-----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, DA+NS04A1CJFogZcsJBx+2P+4bcIEGll0ngDLZsVJhLVI93LepseV8YEVWyCXJS8 EAdCr24vraSpV5KSwcJcXg== 0000831967-99-000004.txt : 19990514 0000831967-99-000004.hdr.sgml : 19990514 ACCESSION NUMBER: 0000831967-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99619328 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 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)
March 31, December 31, 1999 1998 ----------- ------------ (unaudited) 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.
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 March 31, -------------------- 1999 1998 --------- --------- 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.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED) - ---------------------------------------- KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
Three months ended March 31, ------------------- 1999 1998 -------- -------- 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.
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)
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......... $ -- $ -- $ 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 ======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Balance Sheet December 31, 1998 (in thousands)
Kinetic Concepts, Reclassi- Kinetic Inc. Non- fications Concepts, Parent Guarantor Guarantor and Inc. Company Sub- Sub- Elimi- and Sub- Borrower sidiaries sidiaries nations sidiaries -------- --------- --------- --------- --------- 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 ======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the three months ended March 31, 1999 (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.... $ -- $ 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 ====== ======= ====== ===== ======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Earnings For the three months ended March 31, 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.... $ -- $ 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 ====== ====== ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Cash Flows For the three months ended March 31, 1999 (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........... $ 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 ===== ===== ====== ===== =====
Condensed Consolidating Guarantor, Non-Guarantor and Parent Company Statement of Cash Flows For the three months ended March 31, 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........... $ 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
EX-27 2
5 3-MOS DEC-31-1999 MAR-31-1999 7,663,023 0 83,130,152 1,887,115 29,497,456 134,138,518 209,621,629 132,539,314 305,280,058 56,503,679 498,775,292 0 0 70,915 (261,265,550) 305,280,058 17,696,009 80,211,124 7,199,168 58,536,780 0 554,264 11,666,811 2,562,072 1,024,829 1,537,244 0 0 0 1,537,244 $0.02 $0.02
-----END PRIVACY-ENHANCED MESSAGE-----