 $ 3,438
Accrued expenses........................ 39,274 35,321
Current installments of long-term
obligations........................... 10,800 8,800
Current installments of capital lease
obligations........................... 152 150
Income tax payable...................... 3,382 2,689
------- -------
Total current liabilities............ 56,504 50,398
------- -------
Long-term obligations, excluding current
installments............................ 499,183 507,055
Capital lease obligations, excluding
current installments.................... 75 129
Deferred income taxes, net................ 10,713 10,123
------- -------
566,475 567,705
------- -------
Commitments and contingencies (Note 6)
Shareholders' deficit:
Common stock; issued and outstanding
70,915 in 1999 and in 1998............ 71 71
Retained deficit........................ (257,584) (259,121)
Accumulated other comprehensive income.. (3,682) (2,538)
------- -------
(261,195) (261,588)
------- -------
$ 305,280 $ 306,117
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
Rental and service........................ $62,515 $65,245
Sales and other........................... 17,696 16,652
------ ------
Total revenue........................... 80,211 81,897
------ ------
Rental expenses............................. 43,037 42,143
Cost of goods sold.......................... 7,199 6,359
------ ------
50,236 48,502
------ ------
Gross profit............................ 29,975 33,395
Selling, general and administrative expenses 15,500 16,205
Operating earnings...................... 14,475 17,190
Interest income............................. 111 249
Interest expense............................ (11,667) (12,303)
Foreign currency loss....................... (357) (162)
------ ------
Earnings before income taxes and
minority interest..................... 2,562 4,974
Income taxes................................ 1,025 1,990
Minority interest in subsidiary loss........ - 2
------ ------
Net earnings............................ $ 1,537 $ 2,986
====== ======
Earnings per common share............... $ 0.02 $ 0.04
====== ======
Earnings per common share - assuming
dilution.............................. $ 0.02 $ 0.04
====== ======
Average common shares:
Basic (weighted average outstanding
shares)........................... 70,195 70,852
====== ======
Diluted (weighted average outstanding
shares)........................... 73,177 73,304
====== ======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION> Three months ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................ $ 1,537 $ 2,986
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation............................ 6,634 6,189
Amortization............................ 1,532 1,430
Provision for uncollectible accounts
receivable............................ 554 811
Change in assets and liabilities net of
effects from purchase of subsidiaries:
Decrease (increase) in accounts
receivable, net..................... (2,653) 1,458
Increase in inventories............... (983) (343)
Decrease (increase) in prepaid
expenses and other.................. (1,208) 2,861
Decrease in accounts payable.......... (625) (33,259)
Increase in accrued expenses.......... 3,835 5,474
Increase in income taxes payable...... 693 --
Increase in deferred income taxes, net 590 197
----- ------
Net cash provided (used) by
operating activities............... 9,906 (12,196)
----- ------
Cash flows from investing activities:
Additions to property, plant, and equipment. (6,485) (6,004)
Decrease (increase) in inventory to be
converted into equipment for short-term
rental.................................... 100 (4,548)
Dispositions of property, plant, and
equipment................................. 461 404
Businesses acquired in purchase transactions,
net of cash acquired...................... (797) --
Decrease (increase) in other assets......... 6,382 (2,995)
------ ------
Net cash used by investing
activities........................ (339) (13,143)
------ ------
Cash flows from financing activities:
Repayments of long-term obligations......... (5,872) (17,217)
Repayments of capital lease obligations..... (51) (51)
Reimbursement of recapitalization costs and
other..................................... -- 1,543
------ ------
Net cash used by financing
activities........................ (5,923) (15,725)
------ ------
Effect of exchange rate changes on cash and
cash equivalents............................ (347) (411)
------ ------
Net increase (decrease) in cash and cash
equivalents................................. 3,297 (41,475)
Cash and cash equivalents, beginning of
period...................................... 4,366 61,754
------ ------
Cash and cash equivalents, end of period...... $ 7,663 $ 20,279
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first three months for:
Interest.................................. $ 5,858 $ 2,631
Income taxes.............................. $ 1,398 $ 473
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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):
March 31, December 31,
1999 1998
------------ ------------
Finished goods.............. $ 9,733 $10,974
Work in progress............ 4,113 4,203
Raw materials, supplies and
parts..................... 23,651 21,585
------ ------
37,497 36,762
Less amounts expected to be
converted into equipment for
short-term rental........... 8,000 8,100
------ ------
Total inventories.... $29,497 $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):
March 31, 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........... 115,250 117,000
Tranche B due 2004........... 88,875 89,100
Tranche C due 2005........... 88,875 89,100
------- -------
309,500 315,200
9 5/8% Senior Subordinated Notes
Due 2007........................ 200,000 200,000
------- -------
509,500 515,200
Less: Current installments......... 10,800 8,800
------- -------
498,700 506,400
Other.............................. 483 655
------- -------
$499,183 $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
interest expense of approximately $168,000 in the first quarter
of 1999. The fair value of these agreements at March 31, 1999
was not material.
