SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1891727
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
------------------------------- --------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 43,950,082 shares as of July 31, 1996
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
1996 1995
---------- -----------
Assets: (unaudited)
-------
Current assets:
Cash and cash equivalents........... $ 64,866 $ 52,399
Accounts receivable, net............ 56,308 56,032
Inventories......................... 20,647 18,854
Note receivable from principal
shareholder....................... -- 10,291
Prepaid and other assets............ 7,826 4,865
-------- -------
Total current assets............. 149,647 142,441
-------- --------
Net property, plant and equipment..... 63,042 62,276
Other notes receivable, net........... 3,187 3,187
Goodwill, net......................... 14,192 13,968
Other assets, net..................... 21,883 21,854
-------- --------
$251,951 $243,726
======== ========
Liabilities and Shareholders' Equity:
-------------------------------------
Current liabilities:
Accounts payable.................... $ 2,636 $ 2,512
Accrued expenses.................... 26,542 26,490
Income taxes payable................ 4,253 4,026
-------- --------
Total current liabilities........ 33,431 33,028
Capital lease obligations............. 574 --
Deferred income taxes, net............ 1,269 374
-------- --------
35,274 33,402
-------- --------
Shareholders' equity:
Common stock; issued and outstanding
44,192 in 1996 and 44,331 in 1995. 44 44
Additional paid-in capital.......... 6,036 12,123
Retained earnings................... 210,961 197,290
Cumulative foreign currency translation
adjustment........................ (41) 1,052
Notes receivable from officers...... (323) (185)
-------- --------
216,677 210,324
-------- --------
$251,951 $243,726
======== ========
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- --------
Revenue:
Rental and service...... $54,095 $50,432 $110,885 $ 98,854
Sales and other......... 10,177 9,358 20,974 17,963
------- ------- -------- --------
Total revenue......... 64,272 59,790 131,859 116,817
Rental expenses........... 35,611 34,525 72,857 67,952
Cost of goods sold........ 3,786 4,313 7,829 8,229
------- ------- -------- --------
39,397 38,838 80,686 76,181
------- ------- -------- --------
Gross profit.......... 24,875 20,952 51,173 40,636
Selling, general and
administrative expenses. 12,154 12,235 24,711 22,342
------- ------- -------- --------
Operating earnings.... 12,721 8,717 26,462 18,294
Net interest income....... 904 557 1,874 1,090
------- ------- -------- --------
Earnings before income
taxes............. 13,625 9,274 28,336 19,384
Income taxes.............. 5,438 3,558 11,335 7,570
------- ------- -------- --------
Net earnings.......... $ 8,187 $ 5,716 $ 17,001 $ 11,814
======= ======= ======== ========
Earnings per common and
common equivalent
share............. $ 0.18 $ 0.13 $ 0.37 $ 0.26
======= ======= ======== ========
Shares used in earnings
per share
computations...... 46,459 45,242 46,015 45,183
======= ======= ======== =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
---------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net earnings................................ $ 17,001 $ 11,814
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization........... 11,709 11,442
Provision for uncollectible accounts
receivable............................ 1,187 165
Loss on KCIFS disposition............... -- 2,933
Change in assets and liabilities:
Decrease (increase) in accounts
receivable.......................... (1,736) 3,104
Decrease in notes receivable.......... -- 5,049
Increase in inventories............... (1,983) (3,188)
Increase in prepaid and other assets.. (2,395) (950)
Increase in accounts payable.......... 597 1,623
Decrease in accrued expenses.......... (99) (1,059)
Increase (decrease) in income taxes
payable............................. 630 (5,584)
Increase in deferred income taxes..... 492 2,714
------ ------
Net cash provided by operating
activities........................ 25,403 28,063
------ ------
Cash flows from investing activities:
Additions to property, plant, and
equipment................................. (12,480) (16,522)
Increase in inventory to be converted
into equipment for short-term rental...... (150) (2,750)
Dispositions of property, plant, and
equipment................................. 750 425
Proceeds from KCIFS disposition............. -- 7,182
Decrease in finance lease receivables, net.. -- 339
Decrease in note receivable from principal
shareholder............................... 10,000 --
Increase in other assets.................... (1,340) --
------ ------
Net cash used by investing activities (3,220) (11,326)
------ ------
Cash flows from financing activities:
Repayments of note payable and long-term
obligations................................ -- (853)
Proceeds from the exercise of stock options.. 4,276 1,180
Purchase and retirement of treasury stock.... (10,363) --
Cash dividends paid to shareholders.......... (3,331) (3,309)
Other........................................ (138) --
------- -------
Net cash used by financing activites. (9,556) (2,982)
------- -------
Effect of exchange rate changes on cash and
cash equivalents............................. (160) 803
------- -------
Net increase in cash and cash equivalents...... 12,467 14,558
Cash and cash equivalents, beginning of year... 52,399 43,241
------- -------
Cash and cash equivalents, end of period....... $ 64,866 $ 57,799
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the first six months for:
Interest................................... 82 254
Income taxes............................... 6,160 8,492
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the accounts
of Kinetic Concepts, Inc. and all subsidiaries (the "Company").
