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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, 1994
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)
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Texas 74-1891727
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(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, TX 78230 (210) 524-9000
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(Address of principal executive offices (Registrant's telephone number)
and zip code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
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
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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. [ ]
The aggregate market value of the voting stock held of record by non-affiliates
of the Registrant as of March 1, 1995 was approximately $97,965,000.
As of March 1, 1995, there were 44,040,696 shares of the Registrant's Common
Stock outstanding.
Portions of the following documents are incorporated by reference into the
designated parts of this Form 10-K: (a) Annual Report to Shareholders for the
fiscal year ended December 31, 1994 (in Parts I and II) and (b) Definitive
Proxy Statement dated March 28, 1995 (the "Proxy Statement") relating to the
Company's 1994 Annual Meeting of Shareholders (in Part III), which Registrant
intends to file not later than 120 days after the close of the Company's fiscal
year.
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FORM 10-K TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business.................................... 3
Item 2. Properties.................................. 9
Item 3. Legal Proceedings........................... 9
Item 4. Submission of Matters to a Vote
of Security Holders......................... 9
Item 4a. Executive Officers of the Registrant........ 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters............. 13
Item 6. Selected Financial Data..................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 13
Item 8. Financial Statements and
Supplementary Data.......................... 13
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................. 13
PART III
Item 10. Directors and Executive Officers
of the Registrant........................... 14
Item 11. Executive Compensation...................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 14
Item 13. Certain Relationships and Related
Transactions................................ 14
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................... 14
Signatures............................................. 18
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PART I
ITEM 1. BUSINESS
GENERAL
Kinetic Concepts, Inc. (the "Company" or "KCI") is a leading manufacturer
and distributor of specialized therapeutic surfaces and rental medical
equipment to health care providers worldwide. KCI is composed of four
operating groups: KCI Therapeutic Services, Inc., KCI Home Care, KCI
International, Inc., and KCI New Technologies, Inc.
KCI Therapeutic Services provides a complete line of therapeutic specialty
surfaces through a network of trained personnel who assist U.S. health care
professionals in the utilization of its products. The Company's specialized
products are designed to treat and prevent complications associated with
patient immobility and to assist in the reduction of severe pain suffered by
victims of cancer, serious burns, severe arthritis and other acute illnesses.
This division serves patients in not only acute and sub-acute facilities, but
also in extended care settings (i.e. skilled nursing facilities, residential
nursing facilities, etc.) KCI Therapeutic Services' strategy is to offer
products that are clinically efficacious and cost effective when compared to
traditional treatment methods.
In 1994, KCI Home Care ("KCHC") was created to support the increase in home
health care activity and reach out to its market through a broad-based durable
medical equipment dealer network. Providing products and services through the
dealer channel allows this division to meet the demands of the home care market
cost-effectively. KCHC products are designed to be easily transportable into a
patient's home and are reimbursable under Medicare.
KCI International offers KCI's complete product line in eight foreign
countries including Canada, Germany, France, the Netherlands, the United
Kingdom, Switzerland, Australia and Austria. In addition, relationships with
independent distributors in Latin America, the Middle East, Asia and Africa
allow KCI International to serve the demands of the growing global market.
KCI New Technologies ("NuTech") is focused on bringing unique,
cost-effective medical technologies to the marketplace. NuTech's first product
was PlexiPulse, an innovative foot-compression device that aids venous blood
flow.
Effective September 30 1994, the Company sold its Medical Services Division
to MEDIQ Incorporated. The Medical Services Division rented movable critical
care and life support equipment to health care providers. In addition, due to
continuing losses and adverse market conditions, the Company developed a plan
in 1994 to liquidate the assets of Medical Retro Design Inc., a subsidiary
that refurbished standard hospital beds and furniture.
The Company was incorporated on March 31, 1976 under the laws of the State
of Texas. The Company's principal executive offices are located at 8023
Vantage Drive, San Antonio, Texas 78230 and its telephone number is (210)
524-9000. As of December 31, 1994, the Company had approximately 1,938
employees. The Company's employees are not represented by labor unions and the
Company considers its employee relations to be good.
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ITEM 1. BUSINESS (CONTINUED)
PRODUCTS
The Company's "Continuum of Care" represents a comprehensive product line
that provides innovative treatment for the immobile patient. Various types of
therapy are provided by the Company's products including Pressure Relief,
Kinetic Therapy and Pressure Reduction.
Pressure Relief
The Company's Pressure Relief products include the KinAir III,
TheraPulse, FluidAir Plus, HomeKair, HomeKair DMS, DynaPulse, First Step Plus,
and First Step Select. The KinAir III has been shown to provide effective skin
care therapy in the treatment of decubitus ulcers (pressure sores), burns and
post operative skin grafts and flaps, to help prevent the formation of
decubitus ulcers and certain other complications of immobility, and to be
effective in helping relieve severe pain in cancer, severe arthritis and AIDS
patients. The TheraPulse provides continuous pulsating action which gently
massages the skin to help promote capillary circulation in patients suffering
from severe pressure sores, burns, skin grafts or flaps, swelling or
circulation problems. The FluidAir Plus is an air-fluidized bead bed with a
built-in patient weighing system which supports the patient on a low-pressure
surface of air-fluidized silicon beads providing pressure relief for flap or
graft sites, burns, pressure ulcers and severe pain. The HomeKair and HomeKair
DMS are low-cost, low-service pressure relief products designed to be easily
transportable directly to a patient's home. 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 Plus, plus a mattress overlay, is designed to provide
pressure relief and help prevent pressure sores in patients not normally
treated on specialty beds. The First Step Select, an extension of the Company's
low-end product line, offers an expanded selection of mattress overlays with
upgraded design features.
Kinetic Therapy
The Company's Kinetic Therapy products include the RotoRest, RotoRest Delta,
and BioDyne II. 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 (blood clots). The
RotoRest Delta is a specialty bed which offers 62 degrees of rotation and
upgraded design features, for the prevention of pneumonia and treatment of
pulmonary complications. The BioDyne II combines many of the therapeutic
benefits of the KinAir III and the RotoRest and is used by patients suffering
from pneumonia, coma, stroke, chronic neurological disorders and moderate
pulmonary complications.
Pressure Reduction
The TheraRest is a Pressure Reduction product. The TheraRest is a mattress
replacement that provides patient controlled firmness and vibration massage
to help prevent patient skin problems.
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ITEM 1. BUSINESS (CONTINUED)
Recently, the Company introduced the TriaDyne, AirWorks Plus and BariKare as
the latest additions to its Continuum. The TriaDyne was developed to provide
Kinetic Therapy to patients in the intensive care unit. TriaDyne's critical
care frame is narrow and more suited to an intensive care unit environment. It
offers a percussion feature that rapidly inflates and deflates selected
cushions to assist in loosening fluid in the lungs. It allows the patient to
be turned 40 degrees to each side and provides an industry-first feature of
simultaneously turning the patient's torso and lower body in opposite
directions, keeping the patient positioned in the middle of the bed. The
BariKare is an advanced patient care system for large and obese patients. It
allows the patient flexible positioning for comfort and therapy by converting
from a bed to a chair. AirWorks Plus is a low-cost mattress overlay which
provides pulsating air columns which assist in redistributing pressure for
better skin care.
PlexiPulse
The PlexiPulse is a non-invasive vascular assist device that aids venous return
by pumping blood from the lower extremities to help prevent deep vein
thrombosis and re-establish microcirculation.
PATENTS AND TRADEMARKS
The Company seeks patent protection in the United States and abroad. As of
December 31, 1994, the Company and its wholly-owned subsidiaries had thirty-two
(32) issued U.S. patents relating to its specialized beds, mattresses and
related products. The Company does not believe that its patents or licenses
would necessarily prevent a competitor from manufacturing or marketing products
which are similar in overall design or concept to most of its products. The
Company also has thirteen (13) pending U.S. Patent applications. Although the
Company will continue to seek patent protection for its technology and
products, it does not believe that such protection is essential to its success
and intends to rely on the quality of its product design and sales and
distribution system in order to advance and distinguish its products.
During 1994, the Company successfully sought protection of three of its patents
in litigation against one of its primary competitors, Support Systems
International, Inc. ("SSI"). The case was settled when SSI agreed to pay
damages of $84.75 million. Many of the Company's specialized beds, products
and services are offered under trademarks and service marks, and the Company has
twenty-four (24) registered trademarks and service marks in the United States
Patent and Trademark Office.
RESEARCH AND DEVELOPMENT
The focus of the Company's research and development program has been to
make technological improvements to existing products and to develop and review
new products and programs that can be marketed through the Company's
distribution systems. In 1994, the Company introduced two new products which
it had developed: the TriaDyne and BariKare. The TriaDyne is a critical-care
bed which provides Kinetic Therapy for intensive-care patients. The BariKare is
an advanced patient-care system for large and obese patients. In 1995, the
Company will introduce various software systems to facilitate hospital
management. The Kinexus software program has been developed to establish a
consistent method for measuring the magnitude of a facility's prevalence and
incidence of pressure ulcers. The Odyssey program is a combination patient
risk assessment and
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ITEM 1. BUSINESS (CONTINUED)
wound management tool. It assists health care providers in assessing the
patient's risk of skin break-down, and documenting surface placements, topical
treatments as well as nutritional intake. The program provides management and
patient-specific wound outcome reports, which assist in evaluating the
appropriate level of investment for the most effective clinical results. Other
product enhancements were developed as well. Although expenditures for
research and development represent less than 2% of the Company's total
expenditures in 1994, the Company intends to continue to expand its research
and development efforts.
MANUFACTURING
The Company's manufacturing processes for its products include the
manufacture of certain components, the purchase of certain other components
from suppliers and the assembly of these components into a completed product.
The Company currently has sufficient bed frames and Gore-Tex fabric in inventory
which can be used to manufacture beds during the next year. Mechanical
components used on the Company's specialized beds such as blower units,
position controls, 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 in its specialty beds.
DISTRIBUTION
KCI Therapeutic Services markets its products and services through an
extensive sales, service and distribution system. As of December 31, 1994,
KCI's system consisted of 1,938 persons, including approximately 280
professional sales representatives and 548 service personnel and nurses working
from approximately 200 service centers worldwide. KCI Therapeutic Services'
products are rented on a daily basis and are supported by sales and service
personnel who are available to assist customers 24 hours-a-day, 7 days-a-week.
The Company has a national 24-hour customer service communications system which
enhances its ability to quickly and efficiently respond to its customers'
needs.
KCI Home Care, which addresses the needs of home health care, reaches out
to its market through a broad-based durable medical equipment dealer network.
KCI New Technologies is focused on introducing new, cost-effective medical
technologies and developing their respective markets.
MARKET TRENDS AND STRATEGIES
For the past decade, the health care industry has experienced increased
pressure from a variety of sources to control costs and improve patient
outcomes. This pressure intensified in 1993 as our nation debated health care
reform. Although the events of 1994 would seem to indicate that legislative
reform of our health care system is unlikely at this time, it is apparent that
the health care industry will become more cost effective over time and demand
further improvements in patient outcomes.
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 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. In addition, the Company continues to search for new
therapies and technologies, making investments as appropriate, to improve
patient outcomes.
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ITEM 1. BUSINESS (CONTINUED)
The Company has also sponsored a number of 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 prosper in the health care industry in the 1990's.
The Company also maintains an extensive 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.
COMPETITION
The Company markets a complete line of specialty patient surfaces and
unique medical devices to acute care hospitals, extended care facilities and
home care patients all on an international level. The Company believes that
its comprehensive product offering will enable it to remain competitive as
market conditions change.
In the domestic acute care patient surfaces market, the Company competes
primarily with Hill-Rom, which offers a line of specialty patient surfaces.
The Company also competes against an ever increasing number of manufacturers
and distributors of lower cost alternatives to specialty beds such as inflatable
replacement mattresses and mattress overlays ("low cost products"). Indirectly,
the Company competes with more traditional methods of treatment which address
the complications of immobility, wound care and the management of pain
("traditional treatment methods").
The Company believes that the principal competitive factors in the acute
care markets are service and price as well as the ability of competitors to
enter into long-term preferred provider relationships with hospital buying
groups. The Company has developed programs which it believes will enable its
hospital customers to access, manage and maintain medical equipment on a more
cost-effective basis. Although the Company will not generate significant
revenue from these programs, it believes that the provision of these systems
will enable it to strengthen its relationships with the hospitals and provide
it with a competitive advantage.
The Company also competes in the domestic extended care and home care
specialty bed markets. These are diverse markets in which the Company competes
primarily with the distributors of various specialty beds and low cost
products. The Company believes that the principal competitive factor in this
market is the ability to identify and place patients on appropriate,
efficacious surfaces and collect the reimbursement funds which are available
with respect to the use of the products. The Company believes that the
patient features and serviceability of its HomeKair bed make it superior to the
specialty patient surfaces which are currently used to serve the home market.
The Company also competes in the international specialty patient surfaces
market primarily with Support Systems International, Inc., which is the largest
provider of specialty beds outside the United States, and with manufacturers
and
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ITEM 1. BUSINESS (CONTINUED)
distributors of specialty beds and low cost products and more traditional
treatment methods. The Company believes that the important competitive factors
in this market are product quality, medical efficacy and service capability.
GOVERNMENT REGULATION
The Company's business is subject to substantial regulation, principally by the
United States Food and Drug Administration and corresponding state agencies.
These regulations may result in delays in the introduction of and increased
costs for new products, interference with or mandated cessation of production
and marketing of products, or may have other adverse effects on the Company.
Medicare Part A
At present, cost plus reimbursement is still the primary government
reimbursement methodology in the extended care (nursing home) marketplace. As a
result, average rental prices to extended care providers have not been
substantially impacted by the Medicare reimbursement activities of the Health
Care Financing Administration ("HCFA"). HCFA has stated publicly, however, a
preference to see Part A coverage criteria begin to reflect provisions
consistent with Part B. Because of the nature and timing on any proposed
reimbursement changes are not presently known, it is not practicable to
estimate how the Company may be affected in the future.
Medicare Part B
HCFA is currently undertaking a comprehensive review of all reimbursement
coverage criteria and fee schedules for pressure relieving devices in the home.
In January of 1995, HCFA released revised support surface fee schedules which
represented a 2.5% increase in the amount paid by Medicare for both the
HomeKair bed and the HomeKair DMS. New support surface Part B coverage
policies and fee schedules are expected to be introduced mid-year 1995. The
impact of these policies on the Company's product utilization mix and future
reimbursement for these items is not known at this time.