The Revolving Loans may be repaid and reborrowed. At March
31, 1999, the aggregate availability under the Revolving Credit
and Acquisition Facilities was $83.5 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 March 31, 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
March 31,
----------------------
1999 1998
---------- ----------
Net earnings............................ $ 1,537 $ 2,986
======= ======
Average common shares:
Basic (weighted-average outstanding
shares)............................. 70,915 70,852
Dilutive potential common shares from
stock options....................... 2,262 2,452
Diluted (weighted-average outstanding
shares)............................. 73,177 73,304
====== ======
Earnings per common share............... $ 0.02 $ 0.04
====== ======
Earnings per common share - assuming
dilution.............................. $ 0.02 $ 0.04
====== ======
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 $4.2 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. For the first quarters of 1999 and
1998, the Company's comprehensive income was approximately
$390,000 and $2.0 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
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (continued)
----------------------------------------------
income 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
March 31,
------------------------
1999 1998
----------- ----------
Revenue:
KCI Therapeutic Services...... $ 52,793 $ 58,375
KCI International............. 21,146 18,012
Nutech........................ 6,117 5,306
Other (1)..................... 155 204
------- -------
$ 80,211 $ 81,897
======= =======
Operating Earnings:
KCI Therapeutic Services...... $ 14,788 $ 19,101
KCI International............. 4,076 3,152
Nutech........................ 2,203 1,695
Other (2)..................... (6,592) (6,758)
------- -------
$ 14,475 $ 17,190
======= =======
(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. The Company
expects to adopt the new Statement effective January 1, 2000.
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
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9) New Accounting Pronouncements (continued)
-----------------------------------------
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 March 31, 1999 and December 31, 1998 and the related
condensed consolidating statements of earnings and cash flows
for the three month periods ended March 31, 1999 and 1998,
respectively.
