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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2004 |
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Commission file number 001-09913 |
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
Telephone Number: (210) 524-9000
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 ___ No X
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock: 64,883,068 shares as of May 10, 2004
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Earnings
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Table of Contents
KINETIC CONCEPTS, INC.
INDEX
Page No. |
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PART I. |
FINANCIAL INFORMATION |
5 |
|
Item 1. |
Financial Statements |
5 |
|
Condensed Consolidated Balance Sheets |
5 |
||
Condensed Consolidated Statements of Earnings |
6 |
||
Condensed Consolidated Statements of Cash Flows |
7 |
||
Notes to Condensed Consolidated Financial Statements |
8 |
||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
21 |
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
41 |
|
Item 4. |
Controls and Procedures |
42 |
|
PART II. |
OTHER INFORMATION |
42 |
|
Item 1. |
Legal Proceedings |
42 |
|
Item 2. |
Changes in Securities and Use of Proceeds |
43 |
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
44 |
|
Item 6. |
Exhibits and Reports on Form 8-K |
45 |
|
SIGNATURES |
48 |
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. The forward-looking statements are based on our current expectations and projections about future events. Discussions containing such forward-looking statements may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Risk Factors," and elsewhere in this document. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "predicts," "projects," "potential," "continue," "expects," "anticipates," "future," "intends," "plans,&q uot; "believes," "estimates," or the negative of these terms and other comparable terminology, including, but not limited to, the following:
- any projections of revenues, earnings, cash balances or cash flow, synergies or other financial items;
- any statements of the plans, strategies and objectives of management for future operations;
- any statements regarding future economic conditions or performance;
- implementing our business strategy;
- attracting and retaining customers;
- obtaining and expanding market acceptance of the products and services we offer;
- competition in our market;
- statements regarding the outcome of pending litigation;
- trends in the mix of rental and sales product mix and from lower-therapy products to capital purchases;
- future demand for V.A.C. systems;
- expenditures with respect to our therapeutic surfaces business and demand for our bariatric products;
- changes in patient demographics; and
- any statements of assumptions underlying any of the foregoing.
These forward-looking statements are only predictions, not historical facts. These forward-looking statements involve certain risks and uncertainties, as well as assumptions. Actual results, levels of activity, performance, achievements and events could differ materially from those stated, anticipated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption "Risk Factors" in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. You should consider the risks factors and uncertainties under the caption "Risk Factors" among other things, in evaluating KCI's prospects and future financial performance. The occurrence of the events described in the risk factors could ha rm the business, results of operations and financial condition of KCI. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. KCI disclaims any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, or any obligation to explain the reasons why actual results may differ.
In this report, unless the context requires otherwise, the words "we," "our," "us," and "KCI" refer to Kinetic Concepts, Inc.
TRADEMARKS
The following terms used in this report are our trademarks: AirMaxxis™, AtmosAir™, BariAir®, BariKare®, BariMaxx® II, BariMaxx®, DynaPulse®, FirstStep®, FirstStep® Advantage™, FirstStep® Plus, FirstStep Select®, FirstStep Select® Heavy Duty, FluidAir Elite®, FluidAir™ II, KCI®, KinAir™ III, KinAir™ IV, KinAir™ MedSurg™, Kinetic Concepts®, Kinetic Therapy™, Maxxis® 300, Maxxis® 400, MiniV.A.C.™, PediDyne™, PlexiPulse®, PlexiPulse® AC, Pulse IC™, Pulse SC™, RIK®, RotoProne®, Roto Rest®, Roto Rest® Delta, T.R.A.C.™, The Clinical Advantage®, TheraPulse®, TheraPulse® II, TheraRest®, TriaDyne® II, TriaDyne® Proventa™, TriCell®, V.A.C.®, V.A.C.®™, V.A.C.® Freedom™, V .A.C.® Therapy™, The V.A.C.® System™, Vacuum Assisted Closure® and V.A.C.® Instill™. All other trademarks appearing in this report are the property of their holders.
Table of ContentsPART I - FINANCIAL INFORMATION
KINETIC CONCEPTS, INC. AND SUBSIDIARIES |
||||
(in thousands) |
||||
March 31, |
December 31, |
|||
2004 |
2003 |
|||
(unaudited) |
||||
Assets: |
||||
Current assets: |
||||
Cash and cash equivalents |
$ 93,243 |
$ 156,064 |
||
Accounts receivable, net |
200,034 |
199,938 |
||
Inventories, net |
30,102 |
32,253 |
||
Deferred income taxes |
22,925 |
22,749 |
||
Prepaid expenses and other current assets |
14,421 |
11,811 |
||
_______ |
_______ |
|||
Total current assets |
360,725 |
422,815 |
||
_______ |
_______ |
|||
Net property, plant and equipment |
155,085 |
145,208 |
||
Loan and preferred stock issuance costs, less accumulated amortization |
||||
of $1,590 in 2004 and $1,014 in 2003 |
14,931 |
19,779 |
||
Goodwill |
48,791 |
48,797 |
||
Other assets, less accumulated amortization of $8,359 in 2004 and |
||||
$8,190 in 2003 |
28,741 |
28,497 |
||
_______ |
_______ |
|||
$ 608,273 |
$ 665,096 |
|||
_______ |
_______ |
|||
Liabilities and Shareholders' Deficit: |
||||
Current liabilities: |
||||
Accounts payable |
$ 30,719 |
$ 34,386 |
||
Accrued expenses |
100,153 |
112,652 |
||
Current installments of long-term debt |
4,308 |
4,800 |
||
Current installments of capital lease obligations |
1,536 |
1,576 |
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Derivative financial instruments |
4,293 |
2,402 |
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Income taxes payable |
14,793 |
39,403 |
||
_______ |
_______ |
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Total current liabilities |
155,802 |
195,219 |
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_______ |
_______ |
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Long-term debt, net of current installments |
556,842 |
678,100 |
||
Capital lease obligations, net of current installments |
1,337 |
1,351 |
||
Deferred income taxes, net |
26,191 |
26,566 |
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Deferred gain, sale of headquarters facility |
8,915 |
9,183 |
||
Other noncurrent liabilities |
212 |
212 |
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_______ |
_______ |
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749,299 |
910,631 |
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Series A convertible preferred stock, 0 issued and outstanding |
||||
at March 31, 2004 and 264 at December 31, 2003 |
- |
261,719 |
||
Shareholders' equity (deficit): |
||||
Common stock; authorized 225,000 at March 31, 2004 and |
||||
150,000 at December 31, 2003; issued and outstanding 64,814 |
||||
at March 31, 2004 and 41,270 at December 31, 2003 |
65 |
41 |
||
Additional paid-in capital |
429,501 |
1,157 |
||
Deferred compensation |
226 |
185 |
||
Retained deficit |
(579,101) |
(518,955) |
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Accumulated other comprehensive income |
8,283 |
10,318 |
||
_______ |
_______ |
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Shareholders' deficit |
(141,026) |
(507,254) |
||
_______ |
_______ |
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$ 608,273 |
$ 665,096 |
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_______ |
_______ |
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See accompanying notes to condensed consolidated financial statements. |
KINETIC CONCEPTS, INC. AND SUBSIDIARIES |
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Condensed Consolidated Statements of Earnings |
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(in thousands, except per share data) |
|||
(unaudited) |
|||
Three months ended |
|||
March 31, |
|||
2004 |
2003 |
||
Revenue: |
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Rental |
$ 165,908 |
$ 129,442 |
|
Sales |
58,926 |
37,561 |
|
_______ |
_______ |
||
Total revenue |
224,834 |
167,003 |
|
_______ |
_______ |
||
Rental expenses |
105,406 |
79,379 |
|
Cost of goods sold |
16,768 |
13,645 |
|
_______ |
_______ |
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Gross profit |
102,660 |
73,979 |
|
Selling, general and administrative expenses |
48,542 |
36,481 |
|
Research and development expenses |
7,119 |
4,425 |
|
Initial public offering bonuses |
19,534 |
- |
|
_______ |
_______ |
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Operating earnings |
27,465 |
33,073 |
|
Interest income |
371 |
400 |
|
Interest expense |
(18,844) |
(8,178) |
|
Foreign currency gain (loss) |
(464) |
1,788 |
|
_______ |
_______ |
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Earnings before income taxes |
8,528 |
27,083 |
|
Income taxes |
3,070 |
10,156 |
|
_______ |
_______ |
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Net earnings |
$ 5,458 |
$ 16,927 |
|
Series A convertible preferred stock dividends |
(65,604) |
- |
|
_______ |
_______ |
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Net earnings (loss) available to common shareholders |
$ (60,146) |
$ 16,927 |
|
_______ |
_______ |
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Net earnings (loss) per share available to common shareholders: |
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Basic |
$ (1.19) |
$ 0.24 |
|
|
_______ |
_______ |
|
Diluted |
$ (1.19) |
$ 0.21 |
|
_______ |
_______ |
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Weighted average shares outstanding: |
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Basic |
50,332 |
70,995 |
|
|
_______ |
_______ |
|
Diluted |
50,332 |
79,861 |
|
_______ |
_______ |
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See accompanying notes to condensed consolidated financial statements. |
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Table of Contents
KINETIC CONCEPTS, INC. AND SUBSIDIARIES |
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(in thousands) |
|||
(unaudited) |
|||
Three months ended March 31, |
|||
2004 |
2003 |
||
Cash flows from operating activities: |
|||
Net earnings |
$ 5,458 |
$ 16,927 |
|
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: |
|||
Depreciation and amortization |
13,724 |
10,665 |
|
Provision for uncollectible accounts receivable |
3,177 |
1,749 |
|
Amortization of deferred gain on sale of headquarters facility |
(268) |
(259) |
|
Write-off of deferred loan fees |
3,342 |
- |
|
Non-cash amortization of stock award to directors |
42 |
- |
|
Change in assets and liabilities: |
|||
Increase in accounts receivable, net |
(3,313) |
(6,983) |
|
Decrease in other accounts receivable |
- |
175,000 |
|
Decrease in current deferred income taxes |
(176) |
(66,838) |
|
Decrease in inventories |
2,135 |
2,992 |
|
Increase in prepaid expenses and other current assets |
(2,608) |
(3,541) |
|
Increase (decrease) in accounts payable |
(3,671) |
1,455 |
|
Increase (decrease) in accrued expenses |
(10,381) |
3,025 |
|
Increase (decrease) in income taxes payable |
(24,611) |
71,606 |
|
Increase (decrease) in deferred income taxes, net |
279 |
(677) |
|
Net cash provided (used) by operating activities |
(16,871) |
205,121 |
|
_______ |
_______ |
||
Cash flows from investing activities: |
|||
Additions to property, plant and equipment |
(20,841) |
(17,678) |
|
Increase in inventory to be converted into equipment for short-term rental |
(3,100) |
(200) |
|
Dispositions of property, plant and equipment |
395 |
404 |
|
Increase in other assets |
(408 ) |
(323) |
|
Net cash used by investing activities |
(23,954) |
(17,797) |
|
_______ |
_______ |
||
Cash flows from financing activities: |
|||
Repayment of notes payable, long term, capital lease and other obligations |
(121,805) |
(105,787) |
|
Initial public offering of common stock: |
|||
Proceeds from issuance of common stock |
105,000 |
- |
|
Stock issuance costs |
(10,604) |
- |
|
Proceeds from exercise of stock options |
5,443 |
663 |
|
_______ |
_______ |
||
Net cash used by financing activities |
(21,966) |
(105,124) |
|
_______ |
_______ |
||
Effect of exchange rate changes on cash and cash equivalents |
(30) |
506 |
|
Net increase (decrease) in cash and cash equivalents |
(62,821) |
82,706 |
|
Cash and cash equivalents, beginning of period |
156,064 |
54,485 |
|
Cash and cash equivalents, end of period |
$ 93,243 |
$ 137,191 |
|
_______ |
_______ |
||
Cash paid during the three months for: |
|||
Interest (1) |
$ 12,794 |
$ 2,730 |
|
Income taxes |
$ 3,915 |
$ 5,508 |
|
Non-cash activity: |
|||
Non-cash consideration for exercise of stock options |
$ 2,136 |
$ - |
|
(1) 2004 amount includes a bond call premium of $5.3 million related to the IPO. |
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See accompanying notes to condensed consolidated financial statements. |
Table of Contents
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include the accounts of Kinetic Concepts, Inc., together with our consolidated subsidiaries ("KCI"). The unaudited 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 KCI's latest annual report on Form 10-K. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position and cash flows in conformity with accounting principles generally accepted in the United States. Operating results from interim period s are not necessarily indicative of results that may be expected for the fiscal year as a whole. In our opinion, the consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our results for the periods presented. Certain reclassifications of amounts related to the prior year have been made to conform with the 2004 presentation.
(b) Stock Options
We use the intrinsic value method to account for our stock option plans. If the compensation cost for our stock-based employee compensation plan had been determined based upon a fair value method consistent with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," our net earnings to common shareholders and earnings per share would have been adjusted to the pro forma amounts indicated below. For purposes of pro forma disclosures, the estimated fair value of the options is recognized as an expense over the options' respective vesting periods. Our pro forma calculations are as follows (dollars in thousands, except for earnings per share information):
Three months ended |
|||||
March 31, |
|||||
2004 |
2003 |
||||
Net earnings (loss) available to common shareholders |
|||||
as reported |
$ (60,146) |
$ 16,927 |
|||
______ |
______ |
||||
Pro forma net earnings: |
|||||
Net earnings (loss) available to common |
|||||
shareholders as reported |
$ (60,146) |
$ 16,927 |
|||
Compensation charge under intrinsic method |
27 |
659 |
|||
Compensation expense under fair value method |
(301) |
(374) |
|||
______ |
______ |
||||
Pro forma net earnings |
$ (60,420) |
$ 17,212 |
|||
______ |
______ |
||||
Earnings (loss) per share as reported |
|||||
Basic earnings (loss) per common share |
$ (1.19) |
$ 0.24 |
|||
Diluted earnings (loss) per common share |
$ (1.19) |
$ 0.21 |
|||
Pro forma earnings per share |
|||||
Basic earnings per common share |
$ (1.20) |
$ 0.24 |
|||
Diluted earnings per common share |
$ (1.20) |
$ 0.22 |
|||
______ |
______ |
We are not required to apply, and have not applied, the method of accounting prescribed by SFAS 123 to stock options granted prior to January 1, 1995. Moreover, the pro forma compensation cost reflected above may not be representative of future expense.
Table of Contents(c) Other Significant Accounting Policies
For further information, see Note 1 of the Notes to the Consolidated Financial Statements included in KCI's Annual Report on Form 10-K for the year ended December 31, 2003.
(2) INITIAL PUBLIC OFFERING
On February 27, 2004, we closed an initial public offering ("IPO") of our common stock, through which we sold 3,500,000 newly-issued shares and selling shareholders sold an aggregate of 17,200,000 existing shares at a price of $30.00 per share. Net proceeds of the IPO to the Company, after underwriter's discounts and fees of $6.3 million and other offering costs of $4.3 million, were $94.4 million. The net proceeds, along with cash on hand, were used to redeem $71.75 million principal amount of our 73/8% Senior Subordinated Notes due 2013, together with a bond call premium of $5.3 million, prepay $50.0 million of debt under our senior credit facility and pay management bonuses and payroll taxes related to the IPO of $19.3 million. In March 2004, we wrote off $3.3 million in loan issuance costs associated with the retirement of the debt, which is included in interest expense.
As part of the closing of our IPO, the holders of our then-outstanding Series A convertible preferred stock received cumulative preferred dividends paid-in-kind through December 31, 2005 of $65.6 million, and immediately thereafter, all of the then-outstanding shares of preferred stock were automatically converted into 19,199,520 shares of common stock.
