SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9913
KINETIC CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1891727
(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 210/524-9000
(Address of principal executive (Registrant's telephone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 43,950,370 shares as of March 31, 1994
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
March 31, December 31,
1994 1993
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 13,864 $ 10,280
Accounts receivable, net 64,838 63,872
Refundable income taxes 3,712 3,712
Finance lease receivables, current 7,313 6,659
Inventories 22,373 20,902
Prepaid expenses 4,657 4,709
Total current assets 116,757 110,134
Net property, plant and equipment 106,458 113,602
Finance lease receivables, net of current 6,043 7,073
Goodwill, net 44,258 44,859
Other assets, net 10,108 8,905
$283,624 $284,573
======== ========
Liabilities and Capital Accounts
Current liabilities:
Note payable $ 2,584 $ 2,144
Current installments of long-term obligations 13,479 8,872
Current installments of capital lease obligations 2,814 2,955
Current installments of ESOP loan - 359
Accounts payable 6,366 7,751
Accrued expenses 27,272 24,499
Income taxes payable 6,599 2,647
Total current liabilities 59,114 49,227
Long-term obligations, excluding current installments 87,108 99,533
Capital lease obligations,
excluding current installments 1,394 2,060
ESOP loan, excluding current installments - 296
Deferred income taxes 6,960 7,710
154,576 158,826
======= =======
Minority interest - 40
Common stock; issued 45,502 in 1994 and
45,501 in 1993 46 46
Additional paid-in capital 18,808 18,803
Retained earnings 120,301 117,685
Cumulative foreign currency translation adjustment (1,508) (1,602)
Treasury stock; common, at cost, 1,552 shares in
1994 and 1,542 shares in 1993 (8,551) (8,510)
Loan to ESOP - (655)
Notes receivable from officers (48) (60)
$283,624 $284,573
======== ========
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
Three months ended
March 31,
1994 1993
Revenue:
Service and rental $ 61,747 $ 61,002
Sales and other 10,337 8,961
Total revenue 72,084 69,963
Rental expenses 44,436 42,649
Cost of goods sold 5,132 4,444
49,568 47,093
Gross profit 22,516 22,870
Selling, general and administrative expenses 13,355 11,525
Operating income 9,161 11,345
Interest expense 1,854 1,693
Earnings before income taxes, minority interest
and cumulative effect of changes in
accounting principle 7,307 9,652
Income taxes 3,825 3,910
Earnings before minority interest and cumulative
effect of changes in accounting principle 3,482 5,742
Minority interest in subsidiary loss 40 -
Cumulative effect of change in method of accounting
for inventory costing, net 742 -
Cumulative effect of changes in method of accounting
for income taxes - 450
Net earnings $ 4,264 $ 6,192
Earnings per common and common equivalent share:
Earnings before cumulative effect of
change in accounting principle $ 0.08 $ 0.13
Cumulative effect of change in method of
accounting for inventory costing 0.02 -
Cumulative effect of change in method of
accounting for income taxes - 0.01
Earnings per share $ 0.10 $ 0.14
Shares used in earnings per share computations 43,986 45,123
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
<CAPTION>
Three months ended
March 31,
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,264 $ 6,192
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 11,256 9,821
Other amortization, net 847 942
Provision for uncollectible accounts receivable 803 1,050
Change in assets and liabilities net of effect
from acquisitions:
Increase in accounts receivable (1,735) (3,022)
Increase in inventories (1,456) (935)
Decrease (increase) in prepaid expenses 52 (439)
Increase in other assets (301) (786)
Increase (decrease) in accounts payable (1,382) 694
Increase (decrease) in accrued expenses 1,139 (419)
Increase in income taxes payable 3,961 1,804
Decrease in deferred income taxes (750) (934)
Net cash provided by operating activities 16,698 13,968
Cash flows from investing activities:
Additions to property, plant, and equipment (4,022) (10,738)
Increase in inventory to be converted into equipment
for short-term rental (500) (200)
Dispositions of property, plant, and equipment 434 600
Decrease in finance lease receivables 376 536
Increase in other assets (468) (3,878)
Net cash used by investing activities (4,180) (13,680)
Cash flows from financing activities:
Borrowings (repayments) of note payable and long-term obligations (7,378) 5,810
Repayments of capital lease obligations (807) (792)
Proceeds from the exercise of stock options 5 541
Minority interest in subsidiary loss, net (40) -
Purchase of treasury stock (41) (76)
Cash dividends paid to shareholders - (1,680)
Other (668) (65)
Net cash provided (used) by financing activities (8,929) 3,738
Effect of exchange rate changes on cash and cash equivalents (5) (262)
Net increase in cash and cash equivalents 3,584 3,764
Cash and cash equivalents beginning of year 10,280 6,963
Cash and cash equivalents end of period $ 13,864 $ 10,727
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the first three months for:
Interest $ 1,172 $ 1,788
Income taxes 57 410
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The foregoing financial information reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and results of operations for the interim periods presented. Interim
period operating results are not necessarily indicative of the results to
be expected for the full fiscal year. The financial information presented
for the interim periods is unaudited and subject to year-end audit and
adjustments. As a result of divisionalization, certain reclassifications
of rental and selling, general and administrative expenses related to 1993
have been made to conform with the current period's presentation.