The foregoing financial information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of
the financial position and results of operations for the interim
periods presented. Interim period operating results are not
necessarily indicative of the results to be expected for the
full fiscal year.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Inventories are
comprised of the following (in thousands):
June 30, December 31,
1996 1995
---------- ------------
Finished goods.......... $ 3,892 $ 2,890
Work in process......... 2,763 1,040
Raw materials, supplies
and parts............. 19,392 20,174
------- -------
26,047 24,104
Less amounts expected to be
converted into equipment
for short-term rental... 5,400 5,250
------- -------
Total inventories.. $20,647 $18,854
======= =======
(3) SHARES USED IN EARNINGS PER COMMON AND
--------------------------------------
COMMON EQUIVALENT SHARE COMPUTATIONS
------------------------------------
The weighted average number of common and common equivalent
shares used in the computation of earnings per share is as
follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- -------- -------
Average outstanding
common shares...... 44,307 44,206 44,332 44,102
Average common equivalent
shares-dilutive effect
of option shares.... 2,152 1,036 1,683 1,081
------ ------ ------ ------
Shares used in earnings
per share computations 46,459 45,242 46,015 45,183
====== ====== ====== ======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Earnings per common and common equivalent share are computed by
dividing net earnings 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.
(4) 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.
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.
Novamedix 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 business, financial condition or results of
operations.
The Company is party to several lawsuits generally incidental to
its business, including product claims and is contesting certain
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 business, financial condition
or results of operations.
The Company maintains an investment in a Limited Partnership
which invests in securities, primarily in small to mid-sized
companies which have or may have the potential to provide
quality products or services to healthcare organizations and
providers. The Company's investment as of December 31, 1995 was
$150,000; however, the Company is committed to invest a maximum
of $1.5 million with the Partnership. The committed balance is
callable by the General Partner, as needed by the Partnership,
on 30 days prior written notice.
(5) NEW PRONOUNCEMENTS
------------------
Effective with the first quarter of 1996, the Company has
adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of." Statement 121 requires that
long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Adoption of this new
pronouncement had no effect on the financial statements for the
period.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," effective for fiscal
years beginning after December 15, 1995. The new statement
allows companies to continue accounting for stock-based
compensation under the provisions of APB Opinion 25 "Accounting
for Stock Issued to Employees"; however, companies are
encouraged to adopt a new accounting method based on the
estimated fair value of employee stock options.
Companies that do not follow the new fair value based method
will be required to provide expanded disclosures in footnotes
to the financial statements. The Company has elected to
continue to account for its employee stock compensation plans as
prescribed under APB Opinion 25 and will make the pro forma
footnote disclosure of net income and earnings per share
required by Statement 123 beginning with its financial
statements for the year ended December 31, 1996.
