SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
- --------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
-------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
--------------------------- ------------------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 17,713,152 shares as of April 30, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
Assets:
Current assets:
Cash and cash equivalents........... $ 20,279 $ 61,754
Accounts receivable, net............ 78,772 81,238
Inventories......................... 21,760 21,553
Prepaid expenses and other.......... 15,584 18,446
------- -------
Total current assets............. 136,395 182,991
------- -------
Net property, plant and equipment..... 79,264 75,434
Goodwill, less accumulated amorti-
zation of $14,772 in 1998 and
$13,989 in 1997..................... 46,231 45,899
Loan issuance costs, less accumulated
amortization of $957 in 1998 and
$382 in 1997........................ 16,777 17,346
Other assets, less accumulated
amortization of $3,172 in 1998 and
$3,100 in 1997...................... 31,282 29,481
------- -------
$309,949 $351,151
======= =======
Liabilities and Capital Accounts:
Current liabilities:
Accounts payable.................... $ 7,129 $ 40,353
Accrued expenses.................... 46,895 41,334
Current installments of long-term
obligations....................... 5,800 4,800
Current installments of capital
lease obligations................. 142 139
------- -------
Total current liabilities........ 59,966 86,626
------- -------
Long-term obligations, excluding
current installments................ 511,684 529,901
Capital lease obligations, excluding
current installments................ 259 312
Deferred income taxes, net............ 10,207 10,010
------- -------
582,116 626,849
------- -------
Commitments and contingencies (Note 6)
Shareholders' deficit:
Common stock; issued and outstanding
17,713 in 1998 and in 1997........ 17 17
Accumulated deficit................. (268,704) (273,231)
Cumulative foreign currency
translation adjustment............ (3,480) (2,484)
------- -------
(272,167) (275,698)
------- -------
$309,949 $351,151
======= =======
See accompanying notes to condensed consolidated financial
statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
--------------------
1998 1997
--------- --------
Revenue:
Rental and service.................. $65,245 $61,825
Sales and other..................... 16,652 11,356
------ ------
Total revenue..................... 81,897 73,181
------ ------
Rental expenses....................... 42,143 37,712
Cost of goods sold.................... 6,359 4,242
------ ------
48,502 41,954
------ ------
Gross profit...................... 33,395 31,227
Selling, general and administrative
expenses............................ 16,205 15,010
------ ------
Operating earnings................ 17,190 16,217
Interest income....................... 249 515
Interest expense...................... (12,303) (61)
Foreign currency loss................. (162) --
------ ------
Earnings before income taxes and
minority interest............... 4,974 16,671
Income taxes.......................... 1,990 6,668
Minority interest in subsidiary loss.. 2 --
------ ------
Net earnings...................... $ 2,986 $10,003
====== ======
Earnings per share................ $ 0.17 $ 0.24
====== ======
Earnings per share - assuming
dilution........................ $ 0.16 $ 0.23
====== ======
Average common shares:
Basic (weighted average
outstanding shares)......... 17,713 42,401
====== ======
Diluted (weighted average
outstanding shares)......... 18,326 43,763
====== ======
See accompanying notes to consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
March 31,
---------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net earnings................................ $ 2,986 $ 10,003
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation............................ 6,189 4,693
Amortization............................ 1,430 587
Provision for uncollectible accounts
receivable............................ 811 969
Change in assets and liabilities:
Decrease (increase) in accounts
receivable, net..................... 1,458 (13,488)
Increase in inventories............... (343) (1,823)
Decrease (increase) in prepaid
expenses and other.................. 2,861 (2,133)
Increase (decrease) in accounts
payable............................. (33,259) 1,356
Increase in accrued expenses.......... 5,474 2,227
Increase in income taxes payable...... -- 4,842
Increase in deferred income taxes, net 197 942
------ ------
Net cash provided (used) by
operating activities.............. (12,196) 8,175
------ ------
Cash flows from investing activities:
Additions to property, plant, and
equipment................................. (6,004) (3,615)
Increase in inventory to be converted into
equipment for short-term rental........... (4,548) (2,820)
Dispositions of property, plant, and
equipment................................. 404 42
Businesses acquired in purchase
transactions, net of cash acquired........ -- (10,099)
Increase in other assets.................... (2,995) (5,484)
------ ------
Net cash used by investing
activities........................ (13,143) (21,976)
------ ------
Cash flows from financing activities:
Repayments of long-term obligations......... (17,217) --
Repayments of capital lease obligations..... (51) (33)
Proceeds from the exercise of stock options. -- 392
Purchase and retirement of treasury stock... -- (1,309)
Cash dividends paid to shareholders......... -- (1,608)
Recapitalization costs and other............ 1,543 8
------ ------
Net cash used by financing activites (15,725) (2,550)
------ ------
Effect of exchange rate changes on cash and
cash equivalents............................ (411) (1,300)
------ ------
Net decrease in cash and cash equivalents..... (41,475) (17,651)
Cash and cash equivalents, beginning of period 61,754 59,045
------ ------
Cash and cash equivalents, end of period...... $ 20,279 $ 41,394
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first three months for:
Interest.................................. $ 2,631 $ 59
Income taxes.............................. $ 473 $ 676
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the
accounts of Kinetic Concepts, Inc. and all subsidiaries (the
"Company"). The condensed consolidated financial statements
appearing in this quarterly report on Form 10-Q should be read
in conjunction with the financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The foregoing financial information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of
the financial position and results of operations for the interim
periods presented. Interim period operating results are not
necessarily indicative of the results to be expected for the
full fiscal year.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value). Inventories are
comprised of the following (in thousands):
March 31, December 31,
1998 1997
----------- ------------
Finished goods............... $ 8,081 $ 7,162
Work in progress............. 4,597 2,743
Raw materials, supplies and
parts...................... 21,030 19,048
------ ------
33,708 28,953
Less amounts expected to be
converted into equipment for
short-term rental............ 11,948 7,400
------ ------
Total inventories..... $21,760 $21,553
====== ======
(3) RECAPITALIZATION
----------------
On November 5, 1997, a substantial interest in the Company
was acquired by Fremont Partners L.P. ("Fremont") and Richard C.