The Company believes it is in substantial compliance with applicable FDA
regulations. In addition, the Company's operations are subject to federal,
state and local regulations with respect to environmental and safety matters,
including regulations concerning discharges into air and water and regulations
under the Federal Occupational Safety and Health Act. Such laws and
regulations, in the Company's opinion, have not materially affected its
operations.
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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 84,000 square feet of the building with
the remaining space being leased to unrelated entities.
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 center. 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 will be used 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 2,500 square foot house.
The Company leases approximately 150 domestic distribution centers,
including each of its eight regional headquarters, which range in size from 600
to 19,600 square feet.
ITEM 3. LEGAL PROCEEDINGS
On February 21, 1992, Novamedix Limited filed a lawsuit against the Company
in the United States District Court for the Western District of Texas.
Novamedix holds the patent rights to the principal product which directly
competes with the PlexiPulse which is marketed by KCI New Technologies, Inc.
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 subsidiary claims. The Plaintiff seeks injunctive relief and
monetary damages. Discovery in this case has been substantially completed.
Although it is not possible to 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 result in a material
effect on the Company's financial statements.
The Company is party to several lawsuits generally incidental to its
business and is contesting adjustments proposed by the Internal Revenue Service
to prior years' tax returns. 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 items will
not have a material effect on the Company's financial statements.
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 fiscal quarter of 1994.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth below concerning the executive officers of
the Company, each of whom has been elected to serve until the 1995 annual
meeting of directors and until his successor is duly elected and qualified.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
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Officer of Present Position with
the Company Company and/or Principal
Name Age Since Occupation Last Five Years
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James R. Leininger, M.D. 50 1976 Chairman of the Board of
Directors since 1976;
President and Chief Executive
Officer from January 1990 to
November 1994; prior to
October 1986, Dr. Leininger
was also the Chairman of the
Emergency Department of the
Baptist Hospital System in
San Antonio, Texas.
Raymond R. Hannigan 55 1994 President and Chief Executive
Officer since November 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); from May 1989 to
January 1991, Mr. Hannigan
was the President of Sterling
Drug International.
Peter A. Leininger, M.D. 52 1980 Chief Administrative Officer
and Senior Vice President; in
1980, Dr. Leininger became a
member of the Company's Board
of Directors; prior to 1978,
Dr. Leininger maintained a
private medical practice and
functioned as the southeast
regional distributor for the
Company's products. Peter A.
Leininger, M.D. is the
brother of James R.
Leininger, M.D.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
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Officer of Present Position with
the Company Company and/or Principal
Name Age Since Occupation Last Five Years
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Bianca A. Rhodes 36 1993 Senior Vice President -
Finance and Chief Financial
Officer since September 1993;
from July 1992 to April
1993, Ms. Rhodes served as
Senior Vice President,
Finance, Chief Financial
Officer and Corporate
Treasurer of Intelogic Trace,
Inc., a national computer
services company; from 1990
to June 1992, Ms. Rhodes
served as Vice President,
Finance and Corporate
Treasurer of Intelogic Trace,
Inc.; prior to 1990, Ms.
Rhodes served as Corporate
Treasurer of Intelogic Trace,
Inc.
Dennis E. Noll 40 1993 Vice President, General
Counsel and Secretary since
January 1993; from February,
1992 to December, 1992, Mr.
Noll served as Senior
Corporate Counsel for the
Company; prior to February,
1992, Mr. Noll was a partner
with the law firm of Cox and
Smith Incorporated.
Scott S. Brooks 46 1993 President, Medical Retro
Design since March 1994; from
April 1993 to February 1994,
Mr. Brooks served as Vice
President, National Accounts
of the Company; from April
1991 to March 1993; Mr.
Brooks served as Regional
Vice President of KCI
Therapeutic Services, Inc.;
from June 1990 to April 1991,
Mr. Brooks served as Director
of Sales and Marketing of KCI
Medical Services; prior to
June 1990, Mr. Brooks served
as Vice President of Simmons
Healthcare, a subsidiary of
the Company.
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ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
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Officer of Present Position with
the Company Company and/or Principal
Name Age Since Occupation Last Five Years
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Frank DiLazzaro 36 1993 President, KCI International,
Inc. since January 1993 and
Vice President, Marketing
since April 1993; from June
1989 to December 1992,
Mr. DiLazzaro served as
Vice President, KCI
International, Inc.; prior to
June 1989, Mr. DiLazzaro
served as General Manager KCI
Medical Canada.
Daniel Puchek 42 1987 President, KCI New
Technologies, Inc.; from
February 1989 to August 1991,
Mr. Puchek served as Vice
President, Corporate
Development; prior to 1989,
Mr. Puchek served as Vice
President, KCI International,
Inc.
Robert A. Wehrmeyer, Jr. 38 1988 President, KCI Financial
Services; from January 1993
to September 1994, Mr.
Wehrmeyer served as
President, KCI Medical
Services and Senior Vice
President; from June 1990 to
December 1992, Mr. Wehrmeyer
served as Senior Vice
President - Administration,
General Counsel and
Secretary; from March 1988 to
May 1990, Mr. Wehrmeyer
served as Vice President -
Legal, General Counsel and
Secretary; prior to March
1988, Mr. Wehrmeyer was
Corporate Counsel and
Secretary of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The NASDAQ Stock Market under the
symbol: KNCI. The range of the high and low bid prices of the Company's Common
Stock for each of the quarters during the 1994 and 1993 fiscal years is
contained on the inside back cover of the Company's 1994 Annual Report to
Shareholders under the caption "Investor Information" and is hereby
incorporated by reference.
The Company's Board of Directors declared quarterly cash dividends on
the Company's common common stock in 1994 stock in 1994 and common and
preferred stock in 1993. The cash dividends totaled $.15 per common share in
each quarter of 1994 and 1993. The Company's Board of Directors will consider
future dividends on a quarterly basis. The Company's credit agreement contains
certain covenants which limit the Company's ability to declare and pay cash
dividends.
As of March 1, 1995, the approximate number of holders of record of the
Company's Common Stock was 538.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated in this Item 6, by reference, is that portion of the Company's
1994 Annual Report to Shareholders appearing on page 7 under the caption
"Selected Consolidated Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated in this Item 7, by reference, is that portion of the Company's
1994 Annual Report to Shareholders appearing on pages 8 to 12 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated in this Item 8, by reference, are the Consolidated Balance
Sheets and related Consolidated Statements of Earnings, Cash Flows, Capital
Accounts and notes thereto and Independent Auditors' Report appearing on pages
13 to 24 in the Company's 1994 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING MATTERS
AND FINANCIAL DISCLOSURE
Within the twenty-four month period prior to the date of Registrant's most
recent financial statements, no Form 8-K recording a change of accountants due
to a disagreement on any matter of accounting principles, practices or
financial statement disclosures has been filed with the Commission.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated in this Item 10, by reference, are those portions of the
Company's definitive Proxy Statement appearing on pages 1 to 3 therein under
the caption "Election of Directors" and on page 23 therein under the caption
"Timeliness of Certain SEC Filings." See also the information in Item 4a of
Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated in this Item 11, by reference, is that portion of the
Company's definitive Proxy Statement appearing on pages 7 to 9 under the
caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated in this Item 12, by reference, is that portion of the
Company's definitive Proxy Statement appearing on pages 6 and 7 under the
caption "Securities Holdings of Principal Shareholders, Directors and
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions of this nature required to be
disclosed by this item.
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, incorporated herein by
reference to the Company's 1994 Annual Report to Shareholders, are
filed as a part of this report:
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Earnings for the three years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the three years ended
December 31, 1994, 1993 and 1992
-14-
<PAGE> 15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Consolidated Statements of Capital Accounts for the three
years ended December 31, 1994, 1993 and 1992
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, 1994 are filed as
part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts - Years ended
December 31, 1994, 1993 and 1992
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:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated August 23, 1994 by and among
Kinetic Concepts, Inc., a Texas corporation, KCI Therapeutic
Services, Inc., a Delaware corporation, MEDIQ Incorporated, a
Delaware corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support Services-I, Inc., a
Delaware corporation. (Incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K dated October 17, 1994).
2.2 Amendment No. 1 to Asset Purchase Agreement dated September
30, 1994 by and among Kinetic Concepts, Inc., a Texas
corporation, KCI Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware corporation, PRN
Holdings, Inc., a Delaware corporation and MEDIQ/PRN Life
Support Services-I, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 2.2 to the Registrant's
Form 8-K dated October 17, 1994).
2.3 Promissory Note dated September 30, 1994 in the principal
amount of $2,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated
October 17, 1994).
</TABLE>
-15-
<PAGE> 16
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
2.4 Promissory Note dated September 30, 1994 in the principal
amount of $2,956,957 payable by MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation, to the order of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K dated October 17, 1994).
2.5 Promissory Note dated September 30, 1994 in the principal
amount of $3,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.3 to the Registrant's Form 8-K dated
October 17, 1994).
2.6 Promissory Note dated September 30, 1994 in the principal
amount of $5,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.4 to the Registrant's
Form 8-K dated October 17, 1994).
2.7 Promissory Note dated September 30, 1994 in the principal
amount of $5,835,707 payable by MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation, to the order of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.5 to the
Registrant's Form 8-K dated October 17, 1994).
2.8 Negative Covenants Agreement dated September 30, 1994 by and
among Kinetic Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware corporation, MEDIQ
Incorporated, a Delaware corporation, PRN Holdings, Inc., a
Delaware corporation and MEDIQ/PRN Life Support Services-I,
Inc., a Delaware corporation. (Incorporated by reference to
Exhibit 99.6 to the Registrant's Form 8-K dated October 17,
1994).
2.9 Guaranty Agreement dated September 30, 1994 made by PRN
Holdings, Inc., a Delaware corporation, in favor of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.7 to the
Registrant's Form 8-K dated October 17, 1994).
2.10 Guaranty Agreement dated September 30, 1994 made by MEDIQ
Incorporated, a Delaware corporation, in favor of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.8 to the
Registrant's Form 8-K dated October 17, 1994).
</TABLE>
-16-
<PAGE> 17
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
2.11 Collateral Transfer of Note (Security Agreement) dated
September 30, 1994 by MEDIQ Incorporated, a Delaware
corporation, for the benefit of KCI Therapeutic Services,
Inc., a Delaware corporation. (Incorporated by reference to
Exhibit 99.9 to the Registrant's Form 8-K dated October 17,
1994).
2.12 Press Release dated September 30, 1994. (Incorporated by
reference to Exhibit 99.10 to the Registrant's Form 8-K dated
October 17, 1994).
11.1 Earnings Per Share Computation.
13.1 Kinetic Concepts, Inc. 1994 Annual Report to Shareholders
(furnished for the information of the Commission and not
deemed to be "filed", except for those portions expressly
incorporated herein by reference).
21.1 Subsidiary Listing.
23.1 Consent by KPMG Peat Marwick LLP dated March 29, 1995 to
incorporation by reference of their reports dated February
14, 1995 in Registration Statements on Form S-8 previously
filed by the Company.
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 17, 1994 with
respect to the sale of its Medical Services Division. The following
financial statements were included as part of this Form 8-K:
Proforma Condensed Divested Balance Sheet - June 30, 1994
Proforma Condensed Divested Statement of Earnings for the six
months ended June 30, 1994
Proforma Condensed Divested Statement of Earnings for the year
ended December 31, 1993
Notes to Proforma Condensed Divested Financial Statements
-17-
<PAGE> 18
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 29, 1995.
KINETIC CONCEPTS, INC.
By: JAMES R. LEININGER, M.D.
-------------------------------
James R. Leininger, M.D.
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
JAMES R. LEININGER, M.D. Chairman of the Board of March 29, 1995
---------------------------- Directors
James R. Leininger, M.D.
RAYMOND R. HANNIGAN Chief Executive Officer and March 29, 1995
---------------------------- President
Raymond R. Hannigan
BIANCA A. RHODES Chief Financial Officer and March 29, 1995
---------------------------- Senior Vice President
Bianca A. Rhodes (Principal Accounting
Officer)
PETER A. LEININGER, M.D. Director March 29, 1995
----------------------------
Peter A. Leininger, M.D.
SAM A. BROOKS Director March 29, 1995
----------------------------
Sam A. Brooks
FRANK A. EHMANN Director March 29, 1995
----------------------------
Frank A. Ehmann
BERNHARD T. MITTEMEYER, M.D. Director March 29, 1995
----------------------------
Bernhard T. Mittemeyer, M.D.
</TABLE>
-18-
<PAGE> 19
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 14, 1995, we reported on the consolidated balance
sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of earnings, capital accounts,
and cash flows for each of the years in the three-year period ended December
31, 1994, as contained in the 1994 annual report to shareholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1994. 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 audits.
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.
KPMG Peat Marwick LLP
San Antonio, Texas
February 14, 1995
<PAGE> 20
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1994
<TABLE>
<CAPTION>
Additions
----------------------- 12/31/92
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
---------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 2,600 $ 5,335 $ - $ 960 $ 6,975
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Additions
----------------------- 12/31/93
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
---------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 6,975 $ 5,330 $ - $ 4,805 $ 7,500
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Additions
----------------------- 12/31/94
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
---------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 7,500 $ 1,429 $ - $ 329 $ 8,600
======== ======== ======== ======== ========
</TABLE>
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated August 23, 1994 by and among
Kinetic Concepts, Inc., a Texas corporation, KCI Therapeutic
Services, Inc., a Delaware corporation, MEDIQ Incorporated, a
Delaware corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support Services-I, Inc., a
Delaware corporation. (Incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K dated October 17, 1994).
2.2 Amendment No. 1 to Asset Purchase Agreement dated September
30, 1994 by and among Kinetic Concepts, Inc., a Texas
corporation, KCI Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware corporation, PRN
Holdings, Inc., a Delaware corporation and MEDIQ/PRN Life
Support Services-I, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 2.2 to the Registrant's
Form 8-K dated October 17, 1994).
2.3 Promissory Note dated September 30, 1994 in the principal
amount of $2,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated
October 17, 1994).
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
2.4 Promissory Note dated September 30, 1994 in the principal
amount of $2,956,957 payable by MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation, to the order of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form 8-K dated October 17, 1994).
2.5 Promissory Note dated September 30, 1994 in the principal
amount of $3,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.3 to the Registrant's Form 8-K dated
October 17, 1994).
2.6 Promissory Note dated September 30, 1994 in the principal
amount of $5,000,000 payable by PRN Holdings, Inc., a
Delaware corporation, to the order of KCI Therapeutic
Services, Inc., a Delaware corporation. (Incorporated by
reference to Exhibit 99.4 to the Registrant's
Form 8-K dated October 17, 1994).