(3) SUPPLEMENTAL BALANCE SHEET DATA
Accounts receivable consist of the following (dollars in thousands):
March 31, |
December 31, |
||
2004 |
2003 |
||
Trade accounts receivable: |
|||
Facilities / dealers |
$ 120,906 |
$ 122,339 |
|
Third-party payers: |
|||
Medicare / Medicaid |
31,280 |
35,434 |
|
Managed care, insurance and other |
85,248 |
76,694 |
|
_______ |
_______ |
||
237,434 |
234,467 |
||
Medicare V.A.C. receivables prior to |
|||
October 1, 2000 |
13,445 |
13,445 |
|
Employee and other receivables |
1,656 |
1,724 |
|
_______ |
_______ |
||
252,535 |
249,636 |
||
Less: Allowance for doubtful accounts |
(39,056) |
(36,253) |
|
Allowance for Medicare V.A.C. receivables |
|||
prior to October 1, 2000 |
(13,445) |
(13,445) |
|
_______ |
_______ |
||
$ 200,034 |
$ 199,938 |
||
_______ |
_______ |
Table of Contents
Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories are comprised of the following (dollars in thousands):
March 31, |
December 31, |
||
2004 |
2003 |
||
Finished goods |
$ 12,039 |
$ 12,137 |
|
Work in process |
4,408 |
2,847 |
|
Raw materials, supplies and parts |
28,432 |
28,689 |
|
______ |
______ |
||
44,879 |
43,673 |
||
Less: Amounts expected to be converted |
|||
into equipment for short-term rental |
(12,100) |
(9,000) |
|
Reserve for excess and obsolete |
|||
inventory |
(2,677) |
(2,420) |
|
______ |
______ |
||
$ 30,102 |
$ 32,253 |
||
______ |
______ |
(4) LONG-TERM OBLIGATIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
Long-term obligations consist of the following (dollars in thousands):
March 31, |
December 31, |
||
|
2004 |
2003 |
|
2003 Senior Credit Facility |
$ 427,600 |
$ 477,600 |
|
73/8% Senior Subordinated Notes due 2013 |
133,250 |
205,000 |
|
Note Payable - MedClaims |
300 |
300 |
|
_______ |
_______ |
||
561,150 |
682,900 |
||
Less current installments |
(4,308) |
(4,800) |
|
_______ |
_______ |
||
$ 556,842 |
$ 678,100 |
||
_______ |
_______ |
Senior Credit Facility
On March 22, 2004, we made an optional prepayment of $50.0 million on our senior credit facility.
73/8% Senior Subordinated Notes due 2013
On August 11, 2003 we issued and sold an aggregate of $205.0 million principal amount of our 73/8% Senior Subordinated Notes due 2013. On March 29, 2004, we redeemed $71.75 million principal amount of our 73/8% Senior Subordinated Notes due 2013 at a price equal to 107.375% of the principal amount plus accrued but unpaid interest to the redemption date. On April 7, 2004, we completed an exchange offer to all holders of the notes, pursuant to which all holders exchanged their notes for a new issue of registered notes. The exchange notes are identical in all material respects to the notes that were exchanged, except that the exchange notes do not contain terms restricting their transfer or any terms related to registration rights. The exchange notes bear interest from the most recent date on which interest has been paid on the original notes.
Table of Contents
Interest Rate Protection
On March 8, 2004, we terminated our $100.0 million, 2.375% interest rate swap and entered into a new $100.0 million, 2.375% interest rate swap agreement. The amount included in other comprehensive income as of March 31, 2004 continued to be recognized over the original date through which interest payments were hedged because the hedged item (interest payments) continued to exist. Although no cash was exchanged, the new $100.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly effective) as a proxy for the change in the expected fair value of the hedged tra nsactions. As of March 31, 2004, there was no significant hedge ineffectiveness.
The fair value of each of the swaps, except the swap initiated on March 8, 2004, was zero at inception. Due to subsequent movements in interest rates, as of March 31, 2004, the fair values of our swap agreements were negative and were adjusted to reflect a liability of approximately $4.3 million. During the first quarter of 2004 and 2003, we recorded interest expense of approximately $1.2 million and $400,000, respectively, as a result of interest rate protection agreements.
(5) EARNINGS (LOSS) PER SHARE
The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net earnings (loss) per common share. Net earnings (loss) per share was calculated using the weighted average number of common shares outstanding. Common stock equivalents, which consist of stock options and convertible preferred stock, were excluded from the computation of the weighted average number of common shares outstanding for the three-month period ended March 31, 2004 because their effect was antidilutive. Net earnings (loss) for basic and diluted calculations do not differ (dollars in thousands, except per share data): (See Note 1 (b).)
Three months ended |
|||
March 31, |
|||
2004 |
2003 |
||
Net earnings |
$ 5,458 |
$ 16,927 |
|
Series A convertible preferred stock dividends |
(65,604) |
- |
|
______ |
______ |
||
Net earnings (loss) available to common shareholders |
$ (60,146) |
$ 16,927 |
|
______ |
______ |
||
Average common shares: |
|||
Basic (weighted average outstanding shares) |
50,332 |
70,995 |
|
Dilutive potential common shares from stock options (1) |
- |
8,866 |
|
Dilutive potential common shares from preferred stock |
|||
conversion (1) |
- |
- |
|
______ |
______ |
||
Diluted (weighted average outstanding shares) |
50,332 |
79,861 |
|
______ |
______ |
||
Basic net earnings (loss) per common share |
$ (1.19) |
$ 0.24 |
|
______ |
______ |
||
Diluted net earnings (loss) per common share |
$ (1.19) |
$ 0.21 |
|
______ |
______ |
(1) Due to their antidilutive effect, 5,934,824 dilutive potential common shares from stock options and 12,026,073
dilutive potential common shares from preferred stock conversion have been excluded from the diluted weighted
average shares calculation for the three-month period ended March 31, 2004.
(6) OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows (dollars in thousands):
Three months ended |
|||
March 31, |
|||
2004 |
2003 |
||
Net earnings |
$ 5,458 |
$ 16,927 |
|
Foreign currency translation adjustment |
(796) |
1,329 |
|
Net derivative loss net of taxes of $1,083 in 2004 |
|||
and $264 in 2003 |
(2,016) |
(491) |
|
Reclassification adjustment for losses included in |
|||
earnings, net of taxes of $418 in 2004 and $141 in 2003 |
777 |
263 |
|
______ |
______ |
||
Other comprehensive income (loss) |
$ 3,423 |
$ 18,028 |
|
______ |
______ |
(7) COMMITMENTS AND CONTINGENCIES
We are party to a number of legal proceedings for which provisions are made in our financial statements to cover estimated expenses. For a description of recent developments in our legal proceedings for the first quarter of 2004, please see "Part II. Item 1. Legal Proceedings." Other than commitments for new product inventory, including disposable "for sale" products of $20.7 million, we have no material long-term capital commitments and can adjust our level of capital expenditures as circumstances dictate.
(8) SEGMENT AND GEOGRAPHIC INFORMATION
We are principally engaged in the rental and sale of innovative therapeutic systems and surfaces throughout the United States and in 16 primary countries internationally. Revenues are attributed to individual countries based on the location of the customer.
We define our business segments based on geographic management responsibility. We have two reportable segments: USA, which includes operations in the United States, and International, which includes operations for all international units. We have two primary product lines including V.A.C. and Therapeutic Surfaces/Other. Revenues for each of our product lines are disclosed for our operating segments. No discrete financial information is available for our product lines other than revenue. Our product lines are marketed and serviced by the same infrastructure and, as a result, we do not manage our business by product line but rather by operating segments, which include our USA and our International Segments. We use operating earnings to measure segment profit. We define operating earnings as income before interest income or expense, foreign currency gains and losses, and income taxes. All intercompany transactions are eliminated in computing revenue , operating earnings and assets. Prior years have been made to conform with the current presentation. Information on segments and a reconciliation of consolidated totals are as follows (dollars in thousands):
Table of Contents
Three months ended |
|||
March 31, |
|||
2004 |
2003 |
||
Revenue: |
|||
USA |
|||
V.A.C. |
$ 121,589 |
$ 82,380 |
|
Therapeutic surfaces/other |
48,352 |
45,248 |
|
_______ |
_______ |
||
Subtotal - USA |
169,941 |
127,628 |
|
International |
|||
V.A.C. |
26,721 |
15,824 |
|
Therapeutic surfaces/other |
28,172 |
23,551 |
|
_______ |
_______ |
||
Subtotal - International |
54,893 |
39,375 |
|
_______ |
_______ |
||
$ 224,834 |
$ 167,003 |
||
_______ |
_______ |
||
Operating earnings: |
|||
USA |
$ 60,163 |
$ 44,522 |
|
International |
6,739 |
4,447 |
|
Initial public offering bonuses |
(19,534) |
- |
|
Other (1): |
|||
Executive |
(4,596) |
(4,023) |
|
Finance |
(5,871) |
(4,873) |
|
Manufacturing/Engineering |
(1,591) |
(1,157) |
|
Administration |
(7,845) |
(5,843) |
|
_______ |
_______ |
||
Total other |
(19,903) |
(15,896) |
|
_______ |
_______ |
||
$ 27,465 |
$ 33,073 |
||
_______ |
_______ |
(1) Includes general headquarter expenses which are not allocated to the individual segments and are included in
selling, general and administrative expenses within our Condensed Consolidated Statements of Earnings.
(9) RELATED PARTY TRANSACTIONS
C. Thomas Smith became a member of our board of directors in April 2003, after he had retired as the Chief Executive Officer and President of VHA Inc. VHA Inc. is affiliated with Novation, LLC. Novation is a GPO with which we have had major supply contracts since the 1980s. During the first quarters of 2004 and 2003, respectively, we received approximately $35.9 million and $30.5 million in V.A.C. and therapeutic surfaces revenues under our Novation contracts.
Additional related party transactions are discussed in our Annual Report on Form 10-K for the year ended December 31, 2003 under the heading "Part III. Item 13. Certain Relationships and Related Transactions."
(10) SUBSEQUENT EVENT
On May 13, 2004, we purchased $24.4 million principal amount of our 73/8% Senior Subordinated Notes due 2013 at a market price of $26.2 million, plus approximately $900,000 in accrued but unpaid interest. In connection with this purchase, we wrote off $511,000 in loan issuance costs associated with the retirement of these notes. We may purchase additional amounts of our 73/8% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations in our senior credit facility.
Table of Contents(11) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On August 11, 2003, we issued and sold an aggregate of $205.0 million principal amount of 73/8% Senior Subordinated Notes due 2013.
The notes are guaranteed by each of KCI's direct and indirect 100% owned subsidiaries, other than any entity that is a controlled foreign corporation within the definition of Section 957 of the Internal Revenue code or a holding company whose only assets are investments in a controlled foreign corporation. Each of these subsidiaries is a restricted subsidiary, as defined in the indenture governing the notes. (See Note 4.) We have not presented separate financial statements and other disclosures concerning the subsidiary guarantors because management has determined that such information is not material to investors.
The following tables present the condensed consolidating balance sheets of KCI as a parent company, our guarantor subsidiaries and our non-guarantor subsidiaries as of March 31, 2004 and December 31, 2003 and the related condensed consolidating statements of earnings and cash flows for the three-month periods ended March 31, 2004 and 2003, respectively.
Table of Contents
Condensed Consolidating Guarantor, Non-Guarantor And |
|||||||||
Parent Company Balance Sheet |
|||||||||
March 31, 2004 |
|||||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
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 equivalents |
$ - |
$ 62,880 |
$ 30,363 |
$ - |
$ 93,243 |
||||
Accounts receivable, net |
- |
156,329 |
50,185 |
(6,480) |
200,034 |
||||
Inventories, net |
- |
13,886 |
16,216 |
- |
30,102 |
||||
Deferred income taxes |
22,925 |
- |
- |
22,925 |
|||||
Prepaid expenses and other current assets |
- |
8,880 |
5,541 |
- |
14,421 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Total current assets |
- |
264,900 |
102,305 |
(6,480) |
360,725 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Net property, plant and equipment |
- |
108,166 |
57,344 |
(10,425) |
155,085 |
||||
Loan and preferred stock issuance costs, net |
- |
14,931 |
- |
- |
14,931 |
||||
Goodwill |
- |
39,779 |
9,012 |
- |
48,791 |
||||
Other assets, net |
- |
28,129 |
17,937 |
(17,325) |
28,741 |
||||
Intercompany investments and advances |
(141,012) |
563,720 |
6,886 |
(429,594) |
- |
||||
_______ |
_________ |
_______ |
_______ |
_______ |
|||||
$ (141,012) |
$1,019,625 |
$ 193,484 |
$ (463,824) |
$ 608,273 |
|||||
_______ |
_________ |
_______ |
_______ |
_______ |
|||||
Liabilities and Shareholders' Equity (Deficit): |
|||||||||
Current liabilities: |
|
||||||||
Accounts payable |
$ - |
$ 23,726 |
$ 6,993 |
$ - |
$ 30,719 |
||||
Accrued expenses |
14 |
76,867 |
23,272 |
- |
100,153 |
||||
Current installments of long-term debt |
- |
4,308 |
- |
- |
4,308 |
||||
Current installments of capital lease obligations |
- |
35 |
1,501 |
- |
1,536 |
||||
Derivative financial instruments |
- |
4,293 |
- |
- |
4,293 |
||||
Intercompany payables |
- |
17,630 |
- |
(17,630) |
- |
||||
Income taxes payable |
- |
13,658 |
1,135 |
- |
14,793 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Total current liabilities |
14 |
140,517 |
32,901 |
(17,630) |
155,802 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Long-term debt, net of current installments |
- |
556,842 |
- |
- |
556,842 |
||||
Capital lease obligations, net of current |
|||||||||
installments |
- |
- |
1,337 |
- |
1,337 |
||||
Intercompany payables, noncurrent |
- |
(26,284) |
26,284 |
- |
- |
||||
Deferred income taxes, net |
- |
28,553 |
- |
(2,362) |
26,191 |
||||
Deferred gain, sale of headquarters facility |
- |
8,915 |
- |
- |
8,915 |
||||
Other noncurrent liabilities |
- |
15,175 |
- |
(14,963) |
212 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
|
14 |
723,718 |
60,522 |
(34,955) |
749,299 |
||||
Shareholders' equity (deficit) |
(141,026) |
295,907 |
132,962 |
(428,869) |
(141,026) |
||||
_______ |
_________ |
_______ |
_______ |
_______ |
|||||
|
$ (141,012) |
$1,019,625 |
$ 193,484 |
$ (463,824) |
$ 608,273 |
||||
_______ |
_________ |
_______ |
_______ |
_______ |
Table of Contents
Condensed Consolidating Guarantor, Non-Guarantor And |
|||||||||
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 equivalents |
$ - |
$ 129,695 |
$ 26,369 |
$ - |
$ 156,064 |
||||
Accounts receivable, net |
- |
153,199 |
49,903 |
(3,164) |
199,938 |
||||
Inventories, net |
- |
17,114 |
15,139 |
- |
32,253 |
||||
Deferred income taxes |
- |
22,749 |
- |
- |
22,749 |
||||
Prepaid expenses and other current assets |
- |
9,594 |
3,926 |
(1,709) |
11,811 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Total current assets |
- |
332,351 |
95,337 |
(4,873) |
422,815 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Net property, plant and equipment |
- |
103,555 |
55,924 |
(14,271) |
145,208 |
||||
Loan and preferred stock issuance costs, net |
- |
19,779 |
- |
- |
19,779 |
||||
Goodwill |
- |
39,785 |
9,012 |
- |
48,797 |
||||