(2) INVENTORY COMPONENTS
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value). Inventories are comprised of the following
(in thousands):
March 31, December 31,
1994 1993
Finished goods $ 6,127 $ 5,902
Work in process 1,575 1,546
Raw materials, supplies and parts 23,670 21,954
31,372 29,402
Less amounts expected to be
converted into equipment for
short-term rental (9,000) (8,500)
$22,372 $20,902
======= =======
On January 1, 1994, the Company changed its method of applying overhead to
inventory. Historically, a single labor overhead rate and materials
overhead rate was used in valuing ending inventory. Labor overhead was
applied as labor was incurred while materials overhead was applied at the
time of shipping. During 1993, the Company completed a study to more
precisely determine the labor overhead which should be applied to specific
products, parts and accessories which resulted in the adoption of four
separate labor overhead pools, and the application of materials overhead
upon receipt of materials.
The Company believes that the change in the application of this accounting
principle is preferable because it more accurately assigns overhead costs
to the products, parts and accessories which benefit from the related
activities and thus improves the matching of costs with revenues in
reporting operating results.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
The change in the application of this accounting principle resulted in an
increase in net earnings of $742,000 (after reduction of income taxes of
$455,000), which reflects the cumulative effect of this change for the
periods prior to January 1, 1994. The proforma effects of the retroactive
application of the change in accounting principle have not been disclosed
as the effects cannot be reasonably estimated. The effect of the change
for the quarter ended March 31, 1994 on the results of operations before
the cumulative effect of the change is not material.
(3) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
The weighted average number of common and common equivalent shares used in
the computation of earnings per share is as follows (in thousands):
Three months ended
March 31,
1994 1993
Average outstanding common shares 43,947 44,268
Average common equivalent shares-
dilutive effect of option shares 39 855
Shares used in earnings
per share computations 43,986 45,123
Earnings per common and common equivalent share are computed by dividing
net earnings (after deducting preferred stock dividends and accretion) by
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist
of stock options (using the treasury stock method). Earnings per share
computed on a fully diluted basis is not presented as it is not
significantly different from earnings per share computed on a primary
basis.
6 of 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarter of 1994 Compared to First Quarter of 1993
The following table details the Company's Condensed Consolidated Statements
of Earnings for the quarters ended March 31, 1994 and 1993 and provides the
relationship of each item to total revenue and the increase or decrease and
percentage change of each line item as compared to the first quarter of the
prior year (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1994 1993 Increase (decrease)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service and rental $ 61,747 86% $ 61,002 87% $ 745 1%
Sales and other 10,337 14% 8,961 13% 1,376 15%
72,084 100% 69,963 100% 2,121 3%
Rental expenses 44,436 62% 42,649 61% 1,787 4%
Cost of goods sold 5,132 7% 4,444 6% 688 16%
Gross profit 22,516 31% 22,870 33% (354) (2%)
Selling, general and
administrative expenses 13,355 18% 11,525 17% 1,830 16%
Operating Income 9,161 13% 11,345 16% (2,184) (19%)
Interest expense 1,854 3% 1,693 2% 161 10%
Earnings before income taxes,
minority interest and
cumulative effect of
changes in accounting
principle 7,307 10% 9,652 14% (2,345) (24%)
Income taxes 3,825 5% 3,910 6% (85) (2%)
Earnings before minority
interest and cumulative
effect of changes in
accounting principle 3,482 5% 5,742 8% (2,260) (39%)
Minority interest in subsidiary
loss 40 - - 40 -
Cumulative effect of change in
method of accounting for
inventory costing 742 1% - 742 -
Cumulative effect of change in
method of accounting for
income taxes - - 450 1% (450) -
Net earnings $ 4,264 6% $ 6,192 9% $(1,928) (31%)
Earnings per share $ 0.10 $ 0.14 $ (0.04) (29%)
Weighted shares 43,986 45,123 (1,137) (3%)
</TABLE>
7 of 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenue in the first quarter of 1994 increased by 3.0% to $72.1
million from $70.0 million in the first quarter of 1993. Revenue from KCI
Therapeutic Services, KCI's specialty patient surface businesses including
acute care and long-term care, was $40.8 million, down 3.7% from the first
quarter of 1993. This reflects a decline in acute care revenue of 7.1% to
$30.2 million as a result of the continued shift to lower priced overlays from
framed products. Long-term care revenue increased 7.1% from $9.9 million in
the prior year quarter to $10.6 million in the current year quarter, primarily
due to increased therapy days. Revenue from KCI's International division was
$10.0 million, which was comparable to the prior year quarter. Revenue from
the Company's other operating divisions - NuTech, Medical Retro Design and
Medical Services increased 21.4% to $21.3 million in the first quarter of 1994
due to increased revenue from NuTech and revenue contributed by Clinical
Systems, Inc., which was acquired in June, 1993.
