-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PLeBuJy//lIq0iMJu71WhrVabiXD9paQHseadTGhrIOpOe02iLovsVQPrlt5bL23 jKWj/dxUadiO0VUNsVT1dg== 0000831967-98-000007.txt : 19981116 0000831967-98-000007.hdr.sgml : 19981116 ACCESSION NUMBER: 0000831967-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINETIC CONCEPTS INC /TX/ CENTRAL INDEX KEY: 0000831967 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 741891727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09913 FILM NUMBER: 98746841 BUSINESS ADDRESS: STREET 1: 8023 VANTAGE DR CITY: SAN ANTONIO STATE: TX ZIP: 78230 BUSINESS PHONE: 2103083993 MAIL ADDRESS: STREET 1: P. 0. B0X 659508 CITY: SAN ANTONIO STATE: TX ZIP: 78230 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________ Commission file number 1-9913 KINETIC CONCEPTS, INC. - ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Texas 74-1891727 ---------------------- ----------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 8023 Vantage Drive San Antonio, Texas 78230 (210) 524-9000 ------------------------- ------------------------- (Address of principal executive (Registrant's phone number) offices and zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock: 70,915,008 shares as of October 1, 1998 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands)
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) Assets: Current assets: Cash and cash equivalents............. $ 4,889 $ 61,754 Accounts receivable, net.............. 81,420 81,238 Inventories........................... 24,661 21,553 Prepaid expenses and other............ 14,277 18,446 ------- ------- Total current assets............... 125,247 182,991 ------- ------- Property, plant and equipment, net...... 82,570 75,434 Goodwill, less accumulated amortization of $16,480 in 1998 and $13,989 in 1997.................................. 45,505 45,899 Loan issuance costs, less accumulated amortization of $2,108 in 1998 and $382 in 1997.......................... 15,959 17,346 Other assets, less accumulated amortization of $3,346 in 1998 and $3,100 in 1997........................ 31,171 29,481 ------- ------- $300,452 $351,151 ======= ======= Liabilities and Capital Accounts: Current liabilities: Accounts payable...................... $ 3,873 $ 40,353 Accrued expenses...................... 43,121 41,334 Income taxes payable.................. 171 -- Current installments of long-term obligations......................... 7,805 4,800 Current installments of capital lease obligations......................... 147 139 ------- ------- Total current liabilities.......... 55,117 86,626 ------- ------- Long-term obligations, excluding current installments.......................... 498,774 529,901 Capital lease obligations, excluding current installments.................. 173 312 Deferred income taxes, net.............. 11,115 10,010 ------- ------- 565,179 626,849 ------- ------- Commitments and contingencies (Note 7) Shareholders' deficit: Common stock; issued and outstanding 70,915 in 1998 and 70,852 in 1997... 71 71 Accumulated deficit................... (261,941) (273,285) Cumulative foreign currency trans- lation adjustment................... (2,857) (2,484) ------- ------- (264,727) (275,698) ------- ------- $300,452 $351,151 ======= =======
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)
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 1998 1997 1998 1997 --------- -------- -------- -------- Revenue: Rental and service........ $62,865 $61,605 $193,188 $184,730 Sales and other........... 18,183 14,694 51,115 39,781 ------ ------ ------- ------- Total revenue........... 81,048 76,299 244,303 224,511 Rental expenses............. 40,204 39,017 124,426 115,633 Cost of goods sold.......... 6,717 6,065 19,146 16,077 ------ ------ ------- ------- 46,921 45,082 143,572 131,710 ------ ------ ------- ------- Gross profit............ 34,127 31,217 100,731 92,801 Selling, general and administrative expenses... 15,458 15,052 49,312 44,196 ------ ------ ------- ------- Operating earnings...... 18,669 16,165 51,419 48,605 Interest income............. 85 474 477 1,426 Interest expense............ (12,155) (32) (36,473) (131) Foreign currency loss....... (280) -- (521) -- ------ ------ ------- ------- Earnings before income taxes and minority interest.............. 6,319 16,607 14,902 49,900 Income taxes................ 2,528 6,643 5,971 19,960 Minority interest in subsidiary loss (gain).... 1 (16) 25 (37) ------ ------ ------- ------- Net earnings............ $ 3,792 $ 9,948 $ 8,956 $ 29,903 ====== ====== ======= ======= Earnings per share...... $ 0.05 $ 0.06 $ 0.13 $ 0.18 ====== ====== ======= ======= Earnings per share - assuming dilution..... $ 0.05 $ 0.06 $ 0.12 $ 0.17 ====== ====== ======= ======= Average common shares: Basic (weighted average outstanding shares)............. 70,872 169,788 70,872 169,272 ====== ======= ======= ======= Diluted (weighted average outstanding shares)............. 73,264 176,364 73,264 175,088 ====== ======= ======= =======
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)
Nine months ended September 30, -------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net earnings................................... $ 8,956 $ 29,903 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation............................... 19,123 15,389 Amortization............................... 4,463 1,755 Provision for uncollectible accounts receivable............................... 1,575 2,533 Change in assets and liabilities: Increase in accounts receivable, net..... (1,849) (17,599) Increase in inventories.................. (3,169) (598) Decrease (increase) in prepaid expenses and other.............................. 4,168 (3,693) Increase (decrease) in accounts payable.. (36,493) 77 Increase in accrued expenses............. 1,742 2,145 Increase (decrease) in income taxes payable................................ 171 (1,194) Increase in deferred income taxes, net... 1,105 8,397 ------ ------- Net cash provided (used) by operating activities........................... (208) 37,115 ------ ------- Cash flows from investing activities: Additions to property, plant and equipment..... (22,235) (19,794) Increase in inventory to be converted into equipment for short-term rental.............. (5,900) (4,210) Dispositions of property, plant and equipment.. 1,813 1,809 Businesses acquired in purchase transactions, net of cash acquired......................... (2,827) (16,903) Increase in note receivable from principal shareholder.................................. -- (3,000) Increase in other assets....................... (1,546) (1,115) ------ ------ Net cash used by investing activities.. (30,695) (43,213) ------ ------ Cash flows from financing activities: Repayments of long-term obligations............ (28,122) -- Repayments of capital lease obligations........ (131) (307) Proceeds from the sale of stock and exercise of stock options................................ 300 3,864 Purchase and retirement of treasury stock...... -- (4,133) Cash dividends paid to shareholders............ -- (4,789) Recapitalization costs and other............... 2,087 607 ------ ------ Net cash used by financing activities.. (25,866) (4,758) ------ ------ Effect of exchange rate changes on cash and cash equivalents.................................... (96) (2,654) ------ ------ Net decrease in cash and cash equivalents........ (56,865) (13,510) Cash and cash equivalents, beginning of period... 61,754 59,045 ------ ------ Cash and cash equivalents, end of period......... $ 4,889 $ 45,535 ====== ====== Supplemental disclosure of cash flow information: Cash paid during the first nine months for: Interest..................................... 30,901 111 Income taxes................................. 4,212 9,380