Other assets, net |
- |
28,049 |
17,683 |
(17,235) |
28,497 |
||||
Intercompany investments and advances |
(245,401) |
642,737 |
15,333 |
(412,669) |
- |
||||
________ |
_________ |
_______ |
________ |
_______ |
|||||
$ (245,401) |
$1,166,256 |
$ 193,289 |
$ (449,048) |
$ 665,096 |
|||||
________ |
_________ |
_______ |
________ |
_______ |
|||||
Liabilities and Shareholders' Equity (Deficit): |
|||||||||
Current liabilities: |
|||||||||
Accounts payable |
$ - |
$ 24,690 |
$ 9,696 |
$ - |
$ 34,386 |
||||
Accrued expenses |
134 |
89,268 |
23,250 |
- |
112,652 |
||||
Current installments of long-term debt |
- |
4,800 |
- |
- |
4,800 |
||||
Current installments of capital |
|||||||||
lease obligations |
- |
75 |
1,501 |
- |
1,576 |
||||
Derivative financial instruments |
- |
2,402 |
- |
- |
2,402 |
||||
Intercompany payables |
- |
22,136 |
- |
(22,136) |
- |
||||
Income taxes payable |
- |
36,803 |
2,600 |
- |
39,403 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Total current liabilities |
134 |
180,174 |
37,047 |
(22,136) |
195,219 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
Long-term debt, net of |
|||||||||
current installments |
- |
678,100 |
- |
- |
678,100 |
||||
Capital lease obligations, |
|||||||||
net of current installments |
- |
- |
1,351 |
- |
1,351 |
||||
Intercompany payables, noncurrent |
- |
(21,500) |
21,500 |
- |
- |
||||
Deferred income taxes, net |
- |
28,838 |
- |
(2,272) |
26,566 |
||||
Deferred gain, sale of headquarters facility |
- |
9,183 |
- |
- |
9,183 |
||||
Other noncurrent liabilities |
- |
15,175 |
- |
(14,963) |
212 |
||||
_______ |
_______ |
_______ |
_______ |
_______ |
|||||
134 |
889,970 |
59,898 |
(39,371) |
910,631 |
|||||
Series A convertible preferred stock |
261,719 |
- |
- |
- |
261,719 |
||||
Shareholders' equity (deficit) |
(507,254) |
276,286 |
133,391 |
(409,677) |
(507,254) |
||||
_______ |
_________ |
_______ |
_______ |
_______ |
|||||
|
$ (245,401) |
$1,166,256 |
$ 193,289 |
$ (449,048) |
$ 665,096 |
||||
_______ |
_________ |
_______ |
_______ |
_______ |
Table of Contents
Parent Company Statement of Earnings |
|||||||||
For the three months ended March 31, 2004 |
|||||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Kinetic |
Historical |
||||||||
Concepts, |
Reclassi- |
Kinetic |
|||||||
Inc. |
Non- |
fications |
Concepts, |
||||||
Parent |
Guarantor |
Guarantor |
and |
Inc. |
|||||
Company |
Sub- |
Sub- |
Elimi- |
and Sub- |
|||||
Borrower |
sidiaries |
sidiaries |
nations |
sidiaries |
|||||
Revenue: |
|||||||||
Rental |
$ - |
$ 129,273 |
$ 36,635 |
$ - |
$ 165,908 |
||||
Sales |
- |
46,413 |
18,910 |
(6,397) |
58,926 |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Total revenue |
- |
175,686 |
55,545 |
(6,397) |
224,834 |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Rental expenses |
- |
68,536 |
36,870 |
- |
105,406 |
||||
Cost of goods sold |
- |
15,196 |
4,769 |
(3,197) |
16,768 |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Gross profit |
- |
91,954 |
13,906 |
(3,200) |
102,660 |
||||
Selling, general and administrative |
|||||||||
expenses |
- |
43,322 |
5,220 |
- |
48,542 |
||||
Research and development expenses |
- |
6,261 |
858 |
7,119 |
|||||
Initial public offering bonuses |
19,430 |
104 |
- |
19,534 |
|||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Operating earnings (loss) |
(19,430) |
42,267 |
7,828 |
(3,200) |
27,465 |
||||
Interest income |
- |
324 |
47 |
- |
371 |
||||
Interest expense |
- |
(18,844) |
(44) |
44 |
(18,844) |
||||
Foreign currency gain (loss) |
- |
(928) |
464 |
- |
(464) |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Earnings (loss) before income |
|||||||||
taxes (benefit) and equity in |
|||||||||
earnings of subsidiaries |
(19,430) |
22,819 |
8,295 |
(3,156) |
8,528 |
||||
Income taxes (benefit) |
(7,286) |
9,359 |
2,133 |
(1,136) |
3,070 |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Earnings (loss) before equity |
|||||||||
in earnings of subsidiaries |
(12,144) |
13,460 |
6,162 |
(2,020) |
5,458 |
||||
Equity in earnings of subsidiaries |
17,602 |
6,161 |
- |
(23,763) |
- |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Net earnings |
$ 5,458 |
$ 19,621 |
$ 6,162 |
$ (25,783) |
$ 5,458 |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Series A convertible preferred stock dividends |
(65,604) |
- |
- |
- |
(65,604) |
||||
______ |
_______ |
______ |
______ |
_______ |
|||||
Net earnings (loss) available to common |
|||||||||
shareholders |
$ (60,146) |
$ 19,621 |
$ 6,162 |
$ (25,783) |
$ (60,146) |
||||
______ |
_______ |
______ |
______ |
_______ |
Table of Contents
Condensed Consolidating Guarantor, Non-Guarantor And |
|||||||||
Parent Company Statement of Earnings |
|||||||||
For the three months ended March 31, 2003 |
|||||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Kinetic |
Historical |
||||||||
Concepts, |
Reclassi- |
Kinetic |
|||||||
Inc. |
Non- |
fications |
Concepts, |
||||||
Parent |
Guarantor |
Guarantor |
and |
Inc. |
|||||
Company |
Sub- |
Sub- |
Elimi- |
and Sub- |
|||||
Borrower |
sidiaries |
sidiaries |
nations |
sidiaries |
|||||
Revenue: |
|||||||||
Rental |
$ - |
$ 103,150 |
$ 26,292 |
$ - |
$ 129,442 |
||||
Sales |
- |
31,736 |
13,051 |
(7,226) |
37,561 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Total revenue |
- |
134,886 |
39,343 |
(7,226) |
167,003 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Rental expenses |
- |
54,676 |
24,703 |
- |
79,379 |
||||
Cost of goods sold |
- |
13,138 |
4,527 |
(4,020) |
13,645 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Gross profit |
- |
67,072 |
10,113 |
(3,206) |
73,979 |
||||
Selling, general and administrative |
|||||||||
expenses |
- |
32,276 |
4,205 |
- |
36,481 |
||||
Research and development expenses |
- |
3,979 |
446 |
- |
4,425 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Operating earnings |
- |
30,817 |
5,462 |
(3,206) |
33,073 |
||||
Interest income |
- |
339 |
61 |
- |
400 |
||||
Interest expense |
- |
(8,178) |
- |
- |
(8,178) |
||||
Foreign currency gain |
- |
1,522 |
266 |
- |
1,788 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Earnings before income |
|||||||||
taxes and equity in |
|||||||||
earnings of subsidiaries |
- |
24,500 |
5,789 |
(3,206) |
27,083 |
||||
Income taxes |
- |
9,794 |
1,565 |
(1,203) |
10,156 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Earnings before equity |
|||||||||
in earnings of subsidiaries |
- |
14,706 |
4,224 |
(2,003) |
16,927 |
||||
Equity in earnings of subsidiaries |
16,927 |
4,224 |
- |
(21,151) |
- |
||||
_______ |
_______ |
_______ |
_______ |
________ |
|||||
Net earnings |
$ 16,927 |
$ 18,930 |
$ 4,224 |
$ (23,154) |
$ 16,927 |
||||
_______ |
_______ |
_______ |
_______ |
________ |
Table of Contents
Condensed Consolidating Guarantor, Non-Guarantor And |
|||||||||
Parent Company Statement of Cash Flows |
|||||||||
For the three months ended March 31, 2004 |
|||||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Kinetic |
|||||||||
Concepts, |
Reclassi- |
Kinetic |
|||||||
Inc. |
Non- |
fications |
Concepts, |
||||||
Parent |
Guarantor |
Guarantor |
and |
Inc. |
|||||
Company |
Sub- |
Sub- |
Elimi- |
and Sub- |
|||||
Borrower |
sidiaries |
sidiaries |
nations |
sidiaries |
|||||
Cash flows from operating activities: |
|||||||||
Net earnings |
$ 5,458 |
$ 19,621 |
$ 6,162 |
$ (25,783) |
$ 5,458 |
||||
Adjustments to reconcile net earnings to net |
|
|
|
|
|
||||
cash provided (used) by operating activities |
(17,680) |
(27,168) |
(2,672) |
25,191 |
(22,329) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Net cash provided (used) by operating activities |
(12,222) |
(7,547) |
3,490 |
(592) |
(16,871) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Cash flows from investing activities: |
|||||||||
Additions to property, plant and |
|||||||||
equipment |
- |
(23,655) |
6,570 |
(3,756) |
(20,841) |
||||
Increase in inventory to be converted into |
|||||||||
equipment for short-term rental |
- |
(3,100) |
- |
- |
(3,100) |
||||
Dispositions of property, plant and |
|||||||||
equipment |
- |
129 |
266 |
- |
395 |
||||
Increase in other assets |
- |
(244) |
(254) |
90 |
(408) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Net cash provided (used) by investing activities |
- |
(26,870) |
6,582 |
(3,666) |
(23,954) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Cash flows from financing activities: |
|||||||||
Repayments of notes payable, long-term, |
|||||||||
capital lease and other obligations |
- |
(121,791) |
(14) |
- |
(121,805) |
||||
Initial public offering of common stock: |
|||||||||
Proceeds from issuance of common stock |
105,000 |
- |
- |
- |
105,000 |
||||
Stock issuance costs |
(10,604) |
- |
- |
- |
(10,604) |
||||
Proceeds from exercise of stock options |
5,443 |
- |
- |
- |
5,443 |
||||
Proceeds (payments) on intercompany |
|||||||||
investments and advances |
(85,809) |
74,910 |
13,231 |
(2,332) |
- |
||||
Other |
(1,808) |
14,483 |
(19,295) |
6,620 |
- |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Net cash provided (used) by financing activities |
12,222 |
(32,398) |
(6,078) |
4,288 |
(21,966) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Effect of exchange rate changes on |
|||||||||
cash and cash equivalents |
- |
- |
- |
(30) |
(30) |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Net increase (decrease) in cash and |
|||||||||
cash equivalents |
- |
(66,815) |
3,994 |
- |
(62,821) |
||||
Cash and cash equivalents, |
|||||||||
beginning of period |
- |
129,695 |
26,369 |
- |
156,064 |
||||
_______ |
_______ |
______ |
______ |
_______ |
|||||
Cash and cash equivalents, end |
|||||||||
of period |
$ - |
$ 62,880 |
$ 30,363 |
$ - |
$ 93,243 |
||||
_______ |
_______ |
_____ |
_____ |
______ |
Table of Contents
Condensed Consolidating Guarantor, Non-Guarantor And |
|||||||||
Parent Company Statement of Cash Flows |
|||||||||
For the three months ended March 31, 2003 |
|||||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Kinetic |
|||||||||
Concepts, |
Reclassi- |
Kinetic |
|||||||
Inc. |
Non- |
fications |
Concepts, |
||||||
Parent |
Guarantor |
Guarantor |
and |
Inc. |
|||||
Company |
Sub- |
Sub- |
Elimi- |
and Sub- |
|||||
Borrower |
sidiaries |
sidiaries |
nations |
sidiaries |
|||||
Cash flows from operating activities: |
|||||||||
Net earnings |
$ 16,927 |
$ 18,930 |
$ 4,224 |
$ (23,154) |
$ 16,927 |
||||
Adjustments to reconcile net earnings to net |
|
|
|
|
|
||||
cash provided (used) by operating activities |
90,459 |
79,459 |
(7,416) |
25,692 |
188,194 |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Net cash provided (used) by operating |
|||||||||
activities |
107,386 |
98,389 |
(3,192) |
2,538 |
205,121 |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Cash flows from investing activities: |
|||||||||
Additions to property, plant and |
|||||||||
equipment |
- |
(10,607) |
(6,319) |
(752) |
(17,678) |
||||
Increase in inventory to be converted into |
|||||||||
equipment for short-term rental |
- |
(200) |
- |
- |
(200) |
||||
Dispositions of property, plant and |
|||||||||
equipment |
- |
280 |
124 |
- |
404 |
||||
Increase in other assets |
- |
(181) |
(142) |
- |
(323) |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Net cash used by investing activities |
- |
(10,708) |
(6,337) |
(752) |
(17,797) |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Cash flows from financing activities: |
|||||||||
Repayments of notes payable, long-term, |
|||||||||
capital lease and other obligations |
- |
(105,785) |
(2) |
- |
(105,787) |
||||
Proceeds from exercise of stock options |
663 |
- |
- |
- |
663 |
||||
Proceeds (payments) on intercompany |
|||||||||
investments and advances |
(109,150) |
100,753 |
9,279 |
(882) |
- |
||||
Other |
1,101 |
(595) |
904 |
(1,410) |
- |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Net cash provided (used) by financing |
|||||||||
activities |
(107,386) |
(5,627) |
10,181 |
(2,292) |
(105,124) |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Effect of exchange rate changes on |
|||||||||
cash and cash equivalents |
- |
- |
- |
506 |
506 |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Net increase in cash and |
|||||||||
cash equivalents |
- |
82,054 |
652 |
- |
82,706 |
||||
Cash and cash equivalents, |
|||||||||
beginning of period |
- |
41,185 |
13,300 |
- |
54,485 |
||||
________ |
________ |
________ |
________ |
________ |
|||||
Cash and cash equivalents, end |
|||||||||
of period |
$ - |
$ 123,239 |
$ 13,952 |
$ - |
$ 137,191 |
||||
________ |
________ |
________ |
________ |
________ |
Table of Contents
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONThe following discussion should be read in conjunction with the consolidated condensed financial statements and the accompanying notes to this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under "Risk Factors".
General
Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic surfaces. We design, manufacture, market and service a wide range of proprietary products which can significantly improve clinical outcomes while reducing the overall cost of patient care by accelerating the healing process or preventing complications. We derive our revenue from the rental and sale of products in two primary categories: Advanced Wound Care and Therapeutic Surfaces. Our advanced wound care systems incorporate our proprietary V.A.C. technology, which has been clinically demonstrated to promote wound healing and reduce the cost of treating patients with difficult-to-treat wounds. Our therapeutic surfaces, including specialty hospital beds, mattress replacement systems and overlays, are designed to address complications associated with immobility and obesity, such as pressure sores and pneumonia.
We have direct operations in the United States, Canada, Europe, Australia, Asia and South Africa, and we conduct additional business through distributors in Latin America and the Middle East. We manage our business in two geographical segments, USA and International. In the United States, which accounted for 75.6% of our revenue for the three months ended March 31, 2004, we have a substantial presence in all care settings. In the U.S. acute and extended care settings, which accounted for more than half of our domestic revenue, we bill our customers, such as hospitals and extended care facilities, directly. In the U.S. home care setting, where our revenue comes predominantly from V.A.C. systems, we provide products and services directly to patients and we bill third-party payers, such as Medicare and private insurance. Internationally, substantially all of our revenue is generated from the acute care setting. Only a small portion of international V.A.C. revenue comes from home care. However, if we are able to gain home care reimbursement for V.A.C. therapy with third-party payers in Europe and other international locations, we believe revenue from the home care market will increase.
Since the fourth quarter of 2000, our growth has been driven primarily by increased revenue from V.A.C. system rentals and sales, which accounted for approximately 66.0% of total revenue in the first quarter of 2004, up from 58.8% in the prior-year period. We expect V.A.C. growth and the percentage of total revenue from V.A.C. rentals and sales to continue to increase, as it has in each of the last three years.
We believe that the key factors underlying V.A.C. growth over the past year have been:
- Encouraging market expansion by adding new wound type indications for V.A.C. use and increasing the
percentage of wounds that are considered good candidates for V.A.C. therapy. Recent examples of
advances include the use of V.A.C. in open abdominal wounds, sternotomies and highly-infected wounds.