Rental expenses largely consist of service center facility and personnel
costs, regional sales and administrative expenses, advertising and promotion,
depreciation of the Company's rental equipment, the cost of the parts and
accessories used to maintain the equipment and other related expenses. Rental
expenses were 61.6% of total revenue in the first quarter of 1994 compared to
61.0% in the first quarter of 1993, due primarily to expenses associated with
Clinical Systems, Inc., higher worker's compensation and automobile insurance
expenses, and higher costs in the international division. Cost of goods sold
includes the manufacturing cost of the Company's beds and other products that
are sold rather than rented by the Company.
Gross profit decreased 1.5% to $22.5 million in the first quarter of 1994
from $22.9 million in the first quarter of 1993 primarily due to the increase
in rental expenses partially offset by the increase in revenue.
Selling, general and administrative expenses increased 15.9% to $13.4
million in the first quarter of 1994 from $11.5 million in the first quarter of
1993. Selling, general and administrative expenses as a percentage of total
revenue increased to 18.5% in the first quarter of 1994 from 16.5% in the first
quarter of 1993. This increase was due primarily to expenses related to
NuTech, Medical Retro Design, and research and development.
Operating income decreased 19.3% to $9.2 million in the first quarter of
1994 from $11.3 million in the prior year quarter. This decrease is due to an
increase in rental and selling, general and administrative expenses partially
offset by the increase in revenue.
Interest expense in the first quarter of 1994 increased 9.5% to $1.9
million from $1.7 million in the first quarter of 1993 primarily due to an
increase in the average interest rate of the Company's debt under its Credit
Agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's effective income tax rate in the first quarter of 1994 was
52.3%, compared to 40.5% in the first quarter of 1993 and 49.1% from the year
ended December 31, 1993. In 1993, the annual rate differs from the first
quarter due to a decline in anticipated pre-tax earnings. The effective tax
rate for the first quarter of 1994 is higher than the effective tax rate for
the year of 1993, primarily due to higher losses at Medical Retro Design which
are not deductible for tax purposes.
During the first quarter of 1994, the cumulative losses allocated to the
minority interest holder, Medical Retro Design, exceeded the balance of its
investment. As a result, any future losses of Medical Retro Design will be
recorded entirely by the Company.
During the first quarter of 1994, the Company recorded the cumulative
effect of a change in accounting principle related to a change in its method of
applying overhead to its inventory which resulted in an increase of $742,000,
or $0.02 per share. Historically, a single labor overhead rate and materials
overhead rate were used. Labor overhead was applied as labor was incurred while
materials overhead was applied at the time of shipping. During 1994, four
separate overhead pools were adopted to apply labor overhead to specific
products, parts and accessories. In addition, material overhead is now applied
upon receipt of materials. The Company believes that the change in the
application of this accounting principle is preferable because it more
accurately assigns overhead costs to the products, parts and accessories which
benefit from the related activities and thus improves the matching of costs
with revenues in reporting operating results.
During the first quarter of 1993, the Company recorded the cumulative
effect of a change in accounting principle related to the adoption of Statement
of Financial Accounting Standards No. 109 (FAS 109) "Accounting for Income
Taxes" which resulted in an increase of $450,000, or $0.01 per share.