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
March 31, 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......... $ -- $ -- $ 8,887 $ (1,224) $ 7,663
Accounts receivable,
net................. -- 68,246 17,667 (4,695) 81,218
Inventories........... -- 20,781 8,716 -- 29,497
Prepaid expenses and
other............... -- 11,334 4,426 -- 15,760
------- ------- ------- -------- --------
Total current
assets.......... -- 100,361 39,696 (5,919) 134,138
Net property, plant and
equipment............. -- 78,046 9,313 (10,277) 77,082
Goodwill, net........... -- 48,061 5,184 -- 53,245
Loan issuance costs, net -- 14,801 -- -- 14,801
Other assets, net....... -- 25,937 77 -- 26,014
Intercompany investments
and advances.......... (261,195) 466,707 1,607 (207,119) --
------- ------- ------- ------- -------
Total assets...... $(261,195) $733,913 $ 55,877 $(223,315) $305,280
======= ======= ======= ======= =======
LIABILITIES AND SHARE-
HOLDERS' (DEFICIT)
EQUITY:
Accounts payable........ $ -- $ 2,302 $ 1,818 $ (1,224) $ 2,896
Accrued expenses........ -- 32,447 6,827 -- 39,274
Current installments of
long-term obligations. -- 10,800 -- -- 10,800
Intercompany payables... -- 10,559 5,282 (15,841) --
Current installments of
capital lease obli-
gations............... -- 152 -- -- 152
Income tax payable...... -- 295 3,087 -- 3,382
-------- ------- ------- ------- -------
Total current
liabilities..... -- 56,555 17,014 (17,065) 56,504
-------- ------- ------- ------- -------
Long-term obligations,
excluding current
installments.......... -- 499,183 -- -- 499,183
Capital lease obliga-
tions, excluding
current install-
ments................. -- 60 15 -- 75
Deferred income taxes,
net................... -- 17,008 -- (6,295) 10,713
-------- ------- ------ ------- -------
Total liabilities -- 572,806 17,029 (23,360) 566,475
Shareholders' equity
(deficit)............. (261,195) 161,107 38,848 (199,955) (261,195)
------- ------- ------ ------- -------
Total liabilities
and equity
(deficit)...... $(261,195) $733,913 $ 55,877 $(223,315) $ 305,280
======= ======= ====== ======= =======
</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 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
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 obligations
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 March 31, 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.... $ -- $ 48,199 $14,316 $ -- $ 62,515
Sales and other....... -- 14,228 6,188 (2,720) 17,696
------ ------- ------ ----- ------
Total revenue...... -- 62,427 20,504 (2,720) 80,211
Rental expenses....... -- 30,712 12,325 -- 43,037
Cost of goods sold.... -- 5,823 3,099 (1,723) 7,199
------ ------- ------ ----- ------
-- 36,535 15,424 (1,723) 50,236
------ ------- ------ ----- ------
Gross profit....... -- 25,892 5,080 (997) 29,975
Selling, general and
administrative
expenses............. -- 14,452 1,048 -- 15,500
------ ------- ------ ----- ------
Operating earnings.. -- 11,440 4,032 (997) 14,475
Interest income........ -- 42 69 -- 111
Interest expense....... -- (11,667) -- -- (11,667)
Foreign currency gain
(loss)............... -- (373) 16 -- (357)
------ ------- ------ ----- ------
Earnings (loss)
beore income taxes -- (558) 4,117 (997) 2,562
Income taxes........... -- (298) 1,722 (399) 1,025
------ ------- ------ ----- ------
Earnings (loss)
before equity in
earnings of
subsidiaries...... -- (260) 2,395 (598) 1,537
Equity in earnings
of subsidiaries... 1,537 2,395 -- (3,932) --
------ ------- ------ ----- ------
Net earnings........ $ 1,537 $ 2,135 $ 2,395 $(4,530) $ 1,537
====== ======= ====== ===== ======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended March 31, 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.... $ -- $ 53,596 $ 11,649 $ -- $ 65,245
Sales and other....... -- 13,249 5,442 (2,039) 16,652
------ ------- ------- ------ -------
Total revenue..... -- 66,845 17,091 (2,039) 81,897
Rental expenses....... -- 31,508 10,635 -- 42,143
Cost of goods sold.... -- 4,421 2,950 (1,012) 6,359
------ ------- ------- ------ -------
-- 35,929 13,585 (1,012) 48,502
------ ------- ------- ------ -------
Gross profit...... -- 30,916 3,506 (1,027) 33,395
Selling, general and
administrative
expenses............ -- 15,372 833 -- 16,205
------ ------- ------- ------ -------
Operating earnings -- 15,544 2,673 (1,027) 17,190