- Expanding our contractual relationships with third-party payers. We have increased the number of reported
lives that we have under contract with private insurance and managed care organizations from fewer than 20
million in mid-2000 to over 168 million as of the end of March 2004.
- Improving V.A.C.'s acceptance among customers and physicians, both in terms of the number of users and the
extent of use by each customer or physician.
Over the last three years, we have focused our marketing and selling efforts on increasing physician awareness of the benefits of V.A.C. therapy. These efforts are targeted at physician specialties that provide care to the majority of patients with wounds in our target categories. Within these specialties, we focus on those clinicians with the largest wound patient populations. Over time, we have added new specialties as awareness in our initial priority groups begin to approach appropriate levels. Aided awareness of the V.A.C. in our first tier of physician specialties averages over 90%. We will continue to focus on expanding unaided awareness in these groups.
Continuous enhancements in product portfolio and positioning are important to our continued growth and market penetration. In 2003 and the first quarter of 2004, we have benefited from the continuing rollout of the new V.A.C.ATS and the V.A.C. Freedom, which began in 2002. These advanced technology systems have significantly increased customer acceptance and value perception. We have also benefited from the introduction of three new dressing systems designed to improve ease-of-use and effectiveness in treating pressure ulcers and serious abdominal wounds.
At the same time, ongoing clinical experience and studies have increased the market acceptance of V.A.C. and expanded the range of wounds considered to be good candidates for V.A.C. therapy. We believe this growing base of data and clinical experience is driving the trend toward use of the V.A.C. on a routine basis for appropriate wounds.
Our other major product category, therapeutic surfaces, has been a stable revenue generating line of business for the last three years. Therapeutic surfaces/other revenue accounted for approximately $76.5 million in revenue in the first quarter of 2004, up from $68.8 million in the prior-year period. We expect our therapeutic surface business to remain stable, supported by increased demand for our bariatric line of products and our other higher end products due to changing patient demographics, together with the introductions of new high end products and enhancements to existing products.
Recent Developments
On February 27, 2004, we closed an initial public offering ("IPO") of our common stock, through which we sold 3.5 million newly-issued shares and the selling shareholders sold an aggregate of 17.2 million existing shares at a price of $30.00 per share. Net proceeds of the IPO to KCI, after underwriter's discounts and fees of $6.3 million and other offering costs of $4.3 million, totaled $94.4 million. The net proceeds, along with cash on hand, were used to redeem $71.75 million of our 73/8% Senior Subordinated Notes due 2013, together with a bond call premium of $5.3 million, prepay $50.0 million of debt under our senior credit facility, and pay management bonuses and payroll taxes related to the IPO of $19.3 million. In March 2004, we wrote off $3.3 million in loan issuance costs associated with the retirement of the debt.
As part of the closing of our IPO, the holders of our then-outstanding Series A convertible preferred stock received cumulative preferred dividends paid-in-kind through December 31, 2005 of $65.6 million, and immediately thereafter, all of the then-outstanding shares of preferred stock were automatically converted into 19,199,520 shares of common stock.
Results of Operations
Three Months ended March 31, 2004 and 2003
Non-GAAP Financial Information. Throughout this report, we have presented income statement items on an adjusted basis to exclude the impact of our IPO completed in the three months ended March 31, 2004. These adjusted non-GAAP financial measures do not replace the presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because it provides meaningful information regarding our results on a consistent and comparable basis for the periods presented. Management uses this non-GAAP financial information for reviewing the operating results of its business segments and for analyzing potential future
Table of Contentsbusiness trends in connection with its budget process. In addition, we believe investors utilize the information to evaluate period-to-period results and to attempt to understand potential future operating results.
The following table sets forth, for the first quarter of the indicated year, (1) 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 and (2) a reconciliation of IPO-related adjustments to GAAP (dollars in thousands):
Revenue Relationship |
|||||||||||||
2004 |
|||||||||||||
IPO Related |
Excluding |
Variance |
|||||||||||
Costs and |
IPO Costs and |
Increase (Decrease) |
|||||||||||
Reported |
Expenses |
Expenses |
2003 |
$ |
% |
||||||||
Revenue: |
|||||||||||||
Rental |
74 % |
- % |
74 % |
78 |
% |
$ 36,466 |
28.2 |
% |
|||||
Sales |
26 |
- |
26 |
22 |
21,365 |
56.9 |
|||||||
___ |
___ |
___ |
___ |
______ |
|||||||||
Total revenue |
100 |
- |
100 |
100 |
57,831 |
34.6 |
|||||||
|
|||||||||||||
Rental expenses |
47 |
- |
47 |
47 |
26,027 |
32.8 |
|||||||
Cost of goods sold |
7 |
- |
7 |
8 |
3,123 |
22.9 |
|||||||
___ |
___ |
___ |
___ |
______ |
|||||||||
Gross profit |
46 |
- |
46 |
45 |
28,681 |
38.8 |
|||||||
Selling, general and administrative expenses |
22 |
- |
22 |
22 |
12,061 |
33.1 |
|||||||
Research and development expenses |
3 |
- |
3 |
3 |
2,694 |
60.9 |
|||||||
Initial public offering bonuses |
9 |
|
(9) |
- |
- |
- |
- |
||||||
___ |
___ |
___ |
___ |
______ |
|||||||||
Operating earnings |
12 |
9 |
21 |
20 |
13,926 |
42.1 |
|||||||
Interest income |
- |
|
- |
- |
- |
|
(29) |
(7.3) |
|||||
Interest expense |
(8) |
4 |
(4) |
(5) |
(2,032) |
(24.8) |
|||||||
Foreign currency gain (loss) |
- |
- |
- |
1 |
(2,252) |
(126.0) |
|||||||
___ |
___ |
___ |
___ |
______ |
|||||||||
Earnings before income taxes |
4 |
13 |
17 |
16 |
9,613 |
35.5 |
|||||||
Income taxes |
2 |
5 |
7 |
6 |
3,054 |
30.1 |
|||||||
___ |
___ |
___ |
___ |
______ |
|||||||||
Net earnings |
2 % |
8 % |
10 % |
10 |
% |
$ 6,559 |
38.7 |
% |
|||||
___ |
___ |
___ |
___ |
______ |
Table of Contents
KINETIC CONCEPTS, INC. AND SUBSIDIARIES |
|||||
Condensed Consolidated Statement of Earnings |
|||||
For the Three Months ended March 31, |
|||||
(in thousands, except per share data) |
|||||
(unaudited) |
|||||
2004 |
|||||
Excluding |
|||||
IPO Costs |
IPO Costs |
||||
and |
and |
% |
|||
Reported |
Expenses |
Expenses |
2003 |
Change (1) |
|
Revenue: |
|||||
Rental |
$ 165,908 |
$ - |
$ 165,908 |
$129,442 |
28.2 % |
Sales |
58,926 |
- |
58,926 |
37,561 |
56.9 % |
_______ |
_______ |
_______ |
_______ |
||
Total revenue |
224,834 |
- |
224,834 |
167,003 |
34.6 % |
_______ |
_______ |
_______ |
_______ |
||
Rental expenses |
105,406 |
- |
105,406 |
79,379 |
32.8 % |
Cost of goods sold |
16,768 |
- |
16,768 |
13,645 |
22.9 % |
_______ |
_______ |
_______ |
_______ |
||
Gross profit |
102,660 |
- |
102,660 |
73,979 |
38.8 % |
Selling, general and administrative |
|||||
expenses |
48,542 |
- |
48,542 |
36,481 |
33.1 % |
Research and development expenses |
7,119 |
- |
7,119 |
4,425 |
60.9 % |
Initial public offering bonuses |
19,534 |
(19,534 ) |
- |
- |
- |
_______ |
_______ |
_______ |
_______ |
||
Operating earnings |
27,465 |
19,534 |
46,999 |
33,073 |
42.1 % |
_______ |
_______ |
_______ |
_______ |
||
Interest income |
371 |
- |
371 |
400 |
(7.3)% |
Interest expense |
(18,844) |
8,634 |
(10,210) |
(8,178) |
(24.8)% |
Foreign currency gain (loss) |
(464) |
- |
(464) |
1,788 |
(126.0)% |
_______ |
_______ |
_______ |
_______ |
||
Earnings before income taxes |
8,528 |
28,168 |
36,696 |
27,083 |
35.5 % |
Income taxes |
3,070 |
10,140 |
13,210 |
10,156 |
30.1 % |
_______ |
_______ |
_______ |
_______ |
||
Net earnings |
$ 5,458 |
$ 18,028 |
$ 23,486 |
$ 16,927 |
38.7 % |
Series A convertible preferred |
|||||
stock dividends |
(65,604) |
65,604 |
- |
- |
- |
_______ |
_______ |
_______ |
_______ |
||
Net earnings (loss) available to |
|||||
common shareholders |
$ (60,146) |
$ 83,632 |
$ 23,486 |
$ 16,927 |
38.7 % |
_______ |
_______ |
_______ |
_______ |
||
Net earnings (loss) per share |
|||||
available to common shareholders: |
|||||
Basic |
$ (1.19) |
$ 0.47 |
$ 0.24 |
95.8 % |
|
_______ |
_______ |
_______ |
|||
Diluted |
$ (1.19) |
$ 0.34 |
$ 0.21 |
61.9 % |
|
_______ |
_______ |
_______ |
|||
Weighted average shares outstanding: |
|||||
Basic |
50,332 |
50,332 |
70,995 |
||
_______ |
_______ |
_______ |
|||
Diluted |
50,332 |
(2) |
68,293 |
79,861 |
|
_______ |
_______ |
_______ |
|||
(1) Percentage change reflects the percentage variance between the 2004 results, excluding IPO related costs and
expenses, and the 2003 results.
(2) Due to their antidilutive effect, 5,934,824 dilutive potential common shares from stock options and 12,026,073 dilutive
potential common shares from preferred stock conversion have been excluded from the diluted weighted average shares
calculation for the three months ended March 31, 2004.
Total Revenue.
Total revenue in the first quarter of 2004 was $224.8 million, an increase of $57.8 million, or 34.6%, from the prior-year period. Excluding the effects of foreign currency exchange movements, net revenue for the first quarter increased 30.3% over the prior year primarily due to increased rental and sales volumes for V.A.C. wound healing devices and related disposables resulting from increased market penetration and product awareness. The growth in V.A.C. was bolstered by the national availability of the V.A.C.ATS and V.A.C. Freedom in the first quarter of 2004, increased physician awareness of the benefits of V.A.C. therapy, and increased product adoption across wound types. Our revenue is divided between two primary operating segments, USA and International. The following table sets forth, for the periods indicated, the amount of revenue derived from each of these segments (dollars in thousands):
Three months ended March 31, |
||||||||||
Variance |
||||||||||
2004 |
2003 |
$ |
% |
|||||||
USA |
||||||||||
V.A.C. |
||||||||||
Rental |
$ 89,907 |
$ 65,288 |
$ 24,619 |
37.7 |
% |
|||||
Sales |
31,682 |
17,092 |
14,590 |
85.4 |
||||||
_______ |
_______ |
______ |
||||||||
121,589 |
82,380 |
39,209 |
47.6 |
|||||||
Therapeutic surfaces/other |
||||||||||
Rental |
39,801 |
37,862 |
1,939 |
5.1 |
||||||
Sales |
8,551 |
7,386 |
1,165 |
15.8 |
||||||
_______ |
_______ |
______ |
||||||||
Total therapeutic surfaces/other |
48,352 |
45,248 |
3,104 |
6.9 |
||||||
Total USA rental |
129,708 |
103,150 |
26,558 |
25.7 |
||||||
Total USA sales |
40,233 |
24,478 |
15,755 |
64.4 |
||||||
_______ |
_______ |
______ |
||||||||
Subtotal - USA |
$ 169,941 |
$ 127,628 |
$ 42,313 |
33.2 |
% |
|||||
_______ |
_______ |
______ |
||||||||
International |
||||||||||
V.A.C. |
||||||||||
Rental |
$ 13,374 |
$ 7,818 |
$ 5,556 |
71.1 |
% |
|||||
Sales |
13,347 |
8,006 |
5,341 |
66.7 |
||||||
_______ |
_______ |
______ |
||||||||
Total V.A.C. |
26,721 |
15,824 |
10,897 |
68.9 |
||||||
Therapeutic surfaces/other |
||||||||||
Rental |
22,826 |
18,474 |
4,352 |
23.6 |
||||||
Sales |
5,346 |
5,077 |
269 |
5.3 |
||||||
_______ |
_______ |
______ |
||||||||
Total therapeutic surfaces/other |
28,172 |
23,551 |
4,621 |
19.6 |
||||||
Total International rental |
36,200 |
26,292 |
9,908 |
37.7 |
||||||
Total International sales |
18,693 |
13,083 |
5,610 |
42.9 |
||||||
_______ |
_______ |
______ |
||||||||
Subtotal - International |
$ 54,893 |
$ 39,375 |
$ 15,518 |
39.4 |
% |
|||||
_______ |
_______ |
______ |
||||||||
Total revenue |
$ 224,834 |
$ 167,003 |
$ 57,831 |
34.6 |
% |
|||||
_______ |
_______ |
______ |
Table of Contents
Domestic Revenue.
Total domestic revenue for the first quarter of 2004 was $169.9 million, an increase of $42.3 million, or 33.2%, from the prior-year period primarily due to increased rental and sales volumes for V.A.C. wound healing devices and related disposables. Total domestic V.A.C. revenue was $121.6 million, an increase of $39.2 million, or 47.6%, from the prior-year period. Domestic V.A.C. rental revenue increased by $24.6 million, or 37.7%, due to a 45.2% increase in average units on rent per month for the quarter as compared to the prior-year quarter. This increase is partially due to continued market acceptance of the V.A.C.ATS and V.A.C Freedom systems introduced in late 2002 which have now been fully implemented in the United States, and partially due to heightened awareness of the benefits of V.A.C. therapy. Average V.A.C. rental pricing decreased 6.2% period over period due primarily to the continued shift away from a ll-inclusive pricing for managed care organizations, which resulted in a revenue movement from the rental classification to the sales classification.Domestic V.A.C. sales revenue of $31.7 million increased in the first quarter of 2004 by $14.6 million, or 85.4%, from the prior-year period due to higher sales volume for V.A.C. disposables associated with V.A.C. system rentals, improved price realization arising from increased sale of our higher priced disposables associated with the V.A.C.ATS and V.A.C Freedom and the effect of a shift in pricing methodology for managed care organizations. Some managed care organizations pay an all-inclusive daily rate, which covers the rental of V.A.C. systems and all needed disposables during the rental period. All revenue associated with all-inclusive pricing is included in rental revenue. As we enter into new contracts with managed care payers, we continue to shift away from all-inclusive pricing and we expect to continue experiencing some shift in revenue from the rental classification to the sales classification. The cost of V.A.C. disposables, wheth er purchased through all-inclusive pricing or by itemized sale, is included in cost of goods sold and, as a result, affects our rental expense and costs of goods sold margins.
Domestic therapeutic surfaces/other revenue increased in the first quarter of 2004 by $3.1 million, or 6.9%, from the prior-year period. Therapeutic surfaces sales revenue increased 23.3% due primarily to a change in customer buying habits resulting in a change in our product mix. Therapeutic surfaces rental revenue for the first quarter of 2004 increased primarily due to a 7.9% price increase resulting from changes in our product mix, partially offset by a 3.4% decrease in the average number of units on rent per month as compared to the prior-year period. The change in our rental and sales product mix has resulted from increased demand for our bariatric products, and our other high-end products, where fewer competitive alternatives exist. We expect the trend in our changing product mix to continue as patient demographic trends indicate demand for our bariatric products may increase. We have also experienced a reduction in the rental of our lower-ther apy products due to competitive pricing pressures and a market trend toward capital purchases for these products. This trend has also contributed to an increase in sales revenue. We believe the trend towards converting lower-therapy products to capital purchases may continue as facilities continue to manage the balance between their capital and operating budgets.