See accompanying notes to condensed consolidated financial statements. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) BASIS OF PRESENTATION --------------------- The financial statements presented herein include the accounts of Kinetic Concepts, Inc. and all subsidiaries (the "Company"). The condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The foregoing financial information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Interim period operating results are not necessarily indicative of the results to be expected for the full fiscal year. (2) INVENTORY COMPONENTS -------------------- Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories are comprised of the following (in thousands): September 30, December 31, 1998 1997 ------------- ------------ Finished goods..................... $ 8,951 $ 8,487 Work in progress................... 5,536 2,743 Raw materials, supplies and parts.. 23,474 17,723 ------ ------ 37,961 28,953 Less amounts expected to be converted into equipment for short-term rental.................. 13,300 7,400 ------ ------ Total inventories............. $24,661 $21,553 ====== ====== (3) STOCK SPLIT ----------- During the third quarter, the Company declared a four-for- one stock split on the outstanding shares of the common stock of the Company, par value $0.001 per share, payable to the holders of record of said stock on September 1, 1998. The split was achieved by means of a three-for-one stock dividend on all outstanding common shares of the Company. All references in the consolidated financial statements referring to share and per share data have been restated to reflect the stock split. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (4) RECAPITALIZATION ---------------- On November 5, 1997, a substantial interest in the Company was acquired by Fremont Partners L.P. ("Fremont") and Richard C. Blum & Associates, L.P. ("RCBA") (collectively, the "Investors"). The Company and the Investors entered into a Transaction Agreement dated as of October 2, 1997, as amended by a letter agreement dated November 5, 1997 (as so amended, the "Transaction Agreement") pursuant to which the Investors purchased 7.8 million shares of newly-issued shares of the Company's common stock, $0.001 par value per share, at a price equal to $19.25 per share. The proceeds of the stock purchase, together with approximately $534.0 million of aggregate proceeds from certain financings, were used to purchase approximately 31.0 million shares of the Company's common stock from the selling shareholders at a price of $19.25 per share, net to seller, and pay all related fees and expenses. Also pursuant to the Transaction Agreement, the Investors were merged with and into the Company on January 5, 1998 with the Company as the surviving corporation of the Merger. Following the Merger, Fremont, RCBA, Dr. James Leininger and Dr. Peter Leininger own 7,029,922, 4,644,010, 5,939,220 and 100,000 shares, respectively, representing 39.7%, 26.2%, 33.5% and 0.6% of the total shares outstanding. There is currently one other shareholder and certain members of management have retained, and/or have been granted, additional options to purchase common shares. The transactions have been accounted for as a recapitalization and as a result, a step-up of assets to fair market value was not required. The difference between the payment amount and the net book value of assets acquired and liabilities assumed was recorded in retained earnings as a cash distribution to the selling shareholders. (5) LONG TERM OBLIGATIONS --------------------- Long-term obligations consist of the following (in thousands): September 30, December 31, 1998 1997 ------------- ------------ Senior Credit Facilities: Revolving bank credit facility.. $ -- $ 24,500 Acquisition credit facility..... 10,000 10,000 Term loans: Tranche A due 2003........... 117,750 120,000 Tranche B due 2004........... 89,325 90,000 Tranche C due 2005........... 89,325 90,000 ------- ------- 306,400 334,500 9 5/8% Senior Subordinated Notes Due 2007......................... 200,000 200,000 ------- ------- 506,400 534,500 Less: Current installments......... 7,805 4,800 ------- ------- 498,595 529,700 Other.............................. 179 201 ------- ------- $498,774 $529,901 ======= ======= ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (5) LONG TERM OBLIGATIONS (continued) --------------------------------- Senior Credit Facilities Indebtedness under the Senior Credit Facilities, including the Revolving Credit Facility (other than certain loans under the Revolving Credit Facility designated in foreign currency), the Term Loans and the Acquisition Facility initially bear interest at a rate based upon (i) the Base Rate (defined as the higher of (x) the rate of interest publicly announced by Bank of America as its "reference rate" and (y) the federal funds effective rate from time to time plus 0.50%), plus 1.25% in respect of the Tranche A Term Loans, the loans under the Revolving Credit Facility (the "Revolving Loans") and the loans under the Acquisition Facility (the "Acquisition Loans"), 1.50% in respect of the Tranche B Term Loans and 1.75% in respect of the Tranche C Term Loans, or at the Company's option, (ii) the Eurodollar Rate (as defined in the Sr. Credit Facility Agreement) for one, two, three or six months, in each case plus 2.25% in respect of Tranche A Term Loans, Revolving Loans and Acquisition Loans, 2.50% in respect of Tranche B Term Loans and 2.75% in respect of the Tranche C Term Loans. Certain Revolving Loans designated in foreign currency will initially bear interest at a rate based upon the cost of funds for such loans, plus 2.25% or 2.50%, depending on the type of foreign currency. Performance-based reductions of the interest rates under the Term Loans, the Revolving Loans and the Acquisition Loans are available. During the first three months of 1998, the Company entered into an interest rate swap transaction whereby the interest rate on $150,000,000 of the term loans is fixed at 5.7575% through January 8, 2001. As a result of this transaction, the Company recorded additional interest expense of approximately $71,000 through the nine months ended September 30, 1998. The Revolving Loans may be repaid and reborrowed. At September 30, 1998, the aggregate availability under the Revolving Credit and Acquisition Facilities was $90.0 million. The Term Loans are subject to quarterly amortization payments that commenced on March 31, 1998. Commitments under the Acquisition Facility will expire three years from the closing of the Bank Credit Agreement and the Acquisition Facility loans outstanding shall be repayable in equal quarterly amortization payments commencing March 31, 2001. In addition, the Bank Credit Agreement provides for mandatory repayments, subject to certain exceptions, of the Term Loans, the Acquisition Facility and/or the Revolving Credit Facility based on certain net asset sales outside the ordinary course of business of the Company and its subsidiaries, the net proceeds of certain debt and equity issuances and excess cash flows. The Senior Credit Agreement requires the Company to meet certain financial tests, including minimum levels of EBITDA (as defined therein), minimum interest coverage, maximum leverage ratio and capital expenditures. The Bank Credit Agreement also contains covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, asset sales, acquisitions, mergers and consolidations, prepayments ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (5) LONG TERM OBLIGATIONS (continued) --------------------------------- of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. The Company is in compliance with the applicable covenants at September 30, 1998. 9 5/8% Senior Subordinated Notes Due 2007 The 9 5/8% Senior Subordinated Notes Due 2007 (the "Notes") are unsecured obligations of the Company, ranking subordinate in right of payment to all senior debt of the Company and will mature on November 1, 2007. Interest on the Notes accrues at the rate of 9 5/8% per annum and is payable semiannually in cash on each May 1 and November 1, commencing on May 1, 1998, to the persons who are registered Holders at the close of business on April 15 and October 15, respectively, immediately preceding the applicable interest payment date. Interest on the Notes accrues from and includes the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. The Notes are not entitled to the benefit of any mandatory sinking fund. In addition, at any time, or from time to time, the Company may acquire a portion of the Notes through open- market purchases. (6) EARNINGS PER SHARE ------------------ The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings per common share. Net earnings for basic and diluted calculations do not differ and all share and per share data have been restated to reflect the Company's four-for-one stock split (see Note 3). (in thousands, except per share): Three months ended Nine months ended September 30, September 30, ------------------ ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net earnings............. $ 3,792 $ 9,948 $ 8,956 $ 29,903 Average common shares: Basic (weighted-average outstanding shares).. 70,872 169,788 70,872 169,272 Dilutive potential common shares from stock options........ 2,392 6,576 2,392 5,816 ------ ------- ------ ------- Diluted (weighted- average outstanding shares)........ 73,264 176,364 73,264 175,088 ====== ======= ====== ======= Earnings per share....... $ 0.05 $ 0.06 $ 0.13 $ 0.18 ====== ======= ====== ======= Earnings per share - assuming dilution........ $ 0.05 $ 0.06 $ 0.12 $ 0.17 ====== ======= ====== ======= ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (7) COMMITMENTS AND CONTINGENCIES ----------------------------- The Company is party to several lawsuits generally incidental to its business and is contesting certain adjustments proposed by the Internal Revenue Service to prior years' tax returns. Certain provisions have been made in the accompanying financial statements for estimated exposures related to these lawsuits and adjustments. In the opinion of management, the disposition of these items will not have a material effect on the Company's financial statements. Other than commitments for new product inventory, including disposable "for sale" products, of $2.2 million, the Company has no material long-term capital commitments and can adjust the level of capital expenditures as circumstances warrant. (8) NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- The Company adopted Financial Accounting Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. This standard requires disclosure of total nonowner changes in shareholders' equity, which is defined as net earnings plus direct adjustments to shareholders' equity such as equity and cash investment adjustments and foreign currency translation adjustments. On this basis, these nonowner changes in shareholders' equity, including net earnings, for the three months ended September 1998 and 1997 totaled $500,000 and $2.1 million, respectively and for the first nine months of 1998 and 1997, totaled $372,000 and $5.3 million, respectively. Also, effective for periods beginning after December 15, 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way that public companies report information about operating segments in annual financial statements as well as interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company adopted the provisions of Statement No. 131 effective January 1, 1998 and estimates that adoption of these provisions will not have a material impact on the Company's financial position or results of operations. Statement No. 131 need not be applied to interim financial statements in the initial year of its application. During 1997, the Securities and Exchange Commission issued expanded disclosure requirements of accounting policies for derivative financial instruments and the exposure to market risk. The new rules require enhanced descriptions of specific aspects of a registrant's accounting polices for derivatives as well as qualitative and quantitative disclosures about each type of market risk. The increased policy disclosures on derivatives were effective for all public companies for periods ending after June 15, 1997. ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (8) NEW ACCOUNTING PRONOUNCEMENTS (continued) ----------------------------------------- The qualitative and quantitative market risk disclosures must be provided in all filings that include audited financial statements for fiscal years ending after June 15, 1998. The Company expects compliance with these requirements will not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which must be adopted in years beginning after June 15, 1999. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company. (9) SUBSEQUENT EVENT ----------------- On November 6, 1998 the Company acquired certain assets related to its medical devices business from Beirsdorf-Jobst A.G. The assets were acquired for a total purchase price of $14.5 million, subject to certain terms and conditions. The acquired assets consist of DVT prophylaxis medical devices, related disposables, equipment, technology and other intangible assets. The acquisition was funded through the Company's revolving credit line. (10) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS ------------------------------------------------------ Kinetic Concepts, Inc. issued $200 million in subordinated debt securities to finance a tender offer to purchase certain of its common shares outstanding. In connection with the issuance of these securities, certain of its subsidiaries (the guarantor subsidiaries) serve as guarantors. Certain other subsidiaries (the nonguarantor subsidiaries) not guarantee such debt. Each subsidiary guarantor is a wholly-owned subsidiary of the Company and has fully and unconditionally guaranteed the debt securities. The following tables present the condensed consolidating balance sheets of Kinetic Concepts, Inc. as a parent company, its guarantor subsidiaries and its nonguarantor subsidiaries as of September 30, 1998 and December 31, 1997 and the related condensed consolidating statements of earnings for the three and nine month periods ended September 30,1998 and 1997 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1998 and 1997, respectively. Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Balance Sheet September 30, 1998 (in thousands) (unaudited)
Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- --------- --------- ASSETS: Current assets: Cash and cash equivalents........ $ -- $ (3,616) $ 8,505 $ -- $ 4,889 Accounts receivable, net................ -- 72,736 15,372 (6,688) 81,420 Inventories......... -- 15,175 9,486 -- 24,661 Prepaid expenses and other.............. 2,009 8,408 3,860 -- 14,277 ------- ------- ------ ------- -------- Total current assets......... 2,009 92,703 37,223 (6,688) 125,247 Net property, plant and equipment....... -- 82,899 9,680 (10,009) 82,570 Goodwill, net........ -- 40,080 5,425 -- 45,505 Loan issuance costs, net................. -- 15,959 -- -- 15,959 Other assets, net.... -- 31,121 50 -- 31,171 Intercompany investments and advances............ (266,736) 459,346 4,429 (197,039) -- ------- ------- ------ ------- ------- Total assets..... $(264,727) $722,108 $56,807 $(213,736) $300,452 ======= ======= ====== ======= ======= LIABILITIES AND CAPITAL ACCOUNTS: Accounts payable..... $ -- $ 1,814 $ 2,059 $ -- $ 3,873 Accrued expenses..... -- 35,982 7,139 -- 43,121 Income taxes payable. -- 134 37 -- 171 Current installments of long-term obligations......... -- 7,805 -- -- 7,805 Intercompany payables -- 5,969 5,854 (11,823) -- Current installments of capital lease obligations......... -- 147 -- -- 147 -------- ------- ------ -------- ------- Total current liabilities.... -- 51,851 15,089 (11,823) 55,117 -------- ------- ------ -------- ------- Long-term obligations, excluding current installments........ -- 498,774 -- -- 498,774 Capital lease obligations, excluding current installments........ -- 138 35 -- 173 Deferred income taxes, net................. -- 15,990 -- (4,875) 11,115 ------- ------- ------ ------- ------- Total liabilities -- 556,753 15,124 (16,698) 565,179 Shareholders' equity (deficit)........... (264,727) 155,355 41,683 (197,038) (264,727) ------- ------- ------ ------- ------- Total liabilities and equity (deficit) $(264,727) $722,108 $56,807 $(213,736) $ 300,452 ======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Balance Sheet December 31, 1997 (in thousands)
Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- -------- --------- ASSETS: Current assets: Cash and cash equivalents........ $ -- $ 44,439 $17,315 $ -- $ 61,754 Accounts receivable, net................ -- 75,932 15,002 (9,696) 81,238 Inventories......... -- 12,006 9,547 -- 21,553 Prepaid expenses and other.............. 2,010 14,851 1,585 -- 18,446 ------- ------- ------ -------- -------- Total current assets......... 2,010 147,228 43,449 (9,696) 182,991 Net property, plant and equipment...... -- 76,811 9,065 (10,442) 75,434 Goodwill, net........ -- 40,081 5,818 -- 45,899 Loan issuance costs, net................ -- 17,346 -- -- 17,346 Other assets, net.... -- 29,354 127 -- 29,481 Intercompany investments and advances........... (276,832) 460,984 1,511 (185,663) -- ------- ------- ------ ------- ------- Total assets..... $(274,822) $771,804 $59,970 $(205,801) $351,151 ======= ======= ====== ======= ======= LIABILITIES AND CAPITAL ACCOUNTS: Accounts payable..... $ -- $ 38,157 $ 2,196 $ -- $ 40,353 Accrued expenses..... -- 35,643 5,691 -- 41,334 Income tax payable... -- -- 648 (648) -- Current installments on long-term obligations........ -- 4,800 -- -- 4,800 Intercompany payables 876 423 9,761 (11,060) -- Current installments of capital lease obligations........ -- 139 -- -- 139 -------- ------- ------ ------- ------- Total current liabilities.... 876 79,162 18,296 (11,708) 86,626 -------- ------- ------ ------- ------- Long-term obligations excluding current installments....... -- 529,901 -- -- 529,901 Capital lease obligations, excluding current installments....... -- 256 56 -- 312 Deferred income taxes, net................ -- 18,440 -- (8,430) 10,010 ------- ------- ------ ------- ------- Total liabilities 876 627,759 18,352 (20,138) 626,849 Shareholders' equity (deficit).......... (275,698) 144,045 41,618 (185,663) (275,698) ------- ------- ------ ------- ------- Total liabilities and equity (deficit)...... $(274,822) $771,804 $59,970 $(205,801) $351,151 ======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the three months ended September 30, 1998 (in thousands) (unaudited)
Historical Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- --------- --------- Revenue: Rental and service.... $ -- $ 50,399 $12,466 $ -- $ 62,865 Sales and other....... -- 15,839 5,933 (3,589) 18,183 ----- ------ ------ ----- ------ Total revenue..... -- 66,238 18,399 (3,589) 81,048 Rental expenses....... -- 29,233 10,971 -- 40,204 Cost of goods sold.... -- 5,397 3,225 (1,905) 6,717 ----- ------ ------ ----- ------ -- 34,630 14,196 (1,905) 46,921 ----- ------ ------ ----- ------ Gross profit...... -- 31,608 4,203 (1,684) 34,127 Selling, general and administrative expenses............ -- 13,711 1,747 -- 15,458 ----- ------ ------ ----- ------ Operating earnings -- 17,897 2,456 (1,684) 18,669 Interest income....... -- 46 39 -- 85 Interest expense...... -- (12,155) -- -- (12,155) Foreign currency gain (loss).............. -- (6) (275) 1 (280) ----- ------ ------ ----- ------ Earnings before income taxes and minority interest -- 5,782 2,220 (1,683) 6,319 Income taxes.......... -- 2,337 911 (720) 2,528 Minority interest..... -- -- (1) -- (1) ----- ------ ------ ----- ------ Earnings before equity in earnings of subsidiaries.... -- 3,445 1,310 (963) 3,792 Equity in earnings of subsidiaries. 3,792 1,310 -- (5,102) -- ----- ------ ------ ----- ------ Net earnings...... $3,792 $ 4,755 $ 1,310 $(6,065) $ 3,792 ===== ====== ====== ===== ======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the three months ended September 30, 1997 (in thousands) (unaudited)
