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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
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(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, TX 78230 (210) 524-9000
- ------------------------------- ---------------------------------
(Address of principal executive (Registrant's telephone number)
offices and zip code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
As of March 1, 1999, there were 70,915,008 shares of the Registrant's
Common Stock outstanding, of which 70,515,008 were held by affiliates.
FORM 10-K TABLE OF CONTENTS
PART I PAGE
Item 1. Business..................................... 4
Item 2. Properties................................... 17
Item 3. Legal Proceedings............................ 17
Item 4. Submission of Matters to a Vote
of Security Holders.......................... 19
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.............. 19
Item 6. Selected Financial Data...................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk............................ 36
Item 8. Financial Statements and Supplementary
Data......................................... 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....... 82
PART III
Item 10. Directors and Executive Officers of the
Registrant................................... 83
Item 11. Executive Compensation....................... 85
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................ 87
Item 13. Certain Relationships and Related
Transactions................................. 88
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................... 89
Signatures............................................... 92
TriaDyne(R), TriaDyne(R) II, BariKare(R), The V.A.C.(R), PlexiPulse(R),
PlexiPulse, All-in-1 System TM, KinAir(R) III, KinAir(R) IV, FirstStep (R),
FirstStep(R) Plus, FirstStep(R) Select, FirstStep(R) MRS,
TheraPulse(R), TheraPulse(R) II, BioDyne(R), BioDyne(R)II, FluidAir(R)
Plus, FluidAir(R) Elite, RotoRest(R), Q2 Plus(R), HomeKair(R) DMS,
DynaPulse(R), FirstStep(R) TriCell, Impression (R) SR, RotoRest(R) Delta,
PediDyne(R), BariAire(R), FirstStep(R) Select Heavy Duty, FirstStep (R)
Advantage, TriCell(R), RIK(R) and AirWorks(R) Plus, are trademarks of
the Company used in this Report. Kinetic Therapy SM, The
Clinical Advantage SM, Genesis SM and Odyssey SM are service
marks of the Company used in this Report.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements.
The forward-looking statements made in "Business", "Legal
Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which reflect
management's best judgment based on market and other factors
currently known, involve risks and uncertainties. When used in
this Report, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe" and similar expressions are
intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions
made by management of the Company, which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such estimates and statements. No
assurance can be given that any of such statements or estimates
will be realized and actual results will differ from those
contemplated by such forward-looking statements.
PART I
Item 1. Business
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General
Kinetic Concepts, Inc. (the "Company" or "KCI") is a worldwide
leader in innovative therapeutic systems which prevent and treat
the complications of immobility that can result from disease,
trauma, surgery or obesity. The Company's clinically effective
therapeutic systems include specialty hospital beds, specialty
mattress overlays and non-invasive medical devices combined with
on-site patient care consultation by the Company's
clinically-trained staff. The complications of immobility include
pressure sores, pneumonia and circulatory problems which can
increase patient treatment costs by as much as $75,000 and, if left
untreated, can result in death. The Company's therapeutic systems
can significantly improve clinical outcomes while reducing the cost
of patient care by preventing these complications or accelerating
the healing process and by providing labor savings. The Company
has also been successful in applying its therapeutic expertise to
bring to market innovative medical devices that treat chronic
wounds and help prevent blood clots.
The Company designs, manufactures, markets and services its
products, many of which are proprietary. KCI's therapeutic systems
are used to treat patients across all health care settings
including acute care hospitals, extended care facilities and
patients' homes. Health care providers generally prefer to rent
rather than purchase the Company's products in order to avoid the
ongoing service, storage and maintenance requirements and the high
initial capital outlay associated with purchasing such products, as
well as to receive the Company's high-quality clinical support.
The Company can deliver its therapeutic systems to any major
domestic trauma center within two hours of notice through its
network of service centers.
Founded by James R. Leininger, M.D., an emergency room
physician, to provide better care for his patients, the Company was
incorporated in Texas in 1976. The Company's principal offices are
located at 8023 Vantage Drive, San Antonio, Texas 78230 and its
telephone number is (210) 524-9000.
On November 5, 1997, a substantial interest in the Company was
acquired by certain affiliates of Fremont Partners L.P. ("Fremont")
and Richard C. Blum & Associates, L.P. ("RCBA"). Fremont, RCBA, Dr.
James Leininger and Dr. Peter Leininger own approximately 28.0
million, 18.4 million, 23.6 million and 0.4 million common shares,
respectively, representing 39.7%, 26.2%, 33.5% and 0.6% of the
total shares outstanding. Members of management have retained, and
have been granted, additional options to purchase shares.
Corporate Organization
In 1998, the Company had three operating divisions: KCI
Therapeutic Services, Inc. ("KCI Therapeutic Services" or "KCTS"),
KCI International, Inc. ("KCI International") and KCI New
Technologies, Inc. ("NuTech").
KCI Therapeutic Services
KCI Therapeutic Services provides a broad line of therapeutic
specialty support surfaces to patients in acute and sub-acute
facilities as well as extended care settings. This division
consists of approximately 1,100 personnel, many of whom have a
medical or clinical background. Sales are generated by a sales
force of approximately 320 individuals who are responsible for new
accounts in addition to the management and expansion of existing
accounts. A portion of this field organization is focused
exclusively on either the acute and home care markets or the
extended care market.
KCI Therapeutic Services has a national 24-hour, seven
days-a-week customer service communications system which allows it
to quickly and efficiently respond to its customers' needs. The
Company distributes its specialty patient support surfaces to acute
and extended care facilities through a network of 141 domestic
service centers. The KCTS service centers are organized as profit
centers and the general managers who supervise the service centers
are responsible for both sales and service operations. Each center
has an inventory of specialty beds and overlays which are delivered
to the individual hospitals or extended care facilities on an
as-needed basis.
The KCTS sales and support staff is comprised of approximately
250 employees with medical or clinical backgrounds. The principal
responsibility of approximately 120 of these clinicians is making
product rounds and participating in creating treatment protocols.
These clinicians educate the hospital or long-term facility staff
on issues related to patient treatment and assist in the
establishment of protocols. The clinical staff makes approximately
200,000 product rounds annually. KCTS accounted for approximately
69%, 70% and 68%, respectively, of the Company's total revenue in
the years ended December 31, 1998, 1997 and 1996.
KCI has developed a continuum of products that address the
unique demands of the home health care market. KCTS, through its
Home Care group, distributes products primarily through home
medical equipment ("HME") dealers. The Company believes that
selling products through the home care provider network gives it
access to a larger patient population and improves the overall
contribution from this business segment despite a reduction in per
patient revenue.
KCI International
KCI International offers the Company's therapies and services
in 12 foreign countries including Germany, Austria, the United
Kingdom, Canada, France, the Netherlands, Switzerland, Australia,
Italy, Denmark, Sweden, and Ireland. In addition, relationships
with 75 independent distributors in Latin America, the Middle East,
Asia and Eastern Europe allow KCI International to service the
demands of a growing global market. KCI International accounted for
approximately 24%, 23% and 25%, respectively, of the Company's
total revenue in the years ended December 31, 1998, 1997 and 1996.
NuTech
NuTech manufactures and markets a number of circulatory
medical devices including the PlexiPulse and PlexiPulse All-in-l
System. The NuTech products are sold through a direct sales force
and a limited number of independent distributors and rented
through an alliance with MEDIQ/PRN, a national medical device
rental company with a strong portfolio of national accounts. NuTech
accounted for approximately 7%, 6% and 6% of the Company's total
revenue in 1998, 1997 and 1996, respectively.
Therapies
The Company's therapeutic systems deliver one or more of the
following therapies:
Pressure Relief/Pressure Reduction. The Company's pressure
relief and pressure reduction surfaces provide effective skin care
therapy in the treatment of pressure sores, burns, skin grafts and
other skin conditions and help prevent the formation of pressure
sores which develop in certain immobile individuals. The Company's
beds and mattress overlays reduce the amount of pressure at any
point on a patient's skin by using surfaces supported by air,
silicon beads, or a viscous fluid. Some of the products further
promote healing through pulsation.
Pulmonary Care. The Company's pulmonary care systems provide
Kinetic Therapy to help prevent and treat acute respiratory
problems, such as pneumonia, by reducing the build-up of fluid in
the lungs. The United States Center for Disease Control (the
"CDC") defines Kinetic Therapy as the lateral rotation of a patient
by at least 40 degrees to each side (a continuous 80 degree arc).
Some of the Company's products combine Kinetic Therapy with
additional therapies such as percussion and pulsation which help
loosen mucous buildup and promote circulation.
Bariatric Care. The Company offers a line of bariatric care
products which are designed to accommodate obese individuals. These
products are used generally for patients weighing from 300 to 600
pounds, but can accommodate patients weighing nearly 1,000 pounds.
These individuals are often unable to fit into standard-sized beds
and wheelchairs. The Company's most sophisticated bariatric care
product can serve as a bed, chair, scale and x-ray table, helps
patients enter and exit the bed, and contains other features which
permit patients to be treated safely and with dignity. Moreover,
treating obese patients is a significant staffing issue for many
health care facilities because moving and handling these patients
increases the risk of worker's compensation claims by such
personnel. Management believes that these products enable health
care personnel to treat these patients in a manner which is safer
for hospital personnel than traditional methods, which can help
reduce worker's compensation claims. Some of the bariatric products
also address complications of immobility and obesity such as
pressure sores.
Closure of Chronic Wounds. The Company is the provider of a
patented, non-invasive device which uses subatmospheric pressure to
promote the healing of chronic wounds. This pressure is applied
through a proprietary foam dressing which draws the tissue
together, stimulates blood flow, reduces swelling and decreases
bacterial growth. The device heals wounds more quickly than
traditional methods and has been effective at closing chronic
wounds which have, in some cases, been open for years.
Circulatory Improvement. The Company offers a non-invasive
device which improves blood circulation, decreases swelling in the
lower extremities and reduces the incidence of blood clots. The
therapy is accomplished by wrapping an inflatable cuff around a
foot or leg and then automatically inflating and deflating the cuff
at prescribed intervals. The products are often used by individuals
who have had hip or knee surgeries, diabetes, or other conditions
which reduce circulation.
Products
The Company's "Continuum of Care" is focused on treating wound
care patients, pulmonary patients, large or obese patients and
patients with circulatory problems by providing innovative, outcome
driven therapies across multiple care settings.
Pressure Relief/Pressure Reduction
The Company's pressure relief products include a variety of
framed beds and overlays such as the KinAir III and IV, TheraPulse
I and II, FluidAir Elite, First Step TriCell, DynaPulse, First Step
Plus, First Step Select, First Step Advantage, Impression SR and
RIK Fluid mattress and overlay. The KinAir III has been shown to
provide effective skin care therapy in the treatment of pressure
sores, burns and post operative skin grafts and flaps, and to help
prevent the formation of pressure sores and certain other
complications of immobility. The TheraPulse provides a more
aggressive form of treatment through a continuous pulsating action
which gently massages the skin to help improve capillary and
lymphatic circulation in patients suffering from severe pressure
sores, burns, skin grafts or flaps, swelling or circulation
problems. The FluidAir Elite supports the patient on a low-pressure
surface of air-fluidized silicon beads providing pressure relief
for skin grafts or flaps, burns and pressure sores. The DynaPulse
is a pulsating mattress replacement system that helps prevent
pressure ulcers in patients at high risk for skin breakdown and can
also be used to treat existing pressure ulcers. The First Step
family of overlays is designed to provide pressure relief and help
prevent pressure sores. AirWorks Plus is a low-cost overlay which
has air chambers which assist in redistributing pressure for
better skin care. Impression is a self-contained for-sale product
for the prevention of pressure sores which is intended to replace
standard hospital mattresses. The RIK mattress and the RIK overlay
are non-powered products that provide pressure relief using a
patented viscous fluid and an anti-shear layer.
Pulmonary Care
The CDC defines Kinetic Therapy as lateral rotation of a
patient by at least 40 degrees on each side (a continuous 80 degree
arc). The Company believes Kinetic Therapy is essential to the
prevention or effective treatment of pneumonia and other pulmonary
complications in immobile patients. The Company's Kinetic Therapy
products include the TriaDyne, TriaDyne II, RotoRest Delta,
PediDyne, and Q2 Plus. The TriaDyne, introduced in mid-1995,
provides patients mainly in acute care settings with three distinct
therapies on an air suspension surface. The TriaDyne applies
Kinetic Therapy by rotating the patient up to 40 degrees to each
side and provides an industry-first feature of simultaneously
turning the patient's torso and lower body in opposite directions
while keeping the patient positioned in the middle of the bed. The
TriaDyne can also provide percussion therapy to the patient's chest
to loosen mucous buildup in the lungs and pulsating therapy to
promote capillary circulation. The TriaDyne is built on
Stryker Corporation's critical care frame, which is well suited
to an ICU environment. The TriaDyne offers several other novel
features not available on other products. The RotoRest Delta is a
specialty bed which can rotate a patient up to a 62 degree angle on
each side for the treatment of pulmonary complications and
prevention of pneumonia. The RotoRest has been shown to improve the
care of patients suffering from multiple trauma, spinal cord
injury, severe pulmonary complications, respiratory failure and
deep vein thrombosis.
Bariatric Care
The Company markets a line of therapeutic support surfaces and
aids for patients suffering from obesity, a market that had
previously been underserved. These products provide the proper
support needed by obese patients, and enable nurses to care for
obese patients in a dignified manner. The use of the Company's
bariatric products also helps to prevent injuries to hospital staff
and decreases the number of staff members needed to treat larger
patients. The most advanced product in this line is the BariAir
Therapy System, which can serve as a bed, cardiac chair, scale or
x-ray table. The BariAir provides low air loss pressure relief,
continuous turn assistance and step-down features designed for both
patient comfort and nurse assistance. This product is used
generally for patients weighing from 300 to 600 pounds but can be
used for patients who weigh up to nearly 850 pounds. The Company
believes that the BariAir is the most advanced product of its type
available today. In 1996, the Company introduced the FirstStep
Select Heavy Duty overlay which incorporates pressure-relieving
therapy in a design that supports patients weighing up to 650
pounds.
Closure of Chronic Wounds
The Company manufactures and markets the Vacuum Assisted
Closure device (the "V.A.C."), a non-invasive, active wound closure
therapy that utilizes sub atmospheric pressure. The V.A.C. promotes
healing in wounds, pressure ulcers and grafts that frequently do
not respond to traditional methods of treatment. Treatment
protocols with the V.A.C. call for a proprietary foam material to
be fitted and placed in or on top of a wound and covered with an
airtight, occlusive dressing. The foam is attached to a vacuum
pump. When activated, the vacuum pump creates a subatmospheric
pressure in the wound that draws the tissue together. This vacuum
action also stimulates blood flow on the surface of the wound,
reduces edema and decreases bacterial colonization, all of which
stimulate healing. The dressing material is replaced every 48 hours
and fitted to accommodate the decreasing size of the wound over
time. This is a significant improvement over the traditional method
for treating wounds which requires the nursing staff to clean and
dress a serious wound every 8 to 12 hours.
Circulatory Improvement
The PlexiPulse and PlexiPulse All-in-1 System are non-invasive
vascular assistance devices that aid venous return by pumping blood
from the lower extremities to help prevent deep vein thrombosis
("DVT") and re-establish microcirculation. The pumping action is
created by compressing specific parts of the foot or calf
with specially designed inflatable cuffs that are connected to a
separate pump unit. The cuffs are wrapped around the foot and/or
calf and are inflated in timed increments by the pump. The
intermittent inflation compresses a group of veins in the lower
limbs and boosts the velocity of blood flowing back toward the
heart. This increased velocity has been proven to significantly
decrease formation of DVT in non-ambulatory post-surgical and
post-trauma patients. The PlexiPulse is effective in preventing
DVT, reducing edema and improving lower limb blood circulation.
Competition
The Company believes that the principal competitive factors
within its markets are product efficacy, cost of care, clinical
outcomes and service. Furthermore, the Company believes that a
national presence with full distribution capabilities is important
to serve large, sophisticated national and regional health care
group purchasing organizations ("GPOs") and providers.
The Company contracts with both proprietary hospital groups
and voluntary GPOs. Proprietary groups own all of the hospitals
which they represent and, as a result, can ensure compliance with a
national agreement. Voluntary GPOs negotiate contracts on behalf of
member hospital organizations but cannot ensure that their members
will comply with the terms of a national agreement. Approximately
46% of the Company's total revenue during 1998 was generated under
national agreements with proprietary groups and voluntary GPOs in
the acute and extended care settings.
The Company competes on a national level with Hill-Rom,
Kendall and Invacare and on a regional and local level with
numerous other companies. In the U.S. specialty surface market and
certain international markets, the Company competes principally
with Hill-Rom. The Company competes principally with Invacare in
the home care segment. NuTech competes primarily with Kendall
International in the foot and leg compression market.
Market Outlook
Health Care Reform
There are widespread efforts to control health care costs in
the United States and abroad. For example, the Balanced Budget Act
of 1997 (the "BBA") significantly reduces the annual increases in
federal spending for Medicare and Medicaid over the next five years
by: a) reducing annual payment updates to acute care hospitals, b)
changing payment systems for both skilled nursing facilities and
home health care services from cost-based to prospective payment
systems, c) eliminating annual payment updates for durable medical
equipment ("DME") and d) allowing states greater flexibility in
controlling Medicaid costs at the state level. The general effect
of the BBA has been to place increased pricing pressure on the
Company and its customers. In particular, the changes in the
manner Medicare Part A reimburses skilled nursing facilities
("SNFs") has changed dramatically the manner in which the Company's
SNF customers make renting and purchasing decisions. The Company
also believes it is likely that efforts by governmental and private
payors to contain costs through managed care and other efforts and
to reform health systems will continue in the future.
Consolidation of Purchasing Entities
One of the most tangible results of the health care reform
debate in the United States has been to cause health care providers
to examine their cost structures and reassess the manner in which
they provide health care services. This review, in turn, has led
many health care providers to merge or consolidate with
other members of their industry in an effort to reduce costs
or achieve operating synergyies. A substantial number of the
Company's customers, including proprietary hospital groups, group
purchasing organizations, hospitals, national nursing home
companies and national home health care agencies, have been
affected by this consolidation. An extensive service distribution
network and broad product line is key to servicing the needs of
these larger provider networks. In addition, the consolidation of
health care providers often results in the renegotiation of
contracts and in the granting of price concessions. Finally, as
group purchasing organizations and integrated health care systems
increase in size, each contract represents a greater concentration
of market share and the adverse consequences of losing a particular
contract increases considerably.
Reimbursement of Health Care Costs
The Company's products are rented and sold principally to
hospitals, skilled nursing facilities and DME suppliers who receive
reimbursement for the products and services they provide from
various public and private third party payors, including Medicare,
Medicaid and private insurance programs. The Company also acts as a
Durable Medical Equipment Supplier under 42 U.S.C. 1395 et seq. and
as such furnishes its products directly to customers and bills
payors. As a result, the demand for the Company's products in any
specific care setting is dependent in part on the reimbursement
policies of the various payors in that setting. In order to be
reimbursed, the products generally must be found to be reasonable
and necessary for the treatment of medical conditions and must
otherwise fall within the payor's list of covered services. For
example, the Company is seeking to establish coverage and payment
by Medicare Part B for the V.A.C., its chronic wound treatment
product. Although clinical acceptance of this product has continued
to increase, it has not been classified as a covered item by
Medicare Part B pending receipt and review of additional clinical
data. In light of increased controls on Medicare spending, there
can be no assurance on the outcome of future coverage or payment
decisions for any of the Company's products by governmental or
private payors. If providers, suppliers and other users of the
Company's products and services are unable to obtain sufficient
reimbursement for the provision of KCI products, a material adverse
impact on the Company's business, financial condition or operations
could result.
Fraud and Abuse Laws
The Company is 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 Company products. The United States Department of Justice and
the Office of the Inspector General of the United States Department
of Health and Human Services has 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 the Company believes its business
arrangements comply with federal and state fraud and abuse laws,
there can be no assurance that the Company's practices will not be
challenged under these laws in the future or that such a challenge
would not have a material adverse effect on the Company's business,
financial condition or results of operations.
Patient demographics
U.S. Census Bureau statistics indicate that the 65-and over
age group is the fastest growing population segment and is expected
to exceed 75 million by the year 2010. Management of wounds and
circulatory problems is crucial for elderly patients. These
patients frequently suffer from deteriorating physical conditions
and their wound problems are often exacerbated by incontinence and
poor nutrition.
Obesity is increasingly being recognized as a serious medical
complication. In 1996 approximately 730,000 patients in U.S.
hospitals had a principal or secondary diagnosis of obesity. Obese
patients tend to have limited mobility and thus are at risk for
circulatory problems and skin breakdown. Treating obese patients
is also a significant staffing issue for many health care
facilities and a cause of worker's compensation claims among
nurses.