2.7 Promissory Note dated September 30, 1994 in the principal
amount of $5,835,707 payable by MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation, to the order of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.5 to the
Registrant's Form 8-K dated October 17, 1994).
2.8 Negative Covenants Agreement dated September 30, 1994 by and
among Kinetic Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware corporation, MEDIQ
Incorporated, a Delaware corporation, PRN Holdings, Inc., a
Delaware corporation and MEDIQ/PRN Life Support Services-I,
Inc., a Delaware corporation. (Incorporated by reference to
Exhibit 99.6 to the Registrant's Form 8-K dated October 17,
1994).
2.9 Guaranty Agreement dated September 30, 1994 made by PRN
Holdings, Inc., a Delaware corporation, in favor of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.7 to the
Registrant's Form 8-K dated October 17, 1994).
2.10 Guaranty Agreement dated September 30, 1994 made by MEDIQ
Incorporated, a Delaware corporation, in favor of KCI
Therapeutic Services, Inc., a Delaware corporation.
(Incorporated by reference to Exhibit 99.8 to the
Registrant's Form 8-K dated October 17, 1994).
</TABLE>
<PAGE> 23
<TABLE>
<S> <C>
2.11 Collateral Transfer of Note (Security Agreement) dated
September 30, 1994 by MEDIQ Incorporated, a Delaware
corporation, for the benefit of KCI Therapeutic Services,
Inc., a Delaware corporation. (Incorporated by reference to
Exhibit 99.9 to the Registrant's Form 8-K dated October 17,
1994).
2.12 Press Release dated September 30, 1994. (Incorporated by
reference to Exhibit 99.10 to the Registrant's Form 8-K dated
October 17, 1994).
11.1 Earnings Per Share Computation.
13.1 Kinetic Concepts, Inc. 1994 Annual Report to Shareholders
(furnished for the information of the Commission and not
deemed to be "filed", except for those portions expressly
incorporated herein by reference).
21.1 Subsidiary Listing.
23.1 Consent by KPMG Peat Marwick LLP dated March 29, 1995 to
incorporation by reference of their reports dated February
14, 1995 in Registration Statements on Form S-8 previously
filed by the Company.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1994 1993 1992
------------------------------
<S> <C> <C> <C>
Earnings before income taxes, minority
interest, extraordinary item and cumulative
effects of changes in accounting principles $119,550 $ 14,627 $ 47,917
Income taxes (55,949) (7,175) (19,405)
Minority interest in subsidiary loss 40 560 -
-------- -------- --------
Net earnings before extraordinary item and
cumulative effects of changes in accounting
principles 63,641 8,012 28,512
Extraordinary item - (400) -
Cumulative effect of change in method of
accounting for inventory 742 - -
Cumulative effect of change in method of
accounting for income taxes - 450 -
-------- -------- --------
Net earnings 64,383 8,062 28,512
Dividends and accretion related to
preferred stock - (171) (322)
-------- -------- --------
Net earnings available to common shareholders $ 64,383 $ 7,891 $ 28,190
======== ======== ========
Shares used in earnings per share computations 44,143 44,627 45,060
======== ======== ========
Earnings per share:
Earnings before extraordinary item and
cumulative effects of changes in
accounting principles $ 1.44 $ 0.18 $ 0.63
Extraordinary item - (0.01) -
Cumulative effect of change in method of
accounting for inventory 0.02 - -
Cumulative effect of change in method of
accounting for income taxes - 0.01 -
-------- -------- --------
$ 1.46 $ 0.18 $ 0.63
======== ======== ========
Shares used in earnings per share
computations - assuming full dilution 44,709 44,634 45,129
======== ======== ========
Earnings per share - assuming full dilution:
Earnings before extraordinary item and
cumulative effects of changes in
accounting principles $ 1.42 $ 0.18 $ 0.63
Extraordinary item - (0.01) -
Cumulative effect of change in method of
accounting for inventory 0.02 - -
Cumulative effect of change in method of
accounting for income taxes - 0.01 -
-------- -------- --------
$ 1.44 $ 0.18 $ 0.63
======== ======== ========
</TABLE>
<PAGE> 2
Exhibit 11.1 (Continued)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
COMPUTATION OF SHARES USED IN EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1994 1993 1992
------------------------------
<S> <C> <C> <C>
Average outstanding common shares 43,912 44,249 43,834
Average common equivalent shares - dilutive
effect of option shares 231 378 1,226
------ ------ ------
Shares used in earnings per share computation 44,143 44,627 45,060
====== ====== ======
</TABLE>
SHARES USED IN EARNINGS PER SHARE COMPUTATIONS ASSUMING FULL DILUTION
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1994 1993 1992
------------------------------
<S> <C> <C> <C>
Average outstanding common shares 43,912 44,249 43,834
Average common equivalent shares - dilutive
effect of option shares 797 385 1,295
------ ------ ------
Shares used in earnings per share computation
- assuming full dilution 44,709 44,634 45,129
====== ====== ======
</TABLE>
<PAGE> 1
Exhibit 13.1
1994 Annual Report
Kinetic Concepts, Inc.
<PAGE> 2
Eighteen years ago Kinetic Concepts began with a belief in a product called the
RotoRest(Registration Mark) and in making the healing properties of that product
available to every patient who needed it. The innovative technology of the
RotoRest inspired a new generation of Kinetic Concepts products which provide
healing properties to patients around the world.
KINETIC CONCEPTS SUMMARY
LOCATIONS
United States Austria Netherlands
Canada Switzerland United Kingdom
Germany France Australia
Distribution in Latin America, the Middle East, Asia and Africa
PRODUCTS AND THERAPIES
Kinetic Therapy Pressure Relief Bariatric Products
Pressure Reduction Medical Devices
DOMESTIC POINTS OF SERVICE TOTAL EMPLOYEES
153 1,938
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(in millions, except per share data) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue . . . . . . . . . . . . . . . . . . . $269.6 $268.9 $278.5 $248.7 $213.7
Operating earnings . . . . . . . . . . . . . . . . . 124.1 20.5 55.1 48.8 36.6
Net earnings . . . . . . . . . . . . . . . . . . . . 64.4 8.1 28.5 24.8 18.1
Earnings per share . . . . . . . . . . . . . . . . . 1.46 0.18 0.63 0.49 0.35
Cash flow provided by operations . . . . . . . . . . 96.5 56.5 58.0 60.2 58.7
</TABLE>
<PAGE> 3
FROM THE CHAIRMAN
I am pleased to report that 1994 was an extraordinary year for Kinetic Concepts,
Inc. Earnings, adjusted for unusual items, increased to $22.0 million in 1994,
up 80.3% from $12.2 million in 1993. Cash flow from operations improved to $96.5
million in 1994, up 70.8% from the $56.5 million generated through operations
during the same period a year ago.
Our 1993 financial results, combined with an uneasy marketplace, forced
us to take a close look at the way we did business last year. We made a
commitment at that time to control expenses and capital expenditures and focus
on core operations. As indicated by our 1994 financial results, we honored that
commitment. Total expenses in 1994 dropped almost 5% compared to the previous
year while net capital expenditures declined $19.6 million, or 58.6% from 1993
levels.
Our operational enhancements were complemented by two other notable
events last year. In September, we completed the sale of our Medical Services
Division for approximately $85 million in cash and promissory notes. We also
received $84.75 million in a patent infringement lawsuit settlement from our
largest competitor, Support Systems International, a division of Hillenbrand
Industries. These events strengthened our overall financial position, which will
be a major competitive advantage and provide the resources necessary to fund our
future growth.
Another significant event during 1994 was Raymond R. Hannigan joining
our company as president and chief executive officer. The decision to bring in a
new chief executive was made after long and careful reflection. Kinetic Concepts
has grown and changed dramatically during its 18-year history. In 1994 I came
to the conclusion that to move forward we had to redirect our operating
strategies. Ray is the person to lead us on that mission.
Ray comes to our team with an exceptional ability for managing growing
companies. He also has a great deal of expertise in health care operations in
the United States and abroad. Under his leadership, I am confident that Kinetic
Concepts will reach the next level of performance as a company -- and achieve
success in the dynamic markets it serves.
[GRAPH]
I believe there is a vast opportunity awaiting Kinetic Concepts. The
growth and evolution of the health care market, both here and abroad, offers
even greater prospects for the cost-effective, clinically proven products and
services we offer. I am confident in our ability to meet the growing needs of
the marketplace, and excited about the role our company will play in the future
of health care.
/s/ JAMES R. LEININGER, M.D.
JAMES R. LEININGER, M.D.
Chairman of the Board of Directors
ONE
<PAGE> 4
FROM THE PRESIDENT
It is with great pleasure that I introduce myself to you as president and chief
executive officer of Kinetic Concepts, Inc. I am enthusiastic about my
responsibility to guide Kinetic Concepts, and I thank Jim Leininger for this
extraordinary opportunity.
During the past 25 years, my business career has taken me to a number of
places and companies, primarily in the health care field. I have been a member
of successful teams running some of the country's best companies. I believe my
experience has prepared me well for the task ahead.
I intend to build on what Jim has accomplished. Through his vision and
perseverance, Kinetic Concepts has risen from a small but dedicated concern to
become an industry leader in therapeutic products and services. Our company must
now move from its entrepreneurial success to secure our position as the premier
provider of products and services in our segment of the health care field. I am
committed to accomplishing this strategy and excited about the opportunities the
future holds for Kinetic Concepts.
Since joining the Company in November, I have gained a thorough
understanding of the organization and its operations and am encouraged by my
initial overall assessment. Kinetic Concepts was founded on, and remains
governed by, a strong set of core values. These values, combined with a cadre of
skilled and dedicated people, give me confidence that we can achieve the many
goals we have set out before us.
The effect of health care reform and other market conditions have
dramatically changed Kinetic Concepts' operations. A company that began by
renting framed products to acute care hospitals has evolved into a
multi-division operation serving a variety of new and expanding markets. This
change was initiated by a significant patient migration from hospitals to lower
cost extended care and home care settings. To meet the needs of these new
patient locations, the Company expanded its product line. It also introduced
lower cost alternatives for addressing the therapeutic needs of patients in
these new settings. Finally, through accelerated research and development
efforts, Kinetic Concepts continued to identify and design new medical devices
that would effectively serve other therapeutic markets.
At the same time, Kinetic Concepts realized gains in its growth markets
-- inside and outside the borders of the United States. The Company now provides
direct coverage to the United States and eight countries outside the U.S. and
several other countries through alternate distribution channels.
[GRAPH]
Our business today is increasingly diversified among settings, markets
and products. I believe this complements our ability to meet patient needs in
multiple settings and reinforces our commitment to continually bring new and
innovative products to the marketplace.
TWO
<PAGE> 5
The results of that commitment have been impressive. Kinetic Concepts
has now developed the most comprehensive line of specialty surfaces in the
industry. This product line, which we refer to as our Continuum of
Care(Registration Mark), includes a complete spectrum of framed bed products and
unframed surfaces. What distinguishes our products is their unique, innovative
design and healing properties -- advantages that are crucial to assisting
patients in the recovery process.
We have recently added three new products to our continuum:
TriaDyne(Registration Mark), a top-of-the-line, specialized intensive care unit
product; BariKare(Registration Mark), an advanced system for the obese patient;
and AirWorks Plus(Registration Mark), an easy-to-use, cost-effective support
surface. I am proud to say that no other company in our industry can provide the
same comprehensive line of products, therapies, or services as Kinetic Concepts.
The comprehensiveness of our product line is significant from a customer
service standpoint. It allows Kinetic Concepts to serve the needs of each
individual patient as well as the provider of the therapy. Focusing on the needs
of our customers is the most effective way to differentiate Kinetic Concepts
from the competition. We are, above all, a service company.
Kinetic Concepts was founded by a physician to promote healing. As a
result, clinical efficacy has always been a priority. Unlike our competitors, we
have maintained an ongoing clinical research program. In a market environment
that demands improved outcomes at lower cost, we not only have clinically
efficacious products, but we also have the ability to demonstrate the improved
outcomes which those products provide. This is a clear competitive advantage.
The Company made significant strides in operational efficiencies in
1994. The sale of our Medical Services Division, which rented life-support
equipment, has allowed us to focus on our specialty bed business and new medical
technologies. Proceeds from the sale, combined with cash received from our
litigation settlement, were used to reduce the Company's long-term debt, and
provide funds for future investments, many of which will be internal to our
operations.
We have already initiated several infrastructure improvements, including
enhancing our information systems to increase service excellence. In addition,
we have re-examined our expense base in light of the demanding health care
environment, cutting costs where appropriate. We will remain vigilant in this
area, but I am pleased with the progress we've made during the last fiscal year.
[GRAPH]
In 1995, we will realize the greatest impact by continuing our internal
focus on operating excellence and building our infrastructure. Additionally,
opportunities for growth are numerous. Leveraging from a very strong balance
sheet, we are positioned to continue to meet the high-end and niche demands of
the marketplace and to seek new opportunities to develop and distribute
innovative medical devices.
As the cover of this annual report illustrates, our healing mission is
both dynamic and universal. By effectively delivering our therapeutic products
to expanding domestic and international markets, Kinetic Concepts will realize a
future of strategic and profitable growth.
/S/ RAYMOND R. HANNIGAN
RAYMOND R. HANNIGAN
President and Chief Executive Officer
THREE
<PAGE> 6
KINETIC CONCEPTS TODAY
Hela. Heilsam. Curatif. Healing. However translated, this word defines our
company. Improving the quality of life through healing is our mission at Kinetic
Concepts. This philosophy drives our company to find the most innovative
solutions to serve our markets and, in doing so, creates unique therapeutic
opportunities. It's a process that begins with the patient. We use information
derived from the patient to develop and deliver new ways to heal, rehabilitate
and restore. Resulting products are then rigorously evaluated. Finally, our
clinical studies, which are the most comprehensive in the industry, allow us to
thoroughly examine and understand the efficacy of our products and services.
This process translates into the most technologically advanced and effective
products and services in the industry.
Commitment to Service
Kinetic Concepts is a service company, and as a result, our focus is on
the customer and on what they want and need. What our customers want are
therapeutic and cost-effective clinical solutions. Although the immediacy of
health care reform has waned, health care providers around the world continue to
aggressively analyze their operations and the efficiency of their products and
service delivery. In response, Kinetic Concepts has continued to implement new
ways to operate in an environment where acute care hospital budgets are
shrinking, while at the same time meeting the need for new, technically
innovative products. Reducing operating costs allows Kinetic Concepts to service
these markets effectively. Focusing on new product development and improved
service has also positioned the Company to grow with other opportunities in the
health care marketplace.