Interest income....... -- 172 77 -- 249
Interest expense...... -- (12,303) -- -- (12,303)
Foreign currency gain
(loss).............. -- 122 (284) -- (162)
------ ------- ------- ------ -------
Earnings before
income taxes
and minority
interest........ -- 3,535 2,466 (1,027) 4,974
Income taxes.......... -- 1,430 1,011 (451) 1,990
Minority interest..... -- -- (2) -- (2)
------ ------- ------- ------ -------
Earnings before
equity in
earnings of
subsidiaries.... -- 2,105 1,457 (576) 2,986
Equity in earnings
of subsidiaries. 2,986 1,457 -- (4,443) --
------ ------- ------- ------ -------
Net earnings...... $ 2,986 $ 3,562 $ 1,457 $ (5,019) $ 2,986
====== ====== ====== ====== =======
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the three months ended March 31, 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........... $ 1,537 $ 2,135 $ 2,395 $ (4,530) $ 1,537
Adjustments to rec-
oncile net earnings
to net cash pro-
vided by operating
activities........... (1,537) 2,628 1,438 5,840 8,369
----- ----- ----- ----- -----
Net cash provided by
operating activities. -- 4,763 3,833 1,310 9,906
Cash flows from
investing activities:
Additions to prop-
erty, plant and
equipment.......... -- (6,043) (1,249) 807 (6,485)
Decrease in inventory
to be converted
into equipment for
short-term rental.. -- 100 -- -- 100
Dispositions of
property, plant
and equipment...... -- 194 267 -- 461
equipment
Businesses acquired
in purchase
transactions, net
of cash acquired... -- (797) -- -- (797)
Decrease (increase)
in other assets.... -- 6,439 (57) -- 6,382
----- ----- ----- ----- -----
Net cash used by
investing activities. -- (107) (1,039) 807 (339)
Cash flows from
financing activities:
Repayments of notes
payable and long-
term obligations... -- (5,872) -- -- (5,872)
Repayments of
capital lease
obligations........ -- (36) (15) -- (51)
Proceeds (payments)
on intercompany
investments and
advances........... (853) 2,453 1,016 (2,616) --
Cash dividends paid
to shareholders.... -- -- (3,025) 3,025 --
Other................ 853 (1,201) (1,426) 1,774 --
----- ----- ----- ----- -----
Net cash used by
financing activities. -- (4,656) (3,450) 2,183 (5,923)
Effect of exchange
rate changes on
cash and cash
equivalents.......... -- -- -- (347) (347)
----- ----- ----- ----- -----
Net increase (decrease)
in cash and cash
equivalents.......... -- -- (656) 3,953 3,297
Cash and cash
equivalents, beginning
of period............. -- -- 9,543 (5,177) 4,366
----- ----- ----- ----- -----
Cash and cash
equivalents, end of
period................ $ -- $ -- $ 8,887 $(1,224) $ 7,663
===== ===== ====== ===== =====
</TABLE>
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the three months ended March 31, 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........... $ 2,986 $ 3,562 $ 1,457 $ (5,019) $ 2,986
Adjustments to
reconcile net earn-
ings to net cash
provided (used) by
operating activities. (2,986) (16,731) 292 4,243 (15,182)
----- ------ ------ ----- ------
Net cash provided
(used) by operating
activities........... -- (13,169) 1,749 (776) (12,196)
Cash flows from
investing activities:
Additions to property
plant and equipment -- (7,046) (1,006) 2,048 (6,004)
Decrease in inventory
to be converted
into equipment for
short-term rental. -- (4,548) -- -- (4,548)
Dispositions of
property, plant
and equipment..... -- 404 -- -- 404
Decrease (increase)
in other assets... -- (3,035) 40 -- (2,995)
------ ------ ------- ----- ------
Net cash used by
investing activities -- (14,225) (966) 2,048 (13,143)
Cash flows from
financing activities:
Repayments of notes
payable and long-
term obligations.. -- (17,217) -- -- (17,217)
Repayments of
capital lease
obligations....... -- (41) (10) -- (51)
Proceeds (payments)
on intercompany
investments and
advances.......... (2,542) 11,312 (1,021) (7,750) --
Recapitalization
costs - fees and
expenses.......... 1,543 -- -- -- 1,543
Cash dividends paid
to shareholders... -- -- (5,832) 5,832 --
Other............... 999 (1,408) (647) 1,057 --
----- ------ ----- ----- ------
Net cash used by
financing activities -- (7,354) (7,510) (861) (15,725)
Effect of exchange
rate changes on
cash and cash
equivalents......... -- -- -- (411) (411)
----- ------ ----- ----- ------
Net decrease in cash
and cash
equivalents......... -- (34,748) (6,727) -- (41,475)
Cash and cash