Blum & Associates, L.P. ("RCBA") (collectively, the
"Investors"). The Company and the Investors entered into a
Transaction Agreement dated as of October 2, 1997, as amended by
a letter agreement dated November 5, 1997 (as so amended, the
"Transaction Agreement") pursuant to which the Investors
purchased 7.8 million shares of newly-issued shares of the
Company's common
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) RECAPITALIZATION (continued)
----------------------------
stock, $0.001 par value per share, at a price equal to $19.25
per share. The proceeds of the stock purchase, together with
approximately $534.0 million of aggregate proceeds from certain
financings, were used to purchase approximately 31.0 million
shares of the Company's common stock from the selling
shareholders at a price of $19.25 per share, net to seller and
pay all related fees and expenses.
Also pursuant to the Transaction Agreement, the Investors
were merged with and into the Company on January 5, 1998 with
the Company as the surviving corporation of the Merger.
Following the Merger, Fremont, RCBA, Dr. James Leininger and Dr.
Peter Leininger own 7,029,922, 4,644,010, 5,939,220 and 100,000
shares, respectively, representing 39.7%, 26.2%, 33.5% and 0.6%
of the total shares outstanding. There are currently no other
shareholders but certain members of management have retained,
and/or have been granted, additional options to purchase shares.
The transactions have been accounted for as a recapitalization
and as a result, a step-up of assets to fair market value was
not required. The difference between the payment amount and the
net book value of assets acquired and liabilities assumed was
recorded in retained earnings as a cash distribution to the
selling shareholders.
(4) LONG TERM OBLIGATIONS
---------------------
Long-term obligations at consist of the following (in
thousands):
March 31, December 31,
1998 1997
---------- -------------
Senior Credit Facilities:
Revolving bank credit facility.. $ 8,500 $ 24,500
Acquisition credit facility..... 10,000 10,000
Term loans:
Tranche A due 2003........... 119,250 120,000
Tranche B due 2004........... 89,775 90,000
Tranche C due 2005........... 89,775 90,000
------- -------
317,300 334,500
9 5/8% Senior Subordinated Notes
Due 2007......................... 200,000 200,000
------- -------
517,300 534,500
Less: Current installments......... 5,800 4,800
------- -------
511,500 529,700
Other.............................. 184 201
------- -------
$511,684 $529,901
======= =======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
---------------------------------
Senior Credit Facilities
Indebtedness under the Senior Credit Facilities, including
the Revolving Credit Facility (other than certain loans under
the Revolving Credit Facility designated in foreign currency),
the Term Loans and the Acquisition Facility initially bear
interest at a rate based upon (i) the Base Rate (defined as the
higher of (x) the rate of interest publicly announced by Bank of
America as its "reference rate" and (y) the federal funds
effective rate from time to time plus 0.50%), plus 1.25% in
respect of the Tranche A Term Loans, the loans under the
Revolving Credit Facility (the "Revolving Loans") and the loans
under the Acquisition Facility (the "Acquisition Loans"), 1.50%
in respect of the Tranche B Term Loans and 1.75% in respect of
the Tranche C Term Loans, or at the Company's option, (ii) the
Eurodollar Rate (as defined in the Sr. Credit Facility
Agreement) for one, two, three or six months, in each case plus
2.25% in respect of Tranche A Term Loans, Revolving Loans and
Acquisition Loans, 2.50% in respect of Tranche B Term Loans and
2.75% in respect of the Tranche C Term Loans. Certain Revolving
Loans designated in foreign currency will initially bear
interest at a rate based upon the cost of funds for such loans,
plus 2.25% or 2.50%, depending on the type of foreign currency.
Performance-based reductions of the interest rates under the
Term Loans, the Revolving Loans and the Acquisition Loans are
available. During the first three months of 1998, the Company
entered into a swap transaction whereby the interest rate on
$150,000,000 of the term loans is fixed at 5.7575% through
January 8, 2001.
The Revolving Loans may be repaid and reborrowed. At March
31, 1998, the aggregate availability under the Revolving Credit
and Acquisition Facilities was $81.5 million.
The Term Loans are subject to quarterly amortization
payments commencing on March 31, 1998. Commitments under the
Acquisition Facility will expire three years from the closing of
the Bank Credit Agreement and the Acquisition Facility loans
outstanding shall be repayable in equal quarterly amortization
payments commencing March 31, 2001. In addition, the Bank
Credit Agreement provides for mandatory repayments, subject to
certain exceptions, of the Term Loans, the Acquisition Facility
and/or the Revolving Credit Facility based on certain net asset
sales outside the ordinary course of business of the Company and
its subsidiaries, the net proceeds of certain debt and equity
issuances and excess cash flows.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage
ratio and capital expenditures. The Bank Credit Agreement also
contains covenants which, among other things, limit the
incurrence of additional indebtedness, investments, dividends,
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) LONG TERM OBLIGATIONS (continued)
---------------------------------
loans and advances, capital expenditures, transactions with
affiliates, asset sales, acquisitions, mergers and
consolidations, prepayments of other indebtedness, liens and
encumbrances and other matters customarily restricted in such
agreements. The Company is in compliance with the applicable
covenants at March 31, 1998.
9 5/8% Senior Subordinated Notes Due 2007
The 9 5/8% Senior Subordinated Notes Due 2007 (the "Notes")
are unsecured obligations of the Company, ranking subordinate in
right of payment to all senior debt of the Company and will
mature on November 1, 2007. Interest on the Notes accrues at
the rate of 9 5/8% per annum and is payable semiannually in
cash on each May 1 and November 1, commencing on May 1, 1998, to
the persons who are registered Holders at the close of business
on April 15 and October 15, respectively, immediately preceding
the applicable interest payment date. Interest on the Notes
accrues from and including the most recent date to which
interest has been paid or, if no interest has been paid, from
and including the date of issuance.