Net earnings decreased 31.1% to $4.3 million in the first quarter of 1994
from $6.2 million in the first quarter of 1993. Earnings per share before the
effect of the cumulative changes described above decreased 38.4% to $0.08 per
share from $0.13 per share in the prior year quarter. Earnings per share
decreased 28.6% to $0.10 per share in the first quarter of 1994 from $0.14 per
share in the prior year quarter. These decreases are primarily due to an
increase in rental expenses and selling, general and administrative expenses
partially offset by the increase in revenue as discussed above.
Financial Condition
The change in revenue and expenses experienced by the Company during the
first quarter of 1994 and other factors resulted in changes to the Company's
balance sheet as follows:
Inventory at March 31, 1994 increased $1.5 million, or 7.0%, to $22.4
million from $20.9 million at December 31, 1993 primarily due to the change in
accounting principle, previously discussed.
Net property, plant and equipment at March 31, 1994 decreased $7.1 million,
or 6.3%, to $106.5 million from $113.6 million at December 31, 1993 due to
depreciation expense and dispositions of rental equipment which exceeded the
cost of additions to rental equipment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other assets at March 31, 1994 increased $1.2 million, or 13.5%, to $10.1
million from $8.9 million at December 31, 1993. The growth in other assets is
primarily due to the increase in restricted cash related to the Company's
captive insurance company and deferred loan fees paid in 1994 related to the
Company's debt refinancing.
Current installments of long-term obligations increased $4.6 million to
$13.5 million at March 31, 1994 from $8.9 million at December 31, 1993
primarily due to the reclassification of certain long-term obligations to
current.
Accrued expenses at March 31, 1994 increased $2.8 million, or 11.3%, to
$27.3 million from $24.5 million at December 31, 1993 primarily due to accrued
dividends of $1.7 million and an increase in bonus, insurance, interest and
payroll related accruals.
Income taxes payable increased $4.0 million to $6.6 million at March 31,
1994 from $2.6 million at December 31, 1993 due to the accrual for 1994 first
quarter federal taxes which are to be paid in the second quarter of 1994.
Long-term obligations decreased $12.4 million to $87.1 million at March 31,
1994 from $99.5 million at December 31, 1993 primarily due to repayments made
on the Company's credit facility using net cash provided by operating
activities and to the reclassification of certain long-term obligations to
current.
ESOP loan, including current installments, at March 31, 1994 decreased $0.7
million from December 31, 1993 due to the repayment of that loan during the
first quarter of 1994.
Market Trends
During 1993, the introduction of the American Health Security Act and a
variety of competing legislative proposals created a national debate about
health care reform. However, attempts to reduce our nation's health care costs
did not begin in 1993. For the past decade, the health care industry has
experienced increased pressure from a variety of sources to control costs and
improve patient outcomes. Prior to 1983, health care providers lived in a
"cost plus" environment which did not require that cost effectiveness or
patient outcomes be accurately measured. In 1983, Congress created the "DRG"
system under which Medicare reimbursement was based upon an individual
patient's diagnosis rather than the actual cost incurred by the hospital to
treat the patient. In addition, the manner in which health care providers were
reimbursed for their capital costs, including the cost of buying or renting the
Company's products, has been significantly limited over the past ten years. In
general, the focus of these regulations has been to increase health care
providers' awareness of the importance of cost effectiveness, managing patient
outcomes and treating patients in the lowest cost environment which is
appropriate. Further regulatory changes which will impact the health care
industry loom on the horizon. Although it is uncertain which of the health
care reform proposals, if any, will be enacted, it is apparent that the health
care industry in the 1990's will be required to become more cost effective than
it is today and further improve patient outcomes. The reimbursement which the
Company receives for its products may be lowered as a result of health care
reform.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Since 1987, the Company has been positioning itself to remain competitive
in an environment which demands accountability for patient outcomes at a lower
cost. The Company's Therapeutic Service's division offers the most complete
continuum of products in the industry and controls overall patient costs by
allowing the health care provider to match the needs of a particular patient
with the appropriate product and therapy. The Company has also made
significant investments in medical studies which demonstrate the clinical
efficacy and cost effectiveness of its products. Over the past several years,
the Company has entered into a number of partnering arrangements with its
customers which allow its customers to obtain state of the art medical
technology while at the same time lowering their overall costs. The Company
believes that these types of arrangements will be necessary in order to succeed
in the health care industry in the 1990's.