Domestic Specialty Surface Operations
Patients continue to shift from acute care facilities to lower cost
settings. In response to this trend, the Company combined its Therapeutic
Services Division, which serves the needs of acute and subacute patients, with
its Extended Care Division, which serves the needs of patients in long-term and
skilled nursing facilities. This combination led to improved sales focus within
the division, enabling us to service the growing needs of patients across
multiple care settings with state-of-the-art products. This combined entity will
also result in lower overall operating costs.
Driven by an aging population and reimbursement trends focused on lower
cost settings, the use of the home as an alternative therapy site is another
growing market for the Company. Patient days in the home are increasing at a
rate greater than patient days in the hospital. However, as the home care market
has expanded, it has become more fragmented and increasingly characterized by a
large number of potential customer referral points. The Kinetic Concepts
Homecare Division, known as KCHC, was specifically created to support the
increase in home health care activity and reaches out to this market through a
broad based durable medical equipment dealer network. For 1995, we will
introduce a series of products specifically designed for the home care market
meeting both outcome and reimbursement criteria.
[GRAPH]
International Markets
The international market offers promising opportunities for Kinetic
Concepts. The Company has subsidiaries in Canada, Germany, Austria, Switzerland,
France, the Netherlands, the United Kingdom and Australia, and independent
distributors in Latin America, the Middle East, Asia and Africa. The success of
low-cost therapeutic products like the FirstStep (Registration Mark) family has
helped Kinetic Concepts to gain worldwide acceptance in international hospitals
seeking cost-effective health care solutions. In addition, the opportunity to
market new and innovative products will allow for continued growth.
FOUR
<PAGE> 7
Medical Devices
The Company's Medical Devices operations meet Kinetic Concepts'
long-term strategic goal of introducing new, cost-effective medical
technologies. The NuTech Division focuses on identifying new technologies like
PlexiPulse(Registration Mark), and developing their respective markets.
PlexiPulse(Registration Mark) is a non-invasive vascular assist device
developed by NuTech to prevent deep vein thrombosis (DVT) by aiding in venous
return.
We believe that one of our core competencies is our ability to discover
and develop innovative medical products and services. Our commitment to identify
and introduce new cost-effective medical technologies, therefore, is enduring.
How We Heal
A common thread within our business can be found in the Kinetic Concepts
Continuum of Care. The continuum is our healing philosophy. It is the foundation
for effective patient treatment because it provides products which meet the
therapeutic requirements of a wide variety of patients. It allows caregivers to
select from a comprehensive product line and precisely prescribe the appropriate
therapeutic treatment based on individual patient acuity.
The theory of the Continuum of Care is based on the development of
multiple treatment levels for pressure ulcers and the other complications of
immobility. Kinetic Concepts' pressure reduction products can prevent patients
from developing pressure ulcers, while our pressure relief surfaces aid in
healing. The progressive therapeutic benefits of the continuum offer prevention
and treatment for pressure ulcers and address a variety of other clinical needs.
New Product Introductions
Kinetic Concepts recently introduced three new products within the
continuum. One of the most innovative is TriaDyne, the most advanced bed in the
industry. This critical-care bed was developed to provide Kinetic
Therapy(trademark) for intensive-care patients. TriaDyne's critical care frame
is narrow and more suited to the intensive care unit (ICU) environment. It is
the only product on the market which allows the patient to be turned 40 degrees
to each side which we believe optimizes turning, or Kinetic Therapy. It also
provides an industry-first feature of simultaneously turning the patient's
torso and lower body in opposite directions, keeping the patient positioned in
the middle of the bed during turning. In addition, the TriaDyne has a
percussion feature that rapidly inflates and deflates selected cushions to
assist in loosening fluid in the lungs. The unique and multiple features
offered by TriaDyne accommodate the needs of the nurses and physicians while
offering great therapeutic benefit to their ICU patients.
FIVE
<PAGE> 8
During 1994, the Company introduced BariKare, an advanced care system
for patients suffering from morbid obesity -- an ever-increasing market that has
long been underserved. The obese patient presents many unique problems for
providers. The BariKare solves many of these issues by allowing the patient
flexible positioning for comfort and therapy by converting from a bed to a
chair. At the same time, the design also facilitates the treatment of the
patient by the caregiver. BariKare follows in the Kinetic Concepts tradition of
providing comfortable and durable patient surfaces with innovative features to
enhance the healing process.
AirWorks Plus was created to be a lower cost alternative for multiple
care settings. It provides the therapeutic benefits of pulsating air columns in
an effective and easy-to-use support surface. The massaging action of the
product redistributes pressure for better skin care. AirWorks Plus can be used
as an overlay or a mattress replacement system, and its simple operation makes
it ideal for all care settings.
Each of these new products provides a unique solution to identified
needs of the market. They are reflections of Kinetic Concepts' market-driven
creativity and how we develop new standards of healing for market segments.
Kinetic Concepts Tomorrow
Health care is ever-changing. It's the nature of our industry. With each
breakthrough, the science of healing evolves and advances. Each shift in the
market shapes new health care policies. But whether the future of health care is
driven by discoveries or deductibles, Kinetic Concepts has a mission, one that
will define our position as a premier provider of health care products and
services, and guide our company into the future. Health care is changing, but
there will always be one constant -- our commitment to the healing of our
patients.
"The emerging health care market demands efficacious products and services for a
variety of care settings. Kinetic Concepts will continue to meet this demand by
providing only those products and services that are clinically superior, cost
effective and address the basic patient need: healing."
RAYMOND R. HANNIGAN
President and
Chief Executive Officer
SIX
<PAGE> 9
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Earnings Data:
Revenue:
Service and rental $228,832 $232,250 $244,905 $223,192 $192,040
Sales and other 40,814 36,622 33,586 25,529 21,646
-------- -------- -------- -------- --------
Total revenue 269,646 268,872 278,491 248,721 213,686
Rental expenses 159,235 169,687 156,682 146,112 124,632
Cost of goods sold 19,388 18,666 18,987 14,238 12,746
-------- -------- -------- -------- --------
Gross profit 91,023 80,519 102,822 88,371 76,308
Selling, general and administrative expenses 51,813 53,279 47,710 39,538 33,212
Restructuring charge (1) - - - - 6,540
Unusual items (2) (84,868) 6,705 - - -
-------- -------- -------- -------- --------
Operating earnings 124,078 20,535 55,112 48,833 36,556
Net interest expense 4,528 5,908 7,195 6,736 5,057
-------- -------- -------- -------- --------
Earnings before income taxes, minority
interest, extraordinary item and
cumulative effect of changes in
accounting principle 119,550 14,627 47,917 42,097 31,499
Income taxes 55,949 7,175 19,405 17,260 13,350
-------- -------- -------- -------- --------
Earnings before minority interest,
extraordinary item and cumulative effect
of changes in accounting principle 63,601 7,452 28,512 24,837 18,149
Minority interest in subsidiary loss 40 560 - - -
Extraordinary item - debt extinguishment, net - (400) - - -
Cumulative effect of change in method of
accounting for inventory (3) 742 - - - -
Cumulative effect of change in method of
accounting for income taxes (4) - 450 - - -
-------- -------- -------- -------- --------
Net earnings $ 64,383 $ 8,062 $ 28,512 $ 24,837 $ 18,149
======== ======== ======== ======== ========
Earnings per share $ 1.46 $ 0.18 $ 0.63 $ 0.49 $ 0.35
======== ======== ======== ======== ========
Shares used in earnings per share
computations 44,143 44,627 45,060 50,469 50,993
======== ======== ======== ======== ========
Cash flow provided by operations $ 96,451 $ 56,538 $ 58,007 $ 60,241 $ 58,695
======== ======== ======== ======== ========
Cash dividends paid to common shareholders $ 6,588 $ 6,638 $ 6,277 $ 6,047 $ 4,580
======== ======== ======== ======== ========
Cash dividends per share paid to
common shareholders $ .15 $ .15 $ .14 $ .12 $ .09
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital $ 90,731 $ 60,907 $ 55,473 $ 32,206 $ 14,924
Total assets $232,731 $284,573 $286,915 $277,820 $250,155
Long-term obligations-noncurrent (5) $ 2,636 $101,889 $102,237 $101,781 $ 40,468
Minority interest $ - $ 40 $ 990 $ - $ -
Redeemable convertible preferred stock $ - $ - $ 3,307 $ 3,034 $ 6,734
Other capital accounts $185,423 $125,707 $123,813 $ 99,182 $133,664
</TABLE>
(1) Charge relates to employee severance liability resulting from a reduction
in workforce, loss on sale of a subsidiary, and write-down of assets.
(2) See Note (11) of Notes to Consolidated Financial Statements for information
on unusual items.
(3) See Note (1) of Notes to Consolidated Financial Statements for information
on cumulative effect of change in method of accounting for inventory.
(4) See Note (8) of Notes to Consolidated Financial Statements for information
on cumulative effect of change in method of accounting for income taxes.
(5) See Notes (6) and (7) of Notes to Consolidated Financial Statements for
information concerning the Company's borrowing arrangements and lease
obligations.
SEVEN
<PAGE> 10
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by certain items in the Company's Consolidated
Statements of Earnings.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Total revenue 100.0% 100.0% 100.0%
Rental expenses (59.1) (63.1) (56.3)
Cost of goods sold (7.2) (7.0) (6.8)
----- ----- -----
Gross profit 33.7 29.9 36.9
Selling, general and administrative expenses (19.2) (19.8) (17.1)
Unusual items 31.5 (2.5) -
----- ----- -----
Operating earnings 46.0 7.6 19.8
Net interest expense (1.7) (2.2) (2.6)
Income taxes (20.7) (2.6) (7.0)
Minority interest - 0.2 -
Extraordinary item - (0.1) -
Cumulative effect of change in accounting
principle 0.3 0.1 -
----- ----- -----
Net earnings 23.9% 3.0% 10.2%
===== ===== =====
</TABLE>
Certain reclassifications of amounts related to prior years have been made to
conform with the 1994 presentation, principally rental and selling, general and
administrative expenses.
1994 Compared to 1993
The following table presents certain line items from the Company's
Condensed Consolidated Statements of Earnings for the years ended December 31,
1994 and 1993 and provides the relationship of each item to total revenue as
well as the increase or decrease and percentage change of each line item as
compared to the prior year (In thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1994 1993 Increase (Decrease)
--------------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service and rental $228,832 85% $232,250 86% $ (3,418) (2%)
Sales and other 40,814 15% 36,622 14% 4,192 11%
-------- --- -------- --- --------
269,646 100% 268,872 100% 774 -
Rental expenses (159,235) 59% (169,687) 63% (10,452) (6%)
Cost of goods sold (19,388) 7% (18,666) 7% 722 4%
-------- --- -------- --- --------
Gross profit 91,023 34% 80,519 30% 10,504 13%
Selling, general and
administrative expenses (51,813) 19% (53,279) 20% (1,466) (3%)
Unusual items 84,868 31% (6,705) 2% (91,573) -
-------- --- -------- --- --------
Operating earnings 124,078 46% 20,535 8% 103,543 504%
Net interest expense (4,528) 1% (5,908) 2% (1,380) (23%)
Income taxes (55,949) 21% (7,175) 3% 48,774 680%
Minority interest in
subsidiary loss 40 - 560 - (520) (93%)
Extraordinary item - debt
extinguishment, net - - (400) - 400 -
Cumulative effect of change
in method of accounting for
inventory 742 - - - 742 -
Cumulative effect of change
in method of accounting for
income taxes - - 450 - (450) -
-------- --- -------- --- --------
Net earnings $ 64,383 24% $ 8,062 3% $ 56,321 699%
======== === ======== === ========
Earnings per share $ 1.46 $ 0.18 $ 1.28 711%
======== ======== ========
Weighted shares 44,143 44,627 (484) -
======== ======== ========
</TABLE>
The 1994 fiscal year benefited from two significant unusual events:
(i) settlement of a patent infringement suit with Support Systems
International, Inc. for $81.6 million, net of legal fees and before taxes, and
(ii) sale of the Company's Medical Services Division to Mediq Incorporated,
effective September 30, 1994, for $84.1 million resulting in a pretax gain of
$10.1 million. Partially offsetting these gains were certain other unusual
items, primarily planned dispositions of under-utilized rental assets and
over-stocked inventories which had a negative earnings impact of $6.8 million.
Proceeds from the above transactions were used to pay down outstanding debt as
well as fund payment of the income taxes associated with these large gains.
Revenue, gross profit and operating results from the KCI Medical
Services Division as compared to the prior year were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, 1994 December 31, 1993
------------------ -------------------
<S> <C> <C>
Revenue $43,846 $55,990
Gross profit 13,018 14,557
Operating earnings(loss) (1,124) 5,833
</TABLE>
Total revenue in 1994, including revenue from the Medical Services
Division, increased by less than 1% to $269.6 million from $268.9 million in
1993. Revenue from the Company's specialty patient surface business including
acute care and alternate care, was $158.1 million, down less than 1% from 1993.
This reflects a decline in acute care revenue of 8.0% to $111.0 million as a
result of both increased pricing pressure and a shift in patient therapy days
to alternate care settings. Alternate site rental revenue increased 23.9% from
the prior year to $47.1 million in 1994, due primarily to increased therapy
days in both the extended care and home care markets. Revenue from KCI's
International operations increased 17.2% to $46.4 million in 1994 primarily due
to increased overall therapy days and focused product sales. Revenue from
unique medical devices increased 90.8% to $13.9 million in 1994 primarily due
to greater market penetration as this division expanded into new states.
Revenue from the Company's other divisions was consistent with prior year
results.
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 59.1% of total revenue in 1994 compared to 63.1% in 1993. This
decrease was due primarily to lower depreciation expense as well as an overall
effort to control costs.
Gross profit increased 13.0% to $91.0 million in 1994 from $80.5 million
in 1993 primarily due to the decrease in rental expenses as discussed above.
EIGHT
<PAGE> 11
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses decreased 2.8% to $51.8
million in 1994 from $53.3 million in 1993. Selling, general and administrative
expenses as a percentage of total revenue decreased to 19.2% in 1994 from 19.8%
in 1993. This decrease was primarily attributable to lower expenses in the
corporate office and field organization.
Operating earnings increased 504.2% to $124.1 million in 1994 from $20.5
million in the prior year. Excluding unusual items, operating earnings during
1994 increased by 43.9% to $39.2 million. This increase is due primarily to the
decline in rental expenses discussed above.
Net interest expense in 1994 decreased 23.4% to $4.5 million from $5.9
million in 1993 due to the pay down of the Company's long-term debt at the end
of the third quarter as well as the interest earned on notes receivable from
Mediq/PRN.