The Notes are not entitled to the benefit of any mandatory
sinking fund. In addition, at any time, or from time to time,
the Company may acquire a portion of the Notes through open-
market purchases.
(5) EARNINGS PER SHARE
------------------
The following table sets forth the reconciliation from basic
to diluted average common shares and the calculations of net
earnings per common share. Net earnings for basic and diluted
calculations do not differ (in thousands, except per share).
Three months ended
March 31,
-----------------------
1998 1997
----------- ----------
Net earnings........................... $ 2,986 $10,003
====== ======
Average common shares:
Basic (weighted-average outstanding
shares............................. 17,713 42,401
Dilutive potential common shares
from stock options................. 613 1,362
------ ------
Diluted (weighted-average outstanding
shares............................. 18,326 43,763
====== ======
Earnings per share..................... $ 0.17 $ 0.24
====== ======
Earning per share - assuming dilution.. $ 0.16 $ 0.23
====== ======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is party to several lawsuits generally
incidental to its business and is contesting certain adjustments
proposed by the Internal Revenue Service to prior years' tax
returns. Certain provisions have been made in the accompanying
financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the
disposition of these items will not have a material effect on
the Company's financial statements.
Other than commitments for new product inventory, including
disposable "for sale" products, of $11.4 million, the Company
has no material long-term capital commitments and can adjust the
level of capital expenditures as circumstances dictate.
(7) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Company adopted Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income", in
the first quarter of 1998. This standard requires disclosure of
total nonowner changes in shareholders' equity, which is defined
as net earnings plus direct adjustments to shareholders' equity
such as equity and cash investment adjustments and foreign
currency translation adjustments. On this basis, these nonowner
changes in shareholders' equity, including net earnings, for the
first quarter of 1998 and 1997, totaled $996,000 and $3.1
million, respectively.
Also, effective for periods beginning after December 15,
1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This
statement establishes standards for the way that public
companies report information about operating segments in annual
financial statements as well as interim financial reports. It
also establishes standards for related disclosures about
products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company
adopted the provisions of Statement No. 131 effective January 1,
1998 and estimates that adoption of these provisions will not
have a material impact on the Company's financial position or
results of operations. Statement No. 131 need not be applied to
interim financial statements in the initial year of its
application.
During 1997, the Securities and Exchange Commission issued
expanded disclosure requirements of accounting policies for
derivative financial instruments and the exposure to market
risk. The new rules require enhanced descriptions of specific
aspects of a registrant's accounting polices for derivatives as
well as qualitative and quantitative disclosures about each
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) NEW ACCOUNTING PRONOUNCEMENTS (continued)
-----------------------------------------
type of market risk. The increased policy disclosures on
derivatives were effective for all public companies for periods
ending after June 15, 1997. The qualitative and quantitative
market risk disclosures must be provided in all filings that
include audited financial statements for fiscal years ending
after June 15, 1998. The Company expects compliance with these
requirements will not have a material impact on the Company's
consolidated results of operations, financial position, or cash
flows.
(8) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
------------------------------------------------------
Kinetic Concepts, Inc. issued $200 million in subordinated
debt securities to finance a tender offer to purchase certain of
its common shares outstanding. In connection with the issuance
of these securities, certain of its subsidiaries (the guarantor
subsidiaries) will serve as guarantors. Certain other
subsidiaries (the nonguarantor subsidiaries) will not guarantee
such debt. Each subsidiary guarantor is a wholly-owned
subsidiary of the Company and has fully and unconditionally
guaranteed the debt securities.
The following tables present the condensed consolidating
balance sheets of Kinetic Concepts, Inc. as a parent company,
its guarantor subsidiaries and its nonguarantor subsidiaries as
of March 31, 1998 and December 31, 1997 and the related
condensed consolidating statements of earnings and cash flows
for the three months ended March 31, 1998 and 1997.
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
March 31, 1998
(in thousands)
(unaudited)
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
ASSETS:
Current assets:
Cash and cash
equivalents..... $ -- $ 9,691 $10,588 $ -- $ 20,279
Accounts
receivable, net. -- 73,000 14,711 (8,939) 78,772
Inventories....... -- 12,495 9,265 -- 21,760
Prepaid expenses
and other....... 2,010 10,360 3,214 -- 15,584
-------- ------- ------ -------- --------
Total current
assets...... 2,010 105,546 37,778 (8,939) 136,395
-------- ------- ------ -------- --------
Net property, plant
and equipment..... -- 80,734 8,835 (10,305) 79,264
Goodwill, net....... -- 40,544 5,687 -- 46,231
Loan issuance costs,
net............... -- 16,777 -- -- 16,777
Other assets, net... -- 31,219 63 -- 31,282
Intercompany invest-
ments and advances (273,609) 458,103 3,951 (188,445) --
------- ------- ------ ------- -------
Total assets.. $(271,599) $732,923 $56,314 $(207,689) $309,949
======= ======= ====== ======= =======
LIABILITIES AND
CAPITAL ACCOUNTS:
Accounts payable.... $ -- $ 5,118 $ 2,011 $ -- $ 7,129
Accrued expenses.... -- 40,842 6,053 -- 46,895
Current installments