Historical Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- --------- ---------- Revenue: Rental and service.... $ -- $50,311 $11,294 $ -- $61,605 Sales and other....... 18,020 9,120 5,348 (17,794) 14,694 ------ ------ ------ ------ ------ Total revenue..... 18,020 59,431 16,642 (17,794) 76,299 Rental expenses....... -- 30,771 10,291 (2,045) 39,017 Cost of goods sold.... 7,068 2,365 3,223 (6,591) 6,065 ------ ------ ------ ------ ------ 7,068 33,136 13,514 (8,636) 45,082 ------ ------ ------ ------ ------ Gross profit...... 10,952 26,295 3,128 (9,158) 31,217 Selling, general and administrative expenses............ 1,195 12,372 1,485 -- 15,052 ------ ------ ------ ----- ------ Operating earnings earnings (loss).. 9,757 13,923 1,643 (9,158) 16,165 Interest income....... 135 254 86 -- 475 Interest expense...... (6) (209) -- 182 (33) ------ ------ ------ ------ ------ Earnings (loss) before income taxes and minority interest........ 9,886 13,968 1,729 (8,976) 16,607 Income taxes.......... 3,899 5,399 755 (3,410) 6,643 Minority interest..... -- -- 16 -- 16 ------ ------ ------ ------ ------ Earnings (loss) before equity in earnings (loss) of subsidiaries.... 5,987 8,569 958 (5,566) 9,948 Equity in earnings (loss) of subsidiaries.... 3,960 958 -- (4,918) -- ------ ------ ------ ------ ------ Net earnings.......... $ 9,947 $ 9,527 $ 958 $(10,484) $ 9,948 ====== ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the nine months ended September 30, 1998 (in thousands) (unaudited)
Historical Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- -------- ---------- Revenue: Rental and service... $ -- $156,796 $36,392 $ -- $193,188 Sales and other...... -- 42,341 17,332 (8,558) 51,115 ----- ------- ------ ------ ------- Total revenue.... -- 199,137 53,724 (8,558) 244,303 Rental expenses...... -- 91,996 32,430 -- 124,426 Cost of goods sold... -- 14,399 9,269 (4,522) 19,146 ----- ------- ------ ------ ------- -- 106,395 41,699 (4,522) 143,572 ----- ------- ------ ------ ------- Gross profit..... -- 92,742 12,025 (4,036) 100,731 Selling, general and administrative expenses........... -- 37,556 11,756 -- 49,312 ----- ------- ------ ------ ------- Operating earnings (loss)......... -- 55,186 269 (4,036) 51,419 Interest income...... -- 303 174 -- 477 Interest expense..... -- (36,473) -- -- (36,473) Foreign currency gain (loss)............. -- 408 (930) 1 (521) ----- ------- ------ ------ ------ Earnings (loss) before income taxes and minority interest -- 19,424 (487) (4,035) 14,902 Income taxes......... -- 7,851 (200) (1,680) 5,971 Minority interest.... -- -- (25) -- (25) ----- ------- ------ ------ ------ Earnings (loss) before equity in earnings (loss) of subsidiaries... -- 11,573 (262) (2,355) 8,956 Equity in earnings (loss) of subsidiaries 8,956 (262) -- (8,694) -- ----- ------- ------ ------ ------ Net earnings (loss)......... $8,956 $ 11,311 $ (262) $(11,049) $ 8,956 ===== ======= ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the nine months ended September 30, 1997 (in thousands) (unaudited)
Historical Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- -------- --------- Revenue: Rental and service.. $ -- $150,699 $34,031 $ -- $184,730 Sales and other..... 32,018 23,991 15,065 (31,293) 39,781 ------ ------- ------ ------ ------- Total revenue.... 32,018 174,690 49,096 (31,293) 224,511 Rental expenses..... -- 91,263 30,453 (6,083) 115,633 Cost of goods sold.. 20,633 6,014 8,785 (19,355) 16,077 ------ ------- ------ ------ ------- 20,633 97,277 39,238 (25,438) 131,710 ------ ------- ------ ------ ------- Gross profit..... 11,385 77,413 9,858 (5,855) 92,801 Selling, general and administrative expenses.......... 4,593 31,110 8,493 -- 44,196 ------ ------- ------ ------ ------- Operating earnings (loss)......... 6,792 46,303 1,365 (5,855) 48,605 Interest income..... 225 980 216 -- 1,421 Interest expense.... (52) (631) -- 557 (126) ------ ------- ------ ------ ------- Earnings (loss) before income taxes and minority interest 6,965 46,652 1,581 (5,298) 49,900 Income taxes........ 2,747 18,035 689 (1,511) 19,960 Minority interest... -- -- 37 -- 37 ------ ------- ------ ------ ------- Earnings (loss) before equity in earnings (loss) of subsidiaries... 4,218 28,617 855 (3,787) 29,903 Equity in earnings (loss) of subsidiaries... 25,684 855 -- (26,539) -- ------ ------ ------ ------ ------- Net earnings(loss) $29,902 $ 29,472 $ 855 $(30,326) $ 29,903 ====== ====== ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Cash Flows For the nine months ended September 30, 1998 (in thousands) (unaudited)
Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- --------- --------- Cash flows from operating activities: Net earnings (loss).. $ 8,956 $ 11,311 $ (262) $(11,049) $ 8,956 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities.......... (8,956) (6,367) 2,570 3,589 (9,164) ----- ------ ------ ------ ------ Net cash provided (used) by operating activities.......... -- 4,944 2,308 (7,460) (208) Cash flows from investing activities: Additions to property, plant and equipment.... -- (22,393) (5,709) 5,867 (22,235) Increase in inventory to be converted into equipment for short-term rental........... -- (5,900) -- -- (5,900) Dispositions of property, plant and equipment.... -- 656 1,157 -- 1,813 Businesses acquired in purchase trans- actions, net of cash acquired.... -- (2,500) (327) -- (2,827) Decrease (increase) in other assets..... -- (1,826) 280 -- (1,546) ----- ------ ------ ------ ------ Net cash used by investing activities -- (31,963) (4,599) 5,867 (30,695) Cash flows from financing activities: Repayments of notes payable and long- term obligations. -- (28,122) -- -- (28,122) Repayments of capital lease obligations...... -- (110) (21) -- (131) Proceeds from the sale of stock.... 300 -- -- -- 300 Proceeds (payments) on intercompany investments and advances......... (4,012) 8,918 (6,746) 1,840 -- Recapitalization costs - fees and expenses........ 2,087 -- -- -- 2,087 Other............. 1,625 (1,722) 248 (151) -- ----- ------ ------ ------ ------ Net cash used by financing activities -- (21,036) (6,519) 1,689 (25,866) Effect of exchange rate changes on cash and cash equivalents -- -- -- (96) (96) ----- ------ ------ ------ ------ Net decrease in cash and cash equivalents -- (48,055) (8,810) -- (56,865) Cash and cash equivalents, beginning of period -- 44,439 17,315 -- 61,754 ----- ------ ------ ------ ------ Cash and cash equivalents, end of period............. $ -- $(3,616) $ 8,505 $ -- $ 4,889 ===== ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Cash Flows For the nine months ended September 30, 1997 (in thousands) (unaudited)
Kinetic Reclassi- Kinetic Concepts, Non- fications Concepts, Inc. Guarantor Guarantor and Inc. Parent Sub- Sub- Elimi- and Sub- Company sidiaries sidiaries nations sidiaries -------- --------- --------- --------- --------- Cash flows from operating activities: Net earnings......... $ 29,903 $ 29,471 $ 855 $(30,326) $ 29,903 Adjustments to reconcile net earnings to net cash provided (used)by operating activities.......... (33,650) 8,557 4,363 27,942 7,212 ------ ------ ------ ------ ------ Net cash provided (used) by operating activities.......... (3,747) 38,028 5,218 (2,384) 37,115 Cash flows from investing activities: Additions to property, plant and equipment.... 923 (14,912) (3,443) (2,362) (19,794) Increase in inventory to be converted into equipment for short-term rental........... (4,210) -- -- -- (4,210) Dispositions of property, plant and equipment.... -- 264 1,545 -- 1,809 Businesses acquired in purchase transactions, net of cash acquired......... -- (16,903) -- -- (16,903) Note - principal shareholder...... (3,000) -- -- -- (3,000) Decrease (increase) in other assets.. 808 534 125 (2,582) (1,115) ------ ------ ------ ------ ------ Net cash used by investing activities (5,479) (31,017) (1,773) (4,944) (43,213) Cash flows from financing activities: Proceeds (repayments) capital lease obligations...... (40) (208) 3 (62) (307) Proceeds from the exercise of stock options.......... 3,864 -- -- -- 3,864 Proceeds (payments) on intercompany investments and advances......... 21,036 (31,822) 7,966 2,820 -- Purchase and retirement of treasury stock... (4,133) -- -- -- (4,133) Cash dividends paid to shareholders.. (4,789) -- -- -- (4,789) Other.............. (5,097) (2,391) (4,855) 12,950 607 ------ ------ ------ ------ ------ Net cash provided (used) by financing activities......... 