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic
Concepts, Inc. and subsidiaries as of June 30, 1996, and the related
condensed consolidated statements of earnings for the three and six
month periods ended June 30, 1996 and 1995 and the condensed
consolidated statements of cash flows for the six month periods ended
June 30, 1996 and 1995. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical review procedures to financial data and making inquiries
of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Kinetic
Concepts, Inc. and subsidiaries as of December 31, 1995, and the
related consolidated statements of earnings, capital accounts, and
cash flows for the year then ended (not presented herein); and in our
report dated February 6, 1996, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1995, is fairly presented, in all
material respects, in relation to the consolidated balance sheet from
which it has been derived.
/S/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
July 16, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Second Quarter of 1996 Compared to Second Quarter of 1995
- ---------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the second quarter of the
prior year ($ in thousands):
Three Months Ended June 30,
_______________________________________
Variance
Revenue Relationship Increase (Decrease)
-------------------- ------------------
1996 1995 $ Pct
--------- -------- -------- ------
Revenue:
Rental and service.... 84% 84% $ 3,663 7%
Sales and other....... 16% 16% 819 9%
---- ---- ------
100% 100% 4,482 7%
Rental expenses......... 55% 58% 1,086 3%
Cost of goods sold...... 6% 7% (527) (12%)
---- ---- -----
Gross profit.......... 39% 35% 3,923 19%
Selling, general and
administrative expenses 19% 20% (81) (1%)
---- ---- -----
Operating earnings...... 20% 15% 4,004 46%
Net interest income....... 1% 1% 347 62%
---- ---- -----
Earnings before income
taxes. .............. 21% 16% 4,351 47%
Income taxes............... 8% 6% 1,880 53%
---- ---- -----
Net earnings............ 13% 10% $2,471 43%
==== ==== =====
--------------------------------------------------------------------
The Company's revenue is derived from four primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Three months ended
June 30,
------------------------
1996 1995
-------- --------
Acute/Extended......... $41.1 $35.9
HomeCare............... 2.6 3.1
International.......... 16.9 15.8
Medical Devices........ 3.5 4.3
Other.................. .2 .7
---- ----
$64.3 $59.8
==== ====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the second quarter of 1996 increased by $4.5
million, or 7%, to $64.3 million from $59.8 million in the second
quarter of 1995. Revenue from the Company's specialty patient
surface business was $43.7 million, up $4.7 million, or 12%, from the
second quarter of 1995. This increase was due to the success of the
TriaDyne specialty bed and the addition of various national accounts
which are contributing to market share gains. In addition, the
company experienced strong growth in patient days in the extended
care (nursing and rehabilitation) segment. Revenue in the Home Care
segment was down slightly from the prior-year period although
patient days were up from the second quarter of 1995. This decrease
resulted, in part, from the Company's shift to an independent dealer
network beginning in 1995. Revenue received from dealers is less
than that which the Company would receive from direct sales because
revenue from dealers is net of dealer service expenses, however, the
dealer network provides access to a larger patient population. In
addition, the Company believes sales in this segment slowed in
anticipation of the introduction of a new product, the TriCell, a
high-end, multi-featured overlay product specifically designed for
the home care market.
Revenue from the Company's international operations was $16.9
million, up 7% from the second quarter of 1995, despite unfavorable
currency rate fluctuations. Excluding the effect of currency
fluctuations, revenue increased by 19% compared to the 1995 quarter.
Increased market penetration and increased sales contributed towards
the higher revenue. Revenue from medical device operations
decreased 19% to $3.5 million in the second quarter of 1996 due
primarily to a shift in market demand from rentals to sales. During
this transition, product "trials" are underway which should begin to
produce higher revenue in the second half of the year.
Rental expenses were 66% of rental revenue in the second quarter
of 1996 compared to 68% in the second quarter of 1995. This decrease
is primarily attributable to the increase in rental revenue, as the
majority of rental expenses are relatively fixed, combined with
operational efficiencies attributable, in part, to the new Genesis
operations management system.
Gross profit increased $3.9 million, or 19%, to $24.9 million in
the second quarter of 1996 from $21.0 million in the second quarter
of 1995 due to the increase in revenue, controlled growth in rental
expenses and improved sales margins.