of long-term
obligations....... -- 5,800 -- -- 5,800
Intercompany
payables.......... 568 5,367 8,788 (14,723) --
Current installments
of capital lease
obligations....... -- 142 -- -- 142
Income tax payable.. -- -- 428 (428) --
Total current
liabilities. 568 57,269 17,280 (15,151) 59,966
-------- ------- ------ ------ -------
Long-term
obligations,
excluding current
installments..... -- 511,684 -- -- 511,684
Capital lease
obligations,
excluding current
installments..... -- 212 47 -- 259
Deferred income
taxes, net....... -- 16,116 -- (5,909) 10,207
------- ------- ------ ------- -------
Total
liabilities 568 585,281 17,327 (21,060) 582,116
Shareholders'
equity (deficit).. (272,167) 147,642 38,987 (186,629) (272,167)
------- ------- ------ ------- -------
Total
liabilities
and equity
(deficit).. $(271,599) $732,923 $56,314 $(207,689) $309,949
======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Balance Sheet
December 31, 1997
(in thousands)
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ---------
ASSETS:
Current assets:
Cash and cash
equivalents..... $ -- $ 44,439 $ 17,315 $ -- $ 61,754
Accounts
receivable, net. -- 75,932 15,002 (9,696) 81,238
Inventories....... -- 12,006 9,547 -- 21,553
Prepaid expenses
and other....... 2,010 14,851 1,585 -- 18,446
------- ------- ------- ------- -------
Total current
assets...... 2,010 147,228 43,449 (9,065) 182,991
Net property, plant
and equipment..... -- 76,811 9,065 (10,442) 75,434
Goodwill, net....... -- 40,081 5,818 -- 45,899
Loan issuance costs,
net............... -- 17,346 -- -- 17,346
Other assets, net... -- 29,354 127 -- 29,481
Intercompany
investments and
advances.......... (276,832) 460,984 1,511 (185,663) --
------- ------- ------ ------- -------
Total assets.. $(274,882) $771,804 $ 59,970 $(205,801) $351,151
======= ======= ======= ======= =======
LIABILITIES AND
CAPITAL ACCOUNTS:
Accounts payable.... $ -- $ 38,157 $ 2,196 $ -- $ 40,353
Accrued expenses.... -- 35,643 5,691 -- 41,334
Current installments
on long-term
obligations....... -- 4,800 -- -- 4,800
Intercompany payables 876 423 9,761 (11,060) --
Current installments
of capital lease
obligations....... -- 139 -- -- 139
Income tax payable.. -- -- 648 (648) --
-------- ------- ------ ------ -------
Total current
liabilities 876 79,162 18,296 (11,708) 86,626
-------- ------- ------ ------ -------
Long-term
obligations
excluding current
installments...... -- 529,901 -- -- 529,901
Capital lease
obligations,
excluding current
installments...... -- 256 56 -- 312
Deferred income
taxes, net........ -- 18,440 -- (8,430) 10,010
------- ------- ------ ------- -------
Total
liabilities. 876 627,759 18,352 (20,138) 626,849
Shareholders'
equity (deficit). (275,698) 144,045 41,618 (185,663) (275,698)
------- ------- ------ ------- -------
Total
liabilities
and equity
(deficit)... $(274,882) $771,804 $59,970 $(205,801) $351,151
======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended March 31, 1998
(in thousands)
(unaudited)
Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- --------- ----------
Revenue:
Rental and service... $ -- $ 53,596 $11,649 $ -- $65,245
Sales and other...... -- 13,249 5,442 (2,039) 16,652
----- ------- ------ ----- ------
Total revenue..... -- 66,845 17,091 (2,039) 81,897
Rental expenses...... -- 31,508 10,635 -- 42,143
Cost of goods sold... -- 4,421 2,950 (1,012) 6,359
----- ------- ------ ----- ------
-- 35,929 13,585 (1,012) 48,502
----- ------- ------ ----- ------
Gross profit...... -- 30,916 3,506 (1,027) 33,395
Selling, general and
administrative
expenses........... -- 9,540 6,665 -- 16,205
----- ------ ------ ----- ------
Operating earnings
(loss).......... -- 21,376 (3,159) (1,027) 17,190
Interest income...... -- 172 77 -- 249
Interest expense..... -- (12,303) -- -- (12,303)
Foreign currency gain
(loss)............. -- 122 (284) -- (162)
----- ------ ------ ----- ------
Earnings (loss)
before income
taxes and
minority
interest........ -- 9,367 (3,366) (1,027) 4,974
Income taxes......... -- 3,786 (1,381) (415) 1,990
Minority interest.... -- -- (2) -- (2)
----- ------ ----- ----- ------
Earnings (loss)
before equity in
earnings (loss)
of subsidiaries. -- 5,581 (1,983) (612) 2,986
Equity in earnings
(loss) of
subsidiaries.... 2,986 (1,984) -- (1,002) --
----- ------ ----- ----- ------
Net earnings
(loss).......... $2,986 $ 3,597 $(1,983) $(1,614) $ 2,986
===== ====== ====== ===== ======
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Earnings
For the three months ended March 31, 1997
(in thousands)
(unaudited)
Historical
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- --------- --------- -------- ----------
Revenue:
Rental and service... $ -- $50,414 $11,411 $ -- $61,825
Sales and other...... 6,628 6,664 4,523 (6,459) 11,356
----- ------ ------ ----- ------
Total revenue..... 6,628 57,078 15,934 (6,459) 73,181
Rental expenses...... -- 30,168 9,561 (2,017) 37,712
Cost of goods sold... 6,265 1,717 2,429 (6,169) 4,242
----- ------ ------ ----- ------
6,265 31,885 11,990 (8,186) 41,954
----- ------ ------ ----- ------
Gross profit...... 363 25,193 3,944 1,727 31,227
Selling, general and
administrative
expenses........... 2,025 6,706 6,279 -- 15,010
----- ------ ------ ----- ------
Operating earnings
(loss).......... (1,662) 18,487 (2,335) 1,727 16,217
Interest income...... 13 420 82 -- 515
Interest expense..... (24) (216) (9) 188 (61)
----- ------ ------ ----- ------
Earnings (loss)
before income
taxes and
minority
interest........ (1,673) 18,691 (2,262) 1,915 16,671
Income taxes......... (660) 7,226 (1,010) 1,112 6,668
----- ------ ------ ----- ------
Earnings (loss)
before equity
in earnings
(loss) of
subsidiaries.... (1,013) 11,465 (1,252) 803 10,003
Equity in
earnings (loss)
of subsidiares.. 11,016 (1,252) -- (9,764) --
------ ------ ----- ----- ------
Net earnings
(loss)........... $10,003 $10,213 $(1,252) $(8,961) $10,003
====== ====== ===== ===== ======
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the three months ended March 31, 1998
(in thousands)
(unaudited)
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
-------- ---------- --------- --------- ---------
Cash flows from
operating activities:
Net earnings (loss)... $ 2,986 $ 3,597 $ (1,983) $(1,614) $ 2,986