The Company also maintains the largest national accounts portfolio in the
specialty bed industry and expects to benefit from further consolidation of
providers and buying groups. At the same time, as shifts in reimbursement
policy have tended to move patients into lower cost environments, the Company
has continued to focus new efforts on the extended care and home care markets.
Since 1987, U.S. health care expenditures have grown 90% to $942.5 billion.
Estimated U.S. health care expenditures are expected to exceed one trillion
dollars in 1994. While future performance cannot be assured, the Company
believes that it is well positioned to compete in the dynamic health care
marketplace.
Liquidity and Capital Resources
During the first quarter of 1994, the Company generated net cash provided
by operating activities of $16.7 million compared to $14.0 million in the prior
year quarter. The Company believes that net cash provided by operations during
the next twelve month period will be sufficient to provide for new investments
in equipment and reduction of the Company's debt under its credit agreement.
At March 31, 1994, cash and cash equivalents totaling $13.9 million were
available for general corporate purposes. Additionally, the Company maintains
a Credit Agreement with a bank as an agent for itself and certain other
financial institutions. The Credit Agreement permits borrowings of up to
$130.0 million, $36.0 million of which was available at March 31, 1994.
At March 31, 1994, the Company was committed to purchase approximately $1.8
million of inventory associated with a new product over the remainder of this
year. The Company did not have any other material purchase commitments.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of all exhibits filed or included as part of this quarterly
report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
15 Filed herewith Letter from KPMG
Peat Marwick dated
May 13, 1994
18 Filed herewith Letter from KPMG
Peat Marwick dated
April 22, 1994
99 Filed herewith Letter from KPMG
Peat Marwick dated
April 22, 1994
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: JAMES R. LEININGER, M.D.
James R. Leininger, M.D.,
Chairman of the Board,
President & Chief Executive Officer
By: BIANCA A. RHODES
Bianca A. Rhodes
Senior Vice President and
Chief Financial Officer
Date: May 13, 1994
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EXHIBIT 15
Kinetic Concepts, Inc.
San Antonio, Texas
Gentlemen:
Re: Registration Statement Nos. 33-26673, 33-26674
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report
dated April 22, 1994 related to our review of interim
financial information.
Pursuant to Rule 436 (c) under the Securities Act of 1933,
such report is not considered a part of a registration
statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of
sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick
San Antonio, Texas
May 13, 1994
EXHIBIT 18
The Board of Directors
Kinetic Concepts, Inc.
Gentlemen:
We have been furnished with a copy of Form 10-Q of Kinetic Concepts, Inc. and
subsidiaries for the three months ended March 31, 1994, and have read the
Company's statements contained in Note 2 to the condensed consolidated
financial statements included therein. As stated in Note 2, the Company
changed its method of accounting for the application of overhead costs in
inventory. Historically, a single labor overhead rate and materials overhead
rate was used in valuing ending inventory. Labor overhead was applied as labor
was incurred while materials overhead was applied at the time of shipping.
During 1993, the Company completed a study to more precisely determine the
labor overhead to be applied to specific products, parts and accessories which
resulted in the adoption of four separate labor overhead pools, and the
application of materials overhead upon receipt of materials. The Company
states that the newly adopted accounting principle is preferable in the
circumstances because it more accurately assigns overhead costs to the
products, parts and accessories which benefit from the related activities and
thus improves the matching of costs with revenues in reporting operating
results. In accordance with your request, we have reviewed and discussed with
Company officials the circumstances and business judgment and planning upon
which the decision to make this change in the method of accounting was based.
We have not audited any financial statements of Kinetic Concepts, Inc. and
subsidiaries as of any date or for any period subsequent to December 31, 1993,
nor have we audited the information set forth in the aforementioned Note 2 to
the condensed consolidated financial statements; accordingly, we do not express
an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Kinetic Concepts, Inc. and subsidiaries' compliance with the requirements of
the Security and Exchange Commission, we are furnishing this letter.
Based on our review and discussions with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
KPMG Peat Marwick
San Antonio, Texas
April 22, 1994
EXHIBIT 99
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic Concepts,
Inc. and subsidiaries as of March 31, 1994, and the related condensed
consolidated statements of earnings and cash flows for the three-month periods
ended March 31, 1994 and 1993. These consolidated condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinetic Concepts, Inc. and
subsidiaries as of December 31, 1993, and the related consolidated statements of
earnings, capital accounts, and cash flows for the year then ended (not
presented herein); and in our report dated February 14, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1993, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG Peat Marwick
San Antonio, Texas
April 22, 1994