Selling, general and administrative expenses of $12.2 million
approximated the 1995 quarter. As a percentage of total revenue,
selling, general and administrative expenses were at 19% in the
second quarter of 1996 as compared with 20% in the second quarter of
1995. The 1995 quarter included a $2.9 million charge for the loss
on the sale of the Financial Services division in June 1995. On a
comparable basis, the increased spending in 1996 was due primarily to
certain investments, e.g. new marketing programs and information
systems.
Operating earnings for the period increased $4.0 million, or
46%, to $12.7 million compared to $8.7 million in the prior-year
quarter resulting largely from revenue growth.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Net interest income for the three months ended June 30, 1996 was
$900,000 compared to $560,000 in the prior year. This increase was
due to interest recognized on a note receivable obtained in a sale of
assets. Interest on this note is paid quarterly, in arrears,
beginning in the second quarter of 1996.
The Company's effective income tax rate in the second quarter of
1996 was 40%, up slightly from the prior year due primarily to an
increase in the state income tax rate.
Net earnings increased $2.5 million, or 43%, to $8.2 million in
the second quarter of 1996 from $5.7 million in the second quarter of
1995. This increase was due to the relative decrease in rental
expenses, increased net interest income and the change in revenue as
discussed above.
First Six Months of 1996 Compared to First Six Months of 1995
- -------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first six months of the
prior year ($ in thousands):
Six Months Ended June 30,
__________________________________________
Variance
Revenue Relationship Increase(Decrease)
-------------------- ------------------
1996 1995 $ Pct
--------- --------- --------- --------
Revenue:
Rental and service.. 84% 85% $ 12,031 12%
Sales and other..... 16% 15% 3,011 17%
---- ---- -------
100% 100% 15,042 13%
Rental expenses....... 55% 58% 4,905 7%
Cost of goods sold.... 6% 7% (400) ( 5%)
---- ---- ------
Gross profit..... 39% 35% 10,537 26%
Selling, general and
administrative expenses 19% 19% 2,369 11%
---- ---- ------
Operating earnings 20% 16% 8,168 45%
Net interest income... 1% 1% 784 72%
---- ---- ------
Earnings before
income taxes... 21% 17% 8,952 46%
Income taxes.......... 8% 7% 3,765 50%
---- ---- ------
Net earnings..... 13% 10% $ 5,187 44%
==== ==== =======
---------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
The Company's revenue is derived from four primary markets. The
following table sets forth the amount of revenue derived from each of
these markets for the periods indicated ($ in millions):
Six months ended
June 30,
-----------------
1996 1995
-------- -------
Acute/Extended........ $ 83.3 $ 70.2
HomeCare.............. 6.3 6.8
International......... 34.2 29.5
Medical Devices....... 7.9 8.0
Other (1)............. .2 2.3
----- -----
$131.9 $116.8
===== =====
(1) Consists of revenue of KCIFS, MRD and other sales.
Total revenue for the first six months of 1996 increased by
$15.0 million or 13% to $131.9 million. Revenue from the Company's
specialty patient surface business was $89.6 million, up $12.6
million, or 16%, from the six months end June 30, 1995. This increase
was due to new product introductions, primarily the TriaDyne and
BariKare, combined with increased patient days in the extended care
market due, in part, to the addition of various national accounts.
Revenue in the Home Care segment decreased slightly from the prior-
year period, however, patient days were up from the first six
months of 1995. Revenue from the Company's international operations
was $34.2 million, up 16% from the six months ended June 30, 1995.
On a local currency basis, excluding exchange rate fluctuations,
revenue from the international segment increased nearly 23%.
Increased market penetration and increased sales contributed towards
the higher revenue. Revenue from medical device operations in the
first six months of 1996 was comparable to the prior year.
Rental expenses were 66% of total rental revenue in the six
months ended June 30, 1996 compared to 69% in the six months of 1995.
This decrease is primarily attributable to the increase in rental
revenue, as the majority of rental expenses are relatively fixed,
combined with certain operating efficiencies.