International Revenue. Total international revenue for the first quarter of 2004 of $54.9 million increased $15.5 million, or 39.4%, from the prior-year period as a result of increased V.A.C. demand, higher therapeutic surface revenue and favorable foreign currency exchange movements. Excluding the effects of foreign currency exchange movements, international revenue increased 21.0% from the first quarter of the prior year. V.A.C. revenue in the first quarter of 2004 was $26.7 million, an increase of $10.9 million, or 68.9%, from the prior-year period. Excluding the effects of foreign currency exchange movements, international V.A.C. revenue for the period increased 47.3% from the prior-year period. V.A.C. rental revenue increased in the first quarter of 2004 by $5.6 million, or 71.1%, due to a 41.9% increase in average units on rent per month, together with a 4.4% increase in average rental price due to favorable product mix changes. V.A.C. sales revenue increas ed in the first quarter of 2004 by $5.3 million, or 66.7%, from the prior-year period due to increased sales volume for V.A.C. disposables associated with increased V.A.C. system rentals along with increased price realization from the sale of higher priced disposables associated with the V.A.C.ATS.
Table of Contents
International therapeutic surfaces/other revenue of $28.2 million for the first quarter of 2004 increased $4.6 million, or 19.6%, from the prior-year period. Excluding the effects of foreign currency exchange movements, international first quarter surface revenue increased 3.3% from the prior-year period due primarily to a 15.4% increase in the average number of therapeutic surface rental units on rent, partially offset by a 7.7% decline in average rental pricing during the period. The decline in average rental price resulted primarily from competitive pressures. The increase in the average number of units on rent is due to increased market penetration and product awareness in the countries where we do business. We expect this trend to continue.
Rental Expenses. Rental, or "field," expenses of $105.4 million for the first quarter of 2004 increased $26.0 million, or 32.8%, including the effect of foreign currency exchange rate fluctuations, from $79.4 million in the prior-year period. Rental expenses are semi-variable and fluctuate with revenue. Field expenses for the first quarter of 2004 represented 63.5% of total rental revenue compared to 61.3% in the prior-year period. An increase in our investment in V.A.C. marketing and the impact of the shift away from all-inclusive pricing discussed above contributed to this variance.
Cost of Goods Sold. Cost of goods sold of $16.8 million in the first quarter of 2004 increased $3.1 million, or 22.9%, from $13.6 million in the prior-year period due to increased sales of V.A.C. disposables and foreign currency exchange rate variances. Sales margins increased to 71.5% in the first quarter of 2004 compared to 63.7% in the prior-year period due to the shift away from all-inclusive pricing arrangements discussed above and cost reductions resulting from our recent global supply contract for V.A.C. disposables.
Gross Profit. Gross profit in the first quarter of 2004 increased approximately $28.7 million, or 38.8%, to $102.7 million from $74.0 million in the prior-year period due primarily to the period-to-period increase in revenue. Gross profit margin in the first quarter of 2004 was 45.7%, up from 44.3% in the prior-year period. Sales productivity gains and improved service efficiency combined with favorable product mix changes contributed to the margin expansion.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.1 million, or 33.1%, to $48.5 million in the first quarter of 2004 from $36.5 million in the prior-year period. As a percentage of total revenue, selling, general and administrative expenses decreased to 21.6% in the first quarter of 2004 as compared to 21.8% in the prior-year period. The $12.1 million increase includes higher administrative costs of $4.6 million associated with hiring 273 employees for our national call center and billing and collections department, product licensing expense of $1.8 million, provisions for doubtful accounts of $1.4 million and division labor and incentive compensation of $1.3 million. Additionally, finance and information systems costs of $816,000, depreciation expense of $507,000, insurance costs of $420,000, and foreign currency exchange rate variances were higher in the current period when compared to the prior-year period.
Research and Development Expenses. Expenditures for research and development costs, including medical studies, increased $2.7 million, or 60.9%, to $7.1 million for the current quarter compared to $4.4 million, in the prior-year period due to our commitment to continue to invest in research and development. As a percentage of total revenue, research and development expenses increased to 3.2% in the first quarter of 2004 as compared to 2.6% in the prior-year period.
Initial Public Offering Bonuses. Upon the closing of our IPO on February 27, 2004, bonuses totaling $19.3 million, including related payroll taxes, were paid to employees, and approximately $260,000 of professional fees and other miscellaneous expenses were incurred in connection with the offering. (See Note 2 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.)
Operating Earnings. Operating earnings for the first quarter of 2004, including expenses related to the IPO, decreased $5.6 million, or 17.0%, to $27.5 million compared to $33.1 million in the prior-year period. Excluding expenses related to the IPO, operating earnings would have increased $13.9 million, or 42.1%, over the prior-year period to $47.0 million. Operating margins for the first quarter of 2004, excluding expenses related to the IPO, would have been 20.9%, up from 19.8% in the prior year, due primarily to the increase in revenue discussed above.
Table of ContentsInterest Expense.
Interest expense in the first quarter of 2004 was $18.8 million compared to $8.2 million in the prior-year period. This increase is due to expenses related to the IPO, including the payment of the bond call premium of $5.3 million associated with the redemption of a portion of our outstanding 73/8% Senior Subordinated Notes due 2013 and the write-off of $3.3 million of loan issuance costs on debt retired during the period. In addition, our average outstanding debt increased due to the recapitalization completed by KCI in the third quarter of 2003. Excluding expenses related to the IPO, interest expense would have increased $2.0 million, or 24.8%, from the prior-year period to $10.2 million due to our increase in debt. (See Notes 2 and 4 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.)Net Earnings. Net earnings for the first quarter of 2004 were $5.5 million before preferred stock dividends, a decrease of $11.5 million, or 67.8% from the prior-year period due primarily to expenses related to the IPO. After recognition of preferred stock dividends, KCI reported a net loss available to common shareholders of $60.1 million in the first quarter of 2004. Excluding expenses and preferred stock dividends associated with the IPO, net earnings for the first quarter of 2004 would have been $23.5 million, an increase of $6.6 million, or 38.7%. The effective tax rate for the first quarter of 2004 was 36.0% compared to 37.5% for the same period a year ago. The income tax reduction is primarily attributable to our tax structure which is designed to result in higher revenue in lower tax jurisdictions.
Earnings per Share. Including after-tax expenses of $18.0 million and in-kind preferred stock dividends of $65.6 million associated with KCI's IPO, we reported a loss per diluted share, after dividends, of $1.19 for the first quarter compared to earnings per diluted share of $0.21 in the prior year. Earnings per diluted share, excluding expenses and dividends associated with the IPO, would have been $0.34 in the first quarter of 2004 compared to $0.21 in 2003, a 61.9% improvement over the prior year.
Liquidity and Capital Resources
General
We require capital principally for capital expenditures, systems infrastructure, debt service, interest payments and working capital. Our capital expenditures consist primarily of manufactured rental assets, computer hardware and software and expenditures related to the need for additional office space for our expanding workforce. Working capital is required principally to finance accounts receivable and inventory. Our working capital requirements vary from period-to-period depending on manufacturing volumes, the timing of shipments and the payment cycles of our customers and payers.
Sources of Capital
Based upon the current level of operations, we believe cash flows from operating activities and availability under our new revolving credit facility will be adequate to meet our anticipated cash requirements for interest payments, debt service, working capital and capital expenditures for the next twelve months. During the first quarter of 2004, our primary sources of capital were proceeds from our IPO and cash from operations. The following table summarizes the net cash provided and used by operating activities, investing activities and financing activities for the three months ended March 31, 2004 and 2003 (dollars in thousands):
Table of Contents
Year ended March 31, |
|||
2004 |
2003 |
||
Net cash provided (used) by operating activities |
$ (16,871) (1) |
$ 205,121 (2) |
|
Net cash used by investing activities |
(23,954) |
(17,797) |
|
Net cash used by financing activities |
(21,966) (3) |
(105,124) (4) |
|
Effect of exchange rates changes on cash and cash equivalents |
(30) |
506 |
|
______ |
_______ |
||
Net increase (decrease) in cash and cash equivalents |
$ (62,821) |
$ 82,706 |
|
______ |
_______ |
||
(1) Working capital changes include a tax payment of $28.1 million related to receipt of the second and final installment of
an anti-trust litigation settlement we reached in 2002. In addition, the current income tax payable reflects tax benefits of
$10.1 million associated with the IPO which will be realized in the second quarter of 2004. Excluding these working
capital changes and after-tax expenses associated with the IPO of $18.0 million, net cash provided by operating activities
for the three-month period ended March 31, 2004 would have been $39.4 million.
(2) Includes receipt of $175.0 million related to anti-trust lawsuit settlement.
(3) Includes receipt of $94.4 million in proceeds from the IPO, net of expenses of $10.6 million, and pay downs of
$50.0 million on our and $71.75 million on our 73/8% Senior Subordinated Notes due 2013.
(4) Includes pay down of $107.0 million of indebtedness on the previously existing senior credit facility utilizing funds
received related to anti-trust lawsuit settlement.
At March 31, 2004, cash and cash equivalents of $93.2 million were available for general corporate purposes. At March 31, 2004, availability under the revolving portion of our senior credit facility was $86.2 million, net of $13.8 million in letters of credit.
Working Capital
At March 31, 2004, we had current assets of $360.7 million and current liabilities of $155.8 million resulting in a working capital surplus of approximately $204.9 million, compared to a surplus of $227.6 million at December 31, 2003. The reduction in our working capital balance of $22.7 million is related to the repayment of $121.75 million in long-term debt using the net proceeds received in the IPO and cash on hand. Net cash flow used by operations for the first quarter of 2004 was $16.9 million as compared to operating cash flows of $205.1 million for the prior-year period. This decrease in operating cash flows was due primarily to the prior-year receipt of $175.0 million as the first installment of a two-part antitrust settlement. Working capital changes during the period include a tax payment of $28.1 million related to receipt of the second and final installment of an anti-trust litigation settlement we reached in 2002. In a ddition, the current income tax payable reflects tax benefits of $10.1 million associated with the IPO, which will be realized in the second quarter of 2004. Excluding these working capital changes and after-tax expenses associated with the IPO of $18.0 million, net cash provided by operating activities for the three-month period ended March 31, 2004 would have been $39.4 million.
We expect rental and sales volumes for V.A.C. systems and related disposables to continue to increase. We believe that a significant portion of this increase will occur in the homecare market, which could have the effect of increasing accounts receivable due to the extended payment cycles we experience with most third-party payers. We have adopted a number of policies and procedures to reduce these extended payment cycles, which we believe have been effective and will continue to improve our collection turnaround times. Revenue growth year-over-year was 34.6%, and receivables grew 26.6%, resulting in a reduction of total accounts receivable days outstanding from 85 days last year to 81 days at the end of March 2004. If accounts receivable increase, we will use available cash and, if necessary, borrowings under our revolving credit facility to fund the increase. We expect that cash on hand, cash flow from operations and additional borrowings under our rev olving credit facility will be sufficient to meet our working capital needs for the next twelve months.
Table of ContentsNon-GAAP Financial Information
We use earnings before interest, taxes, depreciation and amortization, or EBITDA, as a measure of leverage capacity and debt service ability. We consider EBITDA to be a key liquidity measure but it should not be considered as a measure of financial performance under GAAP or as an acceptable alternative to GAAP cash flows from operating activities, net earnings or operating earnings. Management uses this non-GAAP financial information, among other things, to measure liquidity, and we believe investors may use the information for the same purpose. We have provided this supplemental non-GAAP information to demonstrate meaningful information regarding our liquidity on a consistent and comparable basis for the periods presented. Our definition of EBITDA is not necessarily comparable to similarly titled measures reported by other companies and is not the same as that term is used under our new senior credit agreement. The following table presents a reconciliat ion of EBITDA to cash flows from operating activities (dollars in thousands):
Three months ended March 31, |
||
2004 |
2003 |
|
Net earnings (1) |
$ 5,458 |
$ 16,927 |
Income tax expense |
3,070 |
10,156 |
Interest expense (2) |
18,844 |
8,178 |
Depreciation and amortization (3) |
13,148 |
10,086 |
______ |
_______ |
|
EBITDA (1) |
40,520 |
45,347 |
Provision for uncollectible accounts receivable |
3,177 |
1,749 |
Amortization of deferred gain on sale of headquarters facility |
(268) |
(259) |
Write-off deferred loan fees |
3,342 |
- |
Non-cash amortization-stock award to directors |
42 |
- |
Amortization of loan issuance costs |
576 |
579 |
Income tax expense |
(3,070) |
(10,156) |
Interest expense (2) |
(18,844) |
(8,178) |
Change in assets and liabilities |
(42,346) |
176,039 |
______ |
_______ |
|
Net cash provided (used) by operating activities |
$ (16,871) |
$205,121 |
______ |
_______ |
|
(1) 2004 includes $18.0 million of expenses, net of income taxes, related to our IPO.
(2) Amount for 2004 includes an aggregate of $8.6 million in expense including the redemption premium of $5.3 million incurred in
connection with the redemption of $71.75 million of our 73/8% Senior Subordinated Notes due 2013 and $3.3 million of loan
issuance costs that we wrote off related to the pay down of debt.
(3) Net of amortization of loan issuance costs, which is included in interest expense.
EBITDA for the first quarter of 2004 decreased $4.8 million, or 10.6%, from the prior-year period due to the change in operating earnings discussed above. Excluding the expenses associated with the IPO, EBITDA for the first quarter of 2004 would have been $60.1 million, an increase of $14.7 million, or 32.4% from the prior-year period.
Capital Expenditures
During the first three months of 2004 and 2003, we made capital expenditures of $20.8 million and $17.7 million, respectively. The period-to-period increase is due primarily to purchases of materials for V.A.C. systems and other high demand rental products. As of March 31, 2004, we have commitments to purchase new product inventory of $20.7 million over the next twelve months. Other than commitments for new product inventory, we have no material long-term purchase commitments as of the end of the period. We believe future demand for V.A.C. systems may increase, which will require increased capital expenditures over time.
Table of ContentsDebt Service
As of March 31, 2004, scheduled principal payments under our senior credit facility for the years 2004, 2005 and 2006 were $3.2 million, $4.3 million and $4.3 million, respectively. To the extent that we have excess cash, we may use it to pay down additional debt. On March 22, 2004, we made a prepayment of $50.0 million on our senior credit facility. On March 29, 2004, we redeemed $71.75 million principal amount of our 73/8% Senior Subordinated Notes due 2013 at a price equal to 107.375% of the principal amount plus accrued but unpaid interest to the redemption date.
Senior Credit Facility
Our senior credit facility consists of a seven-year term loan facility and a $100.0 million six-year revolving credit facility. The following table sets forth the amounts outstanding under the term loan and the revolving credit facility, the effective interest rates on such outstanding amounts, and amounts available for additional borrowing thereunder, as of March 31, 2004 (dollars in thousands):
Amount Available |
|||
Amounts |
For Additional |
||
Senior Credit Facility |
Effective Interest Rate |
Outstanding |
Borrowing |
Revolving credit facility |
- |
$ - |
$ 86,176 |
Term loan facility |
4.49% (1) |
427,600 |
- |
______ |
______ |
||
Total |
$ 427,600 |
$ 86,176 |
|
______ |
______ |
||
(1) The effective interest rate includes the effect of interest rate hedging arrangements. Excluding the interest rate hedging
arrangements, our nominal interest rate as of March 31, 2004 was 3.36%.
(2) At March 31, 2004, amounts available under the revolving portion of our credit facility reflect a reduction of
$13.8 million for letters of credit issued on our behalf, none of which have been drawn upon by the beneficiaries
thereunder.
73/8% Senior Subordinated Notes due 2013
On August 11, 2003, we issued and sold an aggregate of $205.0 million principal amount of our 73/8% Senior Subordinated Notes due 2013. On March 29, 2004, we redeemed $71.75 million principal amount of the notes at a price equal to 107.375% of the principal amount plus accrued but unpaid interest to the redemption date. On April 7, 2004, we completed an exchange offer to all holders of the notes, pursuant to which all holders exchanged their notes for a new issue of registered notes. The exchange notes are identical in all material respects to the notes that were exchanged, except that the exchange notes do not contain terms restricting their transfer or any terms related to registration rights. The exchange notes bear interest from the most recent date on which interest has been paid on the original notes.