equivalents,
beginning of period. -- 44,439 17,315 -- 61,754
----- ------ ------ ----- ------
Cash and cash
equivalents, end of
period.............. $ -- $ 9,691 $10,588 $ -- $20,279
====== ====== ====== ===== ======
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. The forward-
looking statements made in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which reflect
management's best judgment based on market and other factors
currently known, involve risks and uncertainties. When used in this
Report, the words "estimate," "project," "anticipate," "expect,"
"intend," "believe" and similar expressions are intended to identify
forward-looking statements. All of these forward-looking statements
are based on estimates and assumptions made by management of the
Company, which, although believed to be reasonable, are inherently
uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. No assurance can be given that any of such
statements or estimates will be realized and actual results will
differ from those contemplated by such forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------
Results of Operations
First Quarter of 1999 Compared to First Quarter of 1998
- -------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first quarter of the
prior year ($ in thousands):
Three Months Ended March 31,
----------------------------------------
Revenue Variance
Relationship Increase (Decrease)
------------------- -------------------
1999 1998 $ Pct
-------- -------- ---------- -----
Revenue:
Rental and service.......... 78% 80% $ (2,730) (4%)
Sales and other............. 22 20 1,044 6
---- ---- -------
Total revenue............ 100% 100% (1,686) (2)
Rental expenses............. 54 51 894 2
Cost of goods sold.......... 9 8 840 13
---- ---- -------
Gross profit............. 37 41 (3,420) (10)
Selling, general and
administrative expenses... 19 20 (705) (4)
---- ---- -------
Operating earnings....... 18 21 (2,715) (16)
Interest income............. -- -- (138) nm
Interest expense............ 15 15 636 5
Foreign currency loss....... -- -- (195) nm
---- ---- -------
Earnings before income
taxes and minority
interest............... 3 6 (2,412) (48)
Income taxes................ 1 2 965 48
Minority interest in
subsidiary loss........... -- -- (2) 100
---- ---- -------
Net earnings............. 2% 4% $ (1,449) (49%)
==== ==== =======
The Company's revenue is derived 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):
Three months ended
March 31,
-------------------
1999 1998
-------- --------
KCI Therapeutic Services.. $ 52.8 $ 58.4
KCI International......... 21.1 18.0
NuTech.................... 6.1 5.3
Other..................... 0.2 0.2
------ ------
$ 80.2 $ 81.9
====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Total revenue in the first quarter of 1999 decreased $1.7
million, or 2.1%, to $80.2 million from $81.9 million in the first
quarter of 1998. Revenue from KCI Therapeutic Services ("KCTS") was
$52.8 million, down $5.6 million, or 9.6% from $58.4 million in the
first three months of the prior year. The decreased revenue was due
substantially to a decrease in extended care rental 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. Domestic patient
days, overall, were up slightly 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, 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.
Revenue from the Company's international operating unit
increased 17.2% to $21.1 million from $18.0 million in the first
quarter of 1998. The international revenue increase reflects higher
patient therapy days in virtually all of the Company's markets, and
higher sales due to growth in the V.A.C. product line partly offset
by unfavorable currency exchange rate fluctuations of approximately
$440,000.
Revenue from the NuTech segment increased 15.1% to $6.1 million
from $5.3 million in the first quarter of 1998, due substantially to
revenues attributable to the acquisition of a product line from
Beiersdorf-Jobst in the fourth quarter of 1998.
Rental, or field, expenses of $43.0 million were 68.8% of total
rental revenue in the first quarter of 1999 compared to 64.6% in the
first 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 $43.0 million increased approximately $900,000, or 2.1%,
from the prior year period due, in part, to increased equipment
depreciation.