The Company's effective income tax rate in 1994 was 46.8%, compared to
49.1% in 1993. The decrease is primarily attributable to the SSI settlement
that resulted in related tax expense at statutory rates which was partially
offset by the nondeductibility of goodwill written-off in connection with the
sale of the Medical Services Division.
During 1994, the cumulative losses allocated to the minority interest
holder of Medical Retro Design, Inc. exceeded the balance of its investment. As
a result, losses of $3.8 million were absorbed entirely by the Company. These
continuing losses and the diminished opportunities within the refurbishment
business contributed towards the Company's decision to liquidate the assets and
discontinue the operations of this unit. Concurrently, the Company has written-
off unamortized goodwill of $1.5 million and written-down inventories to net
realizable value.
During the first quarter of 1994, the Company recorded the cumulative
effect of a change in accounting principle related to its inventory costing
method which resulted in a one-time after-tax earnings increase of $742,000, or
$0.02 per share. See Note (1) to the financial statements for further details.
Net earnings increased to $64.4 million in 1994 from $8.1 million in
1993. Earnings per share increased to $1.46 per share in 1994 from $0.18 per
share in the prior year. Excluding unusual items, net earnings during 1994 were
$22.0 million, or $0.50 per share, up 80.3% or $9.8 million from 1993. This
increase is primarily due to the decrease in rental expenses and net interest
expense as discussed above.
1993 Compared to 1992
The following table presents certain line items from the Company's
Condensed Consolidated Statements of Earnings for the years ended December 31,
1993 and 1992 and provides the relationship of each item to total revenue as
well as the increase or decrease and percentage change of each line item as
compared to the prior year (In thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1993 1992 Increase (Decrease)
------------------ ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service and rental $232,250 86% $244,905 88% $(12,655) (5%)
Sales and other 36,622 14% 33,586 12% 3,036 9%
-------- ---- -------- ---- --------
268,872 100% 278,491 100% (9,619) (3%)
Rental expenses (169,687) 63% (156,682) 56% 13,005 8%
Cost of goods sold (18,666) 7% (18,987) 7% (321) (2%)
-------- ---- -------- ---- --------
Gross profit 80,519 30% 102,822 37% (22,303) (22%)
Selling, general and
administrative expenses (53,279) 20% (47,710) 17% 5,569 12%
Unusual items (6,705) 2% - - 6,705 -
-------- ---- -------- ---- --------
Operating earnings 20,535 8% 55,112 20% (34,577) (63%)
Net interest expense (5,908) 2% (7,195) 3% (1,287) 18%
Income taxes (7,175) 3% (19,405) 7% (12,230) (63%)
Minority interest in
subsidiary loss 560 - - - 560 -
Extraordinary item - debt
extinguishment, net (400) - - - (400) -
Cumulative effect of change
in method of accounting for
income taxes 450 - - - 450 -
-------- ---- -------- ---- --------
Net earnings $ 8,062 3% $ 28,512 10% $(20,450) (72%)
======== ==== ======== ==== ========
Earnings per share $ 0.18 $ 0.63 $ (0.45) (71%)
======== ======== ========
Weighted shares 44,627 45,060 (433) -
======== ======== ========
</TABLE>
Total revenue in 1993 decreased by 3.5% to $268.9 million from $27.5
million in 1992. Revenue from the Company's specialty patient surface
businesses including acute care and alternate care, was $158.8 million, down
9.7% from 1992. This reflects a decline in acute care revenue of 12.1% to
$120.7 million as a result of adverse industry conditions. In addition,
alternate site revenue decreased 1.1% from the prior year to $38.0 million in
the current year, due to lower reimbursement rates for the HomeKair bed which
were offset by increased rentals of the HomeKair bed. Revenue from KCI's
International operations dereased 1.1% to $39.6 million in 1993 primarily due
to the unfavorable effects of currency exchange rate fluctuations from the
prior year which were partially offset by increased therapy days. Revenue from
the Company's other operating divisions increased 12.7% to $70.6 million in
1993 due to increased revenue from the unique medical device business and
revenue contributed by Medical Retro Design, Inc. and Clinical Systems, Inc.,
which were acquired in December, 1992, and June, 1993, respectively.
NINE
<PAGE> 12
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Rental expenses were 63.1% of total revenue in 1993 compared to 56.3% in
1992. This increase was due primarily to higher equipment and facility-related
expenses, many of which are relatively fixed, and higher costs created by the
divisionalization of Therapeutic Services and Medical Services sales and
support personnel.
Gross profit decreased 21.6% to $80.5 million in 1993 from $102.8 million
in 1992 primarily due to the decrease in revenue and the increase in rental
expenses as discussed above.
Selling, general and administrative expenses increased 11.7% to $53.3
million in 1993 from $47.7 million in 1992. Selling, general and administrative
expenses as a percentage of total revenue increased to 19.8% in 1993 from 17.1%
in 1992. This increase was due primarily to the fact that certain components of
these expenses are relatively fixed and do not decline when revenues decline
and to increased expenses related to NuTech and Medical Retro Design.
During the fourth quarter of 1993, as a result of adverse market conditions
and a review of its operating strategies, the Company recorded unusual items of
$6.7 million. Unusual items reduced net earnings by approximately $4.1 million
(net of tax benefit of $2.6 million), or $0.09 per share. Adjustments to
carrying values of assets and liabilities, primarily related to planned
dispositions of under-utilized rental assets and over-stocked inventories
totaling $4.8 million, were charged to unusual items. Unusual items also
included a provision of $900,000 relating to costs anticipated for the
relocation of certain operations as well as certain severance costs. A
provision for anticipated losses of $1 million related to product liability
claims was also charged to unusual items. This provision was made because one
of the Company's prior insurance carriers was placed into receivership.
Operating earnings decreased 62.7% to $20.5 million in 1993 from $55.1
million in the prior year. Excluding the unusual items referred to above,
operating earnings during 1993 would have decreased by 50.6% to $27.2 million.
This decrease is due to the decline in revenue and increase in rental expenses
and selling, general and administrative expenses as discussed above.
Interest expense in 1993 decreased 17.9% to $5.9 million from $7.2 million
in 1992 primarily due to a reversal of interest costs accrued in prior years
related to a contingent liability which never materialized. The effect of this
reversal was partially offset by an increase in the Company's borrowings under
its Credit Agreement and accrued interest related to asserted prior year
tax liabilities.
The Company's effective income tax rate in 1993 was 49.1%, compared to
41.0% in 1992. The rate reflects an increase in the federal corporate tax rate
from 34% to 35% and a higher ratio of international earnings with higher
marginal tax rates to total earnings. In addition, the rate was affected by a
decrease in earnings while the permanent differences (primarily goodwill
amortization) between book earnings and taxable earnings remained at the same
level as in the prior year and the nondeductibility of losses of Medical Retro
Design for tax purposes. The increases were partially offset by tax benefits
related to the recapitalization of the Company's Canadian and French
subsidiaries.
Minority interest represented the 33% interest in losses of Medical Retro
Design allocated to the minority interest holder.
In the fourth quarter of 1993, the Company refinanced its existing debt
facility which resulted in an extraordinary charge of $400,000, net of $267,000
tax benefit, or $0.01 per share.
During 1993, the Company also 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 a one-time earnings increase of $450,000, or $0.01 per share.
Net earnings decreased 71.7% to $8.1 million in 1993 from $28.5 million in
1992. Earnings per share decreased 71.4% to $0.18 per share in 1993 from $0.63
per share in the prior year. Excluding the unusual items, net earnings during
1993 would have been $12.2 million, down 57.2% or $16.3 million, compared with
1992. This decrease is primarily due to the decrease in revenue and increase in
rental expenses and selling, general and administrative expenses discussed
above.
Financial Condition
The impact of the SSI settlement and Medical Services sale, as well as
the change in revenue and expenses experienced by the Company during 1994,
resulted in changes to the Company's balance sheet as follows:
Cash at December 31, 1994 increased $32.9 million to $43.2 million from
$10.3 million at December 31, 1993 primarily due to $150 million received in
conjunction with the settlement of the patent infringement suit and the sale of
the Medical Services Division. Approximately $82 million of the total proceeds
was used to repay borrowings under the Company's revolving credit and term loan
agreement. Overall, long-term obligations decreased $102.4 million to $6.0 at
December 31, 1994 from $108.4 million at December 31, 1993. In addition, the
Company made a Federal tax payment of $37.9 million in the last quarter of
1994.
TEN
<PAGE> 13
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net accounts receivable at December 31, 1994 decreased $8.4 million, or
13.2%, to $55.5 million from $63.9 million at December 31, 1993. This decrease
was primarily due to the sale of the Medical Services Division in September
1994, and subsequent collection of the division's accounts, partially offset
by growth in receivables for KCI International and KCI Therapeutic Services
substantially related to revenue growth.
Inventory at December 31, 1994 decreased $2.7 million, or 13.1%, to
$18.2 million from $20.9 million at December 31, 1993 primarily due to the sale
of the Medical Services Division and the write-down of MRD inventories.
Net property, plant and equipment at December 31, 1994 decreased $62.2
million, or 54.8%, to $51.4 million from $113.6 million at December 31, 1993
primarily due to the sale of certain assets of the Medical Services Division,
as well as depreciation expense and dispositions of rental equipment which
exceeded the cost of additions to rental equipment.
Goodwill at December 31, 1994 decreased $29.4 million, or 65.5%, to
$15.5 million from $44.9 million at December 31, 1993 due primarily to the
write-off of the goodwill related to the sale of the Medical Services Division,
and the write-off of all goodwill associated with the MRD operation.
Management expects to complete the sale of the MRD assets and discontinue
operations of this unit in early 1995.
Other assets at December 31, 1994 increased $7.1 million, or 79.6%, to
$16.0 million from $8.9 million at December 31, 1993 primarily due to an
investment in an asset subject to a leveraged lease.
Current installments of long-term obligations decreased $5.5 million to
$3.4 million at December 31, 1994 from $8.9 million at December 31, 1993
resulting from the repayment of the Company's revolving credit and term loan
agreement.
Accrued expenses at December 31, 1994 increased $2.8 million, or 11.4%,
to $27.3 million from $24.5 million at December 31, 1993 resulting from
accruals for obligations associated with the disposition of the Medical
Services Division.
Income taxes payable increased $5.4 million to $8.0 million at December
31, 1994 from $2.6 million at December 31, 1993 due to the increase in 1994
taxable income related to the settlement of the SSI lawsuit and the sale of the
Medical Services Division. Total tax payments for 1994 were $57.3 million
compared to payments of $13.3 million for 1993.
Cumulative foreign currency translation adjustment at December 31, 1994
decreased $1.4 million to $0.2 million from $1.6 million at December 31, 1993
due to favorable effects of currency exchange rate changes from the prior year,
chiefly in Europe.
During 1994, the Company retired all shares of common stock previously
held as treasury shares which resulted in an $8.5 million decline in additional
paid-in capital and treasury stock.
Income Taxes
The Company recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. 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 differences 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.
During 1994, the net impact of these timing issues resulted in a net
deferred tax asset versus the net deferred tax liability recognized in prior
years. Primary components of these future tax benefits include reserves for
uncollectible accounts receivable and reserves for inventory.
Reimbursement
Medicare Part A
At present, cost plus reimbursement is still the primary government
reimbursement methodology in the extended care (nursing home) marketplace. As a
result, average rental prices to extended care providers have not been
substantially impacted by the Medicare reimbursement activities of the Health
Care Financing Administration ("HCFA"). HCFA has stated publicly, however, a
preference to see Part A coverage criteria begin to reflect provisions
consistent with Part B. Because of the nature and timing on any proposed
reimbursement changes are not presently known, it is not practicable to
estimate how the Company may be affected in the future.
Medicare Part B
HCFA is currently undertaking a comprehensive review of all
reimbursement coverage criteria and fee schedules for pressure relieving
devices in the home. The changes which HCFA is currently considering could
provide codes and coverage criteria which are more product specific for the
Company's products. Because the fee schedule changes may impact the mix of
products ordered by the Company's home care dealers and the results of HCFA's
comprehensive review are not known at this time, it is not possible to predict
the impact of these changes on the Company.
ELEVEN
<PAGE> 14
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Market Trends and Strategies
For the past decade, the health care industry has experienced increased
pressure from a variety of sources to control costs and improve patient
outcomes. This pressure intensified in 1993 as our nation debated health care
reform. Although the events of 1994 would seem to indicate that legislative
reform of our health care system is unlikely at this time, it is apparent that
the health care industry will become more cost effective than today and further
improve patient outcomes.
Since 1987, the Company has been positioning itself to remain
competitive in this environment which demands accountability for patient
outcomes at a lower cost. The Company's Therapeutic Services Division offers
the most complete continuum of products in the industry and helps reduce the
overall cost of patient care by allowing the health care provider to match the
needs of a particular patient with the appropriate product and therapy. In
addition, the Company continues to search for new therapies and technologies,
making investments as deemed prudent, to improve patient outcomes both now and
into the future.
The Company has also sponsored a number of 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 survive and prosper in the health care industry in the 1990's.
The Company also maintains an extensive 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.
While future performance cannot be assured, the Company believes that it is
well positioned to compete in the dynamic health care marketplace.
Legal Proceedings
On February 21, 1992, Novamedix Limited filed a lawsuit against the
Company in the United States District Court for the Western District of Texas.
Novamedix holds the patent rights to the principal product which directly
competes with the PlexiPulse, which is marketed by KCI New Technologies, Inc.
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 subsidiary claims. The Plaintiff seeks injunctive relief and
monetary damages. Discovery in this case has been substantially completed.
Although it is not possible to 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 effect
on the Company's financial statements.
The Company is party to several lawsuits generally incidental to its
business and is contesting adjustments proposed by the Internal Revenue Service
to prior years' tax returns. Provisions have been made in the accompanying
financial statements for estimated exposures related to these lawsuits and
adjustments. In the opinion of management, the disposition of these items will
not have a material effect on the Company's financial statements.
Liquidity and Capital Resources
During 1994, the Company generated net cash provided by operating
activities of $96.5 million compared to $56.5 million in the prior year.
Exclusive of unusual items, year-to-date cash flow provided by operations was
$62.2 million. The Company believes that current cash reserves combined with
operating cash flows during the next twelve month period will be sufficient to
provide for new investments in equipment and any working capital needed during
the period.
At December 31, 1994, cash and cash equivalents totaling $43.2 million
were available for general corporate purposes. Additionally, the Company
maintains a Credit Agreement with a bank as agent for itself and certain other
financial institutions. The Credit Agreement permits borrowings of up to $45.0
million, all of which was available at December 31, 1994.