Gross profit increased $10.5 million, or 26%, to $51.2 million
in the six months ended June 30, 1996 due to the increase in revenue,
controlled growth in rental expenses and improved sales margins.
Selling, general and administrative expenses increased $2.4
million, or 11%, to $24.7 million in the first six months of 1996
from $22.3 million in the first six months of 1995. As a percentage
of total revenue, selling, general and administrative expenses were
at 19% in the six months ended June 30, 1996 as compared with 19% in
the six months of 1995.
Operating earnings for the period increased $8.2 million, or
45%, to $26.5 million compared to $18.3 million in the prior-year
resulting largely from the above-mentioned revenue growth.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Net interest income for the six months ended June 30, 1996 was
$1.9 million compared to $1.1 million in the prior year. This
increase was due to interest recognized on a note receivable obtained
in a sale of assets. Interest on this note is paid quarterly, in
arrears , beginning in 1996.
The Company's effective income tax rate in the first six months
ended June 30, 1996 was 40% as compared to 39% in the first six
months of 1995.
Net earnings increased $5.2 million, or 44%, to $17.0 million in
the first six months of 1996 from $11.8 million in the first six
months of 1995. This increase was due to the relative decrease in
rental expenses and the change in revenue as discussed above.
Impact of Inflation
- -------------------
The Company does not believe that inflation has had a material
impact on sales or expenses during the period. Increases in labor,
raw materials or other operating costs, however, could significantly
affect the Company's operations. The majority of these costs are
relatively fixed in nature and the Company has generally been able to
maintain margins despite changing prices or reimbursement rates.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the Company
during the six months ended June 30, 1996 and other factors resulted
in changes to the Company's balance sheet as follows:
Inventory at June 30, 1996 increased $1.7 million, or 10%, to
$20.6 million from $18.9 million at December 31, 1995 primarily due
to new product introductions and international market expansion. In
late 1995, the Company began operations in both Italy and Sweden
while inventory levels in Germany increased to support strong sales
demand of TheraCare and First Step mattress overlays. In addition,
during the second quarter, the Company acquired a small mattress
overlay manufacturer in the United Kingdom, Astec Medical Ltd., which
carried inventory of approximately $400,000.
The note receivable from principal shareholder at December 31,
1995 of $10.3 million, including accrued interest, was collected in
full during the first quarter of 1996.
Net property, plant and equipment at June 30, 1996 increased
$700,000, or 1%, to $63.0 million from $62.3 million at December 31,
1995 due to additions to rental equipment and computer systems in
excess of depreciation and dispositions. Capital expenditures were
$11.9 million during the first six months of 1996 as the Company
invested in new products for its rental fleet and new computer
systems.
Additional paid-in capital decreased $6.1 million, or 50%,
during the first half of 1996 due primarily to the purchase and
retirement of approximately 680,000 shares of common stock under a
program which authorizes the Company to purchase up to 3 million
shares of its stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends
- -------------
The health care industry is facing various challenges, including
increased pressure on health care providers to control costs, the
accelerating migration of patients from acute care facilities into
extended care (e.g. skilled nursing facilities and rehabilitation
centers) and home care settings, the consolidation of health care
providers and national and regional group purchasing organizations
and the growing demand for clinically proven and cost effective
therapies. In addition, Congress continues to debate federal health
care expenditures in an attempt to slow the rate of growth and
balance the federal budget. As a result, the Company believes that
health care providers will continue to experience heightened cost
control pressures.
Industry trends including pricing pressures, the consolidation
of health care providers and national and regional group purchasing
organizations and a shift in market demand toward lower-priced
products such as mattress overlays have had the impact of reducing
the Company's average daily rental rates on its products. These
industry trends, together with the increasing migration of patients
from acute care to extended and home care settings have had an effect
of reducing the Company's historical revenue from acute care
facilities. The Company expects these industry trends to continue.
The Company has addressed these trends by increasing its marketing
efforts beyond its existing base of more than 1000 acute care
hospitals to market to an additional 2000 medium to large hospitals
in which the Company has a relatively small presence. The Company
further believes that the introductions of the TriaDyne and BariKare
beds have enabled it to further penetrate this market.
