Kinetic Concepts, Inc. (“KCI”) today reported 2002 net earnings of $150.2 million on revenue of $579.0 million, compared to prior-year net earnings of $23.9 million on revenue of $455.9 million. The 2002 results reflect overall revenue growth of approximately 27.0% while net earnings improved 528.2%. Net earnings for 2002 included an unusual gain of $106.4 million net of taxes and fees from the settlement of certain litigation.

During the fourth quarter of 2002, the Company recorded a gain from the settlement of an anti-trust lawsuit filed against Hillenbrand Industries, Inc. and Hill-Rom Company, Inc., a wholly-owned subsidiary of Hillenbrand. Net of expenses, this transaction added $173.3 million of pretax income and $106.4 million of net income to the 2002 results. The settlement also provided that Hillenbrand will pay KCI an additional $75.0 million on January 2, 2004, subject to certain conditions. The $75.0 million receivable was not recorded during 2002.

For the fourth quarter, KCI reported revenue of $164.2 million compared to revenue of $126.7 million for the last quarter of the prior year. The 2002 results represent a revenue increase of 29.7% for revenue in the period. EBITDA and net earnings for the quarter ended December 2002 totaled $215.1 million and $121.0 million, respectively, as compared to $32.9 million and $7.4 million for the same period one year ago. Excluding the litigation settlement, fourth quarter EBITDA and net earnings were $41.9 million and $14.6 million, respectively, up 27.3% and 96.9% from the prior-year period. Compared to the third quarter of 2002, EBITDA increased 18.4% for the three months ended December, while revenue was up 9.1% sequentially.

The following table presents a summary of reported results excluding the favorable effects of the litigation settlement (dollars in thousands):

“2002 was a real growth year for the Company”, stated Dennert O. Ware, President and CEO of KCI. “We continued to demonstrate success in growing and penetrating the wound healing market with the V.A.C. We have made real progress in billing and collecting from third party payors. In addition, we grew our international business both in terms of penetration and geography and we established better business processes in a number of areas. Finally, we reached a favorable settlement on an anti-trust case that involved a lot of time and effort from our team over a period of several years. We are more excited than ever about the future of KCI and believe that we are well positioned to take advantage of the opportunities that lay before us.”

Revenue Growth - Q4
Revenue for the fourth quarter of 2002 was $164.2 million. Rental revenue for the fourth quarter of 2002 was $128.0 million, an increase of $28.2 million, or 28.2%, from a year ago. Sales revenue for the three months ended December 31, 2002 was $36.2 million, an increase of $9.4 million, or 35.1%, compared to the last quarter of 2001. Domestic rentals of $103.4 million increased $22.2 million, or 27.4%, due directly to increased use of the V.A.C. wound-healing device, particularly in the home care setting. International rentals of $22.9 million, on a constant exchange basis, were up $4.1 million, or 21.9% from the prior year, with $3.0 million of the international improvement coming from increased V.A.C. usage. Favorable currency effects accounted for the remaining rental revenue growth.

Worldwide surface rentals for the fourth quarter of 2002, on a comparable, constant-exchange basis, totaled $54.1 million, down just under 1%, from a year ago. Domestic surface rentals declined approximately $630,000, or 1.6%, during the quarter, compared to the prior year, due primarily to lower unit demand in the extended and home care markets. International surface rentals, on a constant exchange basis, increased $1.1 million, or 7.5%.

Domestic sales revenue of $23.2 million for the quarter increased $6.0 million, or 34.5%, from the prior year due to increased V.A.C. disposable and dressing sales, partially offset by lower sales of vascular products and dressings and lower acute care surface sales. International sales of $12.1 million, on a constant exchange basis, increased $2.5 million, or 25.9%, from the prior-year period primarily due to increased V.A.C. usage. Favorable currency effects accounted for the remaining sales revenue improvement.

Operating Margins
Gross profit for the fourth quarter of 2002 was $71.9 million, an increase of $14.8 million, or 26.0%, from the prior-year period. Operating earnings for the three months ended December 2002 were $205.6 million, an increase of $182.4 million from the same period one year ago. Excluding the antitrust litigation settlement, operating earnings were $32.3 million, an increase of $9.2 million, or 39.6%, from the prior-year quarter due to the increase in revenue for the period, partially offset by higher operating costs and expenses. Operating expenses for the fourth quarter increased $28.4 million, or 27.4%, to $131.9 million, due primarily to higher selling and V.A.C. licensing fees of $8.6 million, higher cost of sales of $5.7 million and higher field operating expenses of $4.3 million. The total number of KCI employees at the end of 2002 was 3,345, an increase of 539, or 19.2%, from the prior year.