Adjustments to
reconcile net
earnings (loss) to
net cash provided
(used) by operating
activities......... (2,986) (13,290) 292 802 (15,182)
----- ------ ----- ----- ------
Net cash provided
(used) by operating
activities......... -- (9,693) (1,691) (812) (12,196)
Cash flows from
investing activities:
Additions to
property, plant
and equipment.... -- (7,046) (1,006) 2,048 (6,004)
Increase in
inventory to be
converted into
equipment for
short-term
rental........... -- (4,548) -- -- (4,548)
Dispositions of
property, plant
and equipment.... -- 404 -- -- 404
Decrease (increase)
in other assets.. -- (3,035) 40 -- (2,995)
----- ------ ------ ----- ------
Net cash used by
investing activities -- (14,225) (966) 2,048 (13,143)
Cash flows from
financing activities:
Repayments of notes
payable and long-
term obligations. -- (17,217) -- -- (17,217)
Repayments of
capital lease
obligations...... -- (41) (10) -- (51)
Proceeds (payments)
on intercompany
investments and
advances......... (2,542) 7,837 (3,413) (1,882) --
Recapitalization
costs - fees and
expenses......... 1,543 -- -- -- 1,543
Other.............. 999 (1,409) (647) 1,057 --
----- ------ ----- ------ ------
Net cash used by
financing activities -- (10,830) (4,070) (825) (15,725)
Effect of exchange
rate changes on cash
and cash equivalents -- -- -- (411) (411)
----- ------ ----- ------ ------
Net decrease in cash
and cash equivalents -- (34,748) (6,727) -- (41,475)
Cash and cash
equivalents,
beginning of period -- 44,439 17,315 -- 61,754
----- ------ ------ ------ ------
Cash and cash
equivalents, end of
end of period...... $ -- $ 9,691 $10,588 $ -- $20,279
===== ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor and
Parent Company Statement of Cash Flows
For the three months ended March 31, 1997
(in thousands)
(unaudited)
Kinetic Reclassi- Kinetic
Concepts, Non- fications Concepts,
Inc. Guarantor Guarantor and Inc.
Parent Sub- Sub- Elimi- and Sub-
Company sidiaries sidiaries nations sidiaries
--------- ---------- --------- --------- ---------
Cash flows from
operating activities:
Net earnings (loss).. $ 10,003 $ 10,213 $ (1,252) $ (8,961) $ 10,003
Adjustments to
reconcile net
earnings (loss)
to net cash
provided (used)
by operating
activities......... (16,131) 10 (2,585) 16,878 (1,828)
------ ------ ----- ------ ------
Net cash provided
(used) by operating
activities......... (6,128) 10,223 (3,837) 7,917 8,175
Cash flows from
investing activities:
Additions to
property, plant
and equipment.... 1,126 (2,937) (325) (1,479) (3,615)
Decrease in
inventory to be
converted into
equipment for
short-term rental (2,820) -- -- -- (2,820)
Dispositions of
property, plant
and equipment.... -- 40 2 -- 42
Businesses acquired
in purchase
transactions, net
of cash acquired. -- (10,099) -- -- (10,099)
Decrease (increase)
in other assets.. (3,744) 1,439 247 (3,426) (5,484)
----- ------ ------ ----- ------
Net cash used by
investing activities (5,438) (11,557) (76) (4,905) (21,976)
Cash flows from
financing activities:
Repayments of
capital lease
obligations...... (27) -- (6) -- (33)
Proceeds from the
excercise of
stock options.... 392 -- -- -- 392
Proceeds (payments)
on intercompany
investments and
advances......... 15,561 (19,939) 7,099 (2,721) --
Purchase and
retirement of
treasury stock... (1,309) -- -- -- (1,309)
Cash dividends
paid to
shareholders..... (1,608) -- -- -- (1,608)
Other.............. (1,068) (2,597) (3,062) 6,735 8
------ ------ ------ ------ ------
Net cash provided
(used) by financing
activities......... 11,941 (22,536) 4,031 4,014 (2,550)
Effect of exchange
rate changes on
cash and cash
equivalents........ -- -- -- (1,300) (1,300)
------ ------- ----- ----- -----
Net increase
(decrease) in cash
and cash equivalents 375 (23,870) 118 5,726 (17,651)
Cash and cash
equivalents,
beginning of period. -- 50,286 14,485 (5,726) 59,045
------ ------ ------ ------ ------
Cash and cash
equivalents, end
of period........... $ 375 $ 26,416 $14,603 $ -- $41,394
====== ====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
First Quarter of 1998 Compared to First Quarter of 1997
- -------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first quarter of the
prior year ($ in thousands):
Three Months Ended March 31,
------------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1998 1997 $ Pct
--------- --------- ---------- ------
Revenue:
Rental and service.......... 80% 84% $ 3,420 6%
Sales and other............. 20 16 5,296 47
--- --- -------
Total revenue............ 100% 100% 8,716 12
Rental expenses............. 51 51 4,431 12
Cost of goods sold.......... 8 6 2,117 50
--- --- -------
Gross profit............. 41 43 2,168 7
Selling, general and
administrative expenses... 20 21 1,195 8
--- --- -------
Operating earnings....... 21 22 973 6
Interest income............. -- 1 (266) (52)
Interest expense............ 15 -- (12,242) nm
Foreign currency loss....... -- -- (162) nm
--- --- ------
Earnings before income
taxes and minority
interest............... 6 23 (11,697) (70)
Income taxes................ 2 9 (4,678) (70)
Minority interest in
subsidiary loss........ -- -- 2 nm
--- --- ------
Net earnings............ 4% 14% $ (7,017) (70%)
--- --- ------
The Company's revenue is derived from three primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Three months ended
March 31,
--------------------
1998 1997
-------- --------
Domestic specialty surfaces..... $ 51.8 $ 49.1
International surfaces.......... 16.7 16.0
Medical devices................. 13.2 7.9
Other........................... .2 .2
------ ------
$ 81.9 $ 73.2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the first quarter of 1998 increased $8.7
million, or 11.9%, to $81.9 million from $73.2 million in the first
quarter of 1997. Revenue from the Company's domestic specialty
surface business was $51.8 million, up $2.7 million, or 5.5% from
$49.1 million in the first three months of the prior year. The
increased revenue was derived from core business growth, due to
higher patient therapy days, and the addition of RIK Medical, which
the Company acquired in October 1997. Sales for the period grew as a
percentage of total revenue due substantially to sales of disposable
products associated with the Company's medical devices.