Cost of goods sold increased 13.2% to $7.2 million in the first
quarter of 1999 from $6.4 million in the first 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 $3.4 million, or 10.2%, to $30.0 million
in the first three months of 1999 from $33.4 million in the first
quarter of 1998 due to decreased rental revenue. Gross profit margin
for the first quarter, as a percentage of total revenue, was 37.4%,
down from 40.8% for the first quarter of 1998, due substantially to
the decrease in rental revenue for the period.
Selling, general and administrative expenses decreased $705,000,
or 4.4%, to $15.5 million in the first quarter of 1999 from $16.2
million in the first quarter 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 19.3% in the first
quarter of 1999 as compared with 19.8% in the first quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
As a result of the revenue decrease discussed above, operating
earnings for the period decreased $2.7 million, or 15.8%, to $14.5
million compared to $17.2 million in the prior-year quarter.
Interest income for the three months ended March 31, 1999 was
approximately $111,000 compared to approximately $250,000 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 three months ended March 31, 1999 was
$11.7 million compared to $12.3 million for the first 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 first quarter of 1999 decreased $1.4
million, or 48.5%, from the prior year to $1.5 million due
substantially to the decrease in rental revenue as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the three months ended March 31, 1999 and other factors
resulted in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $7.7 million at March 31, 1999,
an increase of $3.3 million from December 1998. The cash increase is
primarily attributable to net earnings during the quarter combined
with controlled capital spending.
Prepaid expenses and other current assets of $15.8 million
increased 8.3% as compared to $14.6 million at December 31, 1998.
This change resulted primarily from a favorable litigation
settlement.
Other assets at March 31, 1999 were $26.0 million, a $5.5
million, or 17.3%, decrease from year-end. This decrease is
primarily attributable to the liquidation of the assets of KCI
Insurance Co., Ltd. during the quarter.
Accrued expenses at March 31, 1999 were $39.3 million compared
to $35.3 million at the end of 1998. This increase was due to
accrued interest expense recorded during the first quarter of 1999 on
the $200 million in subordinated notes.
Long-term debt obligations, including the current maturities,
decreased $5.9 million to $510.0 million as of March 31, 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 March 31, 1999 the Company had current assets of $134.1
million and current liabilities of $56.5 million resulting in a
working capital surplus of $77.6 million, compared to a surplus of
$76.6 million at December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
During the first three months of 1999, the Company made net
capital expenditures of $5.9 million. Other than commitments for new
product inventory, including disposable "for sale" products, of $4.2
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.
Although the Company reduced borrowings under this facility by $3.5
million in the first three months of 1999, it has borrowed and will
borrow funds from this facility to fund capital expenditures and meet
working capital needs.
The Term Loans and the Notes are subject to customary terms,
covenants and conditions which partially restrict the uses of future
cash flow by the Company. The Company does not expect that these
covenants and conditions will have a material adverse impact on its
operations. At March 31, 1999, the Acquisition Facility and the
Revolving Credit Facility had balances of $10.0 million and $6.5
million, respectively. Accordingly, the aggregate availability under
these two facilities was $83.5 million.
The Senior Credit Agreement requires the Company to meet certain
financial tests, including minimum levels of EBITDA (as defined
therein), minimum interest coverage, maximum leverage ratio and
capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and advances,
capital expenditures, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other
matters customarily restricted in such agreements. The Company is in
compliance with the applicable covenants at March 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
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 March 31, 1999, the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
At March 31, 1999, the Company was committed to purchase
approximately $4.2 million of inventory associated with new products
over the remainder of this year. The Company did not have any other
material purchase commitments.
Known Trends or Uncertainties
- -----------------------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities and
rehabilitation centers) and home care settings, the consolidation of
health care providers and national and regional group purchasing
organizations and the growing demand for clinically proven therapies
which lower the total cost of providing care.