TWELVE
<PAGE> 15
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
Assets 1994 1993
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,241 $ 10,280
Accounts receivable, net 55,456 63,872
Finance lease receivables, current 8,051 6,659
Inventories 18,167 20,902
Notes receivable, current, net 6,014 -
Prepaid expenses and other 4,474 8,421
-------- --------
Total current assets 135,403 110,134
-------- --------
Net property, plant and equipment 51,357 113,602
Finance lease receivables, net of current 7,242 7,073
Notes receivable, net of current and allowance 3,187 -
Goodwill, less accumulated amortization
of $9,105 in 1994 and $10,826 in 1993 15,476 44,859
Other assets, less accumulated amortization
of $8,012 in 1994 and $7,602 in 1993 15,989 8,905
Deferred income tax benefit, net 4,077 -
-------- --------
$232,731 $284,573
======== ========
Liabilities and Capital Accounts
Current liabilities:
Note payable $ 1,878 $ 2,144
Current installments of long-term obligations 3,410 8,872
Current installments of capital lease obligations - 2,955
Current installments of ESOP loan - 359
Accounts payable 4,079 7,751
Accrued expenses 27,280 24,499
Income taxes payable 8,025 2,647
-------- --------
Total current liabilities 44,672 49,227
-------- --------
Long-term obligations, excluding current installments 2,636 99,533
Capital lease obligations, excluding current
installments - 2,060
ESOP loan, excluding current installments - 296
Deferred income taxes, net - 7,710
-------- --------
47,308 158,826
-------- --------
Minority interest - 40
Redeemable preferred stock - -
Common stock; issued and outstanding 43,921
in 1994 and 45,501 in 1993 44 46
Additional paid-in capital 10,053 18,803
Retained earnings 175,480 117,685
Cumulative foreign currency translation adjustment (154) (1,602)
Treasury stock, at cost, 1,542 shares in 1993 - (8,510)
Loan to ESOP - (655)
Notes receivable from officers - (60)
-------- --------
$232,731 $284,573
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
THIRTEEN
<PAGE> 16
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Service and rental $228,832 $232,250 $244,905
Sales and other 40,814 36,622 33,586
-------- -------- --------
Total revenue 269,646 268,872 278,491
-------- -------- --------
Rental expenses 159,235 169,687 156,682
Cost of goods sold 19,388 18,666 18,987
-------- -------- --------
178,623 188,353 175,669
-------- -------- --------
Gross profit 91,023 80,519 102,822
Selling, general and administrative expenses 51,813 53,279 47,710
Unusual items (84,868) 6,705 -
-------- -------- --------
Operating earnings 124,078 20,535 55,112
Net interest expense 4,528 5,908 7,195
-------- -------- --------
Earnings before income taxes,
minority interest, extraordinary
item and cumulative effect of
changes in accounting principle 119,550 14,627 47,917
Income taxes 55,949 7,175 19,405
-------- -------- --------
Earnings before minority interest,
extraordinary item and cumulative effect
of changes in accounting principle 63,601 7,452 28,512
Minority interest in subsidiary loss 40 560 -
Extraordinary item - debt extinguishment, net - (400) -
Cumulative effect of change in method
of accounting for inventory, net 742 - -
Cumulative effect of change in method
of accounting for income taxes - 450 -
-------- -------- --------
Net earnings $ 64,383 $ 8,062 $ 28,512
======== ======== ========
Earnings per common and
common equivalent share:
Earnings before extraordinary
item and cumulative effect of
changes in accounting principle $ 1.44 $ 0.18 $ 0.63
Extraordinary item - (0.01) -
Cumulative effect of change in
method of accounting for
inventory 0.02 - -
Cumulative effect of change in
method of accounting for
income taxes - 0.01 -
-------- -------- --------
Earnings per share $ 1.46 $ 0.18 $ 0.63
======== ======== ========
Shares used in earnings
per share computations 44,143 44,627 45,060
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
FOURTEEN
<PAGE> 17
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
Cash flows from operating activities: 1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
Net earnings $ 64,383 $ 8,062 $ 28,512
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 38,795 47,884 44,495
Provision for uncollectible accounts receivable 1,100 5,330 5,335
Noncash portion of unusual items 4,797 4,832 -
Gain on KCIMS disposition (10,121) - -
Change in assets and liabilities net of effects from
purchase of subsidiaries and unusual items:
Decrease (increase) in accounts receivable, net 7,316 (2,481) (15,340)
Increase in notes receivable (9,201) - -
Decrease (increase) in inventories 2,735 (1,326) (1,578)
Decrease (increase) in prepaid and other assets 3,947 (5,437) (609)
Increase (decrease) in accounts payable (3,672) 666 (1,695)
Increase in accrued expenses 2,781 3,930 1,388
Increase (decrease) in income taxes payable 5,378 (2,889) (73)
Decrease in deferred income taxes (11,787) (2,033) (2,428)
--------- -------- --------
Net cash provided by operating activities 96,451 56,538 58,007
--------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (13,814) (33,402) (43,317)
Inventory to be converted into equipment for
short-term rental 4,250 (3,865) 500
Dispositions of property, plant and equipment 2,869 2,773 2,207
Businesses acquired in purchase transactions,
net of cash acquired - (4,240) (2,909)
Proceeds from sale of KCIMS division 65,300 - -
Cash receipts from finance lease receivables 7,600 6,510 5,418
Increase in finance lease receivables (9,161) (6,929) (9,657)
Decrease (increase) in other assets (9,230) (4,412) 600
--------- -------- --------
Net cash provided (used) by investing
activities 47,814 (43,565) (47,158)
--------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) of notes payable and
long-term obligations (102,625) 7,277 (7,012)
Repayments of capital lease obligations (2,382) (3,526) (4,549)
Proceeds from the exercise of stock options 915 632 2,144
Payments for retirement of preferred stock - (3,452) -
Purchase and retirement of treasury stock (1,157) (2,951) (65)
Cash dividends paid to shareholders (6,588) (6,664) (6,326)
Other (791) (101) 236
--------- -------- --------
Net cash used by financing activities (112,628) (8,785) (15,572)
--------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents 1,324 (871) (505)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 32,961 3,317 (5,228)
Cash and cash equivalents beginning of year 10,280 6,963 12,191
--------- -------- --------
Cash and cash equivalents end of year $ 43,241 $ 10,280 $ 6,963
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
FIFTEEN
<PAGE> 18
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Capital Accounts
Three Years Ended December 31, 1994
(in thousands, except per share data)
<TABLE>
<CAPTION>
Notes
Cumulative receivable
foreign from officers
Additional currency Loan for exercise
Preferred Common paid-in Retained translation Treasury to of stock
stock stock capital earnings adjustment stock ESOP options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 $ 3,034 $45 $11,589 $ 94,519 $ 491 $(5,494) $(1,683) $ (285)
Net earnings - - - 28,512 - - - -
Exercise of stock options - - 2,144 - - - - -
Tax benefit realized from
stock option plan - - 1,291 - - - - -
Accretion of preferred stock 273 - - (273) - - - -
Treasury stock purchased - - - - - (65) - -
Cash dividends on common and
preferred stock - $.1425
per share - - - (6,326) - - - -
Payments on loan to ESOP - - - - - - 502 -
Foreign currency translation
adjustment - - - - (1,154) - - -
------- --- ------- -------- ------- ------- ------- ------
Balances at December 31, 1992 3,307 45 15,024 116,432 (663) (5,559) (1,181) (285)
Net earnings - - - 8,062 - - - -
Exercise of stock options - 1 631 - - - - -
Forgiveness of officer
receivable - - - - - - - 225
Tax benefit realized from
stock option plan and other
equity transactions - - 3,148 - - - - -
Accretion of preferred stock 145 - - (145) - - - -
Treasury stock purchased - - - - - (2,951) - -
Cash dividends on common and
preferred stock - $.15 per
share - - - (6,664) - - - -
Payments on loan to ESOP - - - - - - 526 -
Purchase and retirement of
preferred stock (3,452) - - - - - - -
Foreign currency translation
adjustment - - - - (939) - - -
------- --- ------- -------- ------- ------- ------- ------
Balances at December 31, 1993 - 46 18,803 117,685 (1,602) (8,510) (655) (60)
Net earnings - - - 64,383 - - - -
Exercise of stock options - - 803 - - - - -
Forgiveness of officer
receivable - - - - - - - 60
Tax benefit realized from
stock option plan and other
equity transactions - - 112 - - - - -
Treasury stock purchased - - - - - (1,157) - -
Treasury stock retired - (2) (9,665) - - 9,667 - -
Cash dividends on common stock -
$0.15 per share - - - (6,588) - - - -
Payments on loan to ESOP - - - - - - 655 -
Foreign currency translation
adjustment - - - - 1,448 - - -
------- --- ------- -------- ------- ------- ------- ------
Balances at December 31, 1994 $ - $44 $10,053 $175,480 $ (154) $ - $ - $ -
======= === ======= ======== ======= ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
SIXTEEN
<PAGE> 19
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 (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 1994
presentation, principally rental and selling, general and
administrative expenses.
The Company is a leading manufacturer and distributor of
specialized therapeutic beds and unique medical devices to select
health care providers. Most of the Company's customers are health
care providers, primarily hospitals and extended care facilities
throughout the U.S. and certain international markets. Receivables
from these entities are unsecured.
The Company operates in eight foreign countries including Canada,
Germany, the United Kingdom, the Netherlands, France, Austria,
Switzerland and Australia (see Note (12)).
(b) Revenue Recognition:
Service and rental revenue are recognized as services are
rendered. Sales and other revenue are recognized when products are
shipped. In addition, the Company leases certain medical equipment
under long-term lease agreements which are accounted for as direct
financing leases. Unearned interest is amortized to income over the
term of the lease using the interest method.
(c) Cash and Cash Equivalents:
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
(d) 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.
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. 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 the
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.
The change in the application of this accounting principle resulted
in an increase in net earnings of $742 (after reduction of income
taxes of $455), or $0.02 per share, 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 because the
effects cannot be reasonably estimated. The effect of the change for
the period ended December 31, 1994 on the results of operations
before the cumulative effect of the change is not material.
(e) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Betterments which
extend the useful life of the equipment are capitalized.
(f) Depreciation and Amortization:
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.
(g) Goodwill:
Goodwill represents the excess purchase price over the fair value of
net assets acquired and is amortized over five to thirty-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 strategic focus of
the Company.
(h) Other Assets:
Other assets consist principally of patents, trademarks, cash and
investments restricted for use by the Company's captive insurance
company, and the estimated residual value of assets subject to a
leveraged lease. Patents and trademarks are amortized over the
estimated useful life of the respective asset using the straight-line
method.
(i) 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.
(j) Common Stock and Earnings Per Common and Common Equivalent Share:
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.
(k) Insurance Programs:
In 1993, 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.
During 1993, the Company formed a wholly-owned captive
insurance company, KCI Insurance Company, Ltd. (the "Captive"). The
Captive reinsures the primary layer of commercial general
SEVENTEEN
<PAGE> 20
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
liability, workers compensation, and auto liability insurance for
certain operating subsidiaries of the Company. Provisions for losses
expected under these programs are recorded based upon the Company's
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.
(l) 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.
NOTE 2. Acquisitions and Dispositions
On September 30, 1994, KCI Therapeutic Services, Inc. ("KCTS"), a
wholly-owned subsidiary of the Company, sold certain assets (the "Assets")
used exclusively by KCTS' Medical Services Division (the "Medical Services
Division") to Mediq/PRN Life Support Services-I, Inc. ("Buyer") under an
Asset Purchase Agreement. Upon consummation of this transaction, the Buyer
acquired the Assets and assumed certain liabilities of the Medical
Services Division. The sales price was approximately $84,093. In
conjunction with the sale, KCTS and its affiliates agreed not to rent or
distribute a portfolio of critical care and life support equipment for 5
years.
Gross proceeds included a cash payment of approximately $65,300 and
promissory notes in the aggregate principal amount of $18,793. The net
proceeds of $72,823, pretax gain of $10,121, and after-tax net loss of
$2,480 were calculated, as follows:
<TABLE>
<S> <C>
Cash $ 65,300
Notes receivable (See Note (3)) 9,852
Fees and commissions (2,329)
--------
Net proceeds 72,823
Equipment and inventory sold (38,959)
Goodwill (25,778)
Accounts receivable provision (479)
Capital leases assumed 2,514
--------
Pretax gain on disposition 10,121
--------
Tax expense (12,601)
--------
Net loss on disposition $ (2,480)
========
</TABLE>
Tax expense exceeded the pretax gain amount due to the nondeductibility of
$25.8 million in unamortized goodwill. In addition, the Asset Purchase
Agreement includes a provision for a post-closing adjustment which may
result in a reimbursement to the Buyer for a portion of the purchase
price. The adjustment occurs if actual inventory, or equipment levels are
found to be lower than levels specified in the Asset Purchase Agreement.
Interest accrues at the rate of 8% on any required payment. As of December
31, 1994, the Company provided a liability related to this post-closing
adjustment calculation.
Assuming the sale was consummated as of the beginning of the current and
prior fiscal year, pro forma operating results of the Company would be as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Revenue $225,800 $212,882
Net earnings 68,269 8,064
Earnings per share $1.55 $0.18
Shares used 44,143 44,627
</TABLE>
In June, 1993, the Company acquired the operating assets of Clinical
Systems, Inc. ("CSI"), a provider of intravenous services and supplies to
the home health care market, from a bank for $4.2 million, including direct
acquisition costs. The Company recognized the excess cost of the assets
acquired over the estimated fair value of such assets ("goodwill") of $1.4
million which was being amortized over 15 years. The net assets of CSI were
sold as part of the sale of the Medical Services Division and the
unamortized goodwill was written off.
In December, 1992, the Company acquired the assets of Medical Retro Design,
Inc. ("MRD"), a hospital bed refurbishment company for $1.1 million plus a
continuing ten percent (10%) equity interest in the operations. The equity
interest was subject to a put option for $1 million. In June, 1993, the put
option was exercised by its holder. In 1994, since the Company adopted a
plan to liquidate the assets of this subsidiary, goodwill of $1.5 million
associated with MRD was written off. This write-off was treated as an
unusual item.
On April 23, 1993, KCI sold a 33% interest in MRD for $600. The purchaser's
investment, net of its interest in operating loss, has been reported on
the balance sheet as minority interest.
Detail of businesses acquired in purchase transactions is as follows:
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Fair value of assets acquired,
including goodwill $5,103 $2,849
Liabilities assumed (863) (27)
Minority interest - (990)
Amounts paid in 1992 for 1991
acquisitions - 1,077
------ ------
Net cash paid for acquisitions $4,240 $2,909
====== ======
</TABLE>
These acquisitions have been accounted for under the purchase method and
results of operations are included in the Company's results of operations
from the date of acquisition.