Research and Development
The focus of the Company's research and development program
has been to develop new products and make technological
improvements to existing products. In 1998, the Company has
introduced a number of new products including: the KinAir IV,
TheraPulse II, First Step Advantage, Impression SR, FluidAir HC,
Maxxis 300 & 400 (KCI-built variations of the Equitron beds) and
the Mini V.A.C. Expenditures for research and development
represented approximately 2% of the Company's total operating
expenditures in 1998. The Company intends to continue its research
and development efforts.
Manufacturing
The Company's manufacturing processes for its specialty beds,
mattress overlays, and medical devices include the manufacture of
certain components, the purchase of certain other components from
suppliers and the assembly of these components into a completed
product. Mechanical components such as blower units, electrical
displays and air flow controls consist of a variety of customized
subassemblies which are purchased from suppliers and assembled by
the Company. The Company believes it has an adequate source of
supply for each of the components used to manufacture its products.
Patents and Trademarks
The Company seeks patent protection in the United States and
abroad. As of December 31, 1998, the Company had 74 issued U.S.
patents relating to its various lines of therapeutic medical
devices. The Company also has 50 pending U.S. Patent applications.
Many of the Company's specialized beds, products and services are
offered under trademarks and service marks. The Company has 43
registered trademarks and service marks in the United States Patent
and Trademark Office.
Employees
As of December 31, 1998, the Company had approximately 2,100
employees. The Company's employees are not represented by labor
unions and the Company considers its employee relations to be good.
Government Regulation
United States. The Company's products are subject to
regulation by numerous governmental authorities, principally the
United States Food and Drug Administration ("FDA") and
corresponding state and foreign regulatory agencies. Pursuant to
the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or
approvals, and criminal prosecution. The FDA also has the authority
to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company that violates statutory
or regulatory requirements.
In the United States, medical devices are classified into one
of three classes (Class I, II or III) on the basis of the controls
deemed necessary by the FDA to reasonably ensure their safety and
effectiveness. Although many Class I devices are exempt from
certain FDA requirements, Class I devices are subject to general
controls (e.g., labeling, premarket notification, and adherence to
Quality System Regulations). Class II devices are subject to
general and special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are high risk devices that receive
greater FDA scrutiny to ensure their safety and effectiveness
(e.g., life-sustaining, life-supporting and implantable devices, or
new devices which have been found not to be substantially
equivalent to legally marketed devices). Before a new medical
device can be introduced in the market, the manufacturer must
generally obtain FDA clearance ("510(k) Clearance") or Premarket
Approval ("PMA"). All of the Company's current products have been
classified as Class I or Class II devices, which typically are
legally marketed based upon 510(k) Clearance or related exemptions.
A 510(k) Clearance will generally be granted if the submitted
information establishes that the proposed device is "substantially
equivalent" to a legally marketed medical device. In recent years,
the FDA has been requiring a more rigorous demonstration of
substantial equivalence than in the past.
Devices manufactured or distributed by the Company are subject
to pervasive and continuing regulation by the FDA and certain state
agencies, including record keeping requirements and mandatory
reporting of certain adverse experiences resulting from use of
the devices. Labeling and promotional activities are subject to
regulation by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses and the
FDA scrutinizes the advertising of medical devices to ensure that
unapproved uses of medical devices are not promoted.
Manufacturers of medical devices for marketing in the United
States are required to adhere to applicable regulations setting
forth detailed Quality System Regulation ("QSR") (formerly Good
Manufacturing Practices) requirements, which include design,
testing, control and documentation requirements. Manufacturers must
also comply with MDR requirements that a company report certain
device-related incidents to the FDA. The Company is subject to
routine inspection by the FDA and certain state agencies for
compliance with QSR requirements, MDR requirements and other
applicable regulations. The Company is also subject to numerous
federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Changes in existing requirements
or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, and results
of operations. There can be no assurance that the Company will not
incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material
adverse effect upon the Company's business, financial condition or
results of operations.
Fraud and Abuse Laws. The Company is subject to federal and
state laws pertaining to health care fraud and abuse. In
particular, certain federal and state laws prohibit manufacturers,
suppliers, and providers from offering or giving or receiving
kickbacks or other remuneration in connection with the ordering or
recommending purchase or rental, of health care items and
services. The federal anti-kickback statute provides both civil and
criminal penalties for, among other things, offering or paying any
remuneration to induce someone to refer patients to, or to
purchase, lease, or order (or arrange for or recommend the
purchase, lease, or order of), any item or service for which
payment may be made by Medicare or certain federally-funded
state health care programs (e.g., Medicaid). This statute also
prohibits soliciting or receiving any remuneration in exchange for
engaging in any of these activities. The prohibition applies
whether the remuneration is provided directly or indirectly,
overtly or covertly, in cash or in kind. Violations of the law can
result in numerous sanctions, including criminal fines,
imprisonment, and exclusion from participation in the Medicare and
Medicaid programs.
These provisions have been broadly interpreted to apply to
certain relationships between manufacturers and suppliers, such as
the Company, and hospitals, skilled nursing facilities ("SNFs"),
and other potential purchasers or sources of referral. Under
current law, courts and the Office of Inspector General ("OIG") of
the United States Department of Health and Human Services ("HHS")
have stated, among other things, that the law is violated where
even one purpose (as opposed to a primary or sole purpose) of a
particular arrangement is to induce purchases or patient referrals.
The OIG has taken certain actions which suggest that
arrangements between manufacturers/suppliers of durable medical
equipment or medical supplies and SNFs (or other providers) may be
under continued scrutiny. An OIG enforcement initiative, Operation
Restore Trust ("ORT"), has targeted an investigation of fraud and
abuse in a number of states (i.e., California, Florida, Illinois,
New York, and Texas), focusing specifically on the long-term care,
home health, and DME industries. ORT's funding has officially ended
and the Inspector General has announced plans to implement an
"ORT-Plus" program in other states in conjunction with other
federal law enforcement bodies. Furthermore, in August 1995, the
OIG issued a Special Fraud Alert describing certain relationships
between SNFs and suppliers that the OIG viewed as abusive under
the statute. These initiatives create an environment in which
there will continue to be significant scrutiny for compliance with
federal and state fraud and abuse laws.
Several states also have referral, fee splitting and other
similar laws that may restrict the payment or receipt of
remuneration in connection with the purchase or rental of medical
equipment and supplies. State laws vary in scope and have been
infrequently interpreted by courts and regulatory agencies, but may
apply to all health care items or services, regardless of whether
Medicaid or Medicaid funds are involved.
The Company is also subject to federal and state laws
prohibiting the presentation (or the causing to be presented) of
claims for payment (by Medicare, Medicaid, or other third party
payors) that are determined to be false, fraudulent, or for an item
or service that was not provided as claimed. In one case, a major
DME manufacturer paid more than $4 million to settle allegations
that it had "caused to be presented" false Medicare claims through
advice that its sales force allegedly gave to customers concerning
the appropriate reimbursement coding for its products.
ISO Certification. Due to the harmonization efforts of a
variety of regulatory bodies worldwide, certification of compliance
with the ISO 9000 series of International Standards ("ISO
Certification") has become particularly advantageous and, in
certain circumstances necessary for many companies in recent years.
The Company received ISO Certification in the fourth quarter of
1997 and therefore is certified to sell and distribute the
Company's products within the European community.
Other Laws. The Company owns and leases property that is
subject to environmental laws and regulations. The Company also is
subject to numerous federal, state and local laws and regulations
relating to such matters as safe working conditions, manufacturing
practices, fire hazard control and the handling and disposal of
hazardous or potentially hazardous substances.
International. Sales of medical devices outside of the United
States are subject to regulatory requirements that vary widely from
country to country. Premarket clearance or approval of medical
devices is required by certain countries. The time required to
obtain clearance or approval for sale in a foreign country may be
longer or shorter than that required for clearance or approval by
the FDA and the requirements vary. Failure to comply with
applicable regulatory requirements can result in loss of previously
received approvals and other sanctions and could have a material
adverse effect on the Company's business, financial condition or
results of operations.
Reimbursement
The Company's products are rented and sold principally to
hospitals, extended care facilities and Home Medical Equipment
(HME) providers (also referred to as Durable Medical Equipment
Providers) who receive reimbursement for the products and services
they provide from various public and private third-party payors,
including the Medicare and Medicaid programs and private insurance
plans. The Company also directly bills third party payors,
including Medicare and Medicaid, and receives reimbursement from
these payors. In some cases, Medicare beneficiaries are billed
twenty percent for coinsurance. As a result, demand and payment for
the Company's products is dependent in part on the reimbursement
policies of these payors. The manner in which reimbursement is
sought and obtained for any of the Company's products varies based
upon the type of payor involved and the setting in which the
product is furnished and utilized by patients.
Medicare. Medicare is a federally-funded program that
reimburses the costs of health care furnished primarily to the
elderly and disabled. Medicare is composed of two parts: Part A and
Part B. The Medicare program has established guidelines for the
coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by
Medicare, a health care item or service furnished to a Medicare
beneficiary must be reasonable and necessary for the diagnosis or
treatment of an illness or injury or to improve the functioning of
a malformed body part. This has been interpreted to mean that the
item or service must be safe and effective, not experimental or
investigational (except under certain limited circumstances
involving devices furnished pursuant to an FDA-approved clinical
trial), and appropriate. To date, specific Medicare guidelines have
not been established addressing under what circumstances, if any,
Medicare coverage would be provided for the use of the PlexiPulse
or the V.A C.
The methodology for determining the amount of Medicare
reimbursement of the Company's products varies based upon, among
other things, the setting in which a Medicare beneficiary receives
health care items and services. The recently enacted Balanced
Budget Act (BBA) of 1997 will significantly impact the manner in
which Medicare reimbursement is funded over the next five years.
Most of the Company's products are furnished in a hospital, skilled
nursing facility or the beneficiary's home.
Hospital Setting. With the establishment of the prospective
payment system in 1983, acute care hospitals are now generally
reimbursed by Medicare for inpatient operating costs based upon
prospectively determined rates. Under the prospective payment
system ("PPS"), acute care hospitals receive a predetermined
payment rate based upon the Diagnosis-Related Group ("DRG") into
which each Medicare beneficiary is assigned, regardless of the
actual cost of the services provided. Certain additional or
"outlier" payments may be made to a hospital for cases involving
unusually long lengths of stay or high costs. However, outlier
payments based upon length of stay were phased out with fiscal year
1998. Furthermore, pursuant to regulations issued in 1991, and
subject to a ten-year transition period, the capital costs of acute
care hospitals (such as the cost of purchasing or renting the
Company's specialty beds) are also reimbursed by Medicare pursuant
to an add-on to the DRG-based payment amount. Accordingly, acute
care hospitals generally do not receive direct Medicare
reimbursement under PPS for the distinct costs incurred in
purchasing or renting the Company's products. Rather, reimbursement
for these costs is deemed to be included within the DRG-based
payments made to hospitals for the treatment of Medicare-eligible
inpatients who utilize the products. Since PPS rates are
predetermined, and generally paid irrespective of a hospital's
actual costs in furnishing care, acute care hospitals have
incentives to lower their inpatient operating costs by utilizing
equipment and supplies that will reduce the length of inpatient
stays, decrease labor, or otherwise lower their costs.
The principal manner in which the BBA impacts Medicare Part A
in the acute care setting is that it has reduced the annual DRG
payment updates to be paid over the next five years by more than
$40.0 billion. In addition, the BBA authorizes the Health Care
Financing Administration ("HCFA") to enact regulations which are
designed to restrain certain hospital reimbursement activities
which are perceived to be abusive or fraudulent.
Certain specialty hospitals (e.g., long-term care,
rehabilitation and children hospitals) also use the Company's
products. Such specialty hospitals currently are exempt from the
PPS and, subject to certain cost ceilings, are reimbursed by
Medicare on a reasonable cost basis for inpatient operating and
capital costs incurred in treating Medicare beneficiaries.
Consequently, long-term care hospitals may receive separate
Medicare reimbursement for reasonable costs incurred in purchasing
or renting the Company's products; however, Medicare reimbursement
for such hospitals is expected to be reduced by $3.5 billion over
the next five years. There can be no assurance that a prospective
payment system will not be instituted for such hospitals in future
legislation.
Skilled Nursing Facility Setting. Skilled nursing facilities
("SNFs") which purchase or rent the Company's products have
traditionally been reimbursed directly under Medicare Part A for
some portion of their incurred costs. On July 1, 1998, the manner
in which SNFs were reimbursed under Medicare Part A changed
dramatically. On that date, reimbursement for SNFs under Medicare
Part A changed from a cost-based system to a prospective payment
system. The new payment system is based on resource utilization
groups ("RUGs"). Under the RUGs system, a SNF Medicare patient is
assigned to a RUGs category upon admission to the facility. The
RUGs category to which the patient is assigned depends upon the
level of care and resources the patient requires. The SNF receives
a prospectively determined daily payment based upon the RUGs
category assigned to each Medicare patient. The daily payments made
to the SNFs during a transition period are based upon a blend of
their actual costs from 1995 and a national average cost from 1995
(which is subject to local wage-based adjustments). Initially, 75%
of a SNF's per diem is based on its costs and 25% of the per diem
is based on national average cost. At the end of the four-year
phase-in period, all daily payments will be based on the national
average cost. Because the RUG's system provides SNFs with fixed
cost reimbursement, SNFs have become less inclined than in the past
to use products which had previously been reimbursed as variable
ancillary costs. The Company's revenue from SNF customers has
dropped sharply since the implementation of the RUGs system.
Home Setting. The Company's products are also provided to
Medicare beneficiaries in home care settings. Medicare reimburses
beneficiaries, or suppliers accepting assignment, for the purchase
or rental of HME for use in the beneficiary's home or a home for
the aged (as opposed to use in a hospital or skilled nursing
facility setting). So long as the Medicare Part B coverage criteria
are met, certain of the Company's products, including air fluidized
beds, air-powered floatation beds and alternating air mattresses,
are reimbursed in the home setting under the HME category known as
"Capped Rental Items." Pursuant to the fee schedule payment
methodology for this category, Medicare pays a monthly rental fee
(for a period not to exceed fifteen months) equal to 80% of the
established allowable charge for the item. Under the BBA, there
will be a five-year freeze on consumer price index payment updates
for Medicare Part B Services in the home care setting.
Medicaid. The Medicaid program is a cooperative federal/state
program that provides medical assistance benefits to qualifying low
income and medically-needy persons. State participation in Medicaid
is optional and each state is given discretion in developing and
administering its own Medicaid program, subject to certain federal
requirements pertaining to payment levels, eligibility criteria
and minimum categories of services. The Medicaid program
finances approximately 50% of all care provided in skilled nursing
facilities nationwide. The Company sells or rents its products to
SNFs for use in furnishing care to Medicaid recipients. SNFs, or
the Company, may seek and receive Medicaid reimbursement directly
from states for the incurred costs. However, the method and level
of reimbursement, which generally reflects regionalized average
cost structures and other factors, varies from state to state and
is subject to each states budget restraints.
Private Payors. Many private payors, including indemnity
insurers, employer group health insurance programs and managed care
plans, presently provide coverage for the purchase and rental of
the Company's products. The scope of coverage and payment policies
varies among private payors. Furthermore, many such payors are
investigating or implementing methods for reducing health care
costs, such as the establishment of capitated or prospective
payment systems.
The Company believes that government and private efforts to
contain or reduce health care costs are likely to continue. These
trends may lead third-party payors to deny or limit reimbursement
for the Company's products, which could negatively impact the
pricing and profitability of, or demand for, the Company's
products.
Item 2. Properties
- -------------------
The Company's corporate headquarters are currently located in
a 170,000 square foot building in San Antonio, Texas which was
purchased by the Company in January 1992. The Company utilizes
approximately 89,000 square feet of the building with the remaining
space being leased to unrelated entities. In June 1997, the Company
also acquired a 2.8 acre tract of land adjacent to its corporate
headquarters. There are three buildings on the land which contain
an aggregate of 40,000 square feet, which will be used for general
corporate purposes.
The Company conducts its manufacturing, shipping, receiving
and storage activities in a 153,000 square foot facility in San
Antonio, Texas, which was purchased by the Company in January 1988.
In 1989, the Company completed the construction of a 17,000 square
foot addition to the facility which is utilized as office space.
The Company also owns a 37,000 square foot building in San Antonio,
Texas which houses the Company's engineering. In 1992, the Company
purchased a 35,000 square foot facility in San Antonio, Texas which
is used for storage. The Company maintains additional storage at
two leased facilities in San Antonio, Texas. In 1994, the Company
purchased a facility in San Antonio, Texas which has been provided
to a charitable organization to provide housing for families of
cancer patients. The facility is built on 6.7 acres and consists of
a 15,000 square foot building and a 2,500 square foot house.
The Company leases approximately 141 domestic distribution
centers, including each of its seven regional headquarters, which
range in size from 1,500 to 18,000 square feet. The Company also
leases two small manufacturing plants in the United Kingdom and
Ireland which are approximately 18,000 square feet and 9,000 square
feet, respectively.
Item 3. Legal Proceedings
- --------------------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for
the Western District of Texas. Novamedix manufactures the principal
product which directly competes with the PlexiPulse. The suit
alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship
with Novamedix and a variety of ancillary claims. Novamedix seeks
injunctive relief and monetary damages. Although it is not possible
to reliably predict the outcome of this litigation or the
damages which could be awarded, the Company believes that its
defenses to these claims are meritorious and that the litigation
will not have a material adverse effect on the Company's business,
financial condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust
lawsuit against Hillenbrand Industries, Inc. and one of its
subsidiaries, Hill-Rom. The suit was filed in the United States
District Court for the Western District of Texas. The suit alleges
that Hill-Rom used its monopoly power in the standard hospital bed
business to gain an unfair advantage in the specialty hospital bed
business. Specifically, the allegations set forth in the suit
include a claim that Hill-Rom required hospitals and purchasing
groups to agree to exclusively rent specialty beds in order to
receive substantial discounts on products over which they have
monopoly power - hospital beds and head wall units. The suit
further alleges that Hill-Rom engaged in activities which
constitute predatory pricing and refusals to deal. Hill-Rom has
filed an answer denying the allegations in the suit. Although
discovery has not been completed and it is not possible to reliably
predict the outcome of this litigation or the damages which might
be awarded, the Company believes that its claims are meritorious.
On October 31, 1996, the Company received a counterclaim which
had been filed by Hillenbrand Industries, Inc. in the antitrust
lawsuit which the Company filed in 1995. The counterclaim alleges
that the Company's antitrust lawsuit and other actions were
designed to enable KCI to monopolize the specialty therapeutic
surface market. Although it is not possible to reliably predict the
outcome of this litigation, the Company believes that the
counterclaim is without merit.
On December 24, 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. This case was tried in January 1999
and, in February 1999, the trial judge ruled that the TriaDyne bed
did not infringe the Hill-Rom patent.
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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of the Company's security
holders during the fourth quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters
- ----------------------------
The Company's common stock ("Common Stock") traded on The
Nasdaq Stock Market under the symbol: KNCI until November 19, 1997,
which was the date on which the Company delisted its common stock.
The range of the high and low bid prices of the Common Stock for
each of the quarters during the 1997 fiscal year is presented
below, through the last date that the Company's common stock was
traded on a national exchange.
MARKET PRICES OF COMMON STOCK
1997 High Low
------------- ------- -------
First Quarter $ 3.938 $ 2.844
Second Quarter 4.594 3.375
Third Quarter 4.985 4.219
Fourth Quarter 4.875 4.531
The Company's Board of Directors declared quarterly cash
dividends on the Common Stock in 1997 which totaled $0.0281 per
share. No dividends were declared in 1998. The Company's credit
agreements contain certain covenants which currently restrict the
Company's ability to declare and pay cash dividends.
As of March 1, 1999, there were 5 holders of record of the
Company's Common Stock. There is currently no established public
trading market for the Company's Common Stock.