10,841 (34,421) 3,114 15,708 (4,758) Effect of exchange rate changes on cash and cash equivalents -- -- -- (2,654) (2,654) ------ ------ ------ ------ ------ Net increase decrease) in cash and cash equivalents 1,615 (27,410) 6,559 5,726 (13,510) Cash and cash equivalents, beginning of period. -- 50,286 14,485 (5,726) 59,045 ------ ------ ------ ------ ------ Cash and cash equivalents, end of period............. $ 1,615 $22,876 $21,044 $ -- $45,535 ====== ====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Results of Operations Third Quarter of 1998 Compared to Third Quarter of 1997 - ------------------------------------------------------- The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the third quarter of the prior year ($ in thousands): Three Months Ended September 30, -------------------------------- Revenue Increase Relationship (Decrease) ---------------- ---------------- 1998 1997 $ Pct ------- ------- --------- ---- Revenue: Rental and service........... 78% 81% $ 1,260 2% Sales and other.............. 22 19 3,489 24% --- --- ------ Total revenue.............. 100% 100% 4,749 6% Rental expenses................ 50 51 1,187 3% Cost of goods sold............. 8 8 652 11% --- --- ------ Gross profit............... 42 41 2,910 9% Selling, general and admin- istrative.................... 19 20 406 3% --- --- ------ Operating earnings......... 23 21 2,504 15% Interest income................ -- 1 (389) (82%) Interest expense............... (15) -- (12,123) -- Foreign currency loss.......... -- -- (280) -- --- --- ------ Earnings before income taxes and minority interest..... 8 22 (10,288) (62%) Income taxes.................... 3 9 (4,115) (62%) Minority interest in subsidiary loss.......................... -- -- 17 106% --- --- ------ Net earnings................ 5% 13% $(6,156) (62%) === === ======= The Company's revenue is derived from three primary markets. The following table sets forth the amount of revenue derived from each of these markets for the periods indicated ($ in millions): Three months ended September 30, ------------------ 1998 1997 ------- ------- Domestic specialty surfaces... $ 48.4 $ 49.0 International surfaces........ 17.5 16.4 Medical devices............... 14.7 10.7 Other......................... .4 .2 ------ ------ $ 81.0 $ 76.3 ====== ====== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Total revenue in the third quarter of 1998 increased $4.7 million, or 6.2%, to $81.0 million from $76.3 million in the third quarter of 1997. Revenue from the Company's domestic specialty surface business was $48.4 million, down $600,000, or 1.2%, from $49.0 million in the third quarter of the prior year. The decreased revenue was due primarily to lower overall prices resulting from a change in product mix from framed products to lower cost overlays, particularly in the extended care market place. Lower average prices were partly offset by therapy day growth as compared to the prior year and the addition of RIK Medical which contributed revenue of $2.2 million in the quarter. Total sales for the quarter of $18.2 million increased $3.5 million, or 23.7%, compared to the year-ago period. Sales for the period grew as a percentage of total revenue due to a combination of sales of disposable products associated with the Company's medical devices and sales of wound care dressings and related products which the Company introduced in the current year. Revenue from the Company's international operations increased $1.1 million, or 6.7%, to $17.5 million from $16.4 million in the third quarter of 1997. The international revenue increase reflects higher therapy days in virtually all of the Company's middle-tier markets, e.g., the Netherlands, Canada and Switzerland. Revenue from medical device operations increased $4.0 million, or 37.4%, to $14.7 million from $10.7 million in the third quarter of 1997, due substantially to growth in V.A.C. rentals in the United States. Rentals of the V.A.C. device internationally increased $387,000, or 83.0%, compared to the prior year. Rental, or field, expenses for the third quarter of 1998 increased $1.2 million, or 3.0%, to $40.2 million from $39.0 million in 1997. This increase is primarily attributable to increased equipment depreciation and field labor costs. As a percentage of rental revenue, rental expenses were 64.0% and 63.3% for the third quarter of 1998 and 1997, respectively. Cost of goods sold increased 10.8% to $6.7 million in the third quarter of 1998 from $6.1 million in the third quarter of 1997. This increase was directly attributable to increased sales of disposables associated with the Company's medical devices. Gross profit increased $2.9 million, or 9.3%, to $34.1 million in the third quarter of 1998 from $31.2 million in the third quarter of 1997 due primarily to increased sales volumes and controlled spending in the field. Gross profit margin for the third quarter, as a percentage of total revenue, was 42.1%, compared with 40.9% for the third quarter of 1997. Selling, general and administrative expenses increased $400,000, or 2.7%, to $15.5 million in the third quarter of 1998 from $15.1 million in the third quarter of 1997. This increase was due primarily to increased sales commission expense and goodwill amortization associated with 1997 business acquisitions. As a percentage of total revenue, selling, general and administrative expenses were 19.1% in the third quarter of 1998 as compared to 19.7% in the third quarter of 1997. Operating earnings for the period increased $2.5 million, or 15.5%, to $18.7 million compared to $16.2 million in the third quarter of 1997 resulting largely from the revenue growth discussed above. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Interest income for the three months ended September 30, 1998 was approximately $85,000 compared to approximately $470,000 in the prior period. The decrease in interest income resulted from lower invested cash balances due primarily to acquisition activities in the first nine months of 1997 and the leveraged recapitalization transactions completed during the fourth quarter of last year. Interest expense for the three months ended September 30, 1998 was $12.2 million compared to $32,000 for the third quarter of 1997. The interest expense increase was due to interest accrued on an average balance of approximately $511 million in long-term debt obligations associated with the recapitalization. Net earnings decreased 61.9% to $3.8 million in the third quarter of 1998 from $9.9 million in the third quarter of 1997. This decrease was due substantially to the increase in interest expense as discussed above. First Nine Months of 1998 Compared to First Nine Months of 1997 - --------------------------------------------------------------- The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the nine months of the prior year ($ in thousands): Nine Months Ended September 30, ------------------------------- Revenue Increase Relationship (Decrease) -------------- -------------- 1998 1997 $ Pct ------ ------ ------- ----- Revenue: Rental and service.............. 79% 82% $ 8,458 5% Sales and other................. 21 18 11,334 28% --- --- ------ Total revenue............... 100% 100% 19,792 9% Rental expenses................. 51 52 8,793 8% Cost of goods goods............. 8 7 3,069 19% --- --- ------ Gross profit................ 41 41 7,930 9% Selling, general and administrative................ 20 20 5,116 12% --- --- ------ Operating earnings.......... 21 21 2,814 6% Interest income................. -- 1 (949) (67%) Interest expense................ (15) -- (36,342) -- Foreign currency loss........... -- -- (521) -- --- --- ------ Earnings before income taxes and minority interest..... 6 22 (34,998) (70%) Income taxes.................... 2 9 (13,989) (70%) Minority interest in subsidiary loss.......................... -- -- 62 168% --- --- ------ Net earnings................ 4% 13% $(20,947) (70%) --- --- ------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ The Company's revenue is derived from three primary markets. The following table sets forth the amount of revenue derived from each of these markets for the periods indicated ($ in millions): Nine months ended September 30, ----------------- 1998 1997 ------- ------- Domestic specialty surfaces... $ 150.0 $ 146.9 International surfaces........ 51.7 48.7 Medical devices............... 41.9 28.2 Other......................... 