Revenue from the Company's international operations increased
4.4% to $16.7 million from $16.0 million in the first quarter of
1997. The international revenue increase reflects higher therapy
days in virtually all of the Company's middle-tier markets, e.g., the
Netherlands, Canada and Switzerland, which were largely offset by
softness in Germany and the United Kingdom and by unfavorable
currency exchange rate fluctuations of approximately $700,000.
Revenue from medical device operations increased 67.1% to $13.2
million from $7.9 million in the first quarter of 1997, due
substantially to growth in V.A.C. rentals in the United States.
Rentals of the PlexiPulse vascular assistance device also increased
during the first quarter of 1998 due to increased rental penetration
by the Company's rental distribution partner - Mediq PRN.
Rental, or field, expenses of $42.1 million were 64.6% of total
rental revenue in the first quarter of 1998 compared to 61.0% in the
first quarter of 1997. This increase is primarily attributable to
costs associated with the four business acquisitions completed during
1997 including increased equipment depreciation and field labor
costs.
Cost of goods sold increased 49.9% to $6.4 million in the first
quarter of 1998 from $4.2 million in the first quarter of 1997. Cost
of goods sold has increased primarily due to increased sales of
disposables associated with the medical device rentals.
Gross profit increased $2.2 million, or 6.9%, to $33.4 million
in the first three months of 1998 from $31.2 million in the first
quarter of 1997 due to increased rental revenue as well as increased
sales volumes. Gross profit margin for the first quarter, as a
percentage of total revenue, was 40.8%, down from 42.7% for the first
quarter of 1997, due substantially to the increase in field expenses
and cost of goods sold for the period.
Selling, general and administrative expenses increased $1.2
million, or 8.0%, to $16.2 million in the first quarter of 1998 from
$15.0 million in the first quarter of 1997. This increase was due in
part to goodwill amortization associated with the 1997 business
acquisitions, as well as increased legal and professional fees. As a
percentage of total revenue, selling, general and administrative
expenses were 19.8% in the first quarter of 1998 as compared with
20.5% in the first quarter of 1997.
Operating earnings for the period increased $1.0 million, or
6.0%, to $17.2 million compared to $16.2 million in the prior-year
quarter as a result of the revenue growth discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Interest income for the three months ended March 31, 1998 was
approximately $250,000 compared to approximately $500,000 in the
prior period. The decrease in interest income resulted from lower
invested cash balances due primarily to acquisition activities in the
first nine months of 1997 and the leveraged recapitalization
transactions completed during the fourth quarter of the prior year.
Interest expense for the three months ended March 31, 1998 was
$12.3 million compared to $61,000 for the first quarter of 1997. The
interest expense increase was due to interest accrued on an average
balance of approximately $526 million in long-term debt obligations
associated with the recapitalization.
Net earnings decreased $7.0 million, or 70.1%, to $3.0 million
in the first quarter of 1998. This decrease was due substantially to
the increase in interest expense as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the three months ended March 31, 1998 and other factors
resulted in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $20.3 million at March 31, 1998,
a decrease of $41.5 million from December 1997. The cash decrease is
primarily attributable to payments associated with the
recapitalization, including $32.3 million for first quarter 1998
repurchases of common stock.
Accounts receivable at March 31, 1998 were $78.8 million, a $2.5
million, or 3.0%, decrease from year-end, due to cash collections in
excess of first quarter billings.
Other current assets of $15.6 million decreased 15.5% as
compared to $18.4 million at December 31, 1997. This change resulted
primarily from the refund of all 1997 federal tax payments as the
recapitalization transactions resulted in the Company recording a
current tax receivable for the year ended December 31, 1997.
Net property, plant and equipment at March 31, 1998 increased
5.1% to $79.3 million from $75.4 million at December 31, 1997. Net
capital expenditures were $10.1 million during the first three months
of 1998, including $4.5 million of inventory (raw materials and work-
in-progress) to be converted into equipment for short-term rentals.
Depreciation and amortization for the first three months of 1998
totaled $7.6 million, up $2.3 million, or 44.3%, from the same period
in 1997.
Accounts payable and accrued expenses at March 31, 1998 were
$7.1 million and $46.9 million, respectively, compared to $40.4
million and $41.3 million, respectively, at the end of 1997. The
decrease in accounts payable relates primarily to payments for shares
of common stock not previously tendered while the increase in accrued
expenses was due to accrued interest expense recorded during the
first quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Financial Condition (continued)
- -------------------------------
Long-term debt obligations, including the current maturities,
decreased $17.2 million to $517.5 million as of March 31, 1998 due to
the repayment of a portion of the Company's revolving credit
facility.
Market Trends
- -------------
The health care industry continues to face various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities and
rehabilitation centers) and home care settings, the consolidation of
health care providers and national and regional group purchasing
organizations and the growing demand for clinically proven therapies
which lower the total cost of providing care.
In an effort to reduce the federal deficit and lower overall
federal health care expenditures, President Clinton recently signed
into law the Balanced Budget Act of 1997 (the "BBA"). The BBA
contains a number of provisions which will impact the federal
reimbursement of health care and reduce projected payments under the
Medicare system by $115 billion over the next five years. The
majority of the savings are scheduled for the fourth and fifth years
of this plan. The provisions include (i) a reduction exceeding $30
billion in the level of payments made to acute care hospitals under
Medicare Part A over the next five years (which will be funded
primarily through a reduction in future consumer price index
increases); (ii) a change on July 1, 1998 in the manner in which
skilled nursing facilities ("SNFs") are reimbursed from a cost-based
system to a prospective payment system under which the SNFs will
receive an all inclusive, case-mix-adjusted per diem payment for each
of their Medicare patients; and (iii) a five-year freeze on consumer
price index updates for Medicare Part B services in the home and the
implementation of competitive bidding trials for five categories of
home care products.