Item 6. Selected Financial Data
- --------------------------------
Note: All share and per share amounts shown below have been
adjusted to reflect a four-for-one stock split effective in the
third quarter of 1998.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
--------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Consolidated Statements of
Earnings Data:
Revenue:
Rental and service........$ 258,482 $ 247,890 $225,450 $206,653 $228,832
Sales and other........... 71,989 59,026 44,431 36,790 40,814
------- ------- ------- ------- -------
Total revenue........... 330,471 306,916 269,881 243,443 269,646
------- ------- ------- ------- -------
Rental expenses............. 165,461 156,179 146,205 137,420 159,235
Cost of goods sold.......... 27,881 23,673 16,315 13,729 19,388
------- ------- ------- ------- -------
Gross profit............ 137,129 127,064 107,361 92,294 91,023
Selling, general and
administrative expenses... 69,569 62,654 52,007 48,502 51,813
Unusual items (1)........... -- -- -- -- (84,868)
Recapitalization expense (2) -- 34,361 -- -- --
------- ------- ------- ------- -------
Operating earnings...... 67,560 30,049 55,354 43,792 124,078
Interest income............. 616 2,263 9,332 5,063 1,318
Interest expense............ (48,594) (10,173) (245) (509) (5,846)
Foreign currency gain (loss) 20 (1,106) -- -- --
------- ------- ------- ------- -------
Earnings before income
taxes, minortiy
interest and cumu-
lative effect of
change in accounting
principle............. 19,602 21,033 64,441 48,346 119,550
Income taxes................ 7,851 8,403 25,454 19,905 55,949
------- ------- ------- ------- -------
Earnings before minority
interest and cumulative
effect of change in
accounting principle.. 11,751 12,630 38,987 28,441 63,601
Minority interest in
subsidiary loss (gain).... 25 (25) -- -- 40
Cumulative effect of change
in accounting for
inventory (3)............. -- -- -- -- 742
------- ------- ------- ------- -------
Net earnings............$ 11,776 $ 12,605 $ 38,987 $ 28,441 $ 64,383
======= ======= ======= ======= =======
Earnings per common
share (2).............$ 0.17 $ 0.08 $ 0.22 $ 0.16 $ 0.37
======= ======= ======= ======= =======
Earnings per common
share -- assuming
dilution (2)..........$ 0.16 $ 0.08 $ 0.21 $ 0.16 $ 0.36
======= ======= ======= ======= =======
Average common shares:
Basic (weighted average
common shares)(2)(4)...... 70,873 154,364 175,832 176,652 175,652
======= ======= ======= ======= =======
Diluted (weighted average
outstanding shares)(2)
(4)..................... 73,233 159,640 181,956 181,828 176,572
======= ======= ======= ======= =======
Cash flow provided by
operations................$ 43,885 $ 10,704 $ 62,167 $ 56,782 $ 96,451
======= ======= ======= ======= =======
Cash dividends paid to
common shareholders.......$ -- $ 6,388 $ 6,607 $ 6,631 $ 6,588
======= ======= ======= ======= =======
Cash dividends per share
paid to common share-
holders (4)...............$ -- $ .028 $ .038 $ .038 $ .038
======= ======= ======= ======= =======
Consolidated Balance Sheet
Data:
Working capital...........$ 76,593 $ 96,365 $107,334 $109,413 $ 90,731
Total assets..............$ 308,073 $ 351,151 $253,393 $243,726 $232,731
Long-term obligations --
noncurrent..............$ 506,701 $ 530,213 $ -- $ -- $ 2,755
Other shareholders'
equity..................$(261,588)$(275,698)$211,078 $210,324 $185,423
(1) Includes $81.6 million gain, net of legal expense, from the
settlement of a patent infringement lawsuit. In addition, a $10.1
million pre-tax gain from the sale of the Company's Medical
Services Division was recognized. The Company also recorded
certain other unusual items related to planned dispositions of
under-utilized rental assets and over-stocked inventories of $6.8
million.
(2) See Note 2 of Notes to Consolidated Financial Statements for
information on the Company's recapitalization .
(3) On January 1, 1994, the Company changed its method of applying
overhead to inventory. Historically, a single labor overhead rate
and a single materials overhead rate were used in valuing ending
inventory. Labor overhead was applied as labor was incurred while
materials overhead was applied at the time of shipping. This change
resulted in a cumulative earnings effect of $742,000.
(4) See Note 8 of Notes to Consolidated Financial Statements for
information regarding a four-for-one stock split declared in the
third quarter of 1998.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
- --------------------------------------------
General
The ongoing changes in health care reimbursement continue to
create pressure on health care providers to control costs, provide
cost effective therapies and improve patient outcomes. Industry
trends resulting from these pressures include the accelerating
migration of patients from acute care facilities into extended care
(e.g., skilled nursing facilities and rehabilitation centers) and
home care settings, and the consolidation of health care providers
and national and regional group purchasing organizations.
In August 1997, in an effort to reduce the federal deficit and
lower overall federal healthcare expenditures, Congress passed the
Balanced Budget Act, (the "BBA"). The BBA contains a number of
provisions which will impact the federal reimbursement of health
care costs 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, which commenced July 1, 1998, in the manner in which
skilled nursing facilities ("SNFs") are reimbursed from a cost
based system to a prospective payment system whereby SNFs receive
an all inclusive, case-mix adjusted per diem payment for each of
their Medicare patients (the "RUGS System"); 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 revenues are 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
substantial impact on its hospital customers or the dealers who
distribute the Company's products in the home health care market.
However, changes introduced by the BBA have impacted negatively the
manner in which the extended care customers make purchasing and
rental decisions with respect to the Company's products.
Industry trends including pricing pressures, the consolidation
of health care providers and national and regional group purchasing
organizations and a shift in market demand toward lower-priced
products such as mattress overlays have had the impact of reducing
the Company's overall average daily rental rates on its individual
products. These industry trends, together with the increasing
migration of patients from acute care to extended and home care
settings, have had the effect of reducing overall acute care market
growth.
Generally, the Company's customers prefer to rent rather than
purchase the Company's products in order to avoid the ongoing
service, storage and maintenance requirements and the high initial
capital outlays associated with purchasing such products, as well
as to receive the Company's high-quality clinical support. As a
result, rental revenues are a high percentage of the Company's
overall revenues. More recently, sales have increased as a portion
of the Company's revenues. The Company believes this trend will
continue because certain U.S. health care providers are purchasing
products that are less expensive and easier to maintain such as
medical devices, mattress overlays and mattress replacement
systems. In addition, international health care providers tend to
purchase therapeutic surfaces more often than U.S. health care
providers.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
All share and per share amounts shown in Item 7 have been
adjusted to reflect a four-for-one stock split which was effective
in the third quarter of 1998.
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as
the change in each line item as compared to the prior year ($ in
thousands):
Year Ended December 31,
-------------------------------
Revenue Increase
Relationship (Decrease)
--------------- --------------
1998 1997 $ Pct
------- ------- ------- ----
Revenue:
Rental and service........... 78% 81% $ 10,592 4%
Sales and other.............. 22 19 12,963 22
--- --- ------
100% 100% 23,555 8
Rental expenses................ 50 51 9,282 6
Cost of goods sold............. 9 8 4,208 18
--- --- ------
Gross profit............... 41 41 10,065 8
Selling, general and
administrative expenses...... 21 20 6,915 11
Recapitalization costs......... -- 11 (34,361) (100)
--- --- ------
Operating earnings......... 20 10 37,511 125
Interest income................ -- -- (1,647) (73)
Interest expense............... (14) (3) (38,421) (378)
Foreign currency gain (loss)... -- -- 1,126 102
--- --- ------
Earnings before income
taxes and minority
interest................. 6 7 (1,431) (7)
Income taxes................... 2 3 552 7
Minority interest.............. -- -- 50 200
--- --- ------
Net earnings............... 4% 4% $ (829) (7)%
=== === ======
The Company's revenue is divided between three primary
operating units. The following table sets forth, for the periods
indicated, the amount of revenue derived from each of these
segments ($ in millions):
Year Ended December 31,
-----------------------
1998 1997
---------- ----------
KCI,Therapeutic Services...... $229.6 $215.2
KCI,International............. 78.0 70.3
Nutech........................ 21.5 19.1
Other......................... 1.4 2.3
----- -----
Total revenue $330.5 $306.9
===== =====
Total Revenue: Total revenue in 1998 increased $23.6 million, or
7.7%, to $330.5 million from $306.9 million in 1997. Revenue from
KCI,Therapeutic Services("KCTS") business unit was $229.6 million,
up $14.4 million, or 6.7%, from $215.2 million in the prior year
due substantially to V.A.C. rentals and sales growth. KCTS
surfaces revenue increased slightly due to a combination of
revenue from the RIK Medical acquisition, wound care product sales
and higher patient therapy days which were virtually offset by
lower blended rental rates. Sales for the period increased $13.0
million, or 22.0%, due substantially to sales of disposable
products associated with the Company's medical devices.
Revenue from the Company's international operating unit
increased $7.7 million, or 11.0%, to $78.0 million from $70.3
million in 1997. The international revenue increase reflects
higher therapy days in virtually all of the Company's middle-tier
markets, e.g., the Netherlands, Canada and Switzerland, which were
partly offset by unfavorable currency exchange rate fluctuations of
approximately $2.1 million.
Revenue from the Nutech segment, increased $2.4 million, or
12.6%, to $21.5 million from $19.1 million in 1997, due
substantially to growth in PlexiPulse vascular assistance device
rentals and sales combined with the acquisition of Jobst which
contributed sales of approximately $800,000 in the year.
Rental Expenses: Rental, or field, expenses increased $9.3
million, or 5.9%, to $165.5 million from $156.2 million in 1997.
This increase is primarily attributable to costs associated with
business acquisitions completed during 1997 and 1998 including
increased equipment depreciation and field labor costs. As a
percentage of rental revenue, rental expenses were 64.0% and 63.0%
for the 1998 and 1997, respectively.
Cost of Goods Sold: Cost of goods sold in 1998 increased $4.2
million, or 17.8%, to $27.9 million compared to $23.7 million in
1997. Cost of goods sold has increased primarily as a result of
increased sales of disposables associated with the Company's
medical devices.
Gross Profit: Gross profit increased $10.0 million, or 7.9%, to
$137.1 million in 1998 from $127.1 million in 1997 due primarily to
increased revenue as discussed above. Gross profit margin for 1998,
as a percentage of total revenue, was 41.5%, up from 41.4% for
1997.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased $6.9 million, or 11.0%, to $69.6
million in 1998 from $62.7 million in 1997. This increase was due
in part to increased sales commissions, goodwill amortization
associated with acquisitions, increased inventory valuation
reserves and increased legal and professional fees resulting from
continuing litigation and systems/process improvement projects
including conversion of the Company's manufacturing and payroll
systems to Year 2000 compliant platforms. As a percentage of total
revenue, selling, general and administrative expenses were 21.1% in
1998 as compared with 20.4% in 1997.
Recapitalization: During 1997, the Company recognized $34.4
million in fees and expenses resulting from the transactions
associated with a leveraged recapitalization of the Company (the
"Recapitalization"). Recapitalization expenses consisted of
compensation expense associated with employee stock option
exercises and other incentives, commitment fees on unused credit
facilities, legal and professional fees and other miscellaneous
costs and expenses.
Operating Earnings: Operating earnings for 1998 were $67.6
million, an increase of 124.8% from $30.0 million in 1997, due
substantially to Recapitalization expenses of $34.4 million which
were recognized in 1997. Excluding Recapitalization expenses,
operating earnings for 1998 would have increased $3.2 million, or
4.9%, from 1997. As a percentage of total revenue, the Company's
operating margin was 20.4%, down from 21.0%, excluding
Recapitalization expenses, in 1997 primarily due to the increase
in selling, general and administrative expenses discussed above.
Interest Income: Interest income for 1998 was approximately
$616,000 compared to approximately $2.3 million in the prior
year. The decrease in interest income resulted from lower invested
cash balances due primarily to acquisition activities in 1997 and
the leveraged recapitalization transactions completed during the
fourth quarter of the prior year.
Interest Expense: Interest expense for 1998 was $48.6 million
compared to $10.2 million for 1997. The interest expense increase
was due to interest accrued on an average balance of approximately
$525 million in long-term debt obligations associated with the
Recapitalization.
Income Taxes: The Company's effective income tax rate for 1998
and 1997 was 40.0%.
Net Earnings: Net earnings for 1998 were $11.8 million, or $.17
per share, assuming no dilution, compared to 1997 net earnings of
$12.6 million, or $0.08 per share. Excluding Recapitalization
expenses, net earnings for 1997 would have been $39.2 million, or
$0.25 per share.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as
the change in each line item as compared to the prior year ($ in
thousands):
Year Ended December 31,
-----------------------------------
Revenue Increase
Relationship (Decrease)
------------------ ---------------
1997 1996 $ Pct
--------- -------- -------- ------
Revenue:
Rental and service......... 81% 84% $ 22,440 10%
Sales and other............ 19 16 14,595 33
--- --- -------
100% 100% 37,035 14
Rental expenses.............. 51 54 9,974 7
Cost of goods sold........... 8 6 7,358 45
--- --- -------
Gross profit............. 41 40 19,703 18
Selling, general and
administrative expenses.... 20 19 10,647 20
Recapitalization costs....... 11 -- 34,361 N/A
--- --- -------
Operating earnings....... 10 21 (25,305) (46)
Interest income.............. -- 3 (7,069) (76)
Interest expense............. (3) -- (9,928) N/A
Foreign currency loss........ -- -- (1,106) N/A
--- --- ------
Earnings before income
taxes and minority
interest............... 7 24 (43,408) (67)
Income taxes................. 3 10 17,051 67
Minority interest............ -- -- (25) N/A
--- --- ------
Net earnings 4% 14% $(26,382) (68)%
=== === ======
The Company's revenue is divided between three primary
operating units. The following table sets forth, for the periods
indicated, the amount of revenue derived from each of these markets
($ in millions):
Year Ended December 31,
---------------------------
1997 1996
----------- -----------
KCI,Therapeutic Services..... $215.2 $184.8
KCI, International........... 70.3 68.8
Nutech....................... 19.1 15.7
Other........................ 2.3 0.6
----- -----
Total revenue $306.9 $269.9
===== =====
Total Revenue: Total revenue in 1997 was $306.9 million, an
increase of $37.0 million, or 13.7%, from $269.9 million in 1996.
This increase was primarily attributable to growth in both the
Company's domestic specialty surface and medical devices
businesses. KCI,Therapeutic Services revenue includes revenue from
acute and extended care facilities as well as revenue from the home
care setting. Revenue from the KCTS business unit was $215.2
million, up $30.4 million, or 16.5%, from $184.8 million in the
prior year due primarily to growth in V.A.C. rentals in the United
States and therapy day growth in each of the wound care, pulmonary
and bariatric markets combined with an overall increase in the
average daily rental price of its products. Revenue from the
Company's international business was $70.3 million compared to
$68.8 million in the prior year, despite adverse foreign currency
exchange fluctuations of approximately $6.4 million. Revenue from
the Nutech segment of $19.1 million increased $3.4 million, or
21.7%, up from $15.7 million in the prior year, due substantially
to increased market penetration associated with the Mediq/PRN
alliance.
Rental Expenses: Rental expenses consist largely of field
personnel costs, depreciation of the Company's rental equipment
and related facility costs. Rental expenses for 1997 totaled
$156.2 million, an increase of $10.0 million, or 6.8%, from $146.2
million in the prior year. The addition of extended care sales
representatives, new marketing programs and product costs
associated with new and acquired therapies and technologies
accounted for the majority of this increase. As a percentage of
total revenue, 1997 rental expenses were 50.9%, down from 54.2% in
the prior period. This decrease is primarily attributable to the
increase in rental revenue, as the majority of the Company's
rental or field expenses are relatively fixed.
Gross Profit: Gross profit in 1997 was $127.1 million, an
increase of $19.7 million, or 18.4%, from $107.4 million in the
year-ago period due substantially to higher revenue, combined with
relatively fixed field expenses and improved sales volumes. Gross
profit margin for 1997, as a percentage of total revenue, was
41.4%, up from 39.8% for the prior year. Rental margins improved
to 37.0%, up 1.9 percentage points from 1996, while sales margins
declined to 59.9%, from 63.3%, as the product mix shifted toward
lower-margin overlays, particularly in the international home care
setting.
Selling, General and Administrative Expenses: Selling, general and
administrative (SG&A) expenses for 1997 were $62.7 million, an
increase of $10.6 million, or 20.5%, from 1996. Key investments
in marketing programs and information systems as well as higher
legal and professional fees and provisions for uncollectible
accounts receivable made up the majority of this increase. As a
percentage of total revenue, SG&A expenses in 1997 were 20.4%, up
slightly from 19.3% in the year-ago period.
Recapitalization: During 1997, the Company recognized $34.4
million in fees and expenses resulting from the transactions
associated with the Recapitalization. Recapitalization expenses
consisted of compensation expense associated with employee stock
option exercises and other incentives, commitment fees on unused
credit facilities, legal and professional fees and other
miscellaneous costs and expenses.
Operating Earnings: Operating earnings for 1997 were $30.0
million, a decrease of $25.3 million, or 45.7%, from 1996, due
substantially to Recapitalization expenses of $34.4 million in
1997. Excluding the Recapitalization expenses, operating earnings
for 1997 were $64.4 million, an increase of $9.1 million, or
16.4%, from 1996. As a percentage of total revenue, the Company's
operating margin, excluding the recapitalization expenses,
improved to 21.0%, up from 20.5% in 1996.
Interest Income: Interest income earned during 1997 was $2.3
million, a $7.1 million decrease from 1996. The prior year
interest income included $5.2 million of non-recurring interest
income from the early repayment of all remaining notes receivables
from the 1994 disposition of the Medical Services Division. The
remainder of the variance is due to lower invested cash balances
in 1997 as the Company funded five acquisitions during the year
from existing cash reserves.
Interest Expense: Interest expense for the year was $10.2
million, an increase of $9.9 million from 1996. The majority of
this increase was due to interest accrued on approximately $535.0
million of debt outstanding after completion of the
Recapitalization.
Income Taxes: The Company's effective income tax rate for 1997
was 40.0% compared to 39.5% in 1996.
Net Earnings: Net earnings for 1997 were $12.6 million, or $0.08
per share, compared to 1996 net earnings of $39.0 million, or
$0.22 per share. Excluding non-recurring items, net earnings for
1997 would have been $39.2 million, or $0.25 per share, compared
to 1996 net earnings of $35.9 million, an increase of $3.3
million, or 9.2%. Higher revenue combined with controlled
spending accounted for the earnings improvement.
Financial Condition
The change in revenue and expenses experienced by the Company
during the year ended December 31, 1998 and other factors resulted
in changes to the Company's balance sheet as follows:
Cash and cash equivalents were $4.4 million at December 31,
1998, a decrease of $57.4 million from December 31, 1997. The cash
decrease is primarily attributable to payments associated with the
Recapitalization, including $32.3 million for first quarter 1998
repurchases of common stock, and $19.3 million for the repayment of
long-term debt obligations.
Accounts receivable at December 31, 1998 were $85.2 million,
an increase of $4.0 million, or 4.9%, from the prior year end.
V.A.C. rentals and sales which the Company has billed to the
Medicare program increased receivables by $4.5 million as the
Company has not been granted a Medicare Part B V.A.C.
Reimbursement Code. The remainder of this increase was due
primarily to (i) revenue growth in extended care and home care
markets which tend to have customers and payors who historically
have paid over a longer cycle than acute care customers and (ii)
growth in international receivables.
Inventories at December 31, 1998 increased $7.1 million, or
33.0%, to $28.7 million from the end of 1997, due primarily to
purchases of wound dressing and disposable devices which make up a
large percentage of total company sales revenue.
Prepaid expenses and other current assets of $10.7 million
decreased 42.0% 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 resulted in the Company
recording a tax receivable for the year ended December 31, 1997.
Goodwill increased $8.4 million, or 18.4%, from December 31,
1997 due primarily to the Jobst acquisition during 1998. The
goodwill associated with this acquisition will be amortized over
25 years.
Accounts payable and accrued liabilities at December 31, 1998
were $3.4 million and $37.3 million, respectively, compared to
$40.4 million and $41.3 million, respectively, at the end of 1997.
The decrease in accounts payable relates primarily to payments for
shares of common stock not tendered as of December 31, 1997.
Payments of interest on long-term debt obligations and payment of
an earnout related to a prior year acquisition accounted for the
majority of the decrease in accrued liabilities.
Long-term debt obligations, including current maturities,
decreased $19.3 million to $515.4 million as of December 31, 1998
due to the repayment of a portion of the Company's revolving credit
facility in addition to scheduled principal payments.
Income Taxes
The provision for deferred income taxes is based on the asset
and liability method and represents the change in the deferred
income tax accounts during the year. Under the asset and liability
method of FAS 109, deferred income taxes are recognized for the
future tax consequences attributable to the difference between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. At the end of 1998, the
net impact of these timing issues resulted in a net deferred tax
liability comprised of deferred tax liabilities totaling $27.6
million offset by deferred tax assets totaling $17.5 million.
Legal Proceedings
A description of the Company's legal proceedings is set forth
under the caption "Item 3. Legal Proceedings".
Liquidity and Capital Resources
At December 31, 1998, the Company had current assets of $128.9
million and current liabilities of $52.3 million resulting in a
working capital surplus of $76.6 million, compared to a surplus of
$96.4 million at December 31, 1997.
During 1998, the Company made net capital expenditures of
$28.4 million, including inventory to be converted into equipment
for short term rentals of $700,000. Other than commitments for new
product inventory, including disposable "for sale" products, of
$4.0 million, the Company has no material long-term capital
commitments and can adjust the level of its capital expenditures as
circumstances warrant.
The Company's principal sources of liquidity are expected to
be cash flows from operating activities and borrowings under the
Senior Credit Facilities. It is anticipated that the Company's
principal uses of liquidity will be to fund capital expenditures
related to the Company's rental products, provide needed working
capital, meet debt service requirements and finance the Company's
strategic plans.