On May 13, 2004, we purchased $24.4 million principal amount of the notes at a market price of $26.2 million plus approximately $900,000 in accrued but unpaid interest. In connection with this purchase in May 2004, we wrote off $511,000 in loan issuance costs associated with the retirement of these notes. We may purchase additional amounts of our 73/8% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations in our senior credit facility. We may purchase additional amounts of our 73/8% Senior Subordinated Notes due 2013 in the open market and/or in privately negotiated transactions from time to time, subject to limitations under our senior credit facility.
Table of Contents
Interest Rate Protection
On March 8, 2004, we terminated our $100.0 million, 2.375% interest rate swap and entered into a new $100.0 million, 2.375% interest rate swap agreement. The amount included in other comprehensive income as of March 31, 2004 continued to be recognized over the original date through which interest payments were hedged because the hedged item (interest payments) continued to exist. Although no cash was exchanged, the new $100.0 million swap did not qualify for the shortcut method because the fair value of the swap was not zero at inception (it had a negative value). We elected to use the "hypothetical derivative" method to measure effectiveness, which allowed us to use the change in the fair value of a "hypothetical derivative" (one which had no fair value at inception with terms mirroring the actual derivative that would be assumed to be perfectly ef fective) as a proxy for the change in the expected fair value of the hedged transactions. As of March 31, 2004, there was no significant hedge ineffectiveness.
The fair value of each of the swaps, except the swap initiated on March 8, 20004, was zero at inception. Due to subsequent movements in interest rates, as of March 31, 2004, the fair values of our swap agreements were negative and were adjusted to reflect a liability of approximately $4.3 million. During the first quarter of 2004 and 2003, we recorded interest expense of approximately $1.2 million and $400,000, respectively, as a result of interest rate protection agreements.
Long-Term Commitments
We are committed to making cash payments in the future on long-term debt, capital leases, operating leases and purchase commitments. We have not guaranteed the debt of any other party. The following table summarizes our contractual cash obligations as of March 31, 2004, for each of the periods indicated (dollars in thousands):
Operating |
|||||
Long-Term Debt |
Capital Lease |
Lease |
Purchase |
||
Year |
Amortization |
Obligations |
Obligations |
Obligations |
Total |
2004 |
$ 3,231 |
$1,536 |
$22,698 |
$20,699 |
$ 48,164 |
2005 |
4,458 |
1,035 |
18,506 |
- |
23,999 |
2006 |
4,458 |
302 |
15,261 |
- |
20,021 |
2007 |
4,308 |
- |
11,386 |
- |
15,694 |
2008 |
4,308 |
- |
8,903 |
- |
13,211 |
Thereafter |
540,387 |
- |
16,973 |
- |
557,360 |
We have entered into a sole-source agreement with Avail Medical Products, Inc. for V.A.C. disposables. This supply agreement has a three-year term, beginning October 2002, with an automatic extension for an additional twelve months if neither party gives notice of termination. The agreement does not contain any firm purchase commitments for inventory in excess of our current purchase orders.
Critical Accounting Estimates
For a description of our critical accounting estimates, please see our Annual Report on Form 10-K for the year ended December 31, 2003 under the heading "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates."
Table of Contents
RISK FACTORS
Risks Related to Our Business
We face significant competition in our V.A.C. business from companies offering alternative wound therapies and from Hill-Rom Company in our therapeutic surfaces business, which competition may result in lower growth rates if other companies commercialize competing products before or more successfully than us.
The competition for our V.A.C. systems in wound healing and tissue repair consists in large part of wound-healing modalities which do not operate in a manner similar to V.A.C. systems, including traditional wound care dressings, advanced wound care dressings, skin substitutes, products containing growth factors and medical devices used for wound care. BlueSky Medical Corporation and several companies in Europe have introduced medical devices which have been marketed to compete with V.A.C. systems. We have filed suit against BlueSky and related parties seeking to prohibit their continued marketing and sales of the device, which we believe infringes our patent rights. (See "Part II. Item 1. Legal Proceedings"). We have also taken legal action in Europe to defend the V.A.C. from inappropriate competition. If a product similar to any V.A.C. system is introduced into the market by a legitimate competitor and protections afforded us under intellectual property laws are not adequate to prevent the rental or sale of the product, we could lose market share or experience downward pricing pressure.
Our primary competitor in the therapeutic surface business is Hill-Rom Company, whose financial and other resources substantially exceed those available to us. In Europe, we also face competition from Huntleigh Healthcare and Pegasus Limited.
In medical technology, two types of competitive actions pose particularly important risks for potential market share loss. Significant technological innovations can result in substantial swings in market share if we are not able to launch comparably innovative products within months of a competitor's innovation. Similarly, significant changes in market share may also occur if competitors obtain sole-source contracts with a substantial proportion of GPOs, large health care providers or third-party payers, effectively limiting our market access. Although we are unaware of any current significant competitive developments, future competitive initiatives by our competitors could result in loss of market share, leading to lower growth rates and ultimately to reduced profitability.
Our intellectual property is very important to our competitive position, especially for our V.A.C. products. If we are unsuccessful in protecting our intellectual property, particularly our rights to the Wake Forest patents that we rely on in our V.A.C. business, our competitive position would be harmed.
We place considerable importance on obtaining and maintaining patent protection for our products, particularly, our rights to the Wake Forest patents that we rely on in our V.A.C. business. We have numerous patents on our existing products and processes and we file applications as appropriate for patents covering new technologies as they are developed. However, the patents we own, or in which we have rights, may not be sufficiently broad to protect our technology position against competitors. Issued patents owned by us, or licensed to us, may be challenged, invalidated or circumvented, or the rights granted under issued patents may not provide us with competitive advantages. As the market for, and revenues generated by, our V.A.C. systems expand, we believe additional competitors may introduce products designed to mimic the V.A.C. We would incur substantial costs and diversion of management resources if we have to assert or defend our patent rights agai nst others. Third parties may claim that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights. Any unfavorable outcome in intellectual property disputes or litigation could cause us to lose our intellectual property rights in technology that is material to our products. In addition, we may not be able to detect infringement by third parties, and could lose our competitive position if we fail to do so.
For example, the primary European V.A.C. patent, which we rely upon for patent protection in Europe, was recently subject to an opposition proceeding before the Opposition Division of the European Patent Office. The patent was upheld at a hearing on December 9, 2003, but was corrected to expand the range of pressures covered by the patent
Table of Contentsfrom 0.10-0.99 atmospheres to 0.01-0.99 atmospheres and was modified to provide that the "screen means" covered by our patent is polymer foam and, under European patent law, its equivalents. The screen means in the patent, among other things, helps to remove fluid from within and around the wound, distributes negative pressure within the wound, enhances the growth of granulation tissue and prevents wound overgrowth. In our V.A.C. systems, the foam dressing placed in the wound serves as the screen means. We use two different types of polymer foams as the screen means in our V.A.C. systems. A written ruling is expected in the next several months. We intend to appeal the new screen means definition established by the panel. We believe it will take two to three years to complete the appeal process and we may not be successful in our appeal. During the pendency of the appeal, the original patents will remain in place. The restriction on the type of screen means covered by the patent may lead competitors to believe that they can enter the market with products using screen means other than polymer foam. Although we do not believe that a product using another type of screen means would be as effective as the V.A.C., direct competition would result in significantly increased pricing pressure and could result in a loss of some of our existing customer base. Revenue for the V.A.C. product lines in Europe was $21.5 million for the three months ended March 31, 2004.
We have agreements with third parties, including our exclusive license of the V.A.C. patents from Wake Forest, that provide for licensing of their patented or proprietary technologies. These agreements include royalty-bearing licenses. If we were to lose the rights to license these technologies or our costs to license these technologies were to materially increase, our business would suffer.
If we are unable to develop new generations of V.A.C. and therapeutic surface products and enhancements to existing products, we may lose market share as our existing patent rights begin to expire over time.
Our success is dependent upon the successful development, introduction and commercialization of new generations of products and enhancements to existing products. Innovation in developing new product lines and in developing enhancements to our existing V.A.C. and surfaces products is required for us to grow and compete effectively. Over time, our existing foreign and domestic patent protection in both the V.A.C. and surfaces businesses will begin to expire, which could allow competitors to adopt our older unprotected technology into competing product lines. If we are unable to continue developing proprietary product enhancements to V.A.C. systems and surfaces products that effectively make older products obsolete, we may lose market share in our existing lines of business. In addition, if we fail to develop new lines of products, we will not be able to penetrate new markets. Innovation in enhancements and new products requires significant capital commitm ents and investments on our part, which we may be unable to recover.
Because we have scaled our business to support future V.A.C. growth, our financial condition could suffer if V.A.C. revenues do not grow as we anticipate.
To support the ongoing rapid growth of V.A.C. sales and rentals, we add staff and capital on a routine basis slightly ahead of current requirements. If revenue from our V.A.C. sales and rentals does not grow as we anticipate, our results of operations and financial condition could suffer until resources and requirements are brought back into balance.
Failure of any of our randomized and controlled studies or a third-party study or assessment to demonstrate V.A.C. therapy's clinical efficacy may reduce physician usage of V.A.C. and cause our V.A.C. sales to suffer.
If any of our V.A.C. systems fail to demonstrate statistically significant clinical efficacy in any of our ongoing clinical studies when compared to traditional therapies, our ability to further penetrate the advanced wound care market may be negatively impacted as physicians may choose not to use V.A.C. therapy as a wound treatment. Furthermore, adverse clinical results from these trials would hinder the ability of V.A.C. to achieve standard-of-care designation, which could slow the adoption of V.A.C. across all targeted wound types. As a result, usage of V.A.C. may decline and cause our V.A.C. revenue to suffer.
Table of ContentsWe have recently learned that the Agency for Healthcare Research and Quality ("AHRQ") has assigned a technology assessment on negative pressure therapies for wound healing to the Blue Cross Blue Shield Association Technology Evaluation Center. We have provided AHRQ with an extensive set of clinical documentation on our negative pressure wound therapies and systems and we expect that the technology assessment will be issued in mid-2005. Although the technology assessment will not have any legal or binding effect, a technology assessment which was negative, in whole or part, could cause usage of our V.A.C. systems to decline.
Changes to third-party reimbursement policies could reduce the reimbursement we receive for our products.
Our products are rented and sold to hospitals and skilled nursing facilities that receive reimbursement for the products and services they provide from various public and private third-party payers, including Medicare, Medicaid and private insurance programs. We also act as a durable medical equipment, or DME, supplier and, as such, we furnish our products directly to customers and subsequently bill third-party payers such as Medicare, Medicaid and private insurance. As a result, the demand for our products in any specific care setting is dependent, in part, on the reimbursement policies (including coverage and payment policies) of the various payers in that setting. Some state and private payers make adjustments to their reimbursement policies to reflect federal changes as well as to make their own changes. If coverage and payment policies for our products are revised or otherwise withdrawn under existing Medicare or Medicaid policies, demand for our pr oducts could decrease. In addition, in the event any public or private third-party payers challenge our billing, documentation or other practices as inconsistent with their reimbursement policies, we could experience significant delays, reductions or denials in obtaining reimbursement. In light of increased controls on health care spending, especially on Medicare and Medicaid spending, the outcome of future coverage or payment decisions for any of our products by governmental or private payers remain uncertain.
In 2003, the Centers for Medicare and Medicaid Services issued new regulations on inherent reasonableness of such charges and while these regulations do not impact us currently, future coverage or payment decisions could impact our V.A.C. systems or any of our other products. If providers, suppliers and other users of our products and services are unable to obtain sufficient reimbursement for the provision of our products, demand for our products will decrease. In addition, under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, a number of changes were made to the Medicare payment methodology for items of DME, including certain payment freezes, a competitive bidding program and clinical and quality standards.
Also, in December 2002, we submitted a written request to the medical directors of the four Durable Medical Equipment Regional Carriers, or DMERCs, in which we requested clarification of a number of issues with respect to the DMERCs' "Negative Pressure Wound Therapy Policy." That policy establishes Medicare Part B reimbursement criteria for our V.A.C. products. In June 2003, we received a response from the medical directors and, in some instances, their interpretation of the policy differed from our interpretation. In September 2003, we learned that one of the DMERCs published in its regional newsletter an interpretation of the policy consistent with its June response. The other three DMERCs later published the same interpretation. Also in September 2003, we began to experience an increase in Medicare Part B denials for V.A.C. placements. We provided the medical directors with responses to their interpretation and have spoken to one o f the DMERC medical directors to support our interpretation of the policy. On December 5, 2003, the DMERC medical directors responded to our letter. In their response, the medical directors reiterated their interpretation. In essence, the medical directors provided: (1) that the Negative Pressure Wound Therapy policy generally does not cover wounds of less than 0.5 cm in depth, use of Negative Pressure Wound Therapy for more than four months, or wounds where there has not been any wound healing progress due to an intervening spell of illness; (2) that only measurements of width, length and depth may be used to demonstrate wound healing progress (which is required to justify continuing medical necessity for additional cycles of use); and (3) technical responses to issues concerning the delivery of the V.A.C. pump and ordering of disposables. We do not believe that the DMERC medical directors' interpretation reflects the current Negative Pressure Wound Therapy policy or current medical practice. We have responded to the most recent letter from the medical directors in an effort to clarify the policy while at the same time maintaining coverage for all Medicare Part B beneficiaries for whom V.A.C. treatment is medically
Table of Contentsnecessary. We have begun a dialogue with the DMERC medical directors on these issues and the tone of the discussions has been constructive and positive. In the event that the medical directors do not agree to revise their interpretations on these issues, the rate of V.A.C. revenue growth would be impacted. Although difficult to predict, we believe the reimbursement issues addressed by the medical directors relate to approximately 20% of our annual V.A.C. Medicare revenue or about 2.2% of our overall annual revenue.
If we are not able to timely collect reimbursement payments our financial condition may suffer.
The Medicare Part B coverage policy covering V.A.C. systems is complex and requires extensive documentation. In addition, the reimbursement process for the non-governmental payer segment requires extensive contract development and administration with several hundred payers, with widely varying requirements for documentation and administrative procedures, which can result in extended payment cycles. This has made billing home care payers more complex and time consuming than billing other payers. As of March 31, 2004, we had $200.0 million of receivables outstanding, net of reserves of $39.1 million for doubtful accounts and an additional $13.4 million for Medicare V.A.C. receivables prior to October 1, 2000. For the twelve-month period ended March 31, 2004, our receivables, exclusive of our Medicare receivables prior to October 1, 2000 and related reserves, were outstanding for an average of 81 days. If the average number of days our receivables are outstanding increases, our cash flows could be negatively impacted.
We may be subject to claims audits which would harm our business and financial results.
As a health care supplier, we are subject to extensive government regulation, including laws regulating reimbursement under various government programs. The billing, documentation and other practices of health care suppliers are subject to government scrutiny, including claims audits. To ensure compliance with Medicare regulations, contractors, such as the DMERCs, which serve as the government's agents for the processing of claims for products sold for home use, periodically conduct audits and request medical records and other documents to support claims submitted by us for payment of services rendered to our customers. Because we are a DME supplier, those audits involving home use involve audits of patient claims records. Such audits can result in delays in obtaining reimbursement and denials of claims for payment submitted by us. In addition, the government could demand significant refunds or recoupments of amounts paid by the government for claims whi ch are determined by the government to be inadequately supported by the required documentation. For example, after a routine review by the Region A DMERC during 2003, the DMERC identified overpayments of approximately $110,000, which have been recouped by the DMERC.
Because we depend upon a limited group of suppliers and, in some cases, sole-source suppliers, we may incur significant product development costs and experience material delivery delays if we lose any significant supplier.