Less than 10% of the Company's revenue is received directly from
the Medicare system. However, many of the health care providers who
pay the Company for its products are reimbursed, either directly or
indirectly, by the Federal government under the Medicare system for
the use of those products. The Company does not believe that the
changes introduced by the BBA will have a material impact on our
hospital customers or the dealers we partner with in home health
care. However, the changes to the Medicare system introduced by the
BBA may have an impact on the manner in which the Company's extended
care customers make purchasing decisions. Because the Company has
focused on providing clinically efficacious and cost effective
products, it believes it is well positioned for the changes in
extended care reimbursement introduced by the BBA. Although these
changes may impact revenue in the short term as the Company's
extended care customers begin to understand the impact of the changes
on their respective businesses, the Company does not believe that any
of the changes introduced by the BBA will have a material adverse
impact on its business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends (continued)
- -------------------------
The Company's market continues to increase based upon
demographic trends as most of the Company's patients are over 50
years old. Further, its broad product line and national distribution
system enable it to compete effectively in the changing healthcare
environment.
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will continue
because certain U.S. health care providers are purchasing disposables
associated with the Company's growing installed base of medical
devices and select low-end products that are less expensive and
easier to maintain. In addition, international health care providers
tend to purchase products more often than U.S. health care providers.
Legal Proceedings
- -----------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for
the Western District of Texas. Novamedix manufactures the principal
product which directly competes with the PlexiPulse. The suit alleges
that the PlexiPulse infringes several patents held by Novamedix, that
the Company breached a confidential relationship with Novamedix and a
variety of ancillary claims. Novamedix seeks injunctive relief and
monetary damages. Initial discovery in this case has been
substantially completed. Although it is not possible to reliably
predict the outcome of this litigation or the damages which could be
awarded, the Company believes that its defenses to these claims are
meritorious and that the litigation will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
On August 16, 1995, the Company filed a civil antitrust lawsuit
against Hillenbrand Industries, Inc. and one of its subsidiaries,
Hill-Rom. The suit was filed in the United States District Court for
the Western District of Texas. The suit alleges that Hill-Rom used
its monopoly power in the standard hospital bed business to gain an
unfair advantage in the specialty hospital bed business.
Specifically, the allegations set forth in the suit include a claim
that Hill-Rom required hospitals and purchasing groups to agree to
exclusively rent specialty beds in order to receive substantial
discounts on products over which they have monopoly power - hospital
beds and head wall units. The suit further alleges that Hill-Rom
engaged in activities which constitute predatory pricing and refusals
to deal. Hill-Rom has filed an answer denying the allegations in the
suit. Although discovery has not been completed and it is not
possible to reliably predict the outcome of this litigation or the
damages which might be awarded, the Company believes that its claims
are meritorious.
On October 31, 1996, the Company received a counterclaim which
had been filed by Hillenbrand Industries, Inc. in the antitrust
lawsuit which the Company filed in 1995. The counterclaim alleges
that the Company's antitrust lawsuit and other actions were designed
to enable KCI to monopolize the specialty therapeutic surface market.
Although it is not possible to reliably predict the outcome of this
litigation, the Company believes that the counterclaim is without
merit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc., filed a lawsuit against the Company alleging that
the Company's TriaDyne bed infringes a patent issued to Hill-Rom.
This suit was filed in the United States District Court for the
District of South Carolina. Based upon its preliminary investigation,
the Company does not believe that the TriaDyne bed infringes any
valid claims of the Hill-Rom patent or that this lawsuit will have a
material adverse impact on the Company's business.
The Company is a party to several lawsuits arising in the
ordinary course of its business, including three other lawsuits
alleging patent infringement by the Company, and the Company is
contesting adjustments proposed by the Internal Revenue Service to
prior years' tax returns in Tax Court. Provisions have been made in
the Company's financial statements for estimated exposures related to
these lawsuits and adjustments. In the opinion of management, the
disposition of these matters will not have a material adverse effect
on the Company's business, financial condition or results of
operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain product liability claims pending for which
provision has been made in the Company's financial statements.
Management believes that resolution of these claims will not have a
material adverse effect on the Company's business, financial
condition or results of operations. The Company has not experienced
any significant losses due to product liability claims and management
believes that the Company currently maintains adequate liability
insurance coverage.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998, the Company had current assets of $136.4
million and current liabilities of $60.0 million resulting in a
working capital surplus of $76.4 million, compared to a surplus of
$96.4 million at December 31, 1997.
During the first quarter of 1998, the Company made net capital
expenditures of $10.1 million. The Company's current budget for
capital expenditures for 1998, other than acquisition expenditures,
is $30.5 million and consists primarily of rental product additions.
Other than commitments for new product inventory, including
disposable "for sale" products, of $11.4 million, the Company has no
material long-term capital commitments and can adjust the level of
capital expenditures as circumstances dictate.
The Company's principal sources of liquidity are expected to be
cash flow from operating activities and borrowings under the Senior
Credit Facilities. It is anticipated that the Company's principal
uses of liquidity will be to fund capital expenditures related to the
Company's rental products, provide needed working capital, meet debt
service requirements and finance the Company's strategic plans.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Senior Credit Facilities total $400.0 million and consist of
(i) a $50.0 million six-year Revolving Credit Facility, (ii) a $50.0
million six-year Acquisition Facility, (iii) a $120.0 million six-
year amortizing Term Loan A, (iv) a $90.0 million seven-year
amortizing Term Loan B and (v) a $90.0 million eight-year amortizing
Term Loan C, (collectively, the "Term Loans"). The Term Loans were
fully drawn to finance a portion of the Tender Offer. The
Acquisition Facility was partially drawn to, in effect, finance
the RIK Medical acquisition. The Acquisition Facility provides the
Company with financing to pursue strategic acquisition opportunities.