The Senior Credit Facilities originally totaled $400.0 million
and consist of (i) a $50.0 million six-year Revolving Credit
Facility, (ii) a $50.0 million six-year Acquisition Facility, (iii)
a $120.0 million six-year amortizing Term Loan A, (iv) a $90.0
million seven-year amortizing Term Loan B and (v) a $90.0 million
eight-year amortizing Term Loan C, (collectively, the "Term
Loans"). The Term Loans were fully drawn to finance a portion of
the Recapitalization, and scheduled principal payments totaling
$4.8 million were made in a timely manner. The Acquisition
Facility was partially drawn, in effect, to finance the RIK
Medical acquisition. The Acquisition Facility provides the Company
with financing to pursue strategic acquisition opportunities, and
will remain available to the Company until December 31, 2000, at
which time it will begin to amortize over the remaining three years
of the facility. The Company originally utilized borrowings under
the Revolving Facility to help effect the Recapitalization and pay
related fees and expenses. While the Company reduced borrowings
under this facility by $14.5 million in 1998, it has utilized and
will utilize borrowings to fund capital expenditures and meet
working capital needs.
The Term Loans are payable in equal quarterly installments (1)
subject to an amortization schedule as follows:
Year Amount
---- -----------
1999............................ $ 8,800,000
2000............................ $16,800,000
2001............................ $31,800,000
2002............................ $31,800,000
2003............................ $36,800,000
2004............................ $85,500,000
2005............................ $83,700,000
(1) The first three quarterly principal installments for 2004
shall be $450,000 with the final installment for that year
equal to $84,150,000. For 2005, the first three installments
shall be equal to $225,000 and the final installment shall be
equal to $83,025,000.
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 December 31, 1998, the Acquisition Facility
and the Revolving Credit Facility had a balance of $10.0 million
each. Accordingly, the aggregate availability under these two
facilities was $80.0 million.
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 Senior Credit Facility Agreement) for one, two, three or six
months, in each case plus 2.25% in respect of Tranche A Term Loans,
Revolving Loans and Acquisition Loans, 2.50% in respect of Tranche
B Term Loans and 2.75% in respect of the Tranche C Term Loans.
Certain Revolving Loans designated in foreign currency will
initially bear interest at a rate based upon the cost of funds for
such loans, plus 2.25% or 2.50%, depending on the type of foreign
currency. Performance-based reductions of the interest rates under
the Term Loans, the Revolving Loans and the Acquisition Loans are
available. In December 1998, the Company entered into three
interest rate protection agreements whereby the base interest rate
on $280,000,000 of the term loans is fixed at an average rate of
approximately 5.26% through 1999.
Indebtedness of the Company under the Senior Credit Agreement
is guaranteed by certain of the subsidiaries of the Company and is
secured by (i) a first priority security interest in all, subject
to certain customary exceptions, of the tangible and intangible
assets of the Company and its domestic subsidiaries, including,
without limitation, intellectual property and real estate owned by
the Company and its subsidiaries, (ii) a first priority perfected
pledge of all capital stock of the Company's domestic subsidiaries
and (iii) a first priority perfected pledge of up to 65% of the
capital stock of foreign subsidiaries owned directly by the Company
or its domestic subsidiaries.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage ratio
and capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and
advances, capital expenditures, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of
other indebtedness (including the Notes), liens and encumbrances
and other matters customarily restricted in such agreements. The
Company is in compliance with the applicable covenants at December
31, 1998.
The Senior Credit Agreement contains customary events of
default, including payment defaults, breachs of representations and
warranties, covenant defaults, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency,
failures under ERISA plans, judgment defaults, change of
control of the Company and failure of any guaranty, security
document, security interest or subordination provision supporting
the Bank Credit Agreement to be in full force and effect.
As part of the Recapitalization transactions, the Company
issued $200.0 million of Senior Subordinated Notes (the "Notes")
due 2007. The Notes are unsecured obligations of the Company,
ranking subordinate in right of payment to all senior debt of the
Company and will mature on November 1, 2007.
The Notes are not entitled to the benefit of any mandatory
sinking fund. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and
after November 1, 2002, upon not less than 30 nor more than 60
days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the
twelve-month period commencing on November 1 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if
any, to the date of redemption.
Year Percentage
---- ----------
2002.................................. 104.813%
2003.................................. 103.208%
2004.................................. 101.604%
2005 and therafter.................... 100.000%
At any time, or from time to time, the Company may acquire a
portion of the Notes through open-market purchases. Also, on or
prior to November 1, 2000, the Company may, at its option, on one
or more occasions use all or a portion of the net cash proceeds of
one or more equity offerings to redeem the Notes
issued under the Indenture at a redemption price equal to 109.625%
of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least
65% of the principal amount of Notes originally issued remains
outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any equity
offering, the Company shall make such redemption not more than 120
days after the consummation of any such equity offering.
As of December 31, 1998 the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
During 1998, the Company generated $43.9 million in cash from
operating activities compared to $10.7 in the prior year, an
increase of $33.2 million. The increase in operating cash flows
resulted primarily from improved collections of accounts receivable
and a decrease in other current assets related to the refund of all
federal tax payments made in 1997 as a result of the Company's
leveraged recapitalization. Investment activities in 1998 used
$42.5 million of cash, including net capital expenditures of $28.4
million and $11.3 million used to fund business acquisitions.
Financing activities for 1998 used $59.1 million consisting
primarily of $41.7 million used to complete the recapitalization
transactions and $19.3 million of long-term debt repayments.
At December 31, 1998, cash and cash equivalents of $4.4
million were available for general corporate purposes. Based upon
the current level of operations, the Company believes that cash
flow from operations and the availability under its line of credit
will be adequate to meet its anticipated requirements for debt
repayment, working capital and capital expenditures through 1999.
Also at year-end, the Company was committed to purchase
approximately $4.0 million of inventory associated with new
products over the next year. In addition, the Company will
complete its acquisition of the Jobst product line during 1999.
The Company did not have any other material purchase commitments.
Known Trends or Uncertainties
Euro Currency
- -------------
On January 1, 1999, the European Economic and Monetary Union
("EMU") entered a three-year transition phase during which a new
common currency, the "Euro", was introduced in participating
countries and fixed conversion rates were established through the
European Central Bank ("ECB") between existing local currencies and
the Euro. From that date, the Euro is traded on currency exchanges.
Following introduction of the Euro, local currencies will
remain legal tender until December 31, 2001. During this
transition period, goods and services may be paid for with the Euro
or local currency under the EMU's "no compulsion, no prohibition"
principle.
Based on its evaluation to date, management believes that the
introduction of the Euro will not have a material adverse impact on
the Company's financial position, results of operations or cash
flows. However, uncertainty exists as to the effects the Euro will
have on the marketplace, and there is no guarantee that all issues
will be foreseen and corrected or that other third parties will
address the conversion successfully.
The Company has reviewed its information systems software and
identified modifications necessary to ensure business transactions
can be conducted consistent with the requirements of the conversion
to the Euro. Certain of these modifications have been implemented,
and others will be implemented during the course of the transition
period. The Company expects that modifications not yet implemented
will be made on a timely basis and expects the incremental cost
of the Euro conversion to be immaterial.
The Euro introduction is not expected to have a material
impact on the Company's overall currency risk. The Company
anticipates the Euro will simplify financial issues related to
cross-border trade in the EMU and reduce the transaction costs and
administrative time necessary to manage this trade and related
risks. However, the Company believes that the associated savings
will not be material to corporate results.
Reimbursement
- -------------
The implementation of a prospective payment system for
extended care facilities has changed the way skilled nursing
facilities buy or rent products. The effect of this change has
been to sharply reduce the Company's rental revenues in the
extended care market. The Company believes that in the long term,
under a fixed payment system, decisions on selecting the products
and services used in patient care will be based on clinical and
cost effectiveness. The Company's innovative and extensive product
continuum significantly improves clinical outcomes while reducing
the cost of patient care should allow it to compete effectively in
this environment.
The Company currently rents and sells the V.A.C. in all care
settings and market acceptance of this product has been better than
expected. This is evidenced by the significant revenue growth
experienced in the three years that the product has been available
domestically. However, the Company has not received a Medicare
reimbursement code, and an associated coverage policy, for the
V.A.C. in the home care setting. HCFA has indicated that the grant
of a reimbursement code is dependent upon its receipt and review of
clinical data. The Company continues to vigorously pursue this
reimbursement coverage.
Impact of Year 2000
The Year 2000 issue arose as a result of computer software
programs being written using two digits rather than four digits to
define the date field. Certain of the Company's existing computer
programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions or engage in other normal business activities.
Based on a recent assessment, the Company has determined that
it needs to modify or replace key portions of its software so that
its information technology ("IT") systems will function properly
with respect to dates beyond December 31, 1999. The Company
presently believes that through its conversion to the Oracle
applications platform and with modifications to other existing
software, the Year 2000 issue may be mitigated. However, if such
modifications and conversions are not made properly or are not
completed timely, the Year 2000 issue could have a material impact
on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and
implementation.
Assessment
- ----------
To date, the Company has completed its assessment of all IT
systems that could be significantly affected by the Year 2000. The
completed assessment indicated that most of the Company's
significant IT systems could be affected, particularly the general
ledger, billing and manufacturing (inventory) systems. That
assessment also indicated that software and hardware used in
production, distribution and time and attendance systems also are
at risk. However, based on a review of its product line, the
Company has determined that the products it has sold and will
continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the Year
2000 presents a material exposure as it relates to the Company's
products. In addition, the Company has gathered information about
the Year 2000 compliance status of its significant suppliers and
customers and continues to monitor their compliance.
Remediation
- -----------
The Company is 75% complete on the remediation phase for its
IT systems and expects to complete software modifications and/or
replacements no later that June 30, 1999. Once software
modifications or replacements are completed, the systems are tested
for compliance. These phases can run concurrently for different
systems. To date, the Company has completed
installations/modifications on all mission-critical domestic
systems. Internationally, the Company is installing new integrated
software applications which are expected to be completed by the end
of July 1999.
Testing
- -------
Testing is in process or has been completed for all systems
for which the remediation phase has been completed. To date, this
testing has identified the need for certain additional program
modifications. The additional modifications are expected to be made
no later than June 30, 1999 at which time the upgraded systems
will be retested. Testing of the remaining systems should be
completed during the third quarter of 1999. An integration test
will also be performed at that time.
Implementation
- --------------
Many applications and systems have been put into production.
These include servers, personal computers and various software
programs. Applications and systems are put into production once
they have been tested. All affected applications and systems
should be in production by the end of the third quarter of 1999.
The Company believes that it has completed the assessment of
all major non-information technology based systems. Remediation
plans have been developed, where necessary, and implementation has
been completed. Testing of the remediation steps will be completed
during the second quarter.
Third Parties and Related Systems
- ---------------------------------
The Company's third party payor ("claims") billing system
interfaces directly with certain third party payor programs. The
Company believes that its billing software is Year 2000 compliant
and is in the process of testing the interfaces to ensure that the
Company's claims billing interface systems are Year 2000 compliant
by the end of September, 1999.
In addition, the Company has surveyed its significant
suppliers and large customers that do not share information systems
with the Company. To date, the Company is not aware of any
significant customer or supplier with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring
that all third parties will be ready for the Year 2000. There can
be no guarantee that the inability of a significant customer or
supplier to complete their Year 2000 readiness program in a timely
manner would not materially impact the operations of the Company.
Costs
- -----
The total cost of the Year 2000 project is estimated at $7.4
million and is being funded through operating cash flows. $6.3
million of this total will be used to purchase new software that
will be capitalized and the remaining $1.1 million will be expensed
as incurred. Through December 31, 1998, the Company incurred
approximately $6.9 million ($900,000 expensed and $6.0 million
capitalized for new software), related to the assessment of the
Year 2000 issue, development of a modification plan, preliminary
software modifications, purchase of new software, where necessary,
and testing of implemented systems.
Risks and Contingency Plan
- --------------------------
Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. As
noted above, however, the Company has not yet completed all
necessary phases of the Year 2000 program. The Company is in the
process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation program failed.
It is also developing contingency plans for all mission-critical
processes not yet completed. Under a "worst case" scenario, the
Company's international operations would be unable to deliver,
track and bill for products due to internal system failures and the
Company, as a whole, would be unable to deliver key products due to
the inability of external vendors to deliver such products.
Alternative suppliers are being identified and inventory levels of
certain key products and/or components may be temporarily
increased. While virtually all internal systems can be replaced
with manual systems on a temporary basis, the failure of any
mission-critical system will have at least a short-term negative
effect on operations. The failure of national and worldwide
banking information systems or the loss of essential utility
services due to the Year 2000 issue could result in the inability
of many businesses, including the Company, to conduct business.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which must be adopted in years beginning after
June 15, 1999. The Company expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133
will be on the earnings and financial position of the Company.
In March 1998, the AICPA issued SOP 98-1, "Accounting For
the Costs of Computer Software Developed For or Obtained For
Internal-Use." The SOP is effective beginning January 1, 1999.
The SOP will require the capitalization of certain costs incurred
after the date of adoption in connection with developing or
obtaining software for internal-use. The Company does not
anticipate the adoption of this SOP will have a material impact on
the Company's future earnings or financial position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company is exposed to various market risks, including
fluctuations in interest rates and variability in currency exchange
rates. The Company has established policies, procedures and
internal processes governing its management of market risks and the
use of financial instruments to manage its exposure to such risks.
Interest Rate Risk
- ------------------
At December 31, 1998, approximately 61% of the Company's long-
term debt bore interest at variable rates. These variable-rate
facilities bear interest at a stated rate based upon a Base Rate
(defined as the higher of (i) the rate of interest publicly
announced by Bank of America as its "reference rate" and (ii) the
federal funds effective rate from time to time plus 0.50%) or the
Eurodollar Rate (as defined) for one, two, three or six months
plus associated credit risk factors from 1.50% to 2.75% depending
on the base rate and maturity (see Note 5 to the Company's
consolidated financial statements).
In an effort to minimize the risk of adverse interest rate
fluctuations, the Company has entered into three interest rate
protection agreements which effectively fix the base borrowing rate
on 88% of the Company's variable rate debt as follows (dollars in
millions):
Annual
Swap Interest
Maturity Amount Rate
---------- ------ ---------
01/08/2002 $150.0 5.5775%
12/29/2000 95.0 4.8950%
12/31/1999 35.0 4.8550%
As a result of these interest rate protection agreements, the
Company believes that movements in short term interest rates would
not materially affect the financial position of the Company.
Foreign Currency and Market Risk
- --------------------------------
The Company has direct operations in Western Europe, Canada
and Australia and distributor relationships in many other parts of
the world. The Company's foreign operations are measured in their
local currencies. As a result, the Company's financial results
could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets
in which the Company has operations. Exposure to this variability
is managed primarily through the use of natural hedges, whereby
funding obligations and assets are both managed in the local
currency. The Company maintains no other derivative instruments to
mitigate the exposure to translation and/or transaction risk.
International operations reported operating profit of $15.3 million
for the year ended December 31, 1998. It is estimated that the
result of a 10% fluctuation in the value of the dollar relative to
these foreign currencies at December 31,1998 would change the
Company's 1998 net income by approximately $940,000. The
Company's analysis does not consider the implications that such
fluctuations could have on the overall economic activity that could
exist in such an environment in the U.S. or the foreign countries
or on the results of operations of these foreign entities.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31,
------------------
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents............. $ 4,366 $ 61,754
Accounts receivable, net.............. 85,212 81,238
Inventories........................... 28,662 21,553
Prepaid expenses and other............ 10,707 18,446
------- -------
Total current assets.......... 128,947 182,991
------- -------
Net property, plant and equipment....... 77,950 75,434
Goodwill, less accumulated amortization
of $17,323 in 1998 and $13,989 in 1997 54,327 45,899
Loan issuance cost, less accumulated
amortization of $2,687 in 1998 and
$382 in 1997.......................... 15,380 17,346
Other assets, less accumulated
amortization of $3,425 in 1998 and
$3,100 in 1997........................ 31,469 29,481
------- -------
$308,073 $351,151
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................... $ 3,438 $ 40,353
Accrued expenses...................... 37,277 41,334
Current installments of long-term
obligations......................... 8,800 4,800
Current installments of capital lease
obligations......................... 150 139
Income tax payable.................... 2,689 --
------- -------
Total current liabilities..... 52,354 86,626
------- -------
Long-term obligations, excluding current
installments.......................... 507,055 529,901
Capital lease obligations, excluding
current installments.................. 129 312
Deferred income taxes, net.............. 10,123 10,010
------- -------
569,661 626,849
------- -------
Commitments and contingencies (Note 13)
Shareholders' deficit:
Common stock; issued and outstanding
70,915 in 1998 and 17,713 in 1997..... 71 17
Retained deficit........................ (259,121) (273,231)
Accumulated other comprehensive income.. (2,538) (2,484)
------- -------
(261,588) (275,698)
------- -------
$308,073 $351,151
======= =======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue:
Rental and service.............. $258,482 $247,890 $225,450
Sales and other................. 71,989 59,026 44,431
------- ------- -------
Total revenue............ 330,471 306,916 269,881
------- ------- -------
Rental expenses................... 165,461 156,179 146,205
Cost of goods sold................ 27,881 23,673 16,315
------- ------- -------
193,342 179,852 162,520
------- ------- -------
Gross profit............. 137,129 127,064 107,361
Selling, general and administrative
expenses........................ 69,569 62,654 52,007
Recapitalization expenses......... -- 34,361 --
------- ------- -------
Operating earnings....... 67,560 30,049 55,354
Interest income................... 616 2,263 9,332
Interest expense.................. (48,594) (10,173) (245)
Foreign currency gain (loss)...... 20 (1,106) --
------- ------- ------
Earnings before income
taxes and minority
interest............... 19,602 21,033 64,441
Income taxes...................... 7,851 8,403 25,454
------- ------- ------
Earnings before minority
interest............... 11,751 12,630 38,987
Minority interest in subsidiary
loss (gain)..................... 25 (25) --
------- ------- -------
Net earnings $ 11,776 $ 12,605 $ 38,987
======= ======= =======
Earnings per common share......... $ 0.17 $ 0.08 $ 0.22
======= ======= =======
Earnings per common share -
assuming dilution............... $ 0.16 $ 0.08 $ 0.21
======= ======= =======
Average common shares:
Basic (weighted average
outstanding shares).. 70,873 154,364 175,832
======= ======= =======
Diluted (weighted average
outstanding shares).. 73,233 159,640 181,956
======= ======= =======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
----------------------------
1998 1997 1996
--------- -------- --------
Cash flows from operating activities:
Net earnings............................ $ 11,776 $ 12,605 $38,987
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation.......................... 25,814 21,091 20,301
Amortization.......................... 5,964 2,989 1,493
Provision for uncollectible accounts
receivable.......................... 3,707 5,888 2,457
Gain on early repayment of notes
receivable.......................... -- -- (5,180)
Change in assets and liabilities net
of effects from purchase of
subsidiaries and unusual items:
Increase in accounts receivable, net (7,808) (24,920) (4,626)
Decrease in notes receivable........ -- -- 3,187
Increase in inventories............. (7,186) (13) (1,034)
Decrease (increase)in prepaid
expenses and other................ 7,739 (11,199) (1,927)
Increase in accounts payable........ 4,715 392 1,525
Increase (decrease) in accrued
expenses.......................... (4,121) 1,896 3,349
Increase (decrease) in income taxes
payable........................... 2,689 (2,970) (1,056)
Increase in deferred income taxes,
net............................... 113 4,945 4,691
Increase in non current deferred
other............................. 483 -- --
------ ------ ------
Net cash provided by operating
activities.................. 43,885 10,704 62,167
------ ------ ------
Cash flows from investing activities:
Additions to property, plant and
equipment........................... (29,913) (27,672) (27,783)
Decrease (increase) in inventory to be
converted into equipment for
short-term rental................... (700) (2,850) 700
Dispositions of property, plant and
equipment........................... 2,207 2,620 5,400
Excess principal repayment on
discounted notes receivable......... -- -- 5,180
Business acquired in purchase
transactions, net of cash acquired.. (11,266) (41,153) (1,146)
Note paid by principal shareholder.... -- -- 10,000
Decrease (increase) in other assets... (2,806) 939 (9,960)
------ ------ ------
Net cash used by investing
activities.................. (42,478) (68,116) (17,609)
------ ------ ------
Cash flows from financing activities:
Borrowing (repayment) of notes payable
and long-term obligations........... (19,329) 534,701 --
Borrowing (repayment) of capital lease
obligations......................... (172) (333) 457
Loan issuance costs................... (339) (17,734) --
Proceeds from the exercise of stock
options............................. 300 3,668 4,264
Purchase and retirement of treasury
stock............................... -- (3,827) (35,241)
Cash dividends paid to shareholders... -- (6,388) (6,607)
Recapitalization costs-purchase of
treasury stock...................... -- (631,606) --
Recapitalization costs-proceeds from
common stock issuance............... -- 150,184 --
Recapitalization costs-fees and
expenses............................ 2,088 (8,626) --
Recapitalization costs-amounts
incurred in 1997, paid in 1998...... (41,652) 41,652 --
Other................................. (2) 253 (150)
------ ------ ------
Net cash provided (used) by
financing activities........ (59,106) 61,944 (37,277)
------ ------ ------
Effect of exchange rate changes on cash
and equivalents....................... 311 (1,823) (635)
------ ------ ------
Net increase (decrease) in cash and cash
equivalents........................... (57,388) 2,709 6,646
Cash and cash equivalents, beginning of
year.................................. 61,754 59,045 52,399
------ ------ ------
Cash and cash equivalents, end of year.. $ 4,366 $ 61,754 $ 59,045
====== ====== ======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit) Equity
Three Years Ended December 31, 1998
(in thousands, except per share data)
Notes
Receivable
from Accumu-
Officers lated Total
for Other Share-
Additional Retained Exercise Compre- holders'
Common Paid-In Earnings Treasury of Stock hensive Equity
Stock Capital (Deficit) Stock Options Income (Deficit)
----- ---------- --------- -------- --------- -------- --------
Balances at December
31, 1995............ $ 44 $12,123 $ 197,290 $ -- $ (185) $ 1,052 $ 210,324
Net earnings.......... -- -- 38,987 -- -- -- 38,987
Foreign currency
translation
adjustment.......... -- -- -- -- -- (497) (497)
-------
Total comprehensive
income.............. 38,490
-------
Exercise of stock
options............. -- 2,098 -- -- (150) -- 1,948
Tax benefit realized
from stock option
plan................ -- 2,166 -- -- -- -- 2,166
Treasury stock
purchased........... -- -- -- (35,241) -- -- (35,241)
Treasury stock retired (2) (16,387) (18,854) 35,241 -- -- (2)
Cash dividends on
common stock --
$0.038 per share.. -- -- (6,607) -- -- -- (6,607)
----------------------------------------------------------------------
Balances at December
31, 1996............ 42 -- 210,816 -- (335) 555 211,078
----------------------------------------------------------------------
Net earnings.......... -- -- 12,605 -- -- -- 12,605
Foreign currency
translation
adjustment.......... -- -- -- -- -- (3,039) (3,039)
-------
Total comprehensive
income.............. 9,566
-------
Exercise of stock
options............. -- 2,019 -- -- 335 -- 2,354
Tax benefit realized
from stock option
plan................ -- 1,567 -- -- -- -- 1,567
Treasury stock retired -- 15,330 (19,157) -- -- -- (3,827)
Cash dividends on
common stock--
$0.028 per share.. -- -- (6,388) -- -- -- (6,388)
Purchase of treasury
stock............... (32) (18,916) (612,658) -- -- -- (631,606)
Proceeds from common
stock issuance...... 7 -- 150,177 -- -- -- 150,184
Recapitalization
fees and expenses... -- -- (8,626) -- -- -- (8,626)
-----------------------------------------------------------------------
Balances at December
31, 1997............ $ 17 $ -- $(273,231) $ -- $ -- $(2,484) $(275,698)
-----------------------------------------------------------------------
Net earnings.......... -- -- 11,776 -- -- -- 11,776
Foreign currency
translation
adjustment.......... -- -- -- -- -- (54) (54)
-------
Total comprehensive
income.............. 11,722
-------
Exercise of stock
options............. -- 300 -- -- -- -- 300
Reimbursement of
recapitalization costs -- 1 2,087 -- -- -- 2,088
Stock split........... 54 (54) -- -- -- -- --
Reclass to retained
earnings............ -- (247) 247 -- -- -- --
----------------------------------------------------------------------
Balances at December
31, 1998............ $ 71 $ -- $(259,121) $ -- $ -- $(2,538) $(261,588)
-----------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 1. Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Kinetic Concepts, Inc. ("KCI") and all subsidiaries (collectively,
the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications of amounts related to prior years have been made
to conform with the 1998 presentation.