EIGHTEEN
<PAGE> 21
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
NOTE 3. Notes Receivable
Notes receivable at December 31, 1994, consist of notes received from
Mediq/PRN as part of the proceeds on the sale of the Medical Services
Division effective September 30, 1994. The values of the various notes
receivable for accounting purposes are described below:
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------
Principal Stated Interest
Balance Rate
--------- --------
<S> <C> <C>
Note from Mediq/PRN Life Support Services,
Inc. due in 10 equal monthly installments
beginning December, 1994 $ 5,404 -
Notes from PRN Holding, Inc. with interest
due quarterly beginning March, 1996 and
principal due September, 1999 10,000 10%
Note from Mediq/PRN Life Support Services,
Inc. due in 12 equal monthly installments
beginning December, 1994 2,734 8%
Miscellaneous 4 -
-------
Total $18,142
Less discount and valuation allowance (8,941)
Less amounts classified as current (6,014)
-------
Notes receivable, noncurrent $ 3,187
=======
</TABLE>
At the time of the sale, the Company received an opinion from an
independent investment banker on the notes receivable which was used to
arrive at the carrying values. The Company believes that the carrying
amounts for notes receivable are reasonable estimates of the related fair
values.
NOTE 4. Supplemental Balance Sheet Data
A summary of accounts receivable follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Trade accounts receivable $ 61,722 $ 69,284
Employee and other receivables 2,334 2,088
-------- --------
64,056 71,372
Less allowance for doubtful receivables 8,600 7,500
-------- --------
$ 55,456 $ 63,872
======== ========
</TABLE>
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Finished goods $ 3,086 $ 5,902
Work in process 1,642 1,546
Raw materials, supplies and parts 17,689 21,954
-------- --------
22,417 29,402
Less amounts expected to be converted
into equipment for short-term rental 4,250 8,500
-------- --------
$ 18,167 $ 20,902
======== ========
</TABLE>
Net property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Land $ 742 $ 752
Buildings 9,882 10,016
Equipment for short-term rental 117,745 199,561
Machinery, equipment and furniture 29,041 27,380
Leasehold improvements 633 635
Inventory to be converted into equipment 4,250 8,500
-------- --------
162,293 246,844
Less accumulated depreciation
and amortization 110,936 133,242
-------- --------
$ 51,357 $113,602
======== ========
</TABLE>
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
------- -------
<S> <C> <C>
Payroll, commissions and related taxes $11,450 $ 7,875
Insurance accruals 4,143 3,530
Accruals related to disposition of
Medical Services Division 1,524 -
Other accrued expenses (Note (11)) 10,163 13,094
------- -------
$27,280 $24,499
======= =======
</TABLE>
The carrying amount of financial instruments in current assets and current
liabilities approximate fair value because of the short maturity of these
instruments.
NOTE 5. Equipment Leases
The Company leases medical equipment to hospitals, nursing homes, doctors
and others through a wholly-owned subsidiary, KCI Financial Services, Inc.
Equipment leases that meet the criteria for direct financing leases are
carried at the gross investment in the lease less unearned income. Any
equipment which does not meet the criteria for a direct financing lease is
accounted for as an operating lease. Operating leases are usually for one
to three year periods. The medical devices under the operating leases are
included with property, plant and equipment in the accompanying December
31, 1994 and 1993 balance sheets at a cost of approximately $3,427 and
$5,364 and accumulated depreciation of approximately $1,210 and $2,086,
respectively.
Future minimum lease receivables under noncancelable leasing arrangements
as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Finance Operating
lease leases
Year Ended receivables receivable
---------- ----------- ----------
<S> <C> <C>
1995 $ 8,766 $1,041
1996 5,032 624
1997 2,537 340
1998 1,000 66
1999 521 -
------- ------
Minimum lease payment receivables 17,856 $2,071
Estimated residual value of leased ======
property 519
Less unearned income (2,773)
Less allowance for doubtful accounts (309)
-------
Net investment in finance lease
receivables 15,293
Less current portion (8,051)
-------
Long-term portion $ 7,242
=======
</TABLE>
The carrying amounts of these leases approximate their fair market value.
NOTE 6. Note Payable and Long-Term Obligations
KCI Financial Services, Inc., a wholly-owned subsidiary of the Company,
currently has a note payable which provides for borrowings up to a maximum
of $5,000 with a bank. The obligation stipulates that a part of the
outstanding balance be due on demand with the remaining balance being due
under a term loan. At December 31, 1994 and 1993, $1,878 and $2,144,
respectively, was due on demand on the note payable. The term loan portion
of this obligation is included in long-term obligations following.
Interest on the note payable is at the bank's base lending rate plus
one-half of one percent (9.0% at December 31, 1994).
NINETEEN
<PAGE> 22
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
A summary of long-term obligations follows:
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
------ --------
<S> <C> <C>
Term loan due in semiannual
principal installments
through August, 1996 $ - $ 50,000
Revolving credit facility due
February, 1997 - 51,000
Nonrecourse notes payable to financial
institutions, interest rates ranging
from 10.5% to 13.5%, payable through
October 1998 891 2,560
Other notes 5,155 4,845
------ --------
6,046 108,405
Less current installments 3,410 8,872
------ --------
Long-term obligations, excluding
current installments $2,636 $ 99,533
====== ========
</TABLE>
On December 17, 1993, the Company entered into a revolving credit and
term loan agreement (the "Credit Agreement") with a bank as agent for
itself and certain other financial institutions. The Credit Agreement
was subsequently amended on September 30, 1994 and provides for
a $45 million three-year revolving credit facility (the "Revolver").
Any advances under the Revolver are due in February, 1997. At
December 31, 1994, the entire $45 million was available under the
Credit Agreement.
The interest rate payable on borrowings under the Credit Agreement is
at the election of the Company: (i) the Bank's reference rate (the
"Reference Rate"), (ii) the London interbank offered rate quoted to
the Bank, for one, two, three or six month Eurodollar deposits
adjusted for appropriate reserves ("LIBOR") plus 75 to 150 basis
points, or (iii) the secondary market rate for 30-, 60-, 90-, or
180-day certificates of deposit (the "CD Rate") plus 87.5 to
162.5 basis points. The interest rate available to the Company under
the LIBOR and CD rate options varies depending upon the Company's
ratio of total debt to earnings before interest and taxes plus
depreciation and amortization.
The Credit Agreement requires that the Company maintain specified
ratios and meet certain financial targets. The Credit Agreement also
contains certain events of default, includes certain provisions
governing a change in control of the Company and establishes various
fees to be paid by the Company. At December 31, 1994, the Company was
in compliance with all covenants.
In the fourth quarter of 1993, the Company recorded an extraordinary
item of $400, net of $267 tax benefit, or $0.01 per share related to
the refinancing of its existing debt facility.
The maturities of long-term obligations as of December 31, 1994 are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1995 $3,410
1996 1,701
1997 815
1998 120
------
$6,046
</TABLE>
Any amounts borrowed under the Credit Agreement are secured by a first
lien on substantially all assets of the Company and a pledge of the stock
of the U.S. subsidiaries of the Company. In addition, under the Credit
Agreement, the banks have a negative pledge on the Company's and its U.S.
subsidiaries' other assets.
The carrying value of the Company's long-term obligations approximates
their fair value based on current rates for similar types of debt.
Interest paid on debt during 1994, 1993 and 1992 amounted to $5,421,
$7,021 and $6,664, respectively.
NOTE 7. Leasing Obligations
At December 31, 1993, the gross amount of rental equipment under capital
leases totaled $12,959 and related accumulated depreciation totaled $7,672,
respectively.
The Company also leases 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 $10,858,
$11,100 and $11,067 for the years ended December 31, 1994, 1993 and 1992,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1994 are as follows:
<TABLE>
<CAPTION>
Operating
Year Ended leases
---------- ---------
<S> <C>
1995 $ 5,921
1996 3,324
1997 1,478
1998 721
1999 319
Later years 16
-------
Total minimum lease payments $11,779
=======
</TABLE>
NOTE 8. Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" as of January 1, 1993. The cumulative effect
of this change in accounting for income taxes of $450 was determined as of
January 1, 1993, and is reported separately in the consolidated statement
of earnings for the year ended December 31, 1993. The 1992 financial
statements have not been restated to apply the provisions of Statement 109.
Earnings before income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Domestic $110,287 $10,022 $41,270
Foreign 9,263 4,605 6,647
-------- ------- -------
$119,550 $14,627 $47,917
======== ======= =======
</TABLE>
TWENTY
<PAGE> 23
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
Year Ended December 31, 1994
---------------------------------------
Current Deferred Total
------- --------- -------
<S> <C> <C> <C>
Federal $56,697 $(11,031) $45,666
State 8,212 (756) 7,456
International 3,282 - 3,282
------- -------- -------
$68,191 $(11,787) $56,404
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1993
---------------------------------------
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal $ 4,483 $(1,071) $ 3,412
State 1,565 (574) 991
International 2,710 62 2,772
------- ------- -------
$ 8,758 $(1,583) $ 7,175
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1992
---------------------------------------
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Federal $15,391 $(1,492) $13,899
State 3,216 (1,019) 2,197
International 3,309 - 3,309
------- ------- -------
$21,916 $(2,511) $19,405
======= ======= =======
</TABLE>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the statutory tax rate of
35 percent in 1994 and 1993, and 34 percent in 1992 to pretax income from
continuing operations as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Computed "expected"
tax expense $41,843 $ 5,119 $16,292
Goodwill 9,307 824 787
State income taxes, net
of Federal benefit 4,846 644 1,449
Loss in majority-owned
subsidiary - 802 -
Effect of change in tax rates
on temporary differences - 250 -
Foreign income taxed at other
than U.S. rates 350 1,159 528
Utilization of foreign net
operating loss carryforwards (814) (1,319) -
Nonconsolidated foreign net
operating loss 566 - -
Foreign, other 271 (135) 250
Effect of change in inventory
accounting method 455 - -
Other, net (420) (169) 99
------- ------- -------
$56,404 $ 7,175 $19,405
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and December 31, 1993 are presented below:
Deferred tax assets:
<TABLE>
<CAPTION> 1994 1993
------- -------
<S> <C> <C>
Accounts receivable, principally due to allowance
for doubtful accounts $ 3,083 $ 2,133
Intangible assets, deducted for book purposes but
capitalized and amortized for tax purposes 51 429
Net operating loss carryforwards 1,193 1,316
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 1,064 31
Notes receivable, basis difference 679 -
Nondeductible loss in subsidiary - 628
Legal fees, capitalized and amortized for tax
purposes 672 -
Other 139 122
------- -------
Total gross deferred tax assets 6,881 4,659
Less valuation allowance (1,193) (1,944)
------- -------
Net deferred tax assets 5,688 2,715
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and basis (1,032) (8,978)
Accrued liabilities, not currently deductible for
tax purposes (256) (463)
Deferred state tax liability (144) (900)
Other (179) (84)
------- --------
Total gross deferred tax liabilities (1,611) (10,425)
------- --------
Net deferred tax asset (liability) $ 4,077 $ (7,710)
======= ========
</TABLE>
At December 31, 1994, the Company had $1.6 million 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 $600 can be used indefinitely and the remainder expire
during 1995 through 2000.
The Company anticipates that the reversal of existing taxable temporary
differences and future taxable income will provide sufficient taxable
income to realize the tax benefit of the remaining deferred tax assets.
Income taxes paid during 1994, 1993, and 1992 were $57,349, $13,301 and
$20,499, respectively.
NOTE 9. Shareholders' Equity and Employee Benefit Plans
Common Stock
The Company is authorized to issue 100,000 shares of Common Stock, $.001
par value (the "Common Stock"). The number of shares of Common Stock
issued and outstanding at the end of 1994 and 1993 was 43,921 and 45,501,
respectively.
Treasury Stock
In February, 1993, the Company's Board of Directors approved a program to
repurchase up to 3,000 shares of its Common Stock. The Company repurchased
237 shares during 1994 and 582 shares during 1993. In 1994, the Company's
Board of Directors adopted a resolution to return all repurchased shares
to the status of authorized but unissued shares. In accordance with this
resolution, the Company retired 1,779 treasury shares during 1994.
TWENTY ONE
<PAGE> 24
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Redeemable Preferred Stock
The Company is authorized to issue up to 20,000 shares of Redeemable
Preferred Stock, par value $0.001 per share, in one or more series. As of
December 31, 1994 and December 31, 1993, none were issued.
Options
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the
"Key Contributor Stock Option Plan") covers up to an aggregate of 5,750
shares of the Company's Common Stock. Options may be 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 is determined by a committee of the Board of Directors of
the Company. The Key Contributor Stock Option Plan permits the Board of
Directors to declare the terms for payment when such options are
exercised. Options may be granted with a term not exceeding ten
years.
The following table summarizes the activity in the Company's Key
Contributor Stock Option Plan:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------ -----------------
<S> <C> <C> <C>
Outstanding, January 1, 1992 2,122 $2.75 to $10.00
Granted 515 $8.1875 to $8.625
Canceled (204) $3.50 to $10.00
Exercised (631) $2.75 to $5.75
-----
Outstanding, December 31, 1992 1,802 $3.00 to $8.625
Granted 1,212 $3.75 to $7.625
Canceled (346) $3.50 to $8.1875
Exercised (62) $3.50 to $5.75
-----
Outstanding, December 31, 1993 2,606 $3.00 to $8.625
Granted 2,116 $3.375 to $6.00
Canceled (1,556) $3.50 to $8.625
Exercised (199) $3.50 to $5.75
-----
Outstanding, December 31, 1994 2,967 $3.00 to $8.625
=====
</TABLE>
As of December 31, 1994 and 1993, 1,083 and 819 options were exercisable
and 1,423 and 733 shares were available for future grants, respectively.
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the
"Directors Stock Option Plan") covers an aggregate of 300 shares of the
Company's Common Stock and may be granted to non-employee directors of the
Company. The exercise price of options granted under the Directors Stock
Option Plan shall be the fair market value of the shares of the Company's
Common Stock on the date that such option is granted. The following table
summarizes the activity in the Directors Stock Option Plan:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------ -----------------
<S> <C> <C> <C>
Outstanding, January 1, 1992 126 $ 4.125 to $13.25
Granted 8 $ 8.75 to $ 9.375
Exercised (15) $ 7.00
---
Outstanding, December 31, 1992 119 $ 4.125 to $13.25
Granted 8 $ 4.50
Exercised (57) $ 7.00
Lapsed (8) $13.125 to $13.25
---
Outstanding, December 31, 1993 62 $ 4.125 to $ 9.375
Granted 8 $ 3.75 to $ 4.50
Exercised - $ -
Lapsed (8) $ 5.00 to $ 5.250
---
Outstanding, December 31, 1994 62 $ 3.75 to $ 9.375
===
</TABLE>
In July, 1991, the Company granted options to three non-employee directors
of the Company to acquire a total of 30 shares of the Company's Common
Stock at $5.00 per share (the fair market value at date of grant). At
December 31, 1994, 20 options are exercisable and expire ten years from
the grant date.