We obtain some of the components included in our products from a limited group of suppliers, and, in one case, a sole-source supplier. We have entered into a sole-source agreement with Avail Medical Products, Inc. for V.A.C. disposables. This supply agreement has a three-year term, beginning in October 2002, with an automatic extension for an additional twelve months if neither party gives notice of termination. V.A.C. disposables represented 20% of our revenue for the three months ending March 31, 2004. V.A.C. therapy cannot be administered without the appropriate use of our V.A.C. rental unit in conjunction with the related V.A.C. disposables. Any shortage of V.A.C. disposables could lead to lost revenues from decreased V.A.C. rentals. We maintain an inventory of disposables sufficient to support our business for six weeks in the United States and eight weeks in Europe. If we lose any supplier (including any sole-source supplier), we would be r equired to obtain one or more replacement suppliers and may be required to conduct a significant level of product development to incorporate new parts into our products. The need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase costs.
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If we are unable to successfully implement our new management information systems or are otherwise unable to manage rapid changes, our business may be harmed.
In the last three years we have grown rapidly, and we believe we will continue to grow at a rapid pace. We are currently implementing new management information systems to assist us in managing our rapid growth. If the implementation of these new systems is significantly delayed, or if our expectations for the efficiencies to be obtained through the new systems are not met, our business could be harmed. For example, if we experience problems with our new systems for procurement and billing, we could experience product shortages or an increase in accounts receivable. Any failure by us to properly implement our new information systems, or to otherwise properly manage our growth, could impair our ability to attract and service customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan.
We are subject to numerous laws and regulations governing the healthcare industry, and non-compliance with such laws, as well as changes in such laws or future interpretations of such laws, could reduce demand for and limit our ability to distribute our products and could cause us to incur significant compliance costs.
There are widespread legislative efforts to control health care costs in the United States and abroad, which we expect will continue in the future. For example, the recent enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 eliminated annual payment increases on the V.A.C. system for the foreseeable future and initiated a competitive bidding program. At this time, we are unable to determine whether and to what extent these changes would be applied to our products and our business but this or similar legislative efforts in the future could negatively impact demand for our products.
Substantially all of our products are subject to regulation by the U.S. Food and Drug Administration, or FDA, and its foreign counterparts. Complying with FDA requirements and other applicable regulations imposes significant costs and expenses on our operations. If we fail to comply with applicable regulations, we could be subject to enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or otherwise impacted. In addition, new regulations, such as the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, that regulate the way we do business will result in increased compliance costs.
We are also subject to various federal and state laws pertaining to health care fraud and abuse, including prohibitions on the submission of false claims and the payment or acceptance of kickbacks or other remuneration in return for the purchase or lease of our products. The United States Department of Justice and the Office of the Inspector General of the United States Department of Health and Human Services have launched an enforcement initiative which specifically targets the long-term care, home health and DME industries. Sanctions for violating these laws include criminal penalties and civil sanctions, including fines and penalties, and possible exclusion from the Medicare, Medicaid and other federal health care programs. Although we believe our business arrangements comply with federal and state fraud and abuse laws, our practices may be challenged under these laws in the future.
Product liability claims could expose us to significant costs associated with adverse judgments or could reduce the demand for our V.A.C. and therapeutic surface products.
The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. If a product liability claim is successfully asserted against us and we become liable for amounts in excess of our insurance coverage, we could be responsible for potentially large litigation damage awards and costs and expenses in litigating such a claim.
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Risks Related to Our Capital Structure
Our substantial indebtedness could adversely affect our financial condition.
We have a significant amount of debt. As of March 31, 2004, we had $568.3 million of outstanding indebtedness (long-term debt, capital lease obligations and our liability associated with interest rate swaps) and a shareholders' deficit of $141.0 million. This level of indebtedness could have important consequences, including the following:
- it may be difficult for us to satisfy our obligations under our senior credit facility and the 73/8% Senior
Subordinated Notes due 2013;
- if we default on our secured debt, these lenders may foreclose on our assets and we may not be able to continue
as a going concern;
- we may have to use a significant amount of our cash flow for scheduled debt service rather than for operations;
- we may be less able to obtain other debt or equity financing in the future;
- we could be less able to take advantage of significant business opportunities, including acquisitions or
divestitures;
- our vulnerability to general adverse economic and industry conditions could be increased; and
- we could be at a competitive disadvantage compared to competitors with less debt.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Due to the large amount of principal and interest payments due under our debt, we may not generate enough cash from our operations to meet these obligations or to fund other liquidity needs. Our interest rate swap agreements effectively convert a portion of our variable-rate borrowings to a fixed rate basis through 2006, thus reducing the impact of changes on future interest expense. Approximately 81.9% of our outstanding variable-rate borrowings as of March 31, 2004 have been hedged through the designation of interest rate swap agreements classified as cash flow hedges. If market interest rates for similar borrowings had averaged 1% more than they did at March 31, 2004, our quarterly interest expense, after considering the effects of our interest rate swaps, would have increased, and earnings before taxes would have decreased by approximately $284,000. Our ability to generate cash in the future is, to some extent, subject to risks and uncertainties that are beyond our control. If we are unable to meet our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. Our ability to refinance will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Restrictive covenants in our senior credit facility and the indenture governing the 73/8% Senior Subordinated Notes due 2013 may restrict our ability to pursue our business strategies.
Our senior credit facility and the indenture governing the 73/8% Senior Subordinated Notes due 2013 limit our ability, among other things, to:
- incur additional indebtedness or contingent obligations;
- pay dividends or make distributions to our shareholders;
- repurchase or redeem our stock;
- make investments;
- grant liens;
- make capital expenditures;
- enter into transactions with our shareholders and affiliates;
- sell assets; and
- acquire the assets of, or merge or consolidate with, other companies.
Our senior credit facility contains financial covenants requiring us to meet certain leverage and interest coverage ratios. Specifically, we are obligated not to permit ratios to fall outside certain specified ranges and maintain minimum levels of EBITDA (as defined in our senior credit facility). Under our senior credit facility, EBITDA excludes charges associated with the recapitalization and the IPO. With regard to these financial covenants, it will be an event of default if we permit any of the following:
- for any period of four consecutive quarters ending at the end of any fiscal quarter beginning with the fiscal
quarter ending December 31, 2003, the ratio of EBITDA, as defined, to consolidated cash interest expense to be
less than certain specified ratios ranging from 4.30 to 1.00 for the fiscal quarter ending December 31, 2003 to 5.50
to 1.00 for the fiscal quarter ending December 31, 2006 and each fiscal quarter following that quarter;
- as of the last day of any fiscal quarter beginning with the fiscal quarter ending December 31, 2003, the leverage
ratio of debt to EBITDA, as defined, to be greater than certain specified leverage ratios ranging from 4.30 to 1.00
for the fiscal quarter ending December 31, 2003 to 2.50 to 1.00 for the fiscal quarter ending December 31, 2006
and each fiscal quarter following that quarter, or
- for any period of four consecutive fiscal quarters ending at the end of any fiscal quarter beginning with the fiscal
quarter ending December 31, 2003, EBITDA, as defined, to be less than certain amounts ranging from $156.4
million for the fiscal quarter ending December 31, 2003 to $240.0 million for the fiscal quarter ending December
31, 2006 and each fiscal quarter following that quarter.
We may not be able to maintain these ratios. Covenants in our senior credit facility may also impair our ability to finance future operations or capital needs, or to enter into acquisitions or joint ventures or engage in other favorable business activities.
If we default under our senior credit facility, we could be prohibited from making any payments on the 73/8% Senior Subordinated Notes due 2013. In addition, the lenders under our senior credit facility could require immediate repayment of the entire principal then outstanding. If those lenders require immediate repayment, we may not be able to repay them and also repay the 73/8% Senior Subordinated Notes due 2013 in full. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments under our senior credit facility, or if we are unable to maintain the financial ratios under our senior credit facility, we will be in default under our senior credit facility, which could, in turn, cause a default under the 73/8% Senior Subordinated Notes due 2013, the related indenture and any other debt obligations that we may incur from time to time.
Our obligations under our senior credit facility are secured by substantially all of our assets.
Our obligations under our senior credit facility are secured by liens on substantially all of our assets, and the guarantees of certain of our subsidiaries under our senior credit facility are secured by liens on substantially all of such subsidiaries' assets. If we become insolvent or are liquidated, or if payment under our senior credit facility or of other secured obligations are accelerated, the lenders under our senior credit facility or the obligees with respect to the other secured obligations will be entitled to exercise the remedies available to a secured lender under applicable law and the applicable agreements and instruments, including the right to foreclose on all of our assets. Accordingly, you could lose all or a part of your investment in our common stock.
Our articles of incorporation, our by-laws and Texas law contain provisions that could discourage, delay or prevent a change in control or management of KCI.
Our articles of incorporation and by-laws and Texas law contain provisions which could discourage, delay or prevent a third party from acquiring shares of our common stock or replacing members of our board of directors.
Table of ContentsThese provisions include:
- authorization of the issuance of preferred stock, the terms of which may be determined at the sole discretion of
the board of directors;
- establishment of a classified board of directors with staggered, three-year terms;
- provisions giving the board of directors sole power to set the number of directors;
- limitations on the ability of shareholders to remove directors;
- requirements for the approval of at least two thirds of our outstanding common and preferred share (on an as-
converted basis) to amend our articles of incorporation;
- authorization for our board of directors to adopt, amend or repeal our by-laws (subject to the right of our
shareholders to adopt, amend or repeal the amended and restated by-laws with the approval of at least
two thirds of our outstanding common and preferred shares (on an as-converted basis));
- limitations on the ability of shareholders to call special meetings of shareholders; and
- establishment of advance notice requirements for presentation of new business and nominations for election to
the board of directors at shareholder meetings.
In addition, under Texas law and our articles of incorporation and our by-laws, action may not be taken by less than unanimous written consent of our shareholders unless the board of directors has recommended that the shareholders approve such action.
The limitation on the ability of shareholders to call a special meeting, to act by written consent and to remove directors may make it difficult for shareholders to remove or replace the board of directors should they desire to do so. Since management is appointed by the board of directors, any inability to effect a change in the board may result in the entrenchment of management.
These provisions delay or prevent a third party from acquiring us. Any such delay or prevention could cause the market price of our common stock to decline.
Our voting stock is controlled by three principal shareholders whose interests may conflict with those of our other shareholders.
As of March 31, 2004, Fremont Partners, L.P., Dr. James R. Leininger and Blum Capital Partners, L.P., and their respective affiliates collectively own 57.6% of our outstanding shares of voting stock. As a result of this ownership, Fremont Partners, Dr. Leininger and Blum Capital Partners are able to direct our affairs and to approve any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our articles of incorporation and by-laws and approval of mergers or sales of substantially all our assets. The interests of our principal shareholders may conflict with the interests of our other shareholders.
Our stock price may be volatile and your investment in our common stock could suffer a decline in value.
The market price of our common stock may be highly volatile and may fluctuate substantially due to many factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in health care, pricing or reimbursement policies;
- our competitors' announcements of new products, significant contracts, acquisitions or strategic investments;
- changes in our growth rates or our competitors' growth rates;
- the timing or results of regulatory submissions or actions with respect to our products;
- public concern as to the safety of our products;
- our inability to raise additional capital;
- conditions of the healthcare industry or in the financial markets or economic conditions in general; and
- changes in stock market analyst recommendations regarding our common stock, other comparable companies
or the healthcare industry generally.
We are exposed to various market risks, including fluctuations in interest rates and variability in currency exchange rates. We have established policies, procedures and internal processes governing our management of market risk and the use of financial instruments to manage our exposure to such risk.
Interest Rate Risk
We have variable interest rate debt and other financial instruments, which are subject to interest rate risk and could have a negative impact on our business if not managed properly. We have a risk management policy, which is designed to reduce the potential negative earnings effect arising from the impact of fluctuating interest rates. We manage our interest rate risk on our borrowings through interest rate swap agreements which effectively convert a portion of our variable-rate borrowings to a fixed rate basis through August 21, 2006, thus reducing the impact of changes in interest rates on future interest expenses. These contracts are initiated within the guidance of corporate risk management policies and are reviewed and approved by our senior financial management. We do not use financial instruments for speculative or trading purposes.
Our senior credit facility requires that we fix the base-borrowing rate applicable to at least 50% of the outstanding amount of our term loan under our senior credit facility for a period of two years from the date of issuance. As of March 31, 2004, we have seven interest rate swap agreements pursuant to which we have fixed the rates on $350.0 million, or 81.9%, of our variable rate debt as follows:
- 2.375% per annum on $100.0 million of our variable rate debt through December 31, 2004;
- 2.150% per annum on $60.0 million of our variable rate debt through August 22, 2005;
- 2.130% per annum on $20.0 million of our variable rate debt through August 22, 2005;
- 2.135% per annum on $20.0 million of our variable rate debt through August 21, 2005;
- 2.755% per annum on $50.0 million of our variable rate debt through August 21, 2006;
- 2.778% per annum on $50.0 million of our variable rate debt through August 21, 2006; and
- 2.788% per annum on $50.0 million of our variable rate debt through August 21, 2006.
The tables below provide information about our long-term debt and interest rate swaps, both of which are sensitive to changes in interest rates as of March 31, 2004. For long-term debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date (dollars in thousands):
Expected Maturity Date as of March 31, 2004 |
||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
Fair Value |
|
Long-term debt |
||||||||
Fixed rate |
$ - |
$ 150 |
$ 150 |
$ - |
$ - |
$ 133,250 |
$ 133,550 |
$ 144,210 |
Average interest rate |
- |
7.000% |
7.000% |
- |
- |
7.375% |
7.374% |
|
Variable rate |
$ 3,231 |
$ 4,308 |
$ 4,308 |
$ 4,308 |
$ 4,308 |
$ 407,137 |
$ 427,600 |
$ 427,600 |
Average interest rate |
3.36% |
3.36% |
3.36% |
3.36% |
3.36% |
3.36% |
3.36% |
|
Interest rate swaps (1) |
||||||||
Variable to fixed |
$ 100,000 |
$ 100,000 |
$150,000 |
$ - |
$ - |
$ - |
$ 350,000 |
$ (4,293) |
Average pay rate |
2.375% |
2.143% |
2.774% |
- |
- |
- |
2.480% |
|
Average receive rate |
1.11 % |
1.11 % |
1.11 % |
- |
- |
- |
1.11 % |
|
(1) Interest rate swaps are included in the variable rate debt under long-term debt.
Foreign Currency and Market Risk
We have direct operations in Western Europe, Canada, Australia and South Africa and distributor relationships in many other parts of the world. Our foreign operations are measured in their applicable local currencies. As a result, our 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 we have operations. Exposure to these fluctuations is managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the applicable local currency.
We maintain no other derivative instruments to mitigate our exposure to translation and/or transaction risk. International operations reported operating profit of $6.7 million for the three months ended March 31, 2004. We estimate that a 10% fluctuation in the value of the dollar relative to these foreign currencies at March 31, 2004 would change our net income for the three months ended March 31, 2004 by approximately $400,000. Our 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2004, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date. During the period covered by this report, there have been no material changes in our disclosure controls and procedures or in other factors, which could significantly affect such controls and procedures.
Changes in Internal Control
During the fiscal quarter covered by this report, there were no significant changes in our internal controls or other factors that could significantly affect those controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Set forth below is a description of recent developments in our legal proceedings. For a more detailed description of ongoing legal proceedings, please see our Annual Report on Form 10-K under the caption "Part I. Item 3. Legal Proceedings."