(b) Nature of Operations and Customer Concentration
-----------------------------------------------
The Company designs, manufactures, markets and distributes
therapeutic products, primarily specialty hospital beds, mattress
overlays and medical devices that treat and prevent the
complications of immobility. The principal markets for the
Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities
throughout the U.S. and Western Europe. Receivables from these
customers are unsecured.
The Company contracts with both proprietary hospital groups
and voluntary group purchasing organizations ("GPOs"). Proprietary
hospital groups own all of the hospitals which they represent and,
as a result, can ensure complete compliance with an executed
national agreement. Voluntary GPOs negotiate contracts on behalf
of member hospital organizations but cannot ensure that their
members will comply with the terms of an executed national
agreement. Approximately 46% of the Company's revenue during 1998
was generated under national agreements with GPOs.
The Company operates directly in 12 foreign countries
including Germany, Austria, the United Kingdom, Canada, France, the
Netherlands, Switzerland, Australia, Sweden, Italy, Denmark and
Ireland (see Note 14).
(c) Revenue Recognition
-------------------
Service and rental revenue are recognized as services are
rendered. Sales and other revenue are recognized when products are
shipped.
(d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an
original maturity of ninety days or less to be cash equivalents.
(e) Fair Value of Financial Instruments
-----------------------------------
The carrying amount reported in the balance sheet for cash,
accounts receivable, long-term securities, accounts payable, and
long-term obligations approximates their fair value. The Company
estimates the fair value of long-term obligations by discounting
the future cash flows of the respective instrument, using the
Company's incremental rate of borrowing for a similar instrument.
(f) Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Costs include material,
labor and manufacturing overhead costs. Inventory expected to be
converted into equipment for short-term rental has been
reclassified to property, plant and equipment.
(g) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Betterments
which extend the useful life of the equipment are capitalized.
(h) Depreciation
------------
Depreciation on property, plant and equipment is calculated on
the straight-line method over the estimated useful lives (thirty to
forty years for the buildings and between three and ten years for
most of the Company's other property and equipment) of the assets.
(i) Goodwill
--------
Goodwill represents the excess purchase price over the fair
value of net assets acquired and is amortized over three to twenty-
five years from the date of acquisition using the straight-line
method.
The carrying value of goodwill is based on management's
current assessment of recoverability. Management evaluates
recoverability using both objective and subjective factors.
Objective factors include management's best estimates of projected
future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis,
technological advantage or disadvantage, and the Company's
strategic focus.
(j) Other Assets
------------
Other assets consist principally of patents, trademarks, long-
term investments, cash and investments restricted for use by the
Company's captive insurance company and the estimated residual
value of assets subject to leveraged leases. Patents and trademarks
are amortized over the estimated useful life of the respective
asset using the straight-line method.
(k) Income Taxes
------------
The Company recognizes certain transactions in different time
periods for financial reporting and income tax purposes. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. The provision for deferred income taxes
represents the change in deferred income tax accounts during the
year.
(l) Common Stock
------------
The Company is authorized to issue 400 million shares of
Common Stock, $0.001 par value (the "Common Stock"). During the
third quarter of 1998, the Company declared a four-for-one stock
split on the outstanding shares of the common stock of the Company,
par value $0.001 per share, payable to the holders of record of
said stock on September 1, 1998. The split was achieved by means
of a three-for-one stock dividend on all outstanding common shares
of the Company. All share, per share, stock price and stock option
amounts shown in the financial statements (except the Consolidated
Statement of Changes in Shareholders' Equity) and related footnotes
have been restated to reflect the stock split.
(m) Earnings Per Share
------------------
In 1997, the Financial Accounting Standard Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earning per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
(n) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(o) Insurance Programs
------------------
The Company established the KCI Employee Benefits Trust (the
"Trust") as a self-insurer for certain risks related to the
Company's U.S. employee health plan and certain other benefits. The
Company funds the Trust based on the value of expected future
payments, including claims incurred but not reported. The Company
has purchased insurance which limits the Trust's liability under
the benefit plans.
Through January 31, 1999, the Company's wholly-owned captive
insurance company, KCI Insurance Company, Ltd. (the "Captive"),
reinsured the primary layer of commercial general liability,
workers' compensation and auto liability insurance for certain
operating subsidiaries. On January 31, 1999, the captive insurance
company was liquidated. Provisions for losses expected under these
programs are recorded based upon estimates of the aggregate
liability for claims incurred based on actuarial reviews. The
Company has obtained insurance coverage for catastrophic exposures
as well as those risks required to be insured by law or contract.
(p) Foreign Currency Translation
----------------------------
The functional currency for the majority of the Company's
foreign operations is the applicable local currency. The
translation of the applicable foreign currencies into U.S. dollars
is performed for balance sheet accounts using the exchange rates in
effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period.
(q) Stock Options
-------------
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation." The Statement allows
companies to continue accounting for stock-based compensation under
the provisions of APB Opinion 25, "Accounting for Stock Issued to
Employees"; however, companies are encouraged to adopt a new
accounting method based on the estimated fair value of employee
stock options. Companies that do not follow the new fair value
based method are required to provide expanded disclosures in
footnotes to the financial statements. The Company has elected to
continue accounting for stock-based compensation under the
provisions of APB Opinion 25 and has provided the required
disclosures (See Note 9).
(r) Research and Development
------------------------
The focus of the Company's research and development program
has been to develop new products and make technological
improvements to existing products. Expenditures for research and
development are expensed as incurred and represented approximately
2% of the Company's total operating expenditures in each of the
years ended December 31, 1998, 1997 and 1996.
(s) Interest Rate Protection Agreements
-----------------------------------
Periodically, the Company enters into interest rate protection
agreements to modify the interest characteristics of its
outstanding debt. Each interest rate swap is designated with all
or a portion of the principal balance and term of a specific debt
obligation. These agreements involve the exchange of amounts based
on a variable interest rate for amounts based on fixed interest
rates over the life of the agreement without an exchange of the
notional amount upon which the payments are based. The
differential to be paid or received as interest rate change is
accrued and recognized as an adjustment to interest expense related
to the debt. The fair value of the swap agreements and changes in
the fair value as a result of changes in market interest rates are
not recognized in these consolidated financial statements.
NOTE 2. 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 approximately $31.2
million shares of newly-issued shares of the Company's common
stock, $0.001 par value per share, at a price equal to $4.81 per
share. The proceeds of the stock purchase, together with
approximately $534.0 million of aggregate proceeds from certain
financings, (see Note 5), were used to purchase approximately 124.0
million shares of the Company's common stock from the selling
shareholders at a price of $4.81 per share, net to seller and pay
all related fees and expenses.
Also pursuant to the Transaction Agreement, the Investors were
subsequently 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 28.1 million, 18.6 million, 23.8 million and
400,000 shares, respectively, representing 39.7%, 26.2%, 33.5% and
0.6% of the total shares outstanding. There is currently one other
shareholder and certain members of management have retained, and/or
have been granted, additional options to purchase shares. The
transactions have been accounted for as a recapitalization and as
such, 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 as retained
earnings as a cash distribution to the selling shareholders.
During 1997, non-recurring costs in connection with the
Recapitalization of approximately $34.4 million were incurred and
expensed. Additionally, financing costs of approximately $17.7
million have been deferred and will be amortized over the lives of
the new debt facilities.
NOTE 3. Acquisitions and Dispositions
-----------------------------
On February 1, 1997, the Company acquired the assets of H.F.
Systems, Inc. of Los Angeles. H.F. Systems offered a line of
therapeutic specialty support surfaces primarily to the California
extended care marketplace. The Company acquired the assets of H.F.
Systems in a single transaction for approximately $8.0 million in
cash plus other consideration. H.F. Systems has been integrated
into Kinetic Concepts' extensive distribution system and, as a
result, the Company has benefited from the elimination of certain
redundant expenses. H.F. Systems recorded revenue of
approximately $7.0 million for 1996 and did not have a material
impact on the Company's results of operations for 1998 or 1997.
During 1997, the Company acquired 90% of the outstanding
capital stock of Ethos Medical Group, Ltd. located in Athlone,
Ireland, for approximately $2.8 million in cash plus other
consideration. During 1998, the Company acquired the remaining 10%
of Ethos for approximately $300,000. Ethos manufactures the Keene
Roto Rest trauma bed and other medical devices and rents specialty
support surfaces to caregivers throughout Ireland. Ethos Medical's
operating results did not have a material impact on the Company's
results of operations for 1998 or 1997.
On July 31, 1997, the Company acquired the outstanding capital
stock of Equi-Tron Mfg., Inc. located in Ontario, Canada, for
approximately $3.2 million in cash plus other consideration. Equi-
Tron Mfg., Inc. manufactures a line of products for bariatric
patients used primarily in the home care market. The operating
results of Equi-Tron Mfg., Inc. did not have a material impact on
the Company's results of operations for 1998 or 1997.
On October 1, 1997, the Company acquired substantially all of
the assets of RIK Medical, L.L.C. ("RIK"), a Delaware limited
liability company. The Company paid approximately $23.3 million in
cash for the acquisition plus an earn-out of up to $2.0 million.
RIK is a manufacturer of non-powered therapeutic support surfaces
based in Boulder, Colorado. The RIK products incorporate several
unique and patented components and features. The operating results
of RIK Medical did not have a material impact on the Company's
results of operations for 1998 or 1997.
On November 6, 1998 the Company acquired certain assets
related to its medical devices business from Beiersdorf-Jobst, Inc.
The assets were acquired for a total purchase price of
approximately $14.5 million, when completed, subject to certain
terms and conditions. Approximately $8.7 million of the total
purchase price was paid during 1998. The remaining portion is to
be paid subsequent to December 31, 1998. The acquired assets
consisted of DVT prophylaxis medical devices, related disposables,
equipment, technology and other intangible assets. The acquisition
was funded through the Company's revolving credit line. The
operating results of the acquired business did not have a material
impact on the Company's results of operations for 1998.
The 1998 and 1997 acquisitions have been accounted for by the
purchase method of accounting, and accordingly, the approximate
purchase prices, shown above, have been allocated to the assets
acquired and the liabilities assumed based on the estimated fair
values at the dates of acquisition, with the excess of the purchase
prices over assigned asset values recorded as goodwill which the
Company is amortizing over periods of 15-25 years. The results of
operations of the acquisitions have been included in the Company's
consolidated financial statements since the acquisition dates.
Because the 1998 and 1997 acquisitions are not material to the
Company's financial position or results of operations, pro forma
results of operations are not presented.
NOTE 4. Supplemental Balance Sheet Data
-------------------------------
Accounts receivable consist of the following (in thousands):
December 31,
-----------------
1998 1997
-------- -------
Trade accounts receivable........... $92,684 $88,509
Employee and other receivables...... 2,201 3,933
------ ------
94,885 92,442
Less allowance for doubtful
receivables......................... 9,673 11,204
------ ------
$85,212 $81,238
====== ======
Inventories consist of the following (in thousands):
December 31,
--------------------
1998 1997
--------- ---------
Finished goods................... $10,974 $ 8,487
Work in process.................. 4,203 2,743
Raw materials, supplies and parts 21,585 17,723
------ ------
36,762 28,953
Less amounts expected to be
converted into equipment for
short-term rental.............. 8,100 7,400
------ ------
$28,662 $21,553
====== ======
Net property, plant and equipment consist of the following
(in thousands):
December 31,
-----------------
1998 1997
------- -------
Land............................... $ 649 $ 649
Buildings.......................... 17,173 16,693
Equipment for short-term rental.... 135,158 131,534
Machinery, equipment and furniture. 45,515 40,551
Leasehold improvements............. 1,696 1,560
Inventory to be converted into
equipment........................ 8,100 7,400
------- -------
208,291 198,387
Less accumulated depreciation...... 130,341 122,953
------- -------
$ 77,950 $ 75,434
======= =======
Accrued expenses consist of the following (in thousands):
December
--------------------
1998 1997
--------- ---------
Payroll, commissions and related
taxes............................ $12,217 $14,627
Interest expense................... 3,827 4,591
Insurance accruals................. 3,404 3,238
Other accrued expenses............. 17,829 18,878
------ ------
$37,277 $41,334
====== ======
NOTE 5. Long-Term Obligations
---------------------
Long-term obligations consist of the following (in thousands):
December 31,
--------------------
1998 1997
-------- ---------
Senior Credit Facilities:
Revolving bank credit facility........ $ 10,000 $ 24,500
Acquisition credit facility........... 10,000 10,000
Term loans:
Tranche A due 2003................. 117,000 120,000
Tranche B due 2004................. 89,100 90,000
Tranche C due 2005................. 89,100 90,000
------- -------
315,200 334,500
9 5/8% Senior Subordinated Notes Due 2007 200,000 200,000
------- -------
515,200 534,500
Less: Current installments............... 8,800 4,800
------- -------
506,400 529,700
Other.................................... 655 201
------- -------
$507,055 $529,901
======= =======
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.
In December 1998, the Company entered into three interest rate
protection agreements which effectively fix the base borrowing rate
on 88% of the Company's variable rate debt as follows (dollars in
millions):
Annual
Swap Interest
Maturity Amount Rate
---------- ------- ---------
01/08/2002 $150.0 5.5775%
12/29/2000 95.0 4.8950%
12/31/1999 35.0 4.8550%
As a result of interest rate protection agreements in place
throughout 1998, the Company recorded additional interest expense
of approximately $74,000 in 1998. The fair value of these
agreements at December 31, 1998 were not material.
The Revolving Loans may be repaid and reborrowed. Under the
Bank Credit Agreement, the Company is required to pay to the Banks
a commitment fee initially equal to 0.50% per annum, payable in
arrears on a quarterly basis, on the average daily unused portion
of the Revolving Credit Facility and Acquisition Facility during
such quarter. The Company is also required to pay to the Banks
participating in the Revolving Credit Facility letter of credit
fees equal to the applicable margin then in effect with respect to
Eurodollar loans under the Revolving Credit Facility on the face
amount of each letter of credit outstanding and to the Bank issuing
a letter of credit a fronting fee of 0.25% on the average daily
stated amount of each outstanding letter of credit issued by such
Bank, in each case payable in arrears on a quarterly basis. Bank
of America and Bankers Trust will receive and continue to receive
such other fees as have been separately agreed upon. At December
31, 1998, the aggregate availability under the Revolving Credit and
Acquisition Facilities was $80.0 million.
The Term Loans are subject to quarterly amortization payments
which commenced on March 31, 1998. Commitments under the
Acquisition Facility will expire three years from the closing of
the Bank Credit Agreement and the Acquisition Facility loans
outstanding shall be repayable in equal quarterly amortization
payments commencing March 31, 2001. In addition, the Bank Credit
Agreement provides for mandatory repayments, subject to certain
exceptions, of the Term Loans, the Acquisition Facility and/or the
Revolving Credit Facility based on certain net asset sales outside
the ordinary course of business of the Company and its
subsidiaries, the net proceeds of certain debt and equity issuances
and excess cash flows.
Indebtedness of the Company under the Senior Credit Agreement
is guaranteed by certain of the subsidiaries of the Company and is
secured by (i) a first priority security interest in all, subject
to certain customary exceptions, of the tangible and intangible
assets of the Company and its domestic subsidiaries, including,
without limitation, intellectual property and real estate owned by
the Company and its subsidiaries, (ii) a first priority perfected
pledge of all capital stock of the Company's domestic subsidiaries
and (iii) a first priority perfected pledge of up to 65% of the
capital stock of foreign subsidiaries owned directly by the Company
or its domestic subsidiaries.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage ratio
and capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and
advances, capital expenditures, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of
other indebtedness (including the Notes), liens and encumbrances
and other matters customarily restricted in such agreements. The
Company is in compliance with the applicable covenants at December
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.
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.
Redemption
Optional Redemption. 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%
Optional Redemption upon Equity Offerings. At any time, or
from time to time, on or prior to November 1, 2000, the Company
may, at its option, on one or more occasions use all or a portion
of the net cash proceeds of one or more equity offerings to redeem
the Notes issued under the Indenture at a redemption price equal to
109.625% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that
at least 65% of the principal amount of Notes originally issued
remains outstanding immediately after any such redemption. In
order to effect the foregoing redemption with the proceeds of any
equity offering, the Company shall make such redemption not more
than 120 days after the consummation of any such equity offering.
Interest paid during 1998, 1997 and 1996 was approximately
$47.0 million, $5.1 million and $200,000, respectively.
Future maturities of long-term debt at December 31, 1998 are
as follows (in thousands):
Year Amount
---- ---------
1999.................................. $ 8,800
2000.................................. $ 16,800
2001.................................. $ 35,133
2002.................................. $ 35,133
2003.................................. $ 50,133
Thereafter............................ $369,201
NOTE 6. Leasing Obligations
-------------------
The Company is obligated for equipment under various capital
leases which expire at various dates during the next four years.