In addition, in April, 1993, the Company granted a warrant to the Medical
Retro Design minority interest holder to acquire 150 shares of the
Company's common stock at $6.625 per share (the fair market value at date
of grant). These options are exercisable and expire over a five-year
period from such date.
During 1994, the Chairman of the Board issued options for 440 of his
shares at fair market value of $5.74 to the newly appointed Chief
Executive Officer.
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the "ESOP")
covering employees of the Company who meet minimum age and length of
service requirements. The ESOP enables eligible employees to acquire a
proprietary interest in the Company. As of December 31, 1994, and
December 31, 1993, 500 and 400 shares, respectively, of the stock owned by
the ESOP were allocated to employees. Based on the number of shares
planned to be allocated for the year, ESOP expense recorded during 1994,
1993, and 1992 amounted to $476, $594 and $590, including $5, $55 and $90
of interest expense related to a loan agreement with a bank, respectively.
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 1994,
1993 and 1992, $314, $308 and $318, respectively, was charged to expense
for matching contributions.
NOTE 10. Commitments and Contingencies
On February 21, 1992, Novamedix Limited filed a lawsuit against the
Company in the United States District Court for the Western District of
Texas. Novamedix holds the patent rights to the principal product which
directly competes with the PlexiPulse, which is marketed by KCI New
Technologies, Inc. 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 subsidiary claims. The
Plaintiff seeks injunctive relief and monetary damages. Discovery in this
case has been substantially completed. Although it is not possible to
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 effect on the
Company's financial statements.
The Company is party to several lawsuits generally incidental to its
business and is contesting adjustments proposed by the Internal Revenue
Service to prior years' tax returns. Provisions have been made in the
accompanying financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the disposition of
these items will not have a material effect on the Company's financial
statements.
See discussion of self-insurance program at Note (1) and leases at Note
(7).
TWENTY TWO
<PAGE> 25
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
NOTE 11. Unusual Items
During the third quarter of 1994, the Company recorded a gain from the
settlement of a patent infringement lawsuit brought against Support
Systems International, Inc. (SSI). The settlement was $84.75 million. Net
of legal expenses, this transaction added $81.6 million of pretax income
to the 1994 results. In addition, a $10.1 million pretax gain from the
sale of Medical Services was recognized. The Company recorded certain
other unusual items, primarily planned dispositions of under-utilized
rental assets and over-stocked inventories of $6.8 million.
A summary of unusual items follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
SSI settlement, net of legal fees $81,596 $ -
Gain from KCIMS sale (Note (2)) 10,121 -
Equipment and inventory write-downs (4,045) (4,850)
Other charges (2,804) (1,855)
------- --------
Unusual items in operating earnings $84,868 $ (6,705)
======= ========
</TABLE>
During the fourth quarter of 1993, the Company recorded unusual items of
$6.7 million. Adjustments to the carrying values of assets and
liabilities, primarily related to planned dispositions of under-utilized
rental assets and over-stocked inventories, totaling $4.8 million were
charged to unusual items. Unusual items also includes provisions of $900
relating to losses anticipated for the relocation of certain operations as
well as certain other severance costs. A provision for anticipated losses
of $1 million related to product liability claims was also charged to
unusual items when one of the Company's former insurance carriers was
placed into receivership.
NOTE 12. Segment and Geographic Information
The Company operates primarily in one industry segment: the distribution
of specialty therapeutic beds and rental medical devices to select health
care providers.
A summary of financial information by geographic area is as follows:
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
Total revenue:
Unaffiliated customers $223,202 $46,444 $ - $269,646
Intercompany transfers 5,489 - (5,489) -
-------- ------- --------- --------
Total $228,691 $46,444 $ (5,489) $269,646
======== ======= ========= ========
Operating earnings $117,368 $ 7,737 $ (1,027) $124,078
======== ======= ========= ========
Total assets:
Identifiable assets $156,248 $41,756 $ (8,514) $189,490
Corporate assets ======== ======= ========= 43,241
--------
Total assets $232,731
========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31, 1993:
Total revenue:
Unaffiliated customers
$229,301 $39,571 $ - $268,872
Intercompany transfers 3,644 - (3,644) -
-------- ------- --------- --------
Total $232,945 $39,571 $ (3,644) $268,872
======== ======= ========= ========
Operating earnings $ 14,941 $ 6,073 $ (479) $ 20,535
======== ======= ========= ========
Total assets:
Identifiable assets $244,495 $37,285 $ (7,487) $274,293
Corporate assets ======== ======= ========= 10,280
--------
Total assets $284,573
========
Year Ended December 31, 1992:
Total revenue:
Unaffiliated customers $238,464 $40,027 $ - $278,491
Intercompany transfers 3,891 - (3,891) -
-------- ------- --------- --------
Total $242,355 $40,027 $ (3,891) $278,491
======== ======= ========= ========
Operating earnings $ 49,222 $ 6,728 $ (838) $ 55,112
======== ======= ========= ========
Total assets:
Identifiable assets $246,949 $43,294 $ (10,291) $279,952
Corporate assets ======== ======= ========= 6,963
--------
Total assets $286,915
========
</TABLE>
Domestic intercompany transfers primarily represent shipments of equipment
and parts to international subsidiaries. These intercompany shipments are
made at transfer prices which approximate prices charged to unaffiliated
customers and have been eliminated from consolidated net revenues.
Corporate assets consist primarily of cash and cash equivalents.
NOTE 13. Quarterly Financial Data (Unaudited)
The unaudited consolidated results of operations by quarter are summarized
below:
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
Revenue $72,084 $67,751 $70,239 $59,572 (a)
Operating earnings 9,161 8,035 93,202 13,680 (b)
Net earnings 4,264 3,173 48,641 8,305 (b)
Earnings per common and
common equivalent share $ 0.10 $ 0.07 $ 1.10 $ 0.19 (b)
======= ======= ======= =======
Year Ended December 31, 1993:
Revenue $69,963 $63,594 $67,803 $67,512
Operating earnings (loss) 11,345 4,671 5,305 (786) (b)
Net earnings (loss) 6,192 1,503 1,324 (957) (b)
Earnings per common and
common equivalent share $ 0.14 $ 0.03 $ 0.03 $ (0.02) (b)
======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31, 1992:
Revenue $69,280 $66,818 $70,282 $72,111
Operating earnings (loss) 14,257 12,659 13,951 14,245
Net earnings 7,208 6,320 7,305 7,679
Earnings per common and common
equivalent share $ 0.16 $ 0.14 $ 0.16 $ 0.17
======= ======= ======= =======
</TABLE>
(a) See discussion of acquisitions/dispositions at Note (2).
(b) See discussion of unusual items at Note (11) and extraordinary item at
Note (6).
TWENTY THREE
<PAGE> 26
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
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, 1994 and 1993, and the
related consolidated statements of earnings, cash flows and capital accounts
for each of the years in the three-year period ended December 31, 1994. 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, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for income taxes in 1993, and its method of
applying overhead to inventory in 1994.
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 14, 1995
TWENTY-FOUR
<PAGE> 27
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS OPERATING DIVISION EXECUTIVES
<S> <C> <C>
JAMES R. LEININGER, M.D. JAMES R. LEININGER, M.D. CHRISTOPHER M. FASHEK
Chairman of the Board of Directors Chairman of the Board of Directors President
KCI Therapeutic Services, Inc.
RAYMOND R. HANNIGAN RAYMOND R. HANNIGAN
President and Chief Executive Officer President and Chief Executive Officer FRANK DI LAZZARO
President
PETER A. LEININGER, M.D. PETER A. LEININGER, M.D. KCI International, Inc.
Senior Vice President and Senior Vice President and
Chief Administrative Officer Chief Administrative Officer JOSH H. LEVINE
Vice-President and General Manager
SAM A. BROOKS BIANCA A. RHODES KCI Home Care Division
Chairman, National Imaging Affiliates, Inc. Senior Vice President-Finance
and Chief Financial Officer DANIEL R. PUCHEK
FRANK A. EHMANN President
Partner, RCS Health Care Partners, L.P. DENNIS E. NOLL KCI New Technologies, Inc.
Vice President-Legal,
BERNHARD T. MITTEMEYER, M.D. General Counsel and Secretary
Executive Vice President and Provost,
Texas Tech University FRANK DI LAZZARO
Health Science Center Vice President-Marketing
JOHN H. VRZALIK
Vice President-Engineering
</TABLE>
________________________________________________________________________________
INVESTOR INFORMATION
<TABLE>
<S> <C> <C>
TRANSFER AGENT AND REGISTRAR LISTED INVESTOR INFORMATION
Shareholder Services Division NASDAQ National Market System Bianca A. Rhodes
First National Bank of Boston Senior Vice President-Finance
P.O. Box 1865 TICKER SYMBOL and Chief Financial Officer
Boston, MA 02105 210-524-9000
KNCI
AUDITORS MARKET PRICES OF COMMON STOCK FORM 10K
KPMG Peat Marwick 1993 High Low A copy of the Company's Annual Report
112 East Pecan ------------------------------------- on Form 10K as filed with the Securities
Suite 2400 March 31 10.375 7.000 and Exchange Commission is available
San Antonio, TX 78205 June 30 7.250 4.250 without charge from Investor Relations,
September 30 4.750 3.250 Kinetic Concepts, Inc., 8023 Vantage
December 31 5.250 3.625 Drive, P.O. Box 659508, San Antonio,
Trademarks TX 78265-9508
1994 High Low
RotoRest, FirstStep, HomeKair, -------------------------------------
NuTech, Continuum of Care, TriaDyne, March 31 4.250 3.750 ANNUAL MEETING
BariKare, AirWorks Plus, Kinetic June 30 4.250 3.375
Therapy and PlexiPulse are trade- September 30 5.750 3.500 The Company's annual meeting of share-
marks of Kinetic Concepts, Inc. December 31 6.875 5.375 holders will be held on Tuesday, May 9,
1995 at 9:00 am (local time) at:
Embassy Suites Hotel , 7750 Briaridge,
(c) Copyright 1995 Kinetic Concepts, Inc. San Antonio, TX 78230
</TABLE>
<PAGE> 1
EXHIBIT 21.1
KCI SUBSIDIARIES
A. Kinetic Concepts, Inc., a Texas corporation
Subsidiaries:
1. KCI Therapeutic Services, Inc., a Delaware corporation
2. KCI International, Inc., a Delaware corporation
a. KCI Medical Canada Inc., a Canadian corporation
b. Mediscus International Limited, a United Kingdom corporation
(i) KCI Medical United Kingdom Limited, a United Kingdom
corporation
c. Mediscus Products Limited, a United Kingdom corporation
(i) Home-Care Medical Products Limited, a United Kingdom
corporation
(ii) KCII Medical Limited, a United Kingdom corporation (formerly
Lingard Leasing Limited), (Lingard Plastics Ltd. dissolved)
d. KCI Medical Holding GMBH (formerly) KCI Medical GmbH, a Federal
Republic of Germany GmbH and (formerly KCI Handels GmbH)
(i) KCI Mediscus Produkte GmbH
(ii) KCI Therapy Products (formerly Verwalt)
e. Equipement Medical KCI, S.A.R.L., a French corporation
f. KCI Medical B.V., a Netherlands corporation
g. KCI-Mediscus AG, a Swiss corporation
h. Mediscus medizinisch-technische Gerate Handelsgesellschaft
mbH Austria
i. KCI Europe Holding B.V., a Netherlands corporation
j. KCI International-Virgin Islands, Inc., a Virgin Islands
corporation
k. KCI Medica Espana, S.A., a Spanish corporation
l. KCI Medical Australia PTY, Ltd., an Australian corporation
m. KCI Medical S.r.l., an Italian corporation
[KCI-Mediscus Klinikhausstattung Gesellschaft mbH, an Austrian
corporation - DISSOLVED IN 1994]
3. KCI Financial Services, Inc., a Delaware corporation
4. KCI New Technologies, Inc., a Delaware corporation (d/b/a NuTech)
5. KCI Properties Limited, a Texas limited liability company
6. KCI Real Property Limited, a Texas limited liability company,
(d/b/a Premier Properties)
7. Medical Retro Design, Inc., a Delaware corporation
8. KCI Clinical Systems, Inc., a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Kinetic Concepts, Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 33-26673 and No. 33-26674) on Form S-8 of Kinetic Concepts, Inc.
and subsidiaries (the "Company") of our report dated February 14, 1995,
relating to the consolidated balance sheets of the Company as of
December 31, 1994 and 1993, and the related consolidated statements of
earnings, capital accounts, and cash flows for each of the years in the
three-year period ended December 31, 1994, which report appears in the
1994 annual report to shareholders which is incorporated by reference
in the December 31, 1994 annual report on Form 10-K of the Company and
our report dated February 14, 1995, relating to the related financial
statement schedules as of and for each of the years in the three-year
period ended December 31, 1994, which report appears in the December
31, 1994 annual report on Form 10-K of the Company.
Our report refers to a change in the method of accounting for income
taxes in 1993 and a change in the method of applying overhead to
inventory in 1994.
KPMG Peat Marwick LLP
San Antonio, Texas
March 29, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE RATE> 1
<CASH> 43,240,637
<SECURITIES> 0
<RECEIVABLES> 78,426,773
<ALLOWANCES> (8,905,572)
<INVENTORY> 18,167,426
<CURRENT-ASSETS> 135,403,429
<PP&E> 162,293,117
<DEPRECIATION> (110,935,947)
<TOTAL-ASSETS> 232,730,680
<CURRENT-LIABILITIES> 44,672,029
<BONDS> 0
<COMMON> 43,291
0
0
<OTHER-SE> 185,379,132
<TOTAL-LIABILITY-AND-EQUITY> 232,730,680
<SALES> 40,813,092
<TOTAL-REVENUES> 269,645,837
<CGS> 19,387,769
<TOTAL-COSTS> 230,435,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,335,000
<INTEREST-EXPENSE> 4,527,760
<INCOME-PRETAX> 119,550,103
<INCOME-TAX> 55,949,220
<INCOME-CONTINUING> 63,600,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 741,917
<NET-INCOME> 64,382,485
<EPS-PRIMARY> $1.46
<EPS-DILUTED> $1.44
</TABLE>