Year To Date Results
Total revenue for the year 2002 was $579.0 million, up $123.0 million, or 27.0%, from the prior year. Rental revenue through December 2002 was $453.1 million, an increase of $91.4 million, or 25.3%, due primarily to higher unit demand for the V.A.C. Sales revenue for the year was $125.9 million, an increase of $31.6 million, or 33.5%, due primarily to increased V.A.C. disposable sales, partially offset by lower sales of vascular products and lower sales in the extended and home care markets. Domestic revenue of $446.8 million increased $92.7 million, or 26.2%, compared to the prior year. International revenue, on a constant exchange basis, increased $25.6 million, or 25.1%, to $127.6 million. Currency exchange effects accounted for the remaining revenue variance.

Year 2002 gross profit of $251.0 million increased $48.5 million, or 24.0%, from the prior year. Operating earnings for 2002 of $282.7 million reflected a $173.3 million pretax gain resulting from the favorable antitrust litigation settlement. Excluding the antitrust litigation settlement, operating earnings were $109.4 million, an increase of $21.7 million, or 24.8%, from the prior year due to the increase in revenue for the period, partially offset by higher operating costs and expenses. Operating expenses for 2002 were $469.5 million, up $101.3 million, or 27.5%, from the prior year due primarily to higher selling and V.A.C. licensing fee expenses of $34.2 million, higher field operating expenses of $12.9 million, increased cost of sales of $18.9 million, increased research and development costs of $3.4 million, increased V.A.C. billing and administrative expenses of $4.4 million and increased marketing costs of $4.4 million.

Liquidity and Capital Resources
Operating cash flow for 2002 improved to $76.3 million from $29.9 million for the prior year. This increase was due primarily to higher earnings for the period and improved working capital management. For the year, working capital changes required the use of $11.7 million in cash compared to cash usage of $41.0 million in the prior year. Working capital changes required the use of $1.6 million in the fourth quarter of 2002 compared to cash usage of $14.2 million in the prior-year period. Cash flows used for investing activities were $39.0 million for 2002, down approximately $9.3 million, or 19.2%, from $48.3 million in the prior year. The year-to-year improvement was due primarily to proceeds from the sale/leaseback of the KCI headquarters facility of approximately $18 million, partially offset by increased net capital expenditures of $9.2 million for rental fleet additions and a new customer service facility. In addition, the Company used $3.6 million to purchase the remaining interest in a small V.A.C.-related manufacturing company in which the Company has had an investment since October 1996. The rental fleet additions consisted primarily of V.A.C.-related capital investments and increased bariatric and wound care surface product investments.

As of December 31, 2002, total interest-bearing debt was $521.9 million, up $15.2 million from year-end 2001. Net of cash, total interest-bearing debt was $467.4 million, a decrease of $39.1 million from the prior year, due to improved receivable collections and the sale-leaseback of the company's headquarters building. Liquidity under the revolving credit facility at year-end was $41.3 million. On January 2, 2003, the Company received $175.0 million in cash related to the favorable litigation settlement. A portion of the proceeds from the settlement was used to pay down debt under the Senior Credit Facilities in January.

Kinetic Concepts, Inc. develops and markets innovative therapeutic healing systems that address skin breakdown, circulatory problems and pulmonary complications associated with patient immobility and chronic wounds. The Company's healing systems include specialty beds, mattress replacement systems, negative pressure wound therapy and related medical devices. Kinetic Concepts serves hospitals, long-term care facilities and patients in home care settings both in the U.S. and abroad.

(This press release contains forward-looking statements including, but not limited to, projections of future revenue and operating results, market penetration and the financial condition of the Company. The forward-looking statements contained herein are based on the Company’s current expectations and are subject to a number of risks and uncertainties which could cause the Company to fail to achieve its current financial projections, including a change in the demand for the V.A.C. Certain risk factors that may impact the forward-looking statements set forth herein are detailed from time-to-time in the Company's Securities and Exchange Commission filings.)