At December 31, 1998, the gross amount of equipment under capital
leases totaled $619,000 and related accumulated depreciation
totaled $423,000.
The Company leases computer and telecommunications equipment,
service vehicles, office space, various storage spaces and
manufacturing facilities under noncancelable operating leases which
expire at various dates over the next six years. Total rental
expense for operating leases, net of sublease payments received,
was $13.4 million, $13.2 million and $13.5 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease payments under capital and noncancelable
operating leases (with initial or remaining lease terms in excess
of one year) as of December 31, 1998 are as follows (in thousands):
Capital Operating
Leases Leases
-------- ---------
1999....................................... $ 190 $11,119
2000....................................... 103 8,814
2001....................................... 1 5,796
2002....................................... -- 3,724
2003....................................... -- 2,312
Later years................................ -- 739
----- ------
Total minimum lease payments............... $ 294 $32,504
======
Less amount representing interest.......... 15
-----
Present value of net minimum capital lease
payments................................. 279
Less current portion....................... 150
-----
Obligations under capital leases excluding
current installments..................... $ 129
=====
NOTE 7. Income Taxes
------------
Earnings before income taxes and minority interest consists of
the following (in thousands):
Year Ended December 31,
------------------------------
1998 1997 1996
--------- --------- --------
Domestic........................ $ 8,050 $12,493 $51,771
Foreign......................... 11,552 8,540 12,670
------ ------ ------
$19,602 $21,033 $64,441
====== ====== ======
Income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Year Ended December 31, 1998
-------------------------------
Current Deferred Total
---------- -------- -------
Federal......................... $ 1,267 $ 1,441 $ 2,708
State........................... 397 (38) 359
International................... 4,901 (117) 4,784
------ ------ ------
$ 6,565 $ 1,286 $ 7,851
====== ====== ======
Year Ended December 31, 1997
-------------------------------
Current Deferred Total
--------- -------- ---------
Federal......................... $ 145 $ 3,380 $ 3,525
State........................... 19 1,105 1,124
International................... 3,549 205 3,754
------ ------ ------
$ 3,713 $ 4,690 $ 8,403
====== ====== ======
Year Ended December 31, 1996
--------------------------------
Current Deferred Total
---------- -------- --------
Federal......................... $14,363 $ 4,464 $18,827
State........................... 2,569 552 3,121
International................... 3,831 (325) 3,506
------ ------ ------
$20,763 $ 4,691 $25,454
====== ====== ======
Income tax expense attributable to income from continuing
operations differed from the amounts computed by applying the
statutory tax rate of 35 percent to pre-tax income from continuing
operations as a result of the following (in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------ ------
Computed "expected" tax expense.... $6,869 $7,353 $22,554
Goodwill........................... 365 317 442
State income taxes, net of Federal
benefit.......................... 233 731 2,028
Tax-exempt interest from municipal
bonds............................ (88) (160) (445)
Foreign income taxed at other than
U.S. rates....................... 496 417 1,145
Utilization of foreign net
operating loss carryforwards..... (38) (46) (123)
Nonconsolidated foreign net
operating loss................... 274 402 67
Foreign, other..................... (422) (268) (441)
Other, net......................... 162 (343) 227
----- ----- ------
$7,851 $8,403 $25,454
===== ===== ======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997 are presented below (in
thousands):
1998 1997
---------- ---------
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts........ $ 3,118 $ 3,311
Intangible assets, deducted for book
purposes but capitalized and amortized
for tax purposes....................... 423 617
Foreign net operating loss carryforwards. 274 402
Net operating loss carryforwards......... -- 1,566
Inventories, principally due to
additional costs capitalized for tax
purposes pursuant to the Tax Reform
Act of 1986............................ 814 895
Legal fees, capitalized and amortized for
tax purposes........................... 533 533
Accrued liabilities...................... 1,456 1,381
Foreign tax credits, available for
carryback.............................. 7,751 3,321
Deferred foreign tax asset............... 237 120
Other.................................... 3,204 1,804
------ ------
Total gross deferred tax assets........ 17,810 13,950
Less valuation allowance............... (274) (402)
------ ------
Net deferred tax assets................ 17,536 13,548
Deferred Tax Liabilities:
Plant and equipment, principally due to
differences in depreciation and basis.. (25,949) (20,591)
Deferred state tax liability............. (1,709) (2,077)
Investments, principally due to
differences in tax treatment of
certain components..................... -- (804)
Other.................................... (1) (86)
------ ------
Total gross deferred tax liabilities... (27,659) (23,558)
------ ------
Net deferred tax liability............. $(10,123) $(10,010)
====== ======
At December 31, 1998, the Company had $782,000 of operating
loss carryforwards available to reduce future taxable income of
certain international subsidiaries. These loss carryforwards must
be utilized within the applicable carryforward periods. A valuation
allowance has been provided for the deferred tax assets related to
loss carryforwards. Carryforwards of $425,000 can be used
indefinitely and the remainder expire from 2001 through 2003.
Additionally, the Company had a foreign tax credit of approximately
$3.7 million which will be carried forward to offset future tax
liabilities.
The Company anticipates that the reversal of existing taxable
temporary differences and future income will provide sufficient
taxable income to realize the tax benefit of the remaining deferred
tax assets.
Income taxes paid during 1998, 1997 and 1996 were $5.5
million, $12.1 million and $15.4 million, respectively.
NOTE 8. Shareholders' Equity and Employee Benefit Plans
-----------------------------------------------
Common Stock:
The Company is authorized to issue 400 million shares of
Common Stock, $0.001 par value (the "Common Stock"). During the
third quarter of 1998, the Company declared a four-for-one stock
split on the outstanding shares of the common stock of the Company,
par value $0.001 per share, payable to the holders of record of
said stock on September 1, 1998. The split was achieved by means
of a three-for-one stock dividend on all outstanding common shares
of the Company. All share, per share, stock price and stock option
amounts shown in the financial statements (except the Consolidated
Statement of Changes in Shareholders' Equity) and related footnotes
have been restated to reflect the stock split.
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 approximately 31.2
million shares of newly-issued shares of the Company's common
stock, $0.001 par value per share, at a price equal to $4.81 per
share. The proceeds of the stock purchase, together with
approximately $534.0 million of aggregate proceeds from certain
financings, (see Note 5), were used to purchase approximately 124.0
million shares of the Company's common stock from the selling
shareholders at a price of $4.81 per share, net to seller and pay
all related fees and expenses. The number of shares of Common
Stock issued and outstanding at the end of 1998 and 1997 was
70,915,000 and 17,713,000, respectively.
Treasury Stock:
In July, 1995, the Company's Board of Directors approved a
program to repurchase up to 12.0 million shares of its Common
Stock. The Company repurchased approximately 1.0 million shares
during 1997 and 10.3 million shares during 1996. In 1994, the
Company's Board of Directors adopted a policy to return all
repurchased shares to the status of authorized but unissued shares.
In accordance with this resolution, the Company retired 10.3
million treasury shares in 1996. In February 1997, the Company's
Board of Directors approved a program which authorized the Company
to purchase up to an additional 12.0 million shares. The Company
repurchased no shares during 1997 under this program. Both programs
were terminated in 1997 in connection with the November 1997
recapitalization transactions.
Preferred Stock:
The Company is authorized to issue up to 20.0 million shares
of Preferred Stock, par value $0.001 per share, in one or more
series. As of December 31, 1998 and December 31, 1997, none were
issued.
Employee Stock Ownership Plan:
The Company established an Employee Stock Ownership Plan (the
"ESOP") covering employees of the Company who meet minimum age and
length of service requirements. The ESOP enabled eligible employees
to acquire a proprietary interest in the Company.
As of November 6, 1997, the ESOP was terminated and all shares
of stock owned by the ESOP were tendered in connection with the
November 1997 recapitalization transactions. No ESOP expense was
recorded during 1998, 1997 and 1996. As of October 1998, all plan
benefits had been paid out to participants.
Investment Plan:
The Company has an Investment Plan intended to qualify as a
deferred compensation plan under Section 401(k) of the Internal
Revenue Code of 1986. The Investment Plan is available to all
domestic employees and the Company matches employee contributions
up to a specified limit. In 1998, 1997 and 1996, the Company made
matching contributions and charged to expense $847,000, $950,000
and $498,000, respectively.
NOTE 9. Stock Option Plans
------------------
In October 1995, the Financial Accounting Standards Board
(FASB) issued Statement No. 123, "Accounting and Disclosure of
Stock-Based Compensation." While the accounting standard
encourages the adoption of a new fair-value method for expense
recognition, Statement 123 allows companies to continue accounting
for stock options and other stock-based awards as provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). The Company has elected to follow
the provisions of APB 25 and related interpretations in accounting
for its stock options plans because, as discussed below, the
alternative fair-value method prescribed by FASB Statement No. 123
requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options
generally equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In December 1997, the Company's Board of Directors approved
the 1997 Management Equity Plan. The maximum aggregate number of
shares of Common Stock that may be issued in connection with grants
under the Management Equity Plan, as adjusted, is approximately 4.8
million shares, subject to adjustment as provided for in the plan.
The Management Equity Plan is administered, and grants determined,
by a committee of the Board of Directors. The exercise price and
term of options granted under the Management Equity Plan shall be
determined by the committee, however, in no event shall the term of
any option granted under the Management Equity Plan exceed seven
(7) years. The Management Equity Plan supersedes all other stock
option plans. As of December 31, 1997, all outstanding options
granted under the superseded plans were 100% vested.
The 1997 Kinetic Concepts, Inc. Stock Incentive Plan (the
"Stock Incentive Plan") was approved by the Company's Board of
Directors on May 13, 1997 and covered an aggregate of 10.0 million
shares of the Company's Common Stock. Under the Stock Incentive
Plan, options were granted to employees (including officers), non-
employee directors and consultants of the Company. The exercise
price of the options was determined by a committee of the Board of
Directors of the Company. The Stock Incentive Plan permitted the
Board of Directors to declare the terms for payment when such
options are exercised. Options under the Stock Incentive Plan were
granted with a term not exceeding ten years. The Stock Incentive
Plan was superseded by the 1997 Management Equity Plan.
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option
Plan (the "Key Contributor Stock Option Plan") covered up to an
aggregate of 23.0 million shares of the Company's Common Stock.
Options were granted under the Key Contributor Stock Option Plan to
employees (including officers), non-employee directors and
consultants of the Company. The exercise price of the options was
determined by a committee of the Board of Directors of the Company.
The Key Contributor Stock Option Plan permitted the Board of
Directors to declare the terms for payment when such options are
exercised. Options under the Key Contributor Stock Option Plan were
granted with a term not exceeding ten years. The Key Contributor
Stock Option Plan expired on April 13, 1997 and was succeeded by
the 1997 Stock Incentive Plan.
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan
(the "Directors Stock Option Plan") covered an aggregate of
1,200,000 shares of the Company's Common Stock which were to be
granted to non-employee directors of the Company. The exercise
price of the options granted under the Directors Stock Option Plan
was determined to be the fair market value of the shares of the
Company's Common Stock on the date that such option was granted.
The Directors Stock Option Plan was succeeded by the 1997 Stock
Incentive Plan.
The 1995 Kinetic Concepts, Inc. Senior Executive Management
Stock Option Plan (the "Senior Executive Stock Option Plan")
covered a total of 5.6 million shares of the Company's Common Stock
which were to be granted to certain senior executives of the
Company at the recommendation of the Chief Executive Officer and at
discretion of the Company's Board of Directors. The exercise price
for each share of common stock covered by an option was established
by the Board of Directors but was not in any case to be less than
the fair market value of the shares of Common Stock on the date of
grant. Vesting of options granted was subject to certain terms and
conditions. The Senior Executive Stock Option Plan was superseded
by the 1997 Management Equity Plan .
Pro forma information regarding net income and earnings per
share is required by Statement 123 and has been calculated based on
the assumption that the Company had accounted for its employee
stock options under the fair-value method of that statement. The
fair value for options granted during the three fiscal years ended
December 31, 1998, 1997 and 1996, respectively, was estimated using
a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 5.0%, 5.6% and
6.1%, dividend yields of 1.1%, 1.1% and 0.9%, volatility factors of
the expected market price of the Company's common stock of .26, .30
and .32 and a weighted-average expected option life of 5 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the underlying assumptions can materially affect the
fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in
thousands except for earnings per share information):
1998 1997 1996
---------- --------- ---------
Net Earnings as Reported.... $11,776 $12,605 $38,987
Pro Forma Net Earnings...... $ 9,650 $11,319 $37,996
Earnings Per Share as
Reported:
Earnings per common share. $ 0.17 $ 0.08 $ 0.22
Earnings per common share
-- assuming dilution.... $ 0.16 $ 0.08 $ 0.21
Pro Forma Earnings Per Share
Earnings per common share. $ 0.14 $ 0.07 $ 0.22
Earnings per common share
-- assuming dilution.... $ 0.13 $ 0.07 $ 0.21
The Company is not required to apply the method of accounting
prescribed by Statement 123 to stock options granted prior to
January 1, 1995. As a result, the pro forma compensation cost
reflected above may not be representative of future results.
The following table summarizes information about stock options
outstanding at December 31, 1998 (options in thousands):
Weighted
Average
Options Remaining Weighted Options Weighted
Range of Outstanding Contract Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/98 (yrs) Price 12/31/98 Price
- -------------- -------- ------- --------- --------- --------
$0.88 to $1.16 1,283 5.4 $1.05 1,283 $1.05
$1.25 to $2.38 597 5.8 $1.73 597 $1.73
$2.78 to $4.81 7,617 6.7 $4.26 3,285 $3.53
----- ---- ---- ----- ----
9,497 6.4 $3.67 5,165 $2.70
A summary of the Company's stock option activity, and related
information, for years ended December 31, 1998, 1997 and 1996
follows (options in thousands):
1998 1997 1996
---------------- --------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------- ---------------- -----------------
Options Outstanding -
Beginning of Year... 9,344 $ 3.55 13,356 $ 2.17 11,332 $ 1.30
Granted............. 623 $ 4.81 6,832 $ 4.36 5,268 $ 3.62
Exercised........... (288) $ 2.13 (10,436) $ 2.35 (2,512) $ 1.26
Forfeited........... (182) $ 4.01 (408) $ 2.66 (732) $ 2.34
----- ------ ------
Options Outstanding -
End of Year......... 9,497 $ 2.71 9,344 $ 3.55 13,356 $ 2.17
----- ------ ------
Exercisable at End
of Year............. 5,165 $ 2.70 5,520 $ 2.67 5,284 $ 1.77
----- ----- ------ ----- ------ -----
Weighted-Average Fair
Value of Options
Granted During
the Year............ $ 1.58 $ 1.60 $ 1.45
Exercise prices for options outstanding as of December 31,
1998 ranged from $0.88 to $ 4.81. The weighted average remaining
contractual life of those options is 6.4 years. The weighted
average fair value of options granted during 1998 approximated the
weighted average exercise price at the grant date.
Note 10. Other Comprehensive Income
The Company adopted Financial Accounting Standards Board ("FASB")
Statement No. 130, "Reporting Comprehensive Income", in the first
quarter of 1998. The adoption of this Statement has no impact on
the net earnings or shareholders' equity of the Company. This
standard requires disclosure of total nonowner changes in
shareholders' equity, which is defined as net earnings plus direct
adjustments to shareholders' equity such as equity and cash
investment adjustments and foreign currency translation
adjustments. For KCI, other comprehensive income consists of foreign
currency translation adjustments. For 1998, 1997 and 1996, the
Company's comprehensive income was $11.7 million, $9.6 million and
$38.5 million, respectively. The earnings associated with the
Company's investment in its foreign subsidiaries are considered to
be permanently invested and no provision for U.S. federal and state
income taxes on these earnings or translation adjustments has been
provided.
Note 11. Other Assets
------------
A summary of other long-term assets follows (in thousands):
1998 1997
-------- --------
Investment in assets subject
to leveraged leases.......... $16,445 $16,069
Investment in long-term
securities................... 5,281 5,443
Intangible assets.............. 4,352 4,096
Deposits and other............. 8,816 6,973
------ ------
$34,894 $32,581
(Less) accumulated amortization (3,425) (3,100)
------ ------
$31,469 $29,481
====== ======
The Company acquired beneficial ownership of two Grantor
Trusts in December 1996 and December 1994. The assets held by each
Trust consist of a McDonnell Douglas DC-10 aircraft and three
engines. In connection with the acquisitions, KCI paid cash equity
of $7.2 million and $7.6 million, respectively, and assumed non-
recourse debt of $47.0 million and $51.8 million, respectively.
The DC-10 aircraft are leased to the Federal Express Corporation
through June 2012 and January 2012, respectively. Federal Express
pays monthly rent to a third party who, in turn, pays this entire
amount to the holders of the non-recourse certificated
indebtedness, which is secured by the aircraft. The certificate
holders recourse in the event of a default is limited to the Trust
assets.
Long-term securities consist primarily of government backed
securities held by the Company's wholly-owned captive insurance
company and are carried at market value, which is not significantly
different than cost. The carrying value of the long-term
securities approximates fair value. Subsequent to December 31,
1998, the Company liquidated, at no gain or loss, the securities
held by the captive insurance company and acquired letters of
credit to cover the remaining claims liability recorded by the
Captive as of December 31, 1998.
Note 12. 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).
1998 1997 1996
---------- ---------- ---------
Net earnings................... $ 11,776 $ 12,605 $ 38,987
====== ======= =======
Average common shares:
Basic(weighted-average
outstanding shares)........ 70,873 154,364 175,832
Dilutive potential common
shares from stock options.. 2,360 5,276 6,124
------ ------- -------
Diluted (weighted-average
outstanding shares)........ 73,233 159,640 181,956
====== ======= =======
Earnings per common share..... $ 0.17 $ 0.08 $ 0.22
====== ======= =======
Earnings per common share -
assuming dilution............ $ 0.16 $ 0.08 $ 0.21
====== ======= =======
NOTE 13. Commitments and Contingencies
-----------------------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for
the Western District of Texas. Novamedix manufactures the principal
product which directly competes with the PlexiPulse. The suit
alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship
with Novamedix and a variety of ancillary claims. Novamedix seeks
injunctive relief and monetary damages. Although it is not possible
to reliably predict the outcome of this litigation or the damages
which could be awarded, the Company believes that its defenses to
these claims are meritorious and that the litigation will not have
a material adverse effect on the Company's business, financial
condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust
lawsuit against Hillenbrand Industries, Inc. and one of its
subsidiaries, Hill-Rom. The suit was filed in the United States
District Court for the Western District of Texas. The suit alleges
that Hill-Rom used its monopoly power in the standard hospital bed
business to gain an unfair advantage in the specialty hospital bed
business. Specifically, the allegations set forth in the suit
include a claim that Hill-Rom required hospitals and purchasing
groups to agree to exclusively rent specialty beds in order to
receive substantial discounts on products over which they have
monopoly power - hospital beds and head wall units. The suit
further alleges that Hill-Rom engaged in activities which
constitute predatory pricing and refusals to deal. Hill-Rom
has filed an answer denying the allegations in the suit.
Although discovery has not been completed and it is not possible
to reliably predict the outcome of this litigation or the damages
which might be awarded, the Company believes that its claims are
meritorious.
On October 31, 1996, the Company received a counterclaim which
had been filed by Hillenbrand Industries, Inc. in the antitrust
lawsuit which the Company filed in 1995. The counterclaim alleges
that the Company's antitrust lawsuit and other actions were
designed to enable KCI to monopolize the specialty therapeutic
surface market. Although it is not possible to reliably predict the
outcome of this litigation, the Company believes that the
counterclaim is without merit.
On December 24, 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. On February 12, 1999, the South
Carolina District Court concluded that the TriaDyne bed did not
infringe the Hill-Rom patent. On March 12, 1999, Hill-Rom filed a
Notice of Appeal regarding this decision.
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.
Other than commitments for new product inventory, including
disposable "for sale" products, of $4.0 million and the completion
of the Jobst purchase, the Company has no material long-term
capital commitments and can adjust its level of capital
expenditures as circumstances dictate.
See discussion of the Company's self-insurance program at Note
1 and leases at Note 6.
NOTE 14. Segment and Geographic Information
----------------------------------
The Company is principally engaged in the sale and rental of
innovative therapeutic systems throughout the United States and in
twelve primary countries internationally. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related
Information", which the Company has adopted in the current year.