On April 4, 2004, a federal Magistrate completed a review of our motion for summary judgment in the lawsuit filed by Novamedix Limited. In his Memorandum and Recommendation on the summary judgment motions in the case, the Magistrate recommended to the Federal District Court Judge that one of Novamedix's cause of action for false advertising be significantly limited and that one of Novamedix's patent infringement damage theories be denied for
Table of Contentssummary judgment purposes. The Magistrate recommended that (a) the remainder of KCI's motions for summary judgment be denied and (b) KCI's interpretation of an important phrase in certain of the Novamedix claims be rejected. We believe both KCI and Novamedix will appeal the Magistrate's recommendation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Sales of Registered Securities
On February 27, 2004, we closed an initial public offering of our common stock, consisting of 20,700,000 shares of common stock. Of these shares, 3,500,000 were newly issued shares sold by us and 17,200,000 were existing shares sold by the selling shareholders, including 2,700,000 sold pursuant to the exercise by the underwriters of their over-allotment option. The offering was effected pursuant to a Registration Statement on Form S-1 (File No. 333-111677), which the SEC declared effective on February 23, 2004. Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. acted as joint book-running managers, Credit Suisse First Boston LLC and Goldman, Sachs & Co. acted as joint lead managers and Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Piper Jaffray & Co. and SG Cowen Securities Corporation acted as co-managers.
The public offering price was $30.00 per share and $621.0 million in the aggregate. Underwriting discounts and commissions were $1.80 per share and $37.3 million in the aggregate. Proceeds before expenses to us were $28.20 per share and $98.7 million in the aggregate. Proceeds to the selling shareholders were $28.20 per share and $485.0 million in the aggregate.
Of the $94.4 million in net proceeds raised by us in the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, together with cash on hand, we:
- have paid approximately $19.3 million for bonuses and related employer payroll taxes to our named executive
officers and other members of our management triggered by the initial public offering, and
- have redeemed $71.75 million principal amount of our 73/8% Senior Subordinated Notes due 2013 on March 29,
2004.
Recent Sales of Unregistered Securities
None.
Table of Contents
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
For |
Against |
Abstain |
||||
Class A Directors : |
||||||
Robert Jaunich II |
52,458,703 |
0 |
4,691,513 |
|||
James R. Leininger, M.D. |
52,458,703 |
0 |
4,691,513 |
|||
Dennert O. Ware |
52,458,703 |
0 |
4,691,513 |
|||
Class B Directors |
||||||
N. Colin Lind |
52,458,703 |
0 |
4,691,513 |
|||
James T. Farrell |
52,458,703 |
0 |
4,691,513 |
|||
C. Thomas Smith |
52,458,703 |
0 |
4,691,513 |
|||
Donald E. Steen |
52,458,703 |
0 |
4,691,513 |
|||
Class C Director s: |
||||||
Harry R. Jacobson, M.D. |
52458,703 |
0 |
4,691,513 |
|||
John P. Byrnes |
52,458,703 |
0 |
4,691,513 |
|||
Ronald W. Dollens |
52,458,703 |
0 |
4,691,513 |
|||
David J. Simpson |
52,458,703 |
0 |
4,691,513 |
Our shareholders further approved and authorized each of the following matters:
1. To adopt our Amended and Restated Articles of Incorporation in the form presented;
2. To increase the authorized number of shares of our capital stock from 150,000,000 shares to 275,000,000
shares;
3. To adopt our Third Amended and Restated Bylaws in the form presented;
4. To authorize us to enter into an indemnification agreement in the form presented with each of our directors
and executive officers;
5. To adopt our 2004 Equity Plan, and to reserve 7,000,000 shares of our common stock for issuance
thereunder;
6. To adopt our 2004 Employee Stock Purchase Plan, and to reserve 2,500,000 shares of our common stock for
issuance thereunder;
7. To ratify our 1997 Management Equity Plan, and options previously granted under such plan as presented;
8. To ratify Directors Equity Agreements for Donald E. Steen and Ronald W. Dollens, and reserve a sufficient
number of shares of our common stock for issuance thereunder; and
9. To ratify the appointment of Ernst & Young LLP as our independent accountants for the fiscal year ended
December 31, 2004.
With respect to each of the above matters, 52,458,703 shares were voted in favor, no shares were voted against, and 4,691,513 shares abstained, with shares of our Series A Convertible Participating Preferred Stock voting together with shares of our common stock on an as-converted basis, in accordance with our charter.
Table of Contents
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:
Exhibits |
Description |
3.1 |
Restated Articles of Incorporation (filed as Exhibit 3.4 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
3.2 |
Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI (filed as Exhibit 3.5 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
3.3 |
Amended and Restated By-Laws of KCI (filed as Exhibit 3.6 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
4.1 |
Indenture, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.1 to our Registration Statement of Form S-4 filed on September 29, 2003, as thereafter amended). |
4.2 |
Form of Series B 73/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1) (filed as Exhibit 4.2 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.1 |
Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents (filed as Exhibit 10.1 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.2 |
Credit Agreement, dated as of August 11, 2003 (filed as Exhibit 10.2 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.3 |
Guarantee and Collateral Agreement, dated as of August 11, 2003 (filed as Exhibit 10.3 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.4 |
Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary (filed as Exhibit 10.4 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.5 |
Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors, and the Director Investors (filed as Exhibit 10.5 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.6 |
Investors' Rights Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors (filed as Exhibit 10.6 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.7 |
Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc. (filed as Exhibit 10.7 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.8 |
Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.8 to our Registration Statement on Form S-4 filed on December 19, 1997). |
10.9 |
Joinder and Amendment Agreement, dated as of June 25, 2003 (filed as Exhibit 10.9 to Amendment No. 1 to our Registration Statement on Form S-4 filed on October 24, 2004, as thereafter amended). |
10.10 |
Waiver and Consent, effective as of September 27, 2002 (filed as Exhibit 10.10 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.11 |
Amendment and Waiver, dated as of August 11, 2003 (filed as Exhibit 10.11 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.12 |
KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996). |
10.13 |
Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). |
10.14 |
Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996). |
10.15 |
Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.16 |
Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997). |
10.17 |
Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.18 |
Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.19 |
Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.20 |
Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994). |
10.21 |
Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). |
10.22 |
Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994). |
10.23 |
Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002). |
**10.24 |
Exhibits to Supplier Agreement, dated September 1, 2001, between Novation, LLC and KCI USA, Inc. (Supplier Agreement filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) (filed as Exhibit 10.24 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.25 |
Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). |
10.26 |
Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 to our Registration Statement on Form S-4, as filed on September 29, 2003). |
**10.27 |
Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002 (filed as Exhibit 10.27 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.28 |
First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C. (filed as Exhibit 10.29 to our Registration Statement on Form S-4, filed on September 29, 2003). |
**10.29 |
License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.29 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.30 |
Amendment No. 1 to Credit Agreement, dated December 5, 2003 (filed as Exhibit 10.30 to Amendment No. 3 to our Registration Statement on Form S-4, filed on December 31, 2003). |
10.31 |
Form of Indemnity Agreement (filed as Exhibit 10.31 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.32 |
2004 Equity Plan (filed as Exhibit 10.32 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.33 |
2004 Employee Stock Purchase Plan (filed as Exhibit 10.33 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.34 |
Form of Amendment No. 2 to Credit Agreement (filed as Exhibit 10.34 to Amendment No. 3 to our Registration Statement on Form S-1 filed on February 20, 2004). |
10.35 |
Amendment, Acknowledgement and Waiver (Agreement Among Shareholders) (filed as Exhibit 10.35 to Amendment No. 3 to our Registration Statement on Form S-1 filed on February 20, 2004). |
*31.1 |
Certification of Chief Executive Officer |
*31.2 |
Certification of Chief Financial Officer |
*32.1 |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 14, 2004. |
*Exhibit filed herewith. |
|
**Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been |
Table of Contents
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated February 2, 2004. Regulation FD disclosure furnishing a press
release detailing financial results for the three months and twelve months ended December 31, 2003
and certain other information.
2. Current Report on Form 8-K dated February 23, 2004. Other Events disclosure announcing that the
Company had priced its initial public offering of its common stock.
3. Current Report on Form 8-K dated February 25, 2004. Other Events disclosure announcing that
underwriters had exercised in full their over-allotment option in connection with the company's initial
public offering of its common stock.
4. Current Report on form 8-K dated February 27, 2004. Other Events disclosure announcing the
completion of the Company's initial public offering of its common stock.
5. Current Report on Form 8-K dated March 10, 2004. Other Events disclosure announcing the Company's
exchange offer to all holders of its 73/8% Senior Subordinated Notes due 2013.
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)
Date: May 14, 2004 By: /s/ DENNERT O. WARE
Dennert O. Ware
President and Chief Executive Officer
Date: May 14, 2004 By: /s/ MARTIN J. LANDON
Martin J. Landon
Vice President and Chief Financial Officer
Table of Contents
EXHIBIT INDEX
Exhibit No. |
Exhibit |
3.1 |
Restated Articles of Incorporation (filed as Exhibit 3.4 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
3.2 |
Articles of Amendment to the Amended and Restated Articles of Incorporation of KCI (filed as Exhibit 3.5 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
3.3 |
Amended and Restated By-Laws of KCI (filed as Exhibit 3.6 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 2, 2004, as thereafter amended). |
4.1 |
Indenture, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee (filed as Exhibit 4.1 to our Registration Statement of Form S-4 filed on September 29, 2003, as thereafter amended). |
4.2 |
Form of Series B 73/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1) (filed as Exhibit 4.2 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.1 |
Registration Rights Agreement, dated as of August 11, 2003, among KCI, as Issuer, the Guarantors, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., and Wells Fargo Securities, LLC, as Placement Agents (filed as Exhibit 10.1 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.2 |
Credit Agreement, dated as of August 11, 2003 (filed as Exhibit 10.2 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.3 |
Guarantee and Collateral Agreement, dated as of August 11, 2003 (filed as Exhibit 10.3 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.4 |
Security and Control Agreement, dated as of August 11, 2003, among KCI, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Securities Intermediary (filed as Exhibit 10.4 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.5 |
Series A Preferred Stock Purchase Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors, and the Director Investors (filed as Exhibit 10.5 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.6 |
Investors' Rights Agreement, dated as of August 11, 2003, among KCI, the Non-Sponsor Investors, the Sponsor Investors and the Director Investors (filed as Exhibit 10.6 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.7 |
Statement of Designations, Preferences and Rights of the Series A Convertible Participating Preferred Stock of Kinetic Concepts, Inc. (filed as Exhibit 10.7 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.8 |
Agreement Among Shareholders, dated as of November 5, 1997 (filed as Exhibit 10.8 to our Registration Statement on Form S-4 filed on December 19, 1997). |
10.9 |
Joinder and Amendment Agreement, dated as of June 25, 2003 (filed as Exhibit 10.9 to Amendment No. 1 to our Registration Statement on Form S-4 filed on October 24, 2004, as thereafter amended). |
10.10 |
Waiver and Consent, effective as of September 27, 2002 (filed as Exhibit 10.10 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.11 |
Amendment and Waiver, dated as of August 11, 2003 (filed as Exhibit 10.11 to our Registration Statement on Form S-4 filed on September 29, 2003, as thereafter amended). |
10.12 |
KCI Employee Benefits Trust Agreement (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1996). |
10.13 |
Deferred Compensation Plan (filed as Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). |
10.14 |
Kinetic Concepts, Inc. Senior Executive Stock Option Plan (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31, 1996). |
10.15 |
Form of Option Instrument with respect to Senior Executive Stock Option Plan (filed as Exhibit 10.32 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.16 |
Kinetic Concepts Management Equity Plan effective October 2, 1997 (filed as Exhibit 10.33 to our Annual Report on Form 10-K for the year ended December 31, 1997). |
10.17 |
Form of Option Instrument with Respect to the Kinetic Concepts, Inc. Management Equity Plan (filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.18 |
Kinetic Concepts, Inc. CEO Special Bonus Plan (filed as Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.19 |
Kinetic Concepts, Inc. 2000 Special Bonus Plan (filed as Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 31, 2000). |
10.20 |
Employee Benefits Trust Agreement, by and between the Company and Keith D. Thatcher, dated September 1, 1992 (filed as Exhibit 10.21 to our Annual Report on Form 10-K/A, dated December 31, 1994). |
10.21 |
Letter, dated March 28, 2000, from KCI to Dennert O. Ware outlining the terms of his employment (filed as Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). |
10.22 |
Letter, dated November 22, 1994, from KCI to Christopher M. Fashek outlining the terms of his employment (filed as Exhibit 10.23 to our Annual Report on Form 10-K/A, dated December 31, 1994). |
10.23 |
Settlement Agreement, by and among the Company and certain of its subsidiaries and shareholders and Hillenbrand Industries, Inc. and certain of its subsidiaries and shareholders, dated December 31, 2002 (filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2002). |
**10.24 |
Exhibits to Supplier Agreement, dated September 1, 2001, between Novation, LLC and KCI USA, Inc. (Supplier Agreement filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) (filed as Exhibit 10.24 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.25 |
Therapeutic Specialty Beds, Therapeutic Surfaces & Related Products Supplier Agreement, dated effective September 1, 2001 between Novation, LLC and KCI USA, Inc., as amended by that certain Amendment of Agreement (MS 10730), dated effective May 13, 2002 (filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). |
10.26 |
Standard Office Building Lease Agreement, dated July 31, 2002 between CKW San Antonio, L.P. d/b/a San Antonio CKW, L.P. and Kinetic Concepts, Inc. for the lease of approximately 138,231 square feet of space in the building located at 8023 Vantage Drive, San Antonio, Bexar County, Texas 78230 (filed as Exhibit 10.27 to our Registration Statement on Form S-4, as filed on September 29, 2003). |
**10.27 |
Amended and Restated Manufacturing Agreement, by and between the Company and Avail Medical Products, Inc., dated December 18, 2002 (filed as Exhibit 10.27 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.28 |
First Amended and Restated Management Services Agreement, dated as of August 11, 2003, among KCI, Dr. James Leininger, Blum Capital Partners, L.P., Blum Strategic GP II, L.L.C., Fremont Partners, L.L.C. and Fremont Partners III, L.L.C. (filed as Exhibit 10.29 to our Registration Statement on Form S-4, filed on September 29, 2003). |
**10.29 |
License Agreement, dated as of October 6, 1993, between Wake Forest University and Kinetic Concepts, Inc., as amended by that certain Amendment to License Agreement, dated as of July 1, 2000 (filed as Exhibit 10.29 to Amendment No. 4 to our Registration Statement on Form S-1 filed on February 23, 2004). |
10.30 |
Amendment No. 1 to Credit Agreement, dated December 5, 2003 (filed as Exhibit 10.30 to Amendment No. 3 to our Registration Statement on Form S-4, filed on December 31, 2003). |
10.31 |
Form of Indemnity Agreement (filed as Exhibit 10.31 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.32 |
2004 Equity Plan (filed as Exhibit 10.32 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.33 |
2004 Employee Stock Purchase Plan (filed as Exhibit 10.33 to Amendment No. 1 to our Registration Statement on Form S-1 filed on February 2, 2004). |
10.34 |
Form of Amendment No. 2 to Credit Agreement (filed as Exhibit 10.34 to Amendment No. 3 to our Registration Statement on Form S-1 filed on February 20, 2004). |
10.35 |
Amendment, Acknowledgement and Waiver (Agreement Among Shareholders) (filed as Exhibit 10.35 to Amendment No. 3 to our Registration Statement on Form S-1 filed on February 20, 2004). |
*31.1 |
Certification of Chief Executive Officer |
*31.2 |
Certification of Chief Financial Officer |
*32.1 |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 14, 2004. |
*Exhibit filed herewith. |
|
**Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been |
CERTIFICATION
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
I, Dennert O. Ware, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kinetic Concepts, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: May 14, 2004
/s/ Dennert O. Ware
Dennert O. Ware
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, Martin J. Landon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kinetic Concepts, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: May 14, 2004
/s/ Martin J. Landon
Martin J. Landon
Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kinetic Concepts, Inc. (the "Company") on Form 10-Q for the quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Dennert O. Ware, as Chief Executive Officer of the Company and Martin J. Landon, as Chief Financial Officer of the Company, each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, respectively, that (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company.
Date: May 14, 2004
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/s/ MARTIN J. LANDON |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Kinetic Concepts, Inc. and will be retained by Kinetic Concepts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.