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will continue
because certain U.S. health care providers are purchasing products
that are less expensive and easier to maintain such as medical
devices, mattress overlays and mattress replacement systems. In
addition, international health care providers tend to purchase
products more often than U.S. health care providers, and the
Company's revenue from international operations represents an
increasing portion of the Company's total revenue.
Legal Proceedings
- -----------------
The Company is party to several lawsuits arising in the ordinary
course of 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. See "Item 1.
Financial Statements". In the opinion of management, the disposition
of these items will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain liability claims pending for which provision
has been made in the Company's financial statements. Management
believes that resolution of these claims will not have a material
adverse effect on the Company's business, financial condition or
results of operations. The Company has not experienced any
significant losses due to product liability claims and currently
maintains umbrella liability insurance coverage.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1996, the Company generated
net cash provided by operating activities of $25.4 million compared
to $28.1 million in the prior year period. At June 30, 1996, cash
and cash equivalents totaling $64.9 million were available for
general corporate purposes. Additionally, the Company maintains a
Credit Agreement with a bank as an agent for itself and certain other
financial institutions. The Credit Agreement currently permits
borrowings of up to $50 million. At June 30, 1996, the entire amount
of the Credit Agreement was available. The Company believes that
current cash reserves combined with operating cash flows and available
credit facilities during the next twelve month period will be sufficient
to provide for new investments, e.g., business acquisitions, technology
or equipment, and any working capital needed during the period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1996 Annual Meeting of the Shareholders of Kinetic Concept, Inc.
was held at 9:00 a.m. on May 14, 1996. The following matters were
acted upon by the shareholders at the annual meeting:
1. Sam A. Brooks, Frank A. Ehmann, Raymond R. Hannigan, James
R. Leininger, M.D., Peter A. Leininger, M.D., and Bernhard
T. Mittemeyer, M.D. were each elected to serve as Directors
of the Company until the 1997 Annual Meeting of
Shareholders and until their successors were duly elected
and qualified. With respect to Mr. Brooks' election, there
were 42,181,455 votes for approval and 174,990 votes
against approval. With respect to Mr. Ehmann's election,
there were 42,171,400 votes for approval and 185,045 votes
against approval. With respect to Mr. Hannigan's election,
there were 42,165,555 votes for approval and 190,890 votes
against approval. With respect to Dr. James Leininger's
election, there were 42,163,905 votes for approval and
192,540 votes against approval, no abstentions and no
broker non-votes. With respect to Dr. Peter Leininger's
election, there were 42,168,555 votes for approval and
187,890 votes against approval. With respect to Dr.
Mittemeyer's election there were 42,179,155 votes for
approval and 177,290 votes against approval. No
shareholders abstained in the election of the directors and
there were no broker non-votes.
2. The appointment of KPMG Peat Marwick as the Company's
auditors for 1996 was approved. There were 42,300,487
votes for approval, 20,490 votes against approval, 35,468
abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------- -----------
15 Filed herewith Letter from KPMG
Peat Marwick LLP
dated August 12, 1996
27 Filed herewith Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /S/ JAMES R. LEININGER, M.D.
----------------------------
James R. Leininger, M.D.
Chairman of the Board
By: /S/ RAYMOND R. HANNIGAN
----------------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /S/ BIANCA A. RHODES
----------------------------
Bianca A. Rhodes
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: August 12, 1996
Kinetic Concepts, Inc.
San Antonio, Texas
Gentlemen:
Re: Registration Statement Nos. 33-26673, 33-26674
With respect to the subject registration statements,
we acknowledge our awareness of the use therein of our
report dated July 16, 1996 related to our review of
interim financial information.
Pursuant to Rule 436 (c) under the Securities Act of
1933, such report is not considered a part of a
registration statement prepared or certified by an
accountant or a report prepared or certified by an
accountant within the meaning of sections 7 and 11 of the
Act.
Very truly yours,
/S/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
August 12, 1996
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