The Company identifies its business segments based on management
responsibility within the United States and geographically for all
international units. The KCI New Technologies ("Nutech") segment
includes all operations related to the U.S. rental and sale of
circulatory devices, namely the Plexipulse and Plexipulse All-in-
One systems. The Company measures segment profit as operating
profit, which is defined as income before interest income or
expense, foreign currency gains and losses, income taxes and
minority interest. All intercompany transactions are eliminated in
computing revenues, operating income and assets. Information on
segments and a reconciliation to income before interest, income
taxes, foreign currency gains and losses and minority interest are
as follows (in thousands):
Year Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Revenue:
KCI Therapeutic Services.. $229,582 $215,156 $184,775
KCI International......... 78,039 70,274 68,765
Nutech.................... 21,525 19,124 15,726
Other (1)................. 1,325 2,362 615
------- ------- -------
$330,471 $306,916 $269,881
======= ======= =======
Operating Earnings:
KCI Therapeutic Services.. $ 79,457 $ 73,143 $ 60,282
KCI International......... 15,308 11,284 14,327
Nutech.................... 7,352 6,404 3,872
Other (2)................. (34,557) (60,782) (23,127)
------ ------ ------
$ 67,560 $ 30,049 $ 55,354
====== ====== ======
Depreciation and
Amortization:
KCI Therapeutic Services.. $ 16,969 $ 12,905 $ 12,398
KCI International......... 6,800 5,527 5,184
Nutech.................... 998 698 768
Other..................... 7,011 4,950 3,444
------ ------ ------
$ 31,778 $ 24,080 $ 21,794
====== ====== ======
Total Assets:
KCI Therapeutic Services.. $169,748 $213,531 $137,650
KCI International......... 58,064 65,020 59,340
Nutech.................... 17,437 7,791 4,387
Other..................... 62,824 58,590 52,016
------- ------- -------
$308,073 $344,932 $253,393
======= ======= =======
Gross Capital Expenditures:
KCI Therapeutic Services.. $ 16,244 $ 21,772 $ 15,522
KCI International......... 5,022 5,222 5,114
Nutech.................... 665 1,456 745
Other..................... 8,682 2,072 5,702
------- ------- -------
$ 30,613 $ 30,522 $ 27,083
======= ======= =======
(1) Other revenue sources consist primarily of contract metal
fabrication income.
(2) General headquarter expenses are not allocated to the
individual segments and include executive, financial, legal
and administrative expenses.
Following is other selected geographic financial information of the
Company (in thousands):
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
Geographic location of long-
lived assets:
Domestic.......... $159,472 $149,349 $ 90,669
Foreign........... 19,654 18,811 18,537
------- ------- -------
Total long-lived assets..... $179,126 $168,160 $109,206
======= ======= =======
NOTE 15. Quarterly Financial Data (Unaudited)
------------------------------------
The unaudited consolidated results of operations by quarter,
as adjusted for the stock split, are summarized below:
Year Ended December 31, 1998
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue................. $81,897 $81,358 $81,048 $86,168
Operating earnings...... $17,190 $15,560 $18,669 $16,141
Net earnings............ $ 2,986 $ 2,178 $ 3,792 $ 2,820
Per share:
Earnings per common
share............ $ 0.04 $ 0.03 $ 0.05 $ 0.04
Earnings per common
share - assuming
dilution......... $ 0.04 $ 0.03 $ 0.05 $ 0.04
Average common shares:
Basic (Weighted
average out-
standing shares). 70,852 70,852 70,872 70,915
Diluted (Weighted
average out-
standing shares). 73,304 73,300 73,264 73,273
====== ====== ====== ======
Year Ended December 31, 1997
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Revenue................. $73,181 $75,031 $76,299 $ 82,405
Operating earnings (loss) $16,217 $16,223 $16,165 $(18,556)
Net earnings (loss)..... $10,003 $ 9,952 $ 9,948 $(17,298)
Per share:
Earnings (loss) per
common share..... $ 0.06 $ 0.06 $ 0.06 $ (0.16)
Earnings (loss) per
common share -
assuming dilution $ 0.06 $ 0.06 $ 0.06 $ (0.15)
Average common shares:
Basic (Weighted
average out-
standing shares).. 169,604 169,268 169,788 108,992
Diluted (Weighted
average out-
standing shares).. 175,052 175,224 176,364 112,852
======= ======= ======= =======
Results for the fourth quarter of 1997 include
recapitalization expenses of $34.4 million (See Note 2).
Earnings per share for the full year may differ from the total
of the quarterly earnings per share due to rounding differences.
NOTE 16. 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) act as guarantors. Certain other subsidiaries (the
nonguarantor subsidiaries) do not guarantee such debt.
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
December 31, 1998 and 1997 and the related condensed consolidating
statements of earnings and cash flows for each year in the three-
year period ended December 31, 1998.
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
December 31, 1998
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash
equivalents........ $ -- $ -- $ 9,543 $ (5,177) $ 4,366
Accounts receivable,
net................ -- 72,173 17,474 (4,435) 85,212
Inventories.......... -- 18,971 9,691 -- 28,662
Prepaid expenses and
other.............. -- 7,395 3,312 -- 10,707
------- ------- ------ ------- ------
Total current
assets......... -- 98,539 40,020 (9,612) 128,947
Net property, plant and
equipment............ -- 79,110 9,717 (10,877) 77,950
Goodwill, net.......... -- 49,033 5,294 -- 54,327
Loan issuance cost, net -- 15,380 -- -- 15,380
Other assets, net...... -- 31,417 52 -- 31,469
Intercompany invest-
ments and advances... (261,588) 460,361 1,104 (199,877) --
------- ------- ------ ------- -------
Total assets..... $(261,588) $733,840 $ 56,187 $(220,366) $308,073
======= ======= ====== ======= =======
LIABILITIES AND
SHAREHOLDERS(DEFICIT)
EQUITY
Accounts payable........$ -- $ 6,512 $ 2,104 $ (5,178) $ 3,438
Accrued expenses........ -- 28,971 8,306 -- 37,277
Current installments on
long-term obligations. -- 8,800 -- -- 8,800
Intercompany payables... -- 6,151 3,765 (9,916) --
Current installments of
capital lease obli-
gations............... -- 150 -- -- 150
Income tax payable...... -- 1,612 1,077 -- 2,689
------- ------- ------ ------- -------
Total current
liabilities..... -- 52,196 15,252 (15,094) 52,354
------- ------- ------ ------- -------
Long-term obligations
excluding current
installments.......... -- 507,055 -- -- 507,055
Capital lease
obligations,
excluding current
installments.......... -- 99 30 -- 129
Deferred income taxes,
net................... -- 15,519 -- (5,396) 10,123
------- ------- ------ ------- -------
Total liabilities. -- 574,869 15,282 (20,490) 569,661
Shareholders' (deficit)
equity................ (261,588) 158,971 40,905 (199,876) (261,588)
------- ------- ------ ------- -------
Total liabilities
and equity......$(261,588) $733,840 $ 56,187 $(220,366) $308,073
======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
December 31, 1997
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash
equivalents........ $ -- $ 44,471 $ 17,316 $ (33) $ 61,754
Accounts receivable,
net................ 681 75,252 15,002 (9,697) 81,238
Inventories.......... 16,716 3,056 9,547 (7,766) 21,553
Prepaid expenses and
other.............. 5,663 11,847 1,584 (648) 18,446
------ ------- ------ ------- -------
Total current
assets......... 23,060 134,626 43,449 (18,144) 182,991
Net property, plant
and equipment........ 14,310 75,471 9,065 (23,412) 75,434
Goodwill, net.......... 2,749 37,332 5,818 -- 45,899
Loan issuance cost, net -- 17,346 -- -- 17,346
Other assets, net...... 6,055 23,298 127 1 29,481
Intercompany
investments
and advances......... 264,135 228,016 1,017 (493,168) --
------- ------- ------ ------- -------
Total assets...... $310,309 $516,089 $ 59,476 $(534,723) $351,151
======= ======= ====== ======= =======
LIABILITIES AND
SHAREHOLDERS(DEFICIT)EQUITY
Accounts payable....... $ 37,594 $ 595 $ 2,196 $ (32) $ 40,353
Accrued expenses....... 12,714 23,429 5,691 (500) 41,334
Current installments on
long-term obligations 4,800 -- -- -- 4,800
Intercompany payables.. -- 181,147 9,761 (190,908) --
Current installments of
capital lease obli-
gations.............. 139 -- -- -- 139
Income tax payable..... -- 1 648 (649) --
------- ------- ------ ------- -------
Total current
liabilities..... 55,247 205,172 18,296 (192,089) 86,626
------- ------- ------ ------- -------
Long-term obligations
excluding current
installments......... 529,700 201 -- -- 529,901
Capital lease
obligations,
excluding current
installments......... 256 -- 56 -- 312
Dererred income taxes,
net.................. 804 17,636 -- (8,430) 10,010
------- ------- ------ ------- -------
Total liabilities.. 586,007 223,009 18,352 (200,519) 626,849
Shareholders' (deficit)
equity............... (275,698) 293,080 41,124 (334,204) (275,698)
------- ------- ------ ------- -------
Total liabilities
and equity....... $310,309 $516,089 $ 59,476 $(534,723) $351,151
======= ======= ====== ======= =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1998
(in thousands)
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 and service..... $ -- $208,363 $ 50,119 $ -- $258,482
Sales and other........ -- 59,193 23,567 (10,771) 71,989
------ ------- ------ ------ -------
Total revenue...... -- 267,556 73,686 (10,771) 330,471
Rental expenses........ -- 121,034 44,427 -- 165,461
Cost of goods sold..... -- 20,931 12,470 (5,520) 27,881
------ ------- ------ ------ -------
-- 141,965 56,897 (5,520) 193,342
------ ------- ------ ------ -------
Gross profit....... -- 125,591 16,789 (5,251) 137,129
Selling, general and
administrative
expenses............. -- 64,924 4,645 -- 69,569
------ ------- ------ ------ -------
Operating earnings. -- 60,667 12,144 (5,251) 67,560
Interest income........ -- 334 282 -- 616
Interest expense....... -- (48,594) -- -- (48,594)
Foreign currency
gain(loss)........... -- 1,031 (1,011) -- 20
------ ------- ------ ------ -------
Earnings before
income taxes and
minority interest -- 13,438 11,415 (5,251) 19,602
Income tax............. -- 5,167 4,784 (2,100) 7,851
Minority interest...... -- -- 25 -- 25
------ ------- ------ ------ -------
Earnings before
equity in
earnings of
subsidiaries..... -- 8,271 6,656 (3,151) 11,776
Equity in earnings
of subsidiaries. 11,776 6,656 -- (18,432) --
------ ------- ------ ------ -------
Net earnings....... $11,776 $ 14,927 $ 6,656 $(21,583) $ 11,776
====== ======= ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1997
(in thousands)
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 and service..... $ -- $202,938 $ 44,952 $ -- $247,890
Sales and other........ 42,290 36,777 21,190 (41,231) 59,026
------ ------- ------ ------ -------
Total revenue...... 42,290 239,715 66,142 (41,231) 306,916
Rental expenses........ -- 123,346 40,946 (8,113) 156,179
Cost of goods sold..... 30,335 9,379 12,791 (28,832) 23,673
------ ------- ------ ------ -------
30,335 132,725 53,737 (36,945) 179,852
------ ------- ------ ------ -------
Gross profit....... 11,955 106,990 12,405 (4,286) 127,064
Selling, general and
administrative
expenses............. 8,796 44,090 9,768 -- 62,654
Recapitalization
expense.............. -- 34,361 -- -- 34,361
------ ------- ------ ------ -------
Operating earnings. 3,159 28,539 2,637 (4,286) 30,049
Interest income........ 278 1,527 458 -- 2,263
Interest expense....... (9,736) (1,176) -- 739 (10,173)
Foreign currency loss.. -- -- (1,106) -- (1,106)
------ ------ ------ ----- -------
Earnings before
income taxes and
minority interest (6,299) 28,890 1,989 (3,547) 21,033
Income tax............. (2,483) 11,169 1,381 (1,664) 8,403
Minority interest...... -- -- (25) -- (25)
------ ------- ------ ------ -------
Earnings before
equity in
earnings of
subsidiaries..... (3,816) 17,721 583 (1,883) 12,605
Equity in earnings
of subsidiaries.. 16,421 583 -- (17,004) --
------ ------- ------ ------ -------
Net earnings....... $12,605 $ 18,304 $ 583 $(18,887) $ 12,605
====== ======= ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1996
(in thousands)
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 and service..... $ -- $176,135 $49,315 $ -- $225,450
Sales and other........ 54,716 10,989 18,768 (40,042) 44,431
------ ------- ------ ------ -------
Total revenue...... 54,716 187,124 68,083 (40,042) 269,881
Rental expenses........ -- 110,198 45,851 (9,844) 146,205
Cost of goods sold..... 33,774 -- 9,027 (26,486) 16,315
------ ------- ------ ------ -------
33,774 110,198 54,878 (36,330) 162,520
------ ------- ------ ------ -------
Gross profit....... 20,942 76,926 13,205 (3,712) 107,361
Selling, general and
administrative
expenses............. 22,615 38,218 3,101 (11,927) 52,007
------ ------- ------ ------ -------
Operating earnings. (1,673) 38,708 10,104 8,215 55,354
Interest income........ 249 9,513 334 (764) 9,332
Interest expense....... (962) (810) -- 1,527 (245)
------ ------- ------ ------ -------
Earnings before
income taxes and
minority interest (2,386) 47,411 10,438 8,978 64,441
Income tax............. (788) 19,059 3,862 3,321 25,454
------ ------- ------ ------ -------
Earnings before
equity in
earnings of
subsidiaries..... (1,598) 28,352 6,576 5,657 38,987
Equity in earnings
of subsidiaries.. 40,585 6,576 -- (47,161) --
------ ------- ------ ------ -------
Net earnings....... $38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
====== ======= ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1998
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- -------- ---------
Cash flows from
operating
activities:
Net earnings.......... $ 11,776 $ 14,927 $ 6,656 $(21,583) $ 11,776
Adjustments to
reconcile net
earnings to net
cash provided by
operating
activities.......... (9,767) 33,837 4,695 3,344 32,109
------ ------ ------ ------ ------
Net cash provided by
operating activities 2,009 48,764 11,351 (18,239) 43,885
Cash flows from
investing activities:
Additions to
property, plant and
equipment......... -- (31,166) (7,512) 8,765 (29,913)
Decrease in inventory
to be converted
into equipment for
short-term rental. -- (700) -- -- (700)
Dispositions of
property, plant
and equipment..... -- 755 1,452 -- 2,207
Businesses acquired
in purchase
transactions,
net of cash
acquired.......... -- (10,939) (327) -- (11,266)
Decrease (increase)
in other assets... -- (3,054) 248 -- (2,806)
------ ------ ------ ------ ------
Net cash used by
investing activities -- (45,104) (6,139) 8,765 (42,478)
Cash flows from
financing activities:
Repayments of notes
payable and long-
term obligations.. -- (19,329) -- -- (19,329)
Repayments of capital
lease obligations. -- (145) (27) -- (172)
Loan issuance costs. -- (339) -- -- (339)
Proceeds from the
excercise of
stock options..... 300 -- -- -- 300
Proceeds (payments)
on intercompany
invesments and
advances.......... (6,340) 15,003 (5,510) (3,153) --
Cash dividends paid
to shareholders... -- -- (8,651) 8,651 --
Recapitalization
costs - fees and
expenses.......... 2,088 -- -- -- 2,088
Recapitalization
costs - amount
incurred in 1997,
paid in 1998...... -- (41,652) -- -- (41,652)
Other............... 1,943 (1,637) 1,204 (1,512) (2)
------ ------ ------ ------ ------
Net cash provided by
financing activities (2,009) (48,099) (12,984) 3,986 (59,106)
Effect of exchange rate
changes on cash and
cash equivalents.... -- -- -- 311 311
------ ------ ------ ------ ------
Net decrease in cash
and cash equivalents -- (44,439) (7,772) (5,177) (57,388)
Cash and cash
equivalents,
beginning of year... -- 44,439 17,315 -- 61,754
------ ------ ------ ------ ------
Cash and cash
equivalents, end
of year............. $ -- $ -- $ 9,543 $(5,177) $ 4,366
====== ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1997
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
Cash flows from
operating activities:
Net earnings......... $ 12,605 $ 18,304 $ 583 $(18,887) $ 12,605
Adjustments to
reconcile net
earnings to net
cash provided by
operating
activities......... (19,424) (5,196) 2,355 20,364 (1,901)
-------- ------- ------- ------- -------
Net cash provided by
operating activities (6,819) 13,108 2,938 1,477 10,704
Cash flows from
investing activities:
Additions to
property, plant and
equipment.......... (1,624) (22,565) (5,698) 2,215 (27,672)
Decrease in inventory
to be converted
into equipment for
short-term rental (2,850) -- -- -- (2,850)
Dispositions of
property, plant
and equipment.... -- 521 2,099 -- 2,620
Businesses acquired
in purchase
transactions,net
of cash acquired. -- (38,266) (2,886) (1) (41,153)
Decrease (increase)
in other assets.. 4,583 1,709 2,990 (8,343) 939
------- ------ ------ ------- ------
Net cash provided
(used) by investing
activities......... 109 (58,601) (3,495) (6,129) (68,116)
Cash flows from
financing activities:
Borrowings of notes
payable and long-
term obligations. 534,500 201 -- -- 534,701
Borrowings
(repayments) of
capital lease
obligations...... (71) -- 8 (270) (333)
Loan issuance costs (6) (17,728) -- -- (17,734)
Proceeds from the
excercise of
stock options.... 3,668 -- -- -- 3,668
Proceeds (payments)
on intercompany
investments and
advances......... (71,983) 59,803 7,521 4,659 --
Purchase and
retirement of
treasury stock... (3,827) -- -- -- (3,827)
Cash dividends paid
to shareholders.. (6,388) -- -- -- (6,388)
Recapitalization
costs - purchase
of treasury
stock............ (631,606) -- -- -- (631,606)
Recapitalization
costs - proceeds
from C/S issuance 150,184 -- -- -- 150,184
Recapitalization
costs - fees and
expenses......... (8,626) -- -- -- (8,626)
Recapitalization
costs - amounts
not yet paid..... 41,652 -- -- -- 41,652
Other.............. (787) (2,598) (4,141) 7,779 253
------- ------- ------- ------ ------
Net cash provided by
financing activities 6,710 39,678 3,388 12,168 61,944
Effect of exchange rate
changes on cash and
cash equivalents... -- -- -- (1,823) (1,823)
------- ------- ------- ------ ------
Net increase (decrease)
in cash and cash
equivalents........ -- (5,815) 2,831 5,693 2,709
Cash and cash
equivalents,
beginning of year.. -- 50,286 14,485 (5,726) 59,045
------- ------ ------ ------- -------
Cash and cash
equivalents, end
of year............ $ -- $44,471 $17,316 $ (33) $ 61,754
======= ====== ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1996
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
Cash flows from
operating activities:
Net earnings........... $ 38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
Adjustments to
reconcile net
earnings to net
cash provided by
operating
activities........... (32,912) 24,267 (5,031) 36,856 23,180
------ ------ ------- ------ ------
Net cash provided by
operating activities 6,075 59,195 1,545 (4,648) 62,167
Cash flows from
investing activities:
Additions to
property, plant
and equipment...... (8,474) (13,261) (10,017) 3,969 (27,783)
Decrease in inventory
to be converted
into equipment for
short-term rental.. 700 -- -- -- 700
Dispositions of
property, plant
and equipment...... -- 132 5,268 -- 5,400
Businesses acquired
in purchase
transactions, net
of cash acquired... -- (1,146) -- -- (1,146)
Excess principal
repayment on
discounted
notes receivable... -- 5,180 -- -- 5,180
Note repaid from
principal
shareholder........ -- 10,000 -- -- 10,000
Decrease (increase)
in other assets.... 23 (6,796) (1,227) (1,960) (9,960)
------ ------ ------- ------ ------
Net cash provided
(used) by investing
activities.......... (7,751) (5,891) (5,976) 2,009 (17,609)
Cash flows from
financing
activities:
Borrowings (repayments)
of capital lease
obligations........ 466 -- (6) (3) 457
Proceeds from the
excercise of stock
options............ 4,264 -- -- -- 4,264
Proceeds (payments)
on intercompany
investments and
advances........... 39,442 (45,135) 5,565 128 --
Purchase and
retirement of
treasury stock..... (35,241) -- -- -- (35,241)
Cash dividends paid
to shareholders.... (6,607) -- -- -- (6,607)
Other................ (648) 975 (480) 3 (150)
------ ------ ------ ------ ------
Net cash provided
(used) by financing
activities........... 1,676 (44,160) 5,079 128 (37,277)
Effect of exchange rate
changes on cash and
cash equivalents .... -- -- -- (635) (635)
------ ------- ------ ------ ------
Net increase in cash
and cash equivalents. -- 9,144 648 (3,146) 6,646
Cash and cash
equivalents,
beginning of year.... -- 41,142 13,837 (2,580) 52,399
------ ------- ------ ------ ------
Cash and cash
equivalents, end
of year.............. $ -- $ 50,286 $ 14,485 $ (5,726) $ 59,045
====== ====== ====== ====== ======
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheets of
Kinetic Concepts, Inc. and subsidiaries as of December 31, 1998 and
1997 and the related consolidated statements of earnings, cash
flows and shareholders' (deficit) equity for each of the two years
in the period ended December 31, 1998. Our audits also included the
financial statement schedules, as it relates to information for the
years ended December 31, 1998 and 1997, listed in the index at Item
14(a). These consolidated financial statements and schedules are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
and schedules based on our audits. The consolidated financial
statements for Kinetic Concepts, Inc. and subsidiaries for the year
ended December 31, 1996 were audited by other auditors whose report
dated February 5, 1997, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1998 and 1997 and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
-------------------------
Ernst & Young LLP
San Antonio, Texas
February 5, 1999
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of December 31, 1996 and
the related consolidated statements of earnings, cash flows and
shareholders' equity for each of the years in the two-year period
ended December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Kinetic Concepts, Inc. and subsidiaries as of December
31, 1996, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, 1997
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 5, 1997, we reported on the consolidated
balance sheet of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1996, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1996. In connection with
our audits of the aforementioned consolidated financial statements,
we also have audited the related financial statement schedule as
listed in Item 14 (a) (2) of Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audit.