0.7 0.7 ------ ------ $ 244.3 $ 224.5 ====== ====== Total revenue in the first nine months of 1998 increased $19.8 million, or 8.8%, to $244.3 million from $224.5 million in the first nine months of 1997. Revenue from the Company's domestic specialty surface business was $150.0 million, up $3.1 million, or 2.1%, from $146.9 million in the first nine months of the prior year. The increased revenue was due to a combination of revenue from the RIK Medical acquisition, higher patient therapy days and wound care product sales partially offset by lower blended price rates. Sales for the period increased $11.3 million, or 28.5%, due substantially to sales of disposable products associated with the Company's medical devices and wound care dressing products. Revenue from the Company's international operations increased $3.0 million, or 6.0% to $51.7 million from $48.7 million in the nine months ended September 30, 1997. The international revenue increase reflects higher therapy days in virtually all of the Company's middle- tier markets, e.g., the Netherlands, Canada and Switzerland, which were partly offset by unfavorable currency exchange rate fluctuations of approximately $2.3 million and softness in the U.K. market. Revenue from medical device operations increased $13.7 million, or 48.6% to $41.9 million from $28.2 million in the nine months ended September 30, 1997, due substantially to growth in V.A.C. rentals in the United States. Revenues from the PlexiPulse vascular assistance device also increased 13.1% during the first nine months of 1998 due to increased market penetration. Rental, or field, expenses increased $8.8 million, or 7.6%, to $124.4 million from $115.6 million in the first nine months of 1997. This spending increase is primarily attributable to costs associated with the four business acquisitions completed during 1997 including increased equipment depreciation and field labor costs. As a percentage of rental revenue, rental expenses were 64.4% and 62.6% for the first nine months of 1998 and 1997, respectively. Cost of goods sold in the first nine months of 1998 increased 19.1% to $19.1 million compared to $16.1 million in the first nine months of 1997. Cost of goods sold has increased primarily due to increased sales of disposables associated with the Company's medical devices. Gross profit increased $7.9 million, or 8.5%, to $100.7 million in the first nine months of 1998 from $92.8 million in the first nine months of 1997 due primarily to increased revenue as discussed above. Gross profit margin for the first nine months, as a percentage of total revenue, was 41.2%, down from 41.3% for the first nine months of 1997, due substantially to the relative increase in rental expenses for the period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Selling, general and administrative expenses increased $5.1 million, or 11.6%, to $49.3 million in the first nine months of 1998 from $44.2 million in the first nine months of 1997. This increase was due in part to increased sales commission, goodwill amortization associated with 1997 business acquisitions, and increased legal and professional fees resulting from continuing litigation and systems/process improvement projects including conversion of the Company's manufacturing and payroll systems to Year 2000 compliant platforms. As a percentage of total revenue, selling, general and administrative expenses were 20.2% in the first nine months of 1998 as compared with 19.7% in the first nine months of 1997. Operating earnings for the period increased $2.8 million, or 5.8%, to $51.4 million compared to $48.6 million in the prior-year as a result of the revenue growth discussed above. Interest income for the nine months ended September 30, 1998 was approximately $500,000 compared to approximately $1.4 million in the prior period. The decrease in interest income resulted from lower invested cash balances due primarily to acquisition activities in the first nine months of 1997 and the leveraged recapitalization transactions completed during the fourth quarter of the prior year. Interest expense for the nine months ended September 30, 1998 was $36.5 million compared to $131,000 for the nine months ended September 30, 1997. The interest expense increase was due to interest accrued on an average balance of approximately $521 million in long-term debt obligations associated with the recapitalization. Net earnings decreased $20.9 million, or 70.0%, to $9.0 million for the first nine months of 1998. This decrease was due substantially to the interest expense increase as discussed above. Financial Condition - ------------------- The change in revenue and expenses experienced by the Company during the nine months ended September 30, 1998 and other factors resulted in changes to the Company's balance sheet as follows: Cash and cash equivalents were $4.9 million at September 30, 1998, a decrease of $56.9 million from December 1997. The cash decrease is primarily attributable to payments associated with the recapitalization, including $32.3 million for first quarter 1998 repurchases of common stock, and $28.1 million for the repayment of long-term debt obligations. Prepaid expenses and other current assets of $14.3 million decreased 22.6% as compared to $18.4 million at December 31, 1997. This change resulted primarily from the refund of all 1997 federal tax payments as the recapitalization transactions resulted in the Company recording a current tax receivable for the year ended December 31, 1997. Net property, plant and equipment at September 30, 1998 increased 9.5% to $82.6 million from $75.4 million at December 31, 1997. Net capital expenditures were $28.1 million during the first nine months of 1998, including $5.9 million of additional ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Financial Condition (continued) - ------------------------------- inventory (raw materials and work-in-progress) to be converted into equipment for short-term rentals. Depreciation and amortization, including goodwill, for the first nine months of 1998 totaled $23.6 million, up 37.6% from $17.1 million in the same period of 1997. Goodwill amortization accounted for $2.5 million of the year-to-year increase. Accounts payable and accrued liabilities at September 30, 1998 were $3.9 million and $43.1 million, respectively, compared to $40.4 million and $41.3 million, respectively, at the end of 1997. The decrease in accounts payable relates primarily to payments for shares of common stock not tendered as of December 31, 1997. Interest accrued on long-term debt obligations accounted for the majority of the increase in accrued liabilities. Long-term debt obligations, including current maturities, decreased $28.1 million to $506.6 million as of September 30, 1998 due to the repayment of a portion of the Company's revolving credit facility in addition to scheduled principal payments. Market Trends - ------------- The health care industry continues to face various challenges, including increased pressure on health care providers to control costs, the accelerating migration of patients from acute care facilities into extended care (e.g. skilled nursing facilities and rehabilitation centers) and home care settings, the consolidation of health care providers and national and regional group purchasing organizations and the growing demand for clinically proven therapies which lower the total cost of providing care. The Balanced Budget Act of 1997 (the "BBA") contains a number of provisions which will impact the federal reimbursement of health care and reduce projected payments under the Medicare system by $115 billion over the next five years. In this regard, less than 10% of the Company's revenue is received directly from the Medicare system. However, many of the health care providers who pay the Company for its products are reimbursed, either directly or indirectly, by the Federal government under the Medicare system for the use of those products. The Company does not believe that the changes introduced by the BBA will have a material impact on our hospital customers or the dealers we partner with in home health care. However, the changes to the Medicare system introduced by the BBA has had an impact on the manner in which the Company's extended care customers make purchasing decisions. As the Company's extended care customers attempt to understand the impact of the changes on their respective businesses their initial reaction has been to lower their average daily cost by changing the overall product mix to lower cost products in their respective facilities. These changes have impacted revenue in the short term. The Company is introducing programs to its extended care customers which it believes will address this trend. The Company's market continues to increase based upon demographic trends as most of the Company's patients are over 50 years old. Further, its broad product line and national distribution system enable it to compete effectively in the changing healthcare environment, particularly in light of consolidation of providers and purchasing groups. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Market Trends (continued) - ------------------------- More recently, sales have increased as a portion of the Company's revenue. The Company believes this trend will continue because certain U.S. health care providers are purchasing disposables associated with the Company's growing installed base of medical devices and select low-end products that are less expensive and easier to maintain. In addition, international health care providers tend to purchase products more often than U.S. health care providers. Legal Proceedings - ----------------- On February 21, 1992, Novamedix Limited ("Novamedix") filed a lawsuit against the Company in the United States District Court for the Western District of Texas. Novamedix manufactures the principal product which directly competes with the PlexiPulse. The suit alleges that the PlexiPulse infringes several patents held by Novamedix, that the Company breached a confidential relationship with Novamedix and a variety of ancillary claims. Novamedix seeks injunctive relief and monetary damages. Initial discovery in this case has been substantially completed. Although it is not possible to reliably predict the outcome of this litigation or the damages which could be awarded, the Company believes that its defenses to these claims are meritorious and that the litigation will not have a material adverse effect on the Company's business, financial condition or results of operations. On August 16, 1995, the Company filed a civil antitrust lawsuit against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-Rom. The suit was filed in the United States District Court for the Western District of Texas. The suit alleges that Hill-Rom used its monopoly power in the standard hospital bed business to gain an unfair advantage in the specialty hospital bed business. Specifically, the allegations set forth in the suit include a claim that Hill-Rom required hospitals and purchasing groups to agree to exclusively rent specialty beds in order to receive substantial discounts on products over which they have monopoly power - hospital beds and head wall units. The suit further alleges that Hill-Rom engaged in activities which constitute predatory pricing and refusals to deal. Hill-Rom has filed an answer denying the allegations in the suit. Although discovery has not been completed and it is not possible to reliably predict the outcome of this litigation or the damages which might be awarded, the Company believes that its claims are meritorious. On October 31, 1996, the Company received a counterclaim which had been filed by Hillenbrand Industries, Inc. in the antitrust lawsuit which the Company filed in 1995. The counterclaim alleges that the Company's antitrust lawsuit and other actions were designed to enable KCI to monopolize the specialty therapeutic surface market. Although it is not possible to reliably predict the outcome of this litigation, the Company believes that the counterclaim is without merit. On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand Industries, Inc., filed a lawsuit against the Company alleging that the Company's TriaDyne bed infringes a patent issued to Hill-Rom. This suit was filed in the United States District Court for the District of South Carolina. The Company does not believe that the TriaDyne bed infringes any valid claims of the Hill-Rom patent or that this lawsuit will have a material adverse impact on the Company's business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Legal Proceedings (continued) - ----------------------------- The Company is a party to several lawsuits arising in the ordinary course of its business, including three other lawsuits alleging patent infringement by the Company, and the Company is contesting adjustments proposed by the Internal Revenue Service to prior years' tax returns in Tax Court. Provisions have been made in the Company's financial statements for estimated exposures related to these lawsuits and adjustments. In the opinion of management, the disposition of these matters will not have a material adverse effect on the Company's business, financial condition or results of operations. The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. The Company currently has certain product liability claims pending for which provision has been made in the Company's financial statements. Management believes that resolution of these claims will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company has not experienced any significant losses due to product liability claims and management believes that the Company currently maintains adequate liability insurance coverage. Liquidity and Capital Resources - -------------------------------- At September 30, 1998, the Company had current assets of $125.2 million and current liabilities of $55.1 million resulting in a working capital surplus of $70.1 million, compared to a surplus of $96.4 million at December 31, 1997. During the first nine months of 1998, the Company made net capital expenditures of $28.1 million, including inventory to be converted into equipment for short term rentals of $5.9 million. Other than commitments for new product inventory, including disposable "for sale" products, of $2.2 million, the Company has no material long-term capital commitments and can adjust the level of capital expenditures as circumstances warrant. The Company's principal sources of liquidity are expected to be cash flows from operating activities and borrowings under the Senior Credit Facilities. It is anticipated that the Company's principal uses of liquidity will be to fund capital expenditures related to the Company's rental products, provide needed working capital, meet debt service requirements and finance the Company's strategic plans. The Senior Credit Facilities originally totaled $400.0 million and consist of (i) a $50.0 million six-year Revolving Credit Facility, (ii) a $50.0 million six-year Acquisition Facility, (iii) a $120.0 million six-year amortizing Term Loan A, (iv) a $90.0 million seven-year amortizing Term Loan B and (v) a $90.0 million eight-year amortizing Term Loan C, (collectively, the "Term Loans"). The Term Loans were fully drawn to finance a portion of the Tender Offer, and scheduled principal payments totaling $3.6 million were made in a timely manner. The Acquisition Facility was partially drawn to, in effect, finance the RIK Medical acquisition. The Acquisition Facility provides the Company with financing to pursue strategic acquisition opportunities, and will remain available to the Company until December 31, 2000, at which time it will begin to amortize over the remaining three years of the facility. The Company originally utilized borrowings under the Revolving Facility to help effect the Tender Offer and pay related fees ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Liquidity and Capital Resources (continued) - ------------------------------------------- and expenses. While the Company reduced borrowings under this facility by $24.5 million in the first nine months of 1998, it has utilized and will utilize borrowings to fund capital expenditures and meet working capital needs. The Term Loans and the Notes are subject to customary terms, covenants and conditions which partially restrict the uses of future cash flow by the Company. The Company does not expect that these covenants and conditions will have a material adverse impact on its operations. At September 30, 1998, the Acquisition Facility had a balance of $10.0 million. The Revolving Credit Facility was fully available at September 30, 1998. Accordingly, the aggregate availability under these two facilities was $90.0 million. The Senior Credit Agreement requires the Company to meet certain financial tests, including minimum levels of EBITDA (as defined therein), minimum interest coverage, maximum leverage ratio and capital expenditures. The Bank Credit Agreement also contains covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, loans and advances, capital expenditures, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. The Company is in compliance with the applicable covenants at September 30, 1998. The Senior Credit Agreement contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, failures under ERISA plans, judgment defaults, failure of any guaranty, security document security interest or subordination provision supporting the Bank Credit Agreement to be in full force and effect and change of control of the Company. As part of the Recapitalization transactions, the Company issued $200.0 million of Senior Subordinated Notes (the "Notes") due 2007. The Notes are unsecured obligations of the Company, ranking subordinate in right of payment to all senior debt of the Company and will mature on November 1, 2007. The Notes are not entitled to the benefit of any mandatory sinking fund. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after November 1, 2002, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on November 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption. Year Percentage ---- ---------- 2002.................................. 104.813% 2003.................................. 103.208% 2004.................................. 101.604% 2005 and thereafter................... 