The Balanced Budget Act of 1997 (the "BBA") contains a number of
provisions which will impact the federal reimbursement of health care
and reduce projected payments under the Medicare system by $115
billion over the next five years. In this regard, less than
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Known Trends or Uncertainties (continued)
- -----------------------------------------
10% of the Company's revenue is received directly from the
Medicare system. However, many of the health care providers
who pay the Company for its products are reimbursed, either
directly or indirectly, by the Federal government under the Medicare
system for the use of those products. The Company does not believe
that the changes introduced by the BBA will have a material impact on
our hospital customers or the dealers we partner with in home health
care. However, the changes to the Medicare system introduced by the
BBA has had a significant impact on the manner in which the Company's
extended care customers make purchasing decisions. As the Company's
extended care customers attempt to understand the impact of the
changes on their respective businesses their initial reaction has
been to lower their average daily cost by changing the overall
product mix to lower cost products in their respective facilities.
These changes have impacted revenue in the short term. The Company
is introducing programs to its extended care customers which it
believes will help to address this trend.
The Company's market continues to increase based upon
demographic trends as most of the Company's patients are over 50
years old. Further, its broad product line and national distribution
system enable it to compete effectively in the changing healthcare
environment, particularly in light of consolidation of providers and
purchasing groups.
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
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. This is evidenced by the significant revenue growth
experienced in the three years that the product has been available
domestically. However, the Company has not received a Medicare
reimbursement code, and an associated coverage policy, for the V.A.C.
in the home care setting. As a result, the Company is incurring costs
associated with the use of V.A.C. in the home, for Medicare patients,
while recognizing no revenue due to the continuing lack of a
reimbursement code and coverage criteria. The Company continues to
vigorously pursue this reimbursement coverage.
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, including three other lawsuits
alleging patent infringement by the Company, and the Company is
contesting adjustments proposed by the Internal Revenue Service to
prior years' tax returns in Tax Court. Provisions have been made in
the Company's financial statements for estimated exposures related to
these lawsuits and adjustments. In the opinion of management, the
disposition of these matters will not have a material adverse effect
on the Company's business, financial condition or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
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
- ----------
To date, 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 80% complete on the remediation phase for its IT
systems and expects to complete software modifications and/or
replacements no later that June 30, 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 July
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 are expected to be made
no later than June 30, 1999 at which time the upgraded systems will
be retested. Testing of the remaining systems should be completed
during the third 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 the third quarter of 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 $7.4
million and is being funded through operating cash flows. $6.3
million of this total will be used to purchase new software that will
be capitalized and the remaining $1.1 million will be expensed as
incurred. Through March 31, 1999, the Company incurred approximately
$7.1 million ($900,000 expensed and $6.2 million capitalized for new
software), related to the assessment of the Year 2000 issue,
development of a modification plan, preliminary software
modifications, purchase 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 March 31, 1999, approximately $310 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)
- --------------------------------------------------------------------
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 $4.1 million for the three
months ended March 31, 1999. It is estimated that the result of a
10% fluctuation in the value of the dollar relative to these foreign
currencies at March 31,1999 would change the Company's net income for
the three months ended March 31, 1999 by approximately $275,000.
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: May 13, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,663,023
<SECURITIES> 0
<RECEIVABLES> 83,130,152
<ALLOWANCES> 1,887,115
<INVENTORY> 29,497,456
<CURRENT-ASSETS> 134,138,518
<PP&E> 209,621,629
<DEPRECIATION> 132,539,314
<TOTAL-ASSETS> 305,280,058
<CURRENT-LIABILITIES> 56,503,679
<BONDS> 498,775,292
0
0
<COMMON> 70,915
<OTHER-SE> (261,265,550)
<TOTAL-LIABILITY-AND-EQUITY> 305,280,058
<SALES> 17,696,009
<TOTAL-REVENUES> 80,211,124
<CGS> 7,199,168
<TOTAL-COSTS> 58,536,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 554,264
<INTEREST-EXPENSE> 11,666,811
<INCOME-PRETAX> 2,562,072
<INCOME-TAX> 1,024,829
<INCOME-CONTINUING> 1,537,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537,244
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
</TABLE>