In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information
set forth therein.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, 1997
Item 9. Changes in and Disagreements with Accountants on
- ---------------------------------------------------------
Accounting Matters and Financial Disclosure
- ----------------------------------------------------
Ernst & Young LLP was the Company's certifying accountant for
the two years ended December 31, 1998 and 1997. On February 18,
1997, the Board of Directors of the Company, upon the
recommendation of the Audit Committee, voted to engage the
accounting firm of Ernst & Young LLP as the Company's certifying
accountant for the year ending December 31, 1997. The Company's
previous certifying accountant, KPMG Peat Marwick LLP, was notified
on February 21, 1997 and its engagement was terminated effective
upon the completion and filing of the Company's 1996 Annual Report
on Form 10-K. On February 24, 1997, the Company notified Ernst &
Young LLP that it would be engaged as the Company's certifying
accountant for the 1997 fiscal year.
The report of KPMG Peat Marwick LLP on the Company's financial
statements for the year ended December 31, 1996 did not contain an
adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of the Company's financial
statements for the year ended December 31, 1996 and in the
subsequent interim period through the date of dismissal, there were
no disagreements with KPMG Peat Marwick LLP on any matters of
accounting principles, financial statement disclosure or audit
scope and procedures which, if not resolved to the satisfaction of
KPMG Peat Marwick LLP, would have caused the firm to make reference
to the matter in their report.
The change in certifying accountant came in response to a
Request for Proposal issued by the Company in 1996. Ernst & Young
LLP, has been providing property and income tax planning services
to the Company since 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Set forth below are the names, ages and positions of the
directors and executive officers of the Company, together with
certain other key personnel.
Name Age Position
- ----------------- ---- ---------------------
Robert Jaunich II....... 58 Chairman of the Board
Raymond R. Hannigan..... 59 Director, President and Chief Executive
Officer
James R. Leininger M.D.. 54 Director, Chairman Emeritus
James T. Farrell........ 34 Director
N. Colin Lind........... 42 Director
Charles N. Martin....... 52 Director
Donald E. Steen......... 56 Director
Jeffrey W. Ubben........ 37 Director
Dennis E. Noll.......... 44 Senior Vice President, General Counsel
and Secretary
Christopher M. Fashek... 49 President, KCI Therapeutic Services
Frank DiLazzaro......... 40 President, KCI International
William M. Brown........ 56 Vice President and Chief Financial
Officer
Richard C. Vogel........ 44 Vice President and General Manager,
NuTech
Michael J. Burke........ 51 Vice President, Manufacturing
Martin J. Landon........ 39 Vice President, Accounting and Corporate
Controller
Item 10. Directors and Executive Officers of the Registrant (Continued)
- -------------------------------------------------------------------------
Robert Jaunich II became a director and Chairman of the Board
after the consummation of the Tender Offer. Mr. Jaunich is a
Managing Director of Fremont Partners where he shares management
responsibility for the $605 million investment fund. He is also a
Managing Director and a member of the Board of Directors and
Executive Committee of The Fremont Group. Prior to joining the
Fremont Group in 1991, he was Executive Vice President and a member
of the Chief Executive Office of Jacobs Suchard AG, a Swiss-based
chocolate, sugar confectionery and coffee company. He currently
serves as a director of CNF Transportation, Inc. and as Chairman of
the Managing General Partner of Crown Pacific Partners, L.P.
Raymond R. Hannigan joined the Company as its President and
Chief Executive Officer in November 1994 and has served as a
director of the Company since 1994. From January 1991 to November
1994, Mr. Hannigan was the President of the International Division
of Sterling Winthrop Consumer Health Group (a pharmaceutical
company with operations in over 40 countries), a wholly-owned
subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr.
Hannigan was the President of Sterling Drug International.
James R. Leininger, M.D. is the founder of the Company and
served as Chairman of the Board of Directors from 1976 until 1997.
From January 1990 to November 1994, Dr. Leininger served as
President and Chief Executive Officer of the Company. From 1975
until October 1986, Dr. James Leininger was also the Chairman of
the Emergency Department of the Baptist Hospital System in San
Antonio, Texas.
James T. Farrell became a director after the consummation of
the Tender Offer. Mr. Farrell is a Managing Director of Fremont
Partners. Before joining The Fremont Group in 1991, he was an
associate at ESL Partners, a private investment partnership. In
1985, he began his career at Copley Real Estate Advisors. Mr.
Farrell is a former director of Coldwell Banker Corporation. He
also serves as a director of the nonprofit Pacific Research
Institute.
N. Colin Lind became a director after the consummation of the
Tender Offer. Mr. Lind is a Managing Director of Richard C. Blum &
Associates, L.P. Before joining RCBA in 1986, he was a Vice
President at R. H. Chappell Co., an investment concern focused on
development stage companies, and was previously a Vice President of
Research for two regional brokerage firms, Davis Skaggs, Inc. and
Wheat First Securities. He has previously been a director of two
public companies and seven venture capital backed companies.
Charles N. Martin became a director in 1998. From January
1992 to January 1997, Mr. Martin served as Chairman, President and
Chief Executive Officer of OrNda Health Corp. Starting in 1987
through January 1992, Mr. Martin served as President, Director and
Chief Operating Officer for HealthTrust Inc. Mr. Martin serves as
a director of Heritage Health Systems, Ambulatory Resource Centres,
the Center for Professional Excellence and UniPhy.
Donald E. Steen became a director in 1998. Mr. Steen is
Chairman of the Board of United Surgical Partners International, Inc.
("USP"). Prior to USP Mr. Steen served as President of the
International group of Columbia/HCA. He was formerly President of
the Western Group of Columbia/HCA. Prior to joining Columbia/HCA,
Mr. Steen served as President and Chief Executive Officer of
Medical Care America, the holding company of Medical Care
International, Inc. and Critical Care America, Inc. Mr. Steen
currently serves on the Board of Directors of several health care
companies.
Jeffrey Ubben became a director after the consummation of the
Tender Offer. Mr. Ubben is a Managing Director of Richard C. Blum &
Associates, L.P. Before joining RCBA in 1995 he was manager of the
$5 billion Fidelity Value Fund and had been employed by Fidelity
for a period of nine years.
Dennis E. Noll joined the Company in February 1992 as its
Senior Corporate Counsel and was appointed Vice President, General
Counsel and Secretary in January 1993. Mr. Noll was promoted to
Senior Vice President in September 1995. Prior to joining the
Company in February 1992, Mr. Noll was a shareholder of the law
firm of Cox & Smith Incorporated.
Christopher M. Fashek joined the Company in February 1995 as
President, KCTS. Prior to joining the Company, he served as General
Manager, Sterling Winthrop, New Zealand since February 1993, and
served as Vice President Sales of Sterling Health USA from 1989
until February 1993.
Frank DiLazzaro joined the Company in 1988 as General Manager,
KCI Medical Canada. Mr. DiLazzaro served as Vice President, KCI
International, Inc. from June 1989 to December 1992. Mr. DiLazzaro
has served as President, KCI International, Inc. since January 1993
and was Vice President, Marketing from April 1993 to September
1995.
William M. Brown joined the Company as its Vice President and
Chief Financial Officer on July 1, 1998. Prior to joining the
Company, he served as Executive Vice President and Chief Financial
Officer for IMO Industries from 1992 until October 1997 and held
various executive positions with ITT Corporation from 1967 through
1992.
Richard C. Vogel joined the Company as its Vice President and
General Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr.
Vogel served as Executive Vice President of Vestar, Inc., a
California-based biotechnology company.
Michael J. Burke joined the Company in September 1995 as Vice
President, Manufacturing. Prior to joining the Company, Mr. Burke
worked for Sterling Winthrop, Inc., a Division of Eastman Kodak
Company, for 25 years, where he served as Vice President,
Manufacturing and as General Manager, Sterling Health HK/China
since 1992.
Martin J. Landon joined the Company in May 1994 as Senior
Director of Corporate Development and was promoted to Vice
President, Accounting and Corporate Controller in October 1994.
From 1987 to May 1994, Mr. Landon worked for Intelogic Trace, Inc.,
most recently serving as Vice President and Chief Financial
Officer.
Item 11. Executive Compensation
- ---------------------------------
SUMMARY COMPENSATION TABLE
--------------------------
LONG-
TERM
COMPEN-
SATION
ANNUAL COMPENSATION AWARDS
- ------------------------------------------------------------------------
Other
Annual (2)
Compen- Securities All Other
Name and Principal sation Underlying Compen-
Position Year Salary Bonus (1) Options sation
- -------------------- ---- -------- -------- -------- ---------- --------
Raymond R. Hannigan 1998 $322,500 $ 64,500 -- $5,214
Chief Executive 1997 300,000 433,100 816,000 5,583
Officer,& President 1996 275,000 175,000 48,000 4,888
Frank DiLazzaro 1998 $188,667 $ 52,920 -- $1,695
President, 1997 181,000 390,323 352,000 1,409
KCI International, Inc. 1996 168,000 86,000 312,000 884
Christopher M. Fashek 1998 $219,000 $ 16,650 -- $2,338
President & Chief 1997 206,750 362,637 473,600 2,256
Executive Officer, KCI 1996 193,000 115,800 493,000 1,647
Therapeutic Services,
Inc.
Dennis E. Noll 1998 $187,750 $ 36,225 -- $1,612
Senior Vice-President, 1997 177,688 293,390 352,000 1,623
General Counsel & 1996 165,812 81,000 392,000 1,315
Secretary
Richard Vogel 1998 $160,542 $ 54,000 -- $1,513
Vice President & G. 1997 150,833 287,539 188,800 1,463
Manager KCI New
Technologies, Inc. 1996 72,500 29,000 $104,350 200,000 1,805
(1) The column entitled "Other Annual Compensation" includes
monies paid to Mr. Vogel in 1996 for reimbursement of
relocation expenses. Except with respect to personal benefits
received by individuals in fiscal 1996, the personal benefits
provided to each of the named executive officers under various
Company programs did not exceed 10% of the individual's
combined salary and bonus in any other year.
(2) The "All Other Compensation" column includes the Company's
contribution to the Company's Employee Stock Ownership Plan
which was credited in 1996, a Company contribution of $1,000
in 1998 and $500 in 1997 to the Company's 401(k) plan for the
named individuals and a premium for term life insurance in an
amount which varied depending on the age of the executive
officer.
Item 11. Executive Compensation (continued)
- ------------------------------------------
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
No options were granted or exercised during 1998.
FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information concerning
the number and value of the options held by the named executive
officers at the end of the fiscal year ended December 31, 1998.
Number of Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options at
at FY-End FY-End
Exercisable/ Exercisable/
Name Unexercisable Unexercisable(1)
- ------------------- ------------- ----------------
Raymond R. Hannigan 953,600 $2,651,500
614,400 --
Christopher M. Fashek 647,520 $1,104,375
353,280 --
Frank DiLazzaro 458,120 $ 800,568
256,000 --
Dennis E. Noll 264,000 $ 331,250
256,000 --
Richard C. Vogel 265,920 $ 214,400
122,880 --
(1) The Company's Common Stock is no longer publicly traded.
For purposes of this calculation, the fair market value of
the Common Stock was assumed to be $4.8125 per share.
Item 12. Security Ownership of Certain Beneficial Owners
- --------------------------------------------------------
and Management
--------------
SECURITIES HOLDINGS OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND
OFFICERS
Based upon information received upon request from the
persons concerned, each person known to be the beneficial owner
of more than five percent of the Company's outstanding common
stock, each director, nominee for director, named executive
officer (as defined on page 7 hereof) and all directors and
executive officers of the Company as a group, owned beneficially
as of March 1, 1999, the number and percentage of outstanding
shares of Common Stock of the Company indicated in the following
table:
Shares of Common
Stock
Beneficially owned
as of Percent
March 1, 1999 (1) of Class
------------------ --------
James R. Leininger, M.D.............. 23,756,880 31.2%
8023 Vantage Drive
San Antonio, TX 78230
Fremont Partners L.P................. 28,119,688 37.0%
and certain related parties
50 Fremont Street, Suite 3700
San Francisco, CA 94105
Richard C. Blum & Associates......... 18,576,040 24.4%
and certain related parties
909 Montgomery Street, Suite 400
San Francisco, CA 84133
Raymond R. Hannigan (2).............. 953,600 1.3%
James T. Farrell (3)................. --
Robert Jaunich II (3)................ --
N. Colin Lind (4).................... --
Jeffrey W. Ubben (4)................. --
Charles N. Martin (5)................ --
Donald E. Steen (5).................. 64,200 *
Christopher M. Fashek (2)............ 647,520 *
Frank DiLazzaro (2).................. 458,120 *
Dennis E. Noll (2)................... 264,000 *
Richard C. Vogel (2)................. 265,920 *
All directors and executive officers
as a group (20 persons)(2)......... 3,666,840 4.8%
* Less than one (1%) percent
(1) Except as otherwise indicated in the following notes, the
persons named in the table directly own the number of shares
indicated in the table and have the sole voting power and
investment power with respect to all of such shares. Shares
beneficially owned include options exercisable as of May 30,
1999.
(2) The shares shown represent shares of Common Stock which such
persons have the right to acquire under stock options
granted by the Company as of May 30, 1999.
(3) Messrs. Farrell and Jaunich are managing directors of
Fremont Partners, L.P. and certain of its related parties
("Fremont"). The Shares shown do not include the Shares
beneficially owned by Fremont.
(4) Messrs. Lind and Ubben are managing directors of
Richard C. Blum & associates, L.P. and certain of its related
parties ("RCBA"). The Shares shown do not include the Shares
beneficially owned by RCBA.
(5) Messrs. Martin and Steen are outside directors and are
not affiliated with Fremont Partners, LP or Richard C. Blum
and Associates, L.P.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
On December 18, 1996, a company controlled by Dr. James
Leininger acquired a tract of land (the "Property") from the
Company for $395,000. The Property is comprised of approximately
2.2 acres and is adjacent to the Company's corporate
headquarters. The purchase price was based on the aggregate cost
of the Property to the Company (including acquisition expenses).
The Company believes that the acreage was transferred to Dr.
James Leininger at a price equal to its fair market value. In
connection with the purchase of the Property, the Company loaned
Dr. James Leininger $3,000,000 in February 1997 to develop the
Property. The loan bore interest at a rate equal to the prime
rate of Texas Commerce Bank. The loan was non-recourse to Dr.
James Leininger but was secured by the Property, the improvements
on the Property and 1,200,000 shares owned by Dr. James
Leininger. Dr. Leininger repaid the loan in full on December 31,
1997.
Pursuant to the provisions of the Executive Committee Stock
Ownership Policy, the Company loaned funds to Christopher M.
Fashek, the President of KCI Therapeutic Services, Inc. (a
division of the Company), Bianca A. Rhodes, the Company's Chief
Financial Officer at the time and Dennis E. Noll, the Company's
Senior Vice President and General Counsel. These loans were
utilized by such executive officers to acquire Shares in order to
meet the standards set forth in the Company's Executive Committee
Stock Ownership Policy. The loans bore interest at the
applicable federal rate established by the Internal Revenue
Service and had a term of five years. The initial loans made to
Mr. Fashek, Ms. Rhodes and Mr. Noll were $107,672, $170,672 and
$86,310, respectively, and the outstanding balance of principal
and accrued interest on such loans as of December 31, 1996 were
$87,076, $166,003 and $81,888, respectively. Mr. Noll repaid his
loan in February 1997. Ms. Rhodes repaid the principal amount of
her loan in July 1997. Mr. Fashek repaid his loan on November 5,
1997. The Board has amended the Executive Committee Stock
Ownership Policy to make the ownership thresholds in the policy
voluntary and, as a result, the Company will not be making loans
to executive officers under the policy in the future.
At its December 1997 meeting, the Company's Board of
Directors agreed to sell Dr. James R. Leininger certain of the
Company's non-operating assets. The assets included the vehicle
driven by Dr. Leininger and the Company's ownership interest in
the San Antonio Spurs, Bionumerick, Inc. and a small aircraft.
The vehicle was sold to Dr. Leininger at its depreciated book
value and the ownership interests were to be sold at their cost
to the Company. The assets were transferred in 1998. The Company
believes that the transfers were made at prices equal to their
fair market value.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
- -------------------------------------------------------------
on Form 8-K
-----------
(a) The following documents are filed as part of this report:
1. Financial Statements
--------------------
The following consolidated financial statements are
filed as a part of this report:
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of (Deficit) Earnings for
the three years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1998, 1997 and
1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedules
for each of the years in the three-year period ended
December 31, 1998 are filed as part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts -
Years ended December 31, 1998, 1997 and 1996
All other schedules have been omitted as the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or
because the information required is included in the
financial statements and notes thereto.
3. Exhibits
--------
The following exhibits are filed as a part of this Report:
Exhibit Description
------- -----------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by
reference).
10.1 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Annual
Report on Form 10-K/A dated December 31,
1994, and incorporated herein by reference).
10.2 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Annual Report on Form
10-K/A dated December 31, 1994, and
incorporated herein by reference).
10.3 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment (filed as Exhibit
10.23 to the Company's Annual Report on Form
10-K/A dated December 31, 1994, and
incorporated herein by reference).
10.4 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1995 and incorporated herein by reference).
10.5 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996, and
incorporated herein by reference).
10.6 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996, and incorporated herein by reference).
10.7 Kinetic Concepts Management Equity Plan
effective October 1, 1997 (filed as Exhibit
10.33 on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference).
* 10.8 Director Equity Agreement, dated May 12,
1998, between the Company and Charles N.
Martin.
* 10.9 Director Equity Agreement, dated May 12,
1998, between the Company and Donald E. Steen.
* 10.10 Letter, dated June 4, 1998, from the Company
to William M. Brown outlining the terms of
his employment.
*10.11 Supplier Agreement, dated December 1, 1998,
between Novation, LLC and Kinetic Concepts,
Inc.
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).
* 21.0 List of Subsidiaries.
* 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 last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San Antonio, State of
Texas on March 30, 1999.
KINETIC CONCEPTS, INC.
By: /s/ Robert Jaunich II
----------------------
Robert Jaunich II,
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, this Registration Statement has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Date
By: /s/ Robert Jaunich II March 30, 1999
-------------------------------
Robert Jaunich II
Chairman of the Board of
Directors
By: /s/ Raymond R. Hannigan March 30, 1999
-------------------------------
Raymond R. Hannigan
Chief Executive Officer and
President
By: /s/ William M. Brown March 30, 1999
-------------------------------
William M. Brown
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
SIGNATURES (CONTINUED)
Signature Date
By: /s/ James R. Leininger, M.D. March 30, 1999
----------------------------
James R. Leininger M.D.
Director
By: /s/ James T. Farrell March 30, 1999
---------------------------
James T. Farrell
Director
By: /s/ N. Colin Lind March 30, 1999
--------------------------
N. Colin Lind
Director
By: /s/ Charles N. Martin March 30, 1999
--------------------------
Charles N. Martin
Director
By: /s/ Donald E. Steen March 30, 1999
--------------------------
Donald E. Steen
Director
By: /s/ Jeffrey W. Ubben March 30, 1999
--------------------------
Jeffrey W. Ubben
Director
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1998
Additions
Balance Charged Additions 12/31/96
at to Costs Charged Balance
Beginning and to Other at End of
Description of Period Expenses Accounts Deductions Period
- -------------- --------- --------- --------- ---------- ---------
Allowance for
doubtful
accounts $ 6,177 $2,457 $ - $1,102 $ 7,532
====== ===== ===== ===== ======
Additions
Balance Charged Additions 12/31/97
at to Costs Charged Balance
Beginning and to Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- --------- --------- ---------- ---------
Allowance for
doubtful
accounts $ 7,532 $5,888 $ - $2,216 $11,204
====== ===== ===== ===== ======
Additions
Balance Charged Additions 12/31/98
at to Costs Charged Balance
Beginning and to Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- --------- --------- ---------- --------
Allowance for
doubtful
accounts $11,204 $3,707 $ - $5,238 $ 9,673
====== ===== ===== ===== ======