The Acquisition Facility will remain available to the Company for a
period of three years at which time will begin to amortize over the
remaining three years of the facility. The Company utilized
borrowings under the Revolving Facility to help effect the Tender
Offer and pay related fees and expenses and has utilized and will
utilize borrowings under the Revolving Facility to fund capital
expenditures and meet working capital needs.
The Term Loans and the Notes are subject to customary terms,
covenants and conditions which partially restrict the uses of future
cash flow by the Company. The Company does not expect that these
covenants and conditions will have a material adverse impact on its
operations. At March 31, 1998, the Revolving Credit Facility and
Acquisition Facility had balances of $8.5 million and $10 million,
respectively. Correspondingly, the aggregate availability under
these two facilities was $81.5 million.
The Senior Credit Agreement requires the Company to meet certain
financial tests, including minimum levels of EBITDA (as defined
therein), minimum interest coverage, maximum leverage ratio and
capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and advances,
capital expenditures, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other
matters customarily restricted in such agreements. The Company is in
compliance with the applicable covenants at March 31, 1998.
The Senior Credit Agreement contains customary events of
default, including payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency, failures
under ERISA plans, judgment defaults, failure of any guaranty,
security document security interest or subordination provision
supporting the Bank Credit Agreement to be in full force and effect
and change of control of the Company.
As part of the Recapitalization transactions, the Company issued
$200.0 million of Senior Subordinated Notes (the "Notes") due 2007.
The Notes are unsecured obligations of the Company, ranking
subordinate in right of payment to all senior debt of the Company and
will mature on November 1, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Notes are not entitled to the benefit of any mandatory
sinking fund. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after
November 1, 2002, upon not less than 30 nor more than 60 days'
notice, at the following redemption prices (expressed as percentages
of the principal amount thereof) if redeemed during the twelve-month
period commencing on November 1 of the year set forth below, plus, in
each case, accrued and unpaid interest thereon, if any, to the date
of redemption.
Year Percentage
---- ----------
2002.................................. 104.813%
2003.................................. 103.208%
2004.................................. 101.604%
2005 and thereafter................... 100.000%
As of March 31, 1998 the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
At March 31, 1998, the Company was committed to purchase
approximately $11.4 million of inventory associated with new products
over the remainder of this year. The Company did not have any other
material purchase commitments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
Exhibit Description
------- -----------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by
reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company,
Inc. (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed
as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery
trucks (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1,
1989 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein
by reference).
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form 8-
K dated October 17, 1994, and incorporated
herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic
Services, Inc. and Voluntary Hospitals of
America, Inc.(filed as Exhibit 10.18 to the
Company's Amended Annual Report on Form 10-
K/A, dated January 23, 1996, for the year
ended December 31, 1994, and incorporated
herein by reference).
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P. (filed as Exhibit 10.19 to the Company's
Amended Annual Report on Form 10-K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.20 KCI Management 1994 Incentive Program (filed
as Exhibit 10.20 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.21 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment (filed as Exhibit
10.23 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan (filed as
Exhibit 10.24 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes (filed as
Exhibit 10.25 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23,
1996, for the year ended December 31, 1994,
and incorporated herein by reference).
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
EXHIBITS (continued)
--------------------
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1995 and incorporated herein by reference).
10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).
10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.33 Asset Purchase Agreement dated January 3,
1997 by and among Trac Medical, Inc., a North
Carolina corporation, Terry Williams, David
Mattis, George Parrish and KCI Therapeutic
Services, Inc., a Delaware corporation(filed
as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.34 Asset Purchase Agreement dated January 27,
1997 by and among Hydrothermic Floatation
Systems, Inc., a California corporation, Y.
Jeremy Levy and KCI Therapeutic Services,
Inc., a Delaware corporation (filed as
Exhibit 10.34 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.35 Agreement for the sale and purchase of 80% of
the issued share capital of Ethos Medical
Group Limited by KCI International, Inc.
dated April 18, 1997 (filed as Exhibit 10.35
to the Company's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997 and
incorporated herein by reference.)
EXHIBITS (continued)
--------------------
10.36 Asset Purchase Agreement made as of July 31,
1997 between KCI Equi-Tron, Inc. as Purchaser
and James H. Alexander, Elleanor Alexander
and Scott Alexander as vendors (filed as
Exhibit 10.36 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by
reference.)
10.37 Transaction Agreement, dated as of October 2,
1997, among Fremont Purchaser II, Inc., RCBA
Purchaser I, L.P. and the Company (filed as
Exhibit (c)(1) to the Company's Schedule 13E-
3 dated October 8, 1997, and incorporated
herein by reference.)
10.38 Kinetic Concepts, Inc. Management Equity Plan
(filed as Exhibit (c)(4) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
10.39 Management Equity Agreement for Raymond R.
Hannigan, dated October 2, 1997 (filed as
Exhibit (c)(6) to the Company's Schedule 13E-
3 dated October 8, 1997, and incorporated
herein by reference.)
10.40 Offer to Purchase, dated October 8, 1997
(filed as Exhibit (d)(1) to the Company's
Schedule 13E-3 dated October 8, 1997, and
incorporated herein by reference.)
10.41 Kinetic Concepts Management Equity Plan
effective October 1, 1997 (filed as Exhibit
10.33 on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.)
16.1 Letter from KPMG Peat Marwick LLP to the
Securities and Exchange Commission regarding
agreement with statements made by Registrant
under Item 9 of its Form 10-K dated March 28,
1997 (filed as Exhibit 16.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
22.1 List of Subsidiaries (filed as Exhibit 22.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference).
*27.1 Financial Data Schedule.
Note: (*) Exhibits filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /s/ RAYMOND HANNIGAN
-------------------------------------
Raymond Hannigan
President and Chief Executive Officer
By: /s/ MARTIN J. LANDON
-------------------------------------
Martin J. Landon
Vice President, Accounting and
Corporate Controller
Date: May 15, 1998