100.000% ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Liquidity and Capital Resources (continued) - ------------------------------------------- As of September 30, 1998 the entire $200.0 million of Senior Subordinated Notes was issued and outstanding. At September 30, 1998, the Company was committed to purchase approximately $2.2 million of inventory associated with new products over the remainder of this year. The Company did not have any other material purchase commitments. Year 2000 Issue - --------------- During the third quarter of 1998, the Company completed the implementation and testing of an Oracle manufacturing application and conversion to a Year 2000 compliant payroll system. The Company will continue to utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company anticipates completing the Year 2000 project by no later than June 30, 1999, at which time the conversion of all international subsidiary financial platforms will be completed and which is prior to any anticipated impact on its operating systems. The total cost of the Year 2000 project is estimated at $7.0 million and is being funded through operating cash flows. Also, $6.0 million of this total will be used to purchase new software that will be capitalized and the remaining $1.0 million will be expensed as incurred. Through September 30, 1998, the Company has incurred approximately $5.8 million ($900,000 expensed and $4.9 million capitalized for new software), related to the assessment of the Year 2000 issue, development of a modification plan, preliminary software modifications and purchase of new software, where necessary. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS A list of all exhibits filed or included as part of this quarterly report on Form 10-Q is as follows: Exhibit Description ------- ----------- 3.1 Restatement of Articles of Incorporation (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 3.2 Restated By-Laws of the Company (filed as Exhibit 3.3 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 4.1 Specimen Common Stock Certificate of the Company (filed as Exhibit 4.1 to the Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference). 10.1 Agreement dated September 29, 1987, by and between the Company and Hill-Rom Company, Inc. (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.2 Employment and Non-Competition Agreement dated December 26, 1986, by and between the Company and James R. Leininger, M.D. (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.3 Contract dated September 30, 1985, by and between Ryder Truck Rental, Inc. and the Company regarding the rental of delivery trucks (filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.4 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-21353), and incorporated herein by reference). 10.5 Kinetic Concepts, Inc. Employee Stock Ownership Plan and Trust dated January 1, 1989 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, and incorporated herein by reference). EXHIBITS (continued) -------------------- 10.6 1987 Key Contributor Stock Option Plan, as amended, dated October 27, 1989 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). 10.7 Amendment No. 1 to Asset Purchase Agreement dated September 30, 1994 by and among Kinetic Concepts, Inc., a Texas corporation, KCI Therapeutic Services, Inc., a Delaware corporation, MEDIQ Incorporated, a Delaware corporation, PRN Holdings, Inc., a Delaware corporation and MEDIQ/PRN Life Support Services-I, Inc., a Delaware corporation (filed as Exhibit 2.2 to the Company's Form 8- K dated October 17, 1994, and incorporated herein by reference). 10.17 Credit Agreement dated as of May 8, 1995 by and among the Company and Bank of America National Trust and Savings Association, as Agent (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference). 10.18 Purchasing Agreement, dated February 1, 1994, between the Company, KCI Therapeutic Services, Inc. and Voluntary Hospitals of America, Inc.(filed as Exhibit 10.18 to the Company's Amended Annual Report on Form 10- K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.19 Rental/Purchasing Agreement, dated April 1, 1993 between the Company, KCI Therapeutic Services, Inc. and AmHS Purchasing Partners, L.P. (filed as Exhibit 10.19 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.20 KCI Management 1994 Incentive Program (filed as Exhibit 10.20 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.21 KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). EXHIBITS (continued) -------------------- 10.22 Letter, dated September 19, 1994, from the Company to Raymond R. Hannigan outlining the terms of his employment (filed as Exhibit 10.22 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.23 Letter, dated November 22, 1994, from the Company to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.24 Option Agreement, dated November 21, 1994, between Dr. James R. Leininger, Cecilia Leininger and Raymond R. Hannigan (filed as Exhibit 10.24 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.25 Option Agreement, dated August 23, 1995, between Dr. James R. Leininger, Cecilia Leininger and Bianca A. Rhodes (filed as Exhibit 10.25 to the Company's Amended Annual Report on Form 10-K/A, dated January 23, 1996, for the year ended December 31, 1994, and incorporated herein by reference). 10.26 Stock Purchase Agreement dated June 15, 1995 among KCI Financial Services, Inc., Kinetic Concepts, Inc., Cura Capital Corporation, MG Acquisition Corporation and the Principal Shareholders of Cura Capital Corporation (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 10.27 Promissory Note dated August 21, 1995 in the principal amount of $10,000,000 payable to James R. Leininger, M.D. to the order of Kinetic Concepts, Inc., a Texas corporation (filed as Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference). 10.28 Stock Pledge Agreement dated August 21, 1995 by and between James R. Leininger, M.D. and Kinetic Concepts, Inc., a Texas corporation (filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference). 10.29 Executive Committee Stock Ownership Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). EXHIBITS (continued) -------------------- 10.30 Deferred Compensation Plan (filed as Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 10.31 Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.32 Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.33 Asset Purchase Agreement dated January 3, 1997 by and among Trac Medical, Inc., a North Carolina corporation, Terry Williams, David Mattis, George Parrish and KCI Therapeutic Services, Inc., a Delaware corporation(filed as Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference). 10.34 Asset Purchase Agreement dated January 27, 1997 by and among Hydrothermic Floatation Systems, Inc., a California corporation, Y. Jeremy Levy and KCI Therapeutic Services, Inc., a Delaware corporation (filed as Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference). 10.35 Agreement for the sale and purchase of 80% of the issued share capital of Ethos Medical Group Limited by KCI International, Inc. dated April 18, 1997 (filed as Exhibit 10.35 to the Company's Quarterly Report on Form 10- Q for the quarter ended June 30, 1997 and incorporated herein by reference.) 10.36 Asset Purchase Agreement made as of July 31, 1997 between KCI Equi-Tron, Inc. as Purchaser and James H. Alexander, Elleanor Alexander and Scott Alexander as vendors (filed as Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference.) 10.37 Transaction Agreement, dated as of October 2, 1997, among Fremont Purchaser II, Inc., RCBA Purchaser I, L.P. and the Company (filed as Exhibit (c)(1) to the Company's Schedule 13E- 3 dated October 8, 1997, and incorporated herein by reference.) EXHIBITS (continued) -------------------- 10.38 Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit (c)(4) to the Company's Schedule 13E-3 dated October 8, 1997, and incorporated herein by reference.) 10.39 Management Equity Agreement for Raymond R. Hannigan, dated October 2, 1997 (filed as Exhibit (c)(6) to the Company's Schedule 13E- 3 dated October 8, 1997, and incorporated herein by reference.) 10.40 Offer to Purchase, dated October 8, 1997 (filed as Exhibit (d)(1) to the Company's Schedule 13E-3 dated October 8, 1997, and incorporated herein by reference.) 10.41 Kinetic Concepts Management Equity Plan effective October 1, 1997 (filed as Exhibit 10.33 on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference.) 22.1 List of Subsidiaries (filed as Exhibit 22.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference.) *27.1 Financial Data Schedule. Note: (*) Exhibits filed herewith. (b) REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KINETIC CONCEPTS, INC. (REGISTRANT) By: /s/ RAYMOND HANNIGAN --------------------- Raymond Hannigan President and Chief Executive Officer By: /s/ WILLIAM M.BROWN --------------------- William M. Brown Vice President and Chief Financial Officer Date: November 13, 1998 EX-27 2
5 9-MOS DEC-31-1998 SEP-30-1998 4,888,563 0 90,490,768 9,045,819 24,660,718 125,247,480 210,963,066 128,393,196 300,452,229 55,116,856 498,946,786 0 0 70,914 (264,797,716) 300,452,229 51,115,166 244,302,916 19,146,338 173,737,641 0 1,574,592 36,473,087 14,901,726 5,970,509 8,955,764 0 0 0 8,955,764 $0.13 $0.12
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