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, 1995
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.
(Exact name of registrant as specified in its charter)
Texas 74-1891727
(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, TX 78230 (210) 524-9000
(Address of principal executive offices (Registrant's telephone number)
and zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(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 _____
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, 1996 was approximately
$284,211,068.00.
As of March 1, 1996, there were 44,404,588 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, 1995 (in Parts I
and II) and (b) Definitive Proxy Statement dated March 28, 1996 (the
"Proxy Statement") relating to the Company's 1995 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.
FORM 10-K TABLE OF CONTENTS
PART I PAGE
Item 1. Business.................................... 3
Item 2. Properties.................................. 14
Item 3. Legal Proceedings........................... 14
Item 4. Submission of Matters to a Vote
of Security Holders......................... 15
Item 4a. Executive Officers of the Registrant........ 15
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters............. 18
Item 6. Selected Financial Data..................... 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8. Financial Statements and
Supplementary Data.......................... 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...... 18
PART III
Item 10. Directors and Executive Officers
of the Registrant........................... 19
Item 11. Executive Compensation...................... 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 19
Item 13. Certain Relationships and Related
Transactions................................ 19
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................... 19
Signatures............................... 21
PART I
Item 1. Business
General
Kinetic Concepts, Inc. (the "Company" or "KCI") designs,
manufactures, markets and distributes therapeutic products,
primarily specialty hospital beds, mattress overlays and mattress
replacement systems, that treat and prevent the complications of
immobility. By preventing these complications or accelerating the
healing process, the Company's products and services can
significantly reduce the cost of patient care while improving
clinical outcomes.
From an initial base of specialty hospital beds designed for
and used almost exclusively in acute care hospitals, the Company
has broadened its existing product line and expanded its
distribution network to serve the extended and home care
settings. More recently, Kinetic Concepts has applied its
therapeutic expertise to develop innovative medical devices to
treat wounds and prevent deep vein thrombosis ("DVT"). The
Company has also developed a product line to aid in the care of
obese patients.
Founded by James R. Leininger, M.D., an emergency room
physician, to provide better care for his patients, the Company
was incorporated in Texas in 1976. The Company's executive
offices are located at 8023 Vantage Drive, San Antonio, Texas
78230, and its telephone number is (210) 524-9000.
The Company is organized into four operating divisions: KCI
Therapeutic Services, Inc. ("KCI Therapeutic Services" or
"KCTS"), KCI Home Care, KCI International, Inc. ("KCI
International") and KCI New Technologies, Inc. ("NuTech").
KCI Therapeutic Services. KCI Therapeutic Services provides
a complete line of therapeutic specialty support surfaces to
patients in acute and sub-acute facilities as well as extended-
care settings. This division consists of approximately 1000
personnel, many of which have a medical or clinical background.
Sales are generated by a sales force of more than 250 individuals
who are responsible for new accounts in addition to the
management and expansion of existing accounts. A portion of this
sales force is focused exclusively on either the extended care
market or the acute care market although the majority of the
sales force is responsible for sales across both settings.
KCI Therapeutic Services has a national 24-hour customer
service communications system which enhances its ability to
quickly and efficiently respond to its customers' needs 24 hours-
a-day, seven days-a-week. The Company distributes its specialty
patient support products to acute and extended care facilities
through a network of 147 domestic service centers. The KCTS
service centers are organized as profit centers and the general
managers who supervise the service centers are responsible for
both sales and service operations. Each center has an inventory
of beds and overlays which are delivered to the individual
hospitals on an as-needed basis. The service personnel also
assist in the placement of the patient on a support surface and
in the pick-up and maintenance of the beds, overlays, sheets and
accessories.
The KCTS sales and support staff is comprised of over 250
employees with medical or clinical backgrounds. The principal
responsibility of approximately 130 of these clinicians is making
product rounds and participating in treatment protocols. These
clinicians educate the hospital staff on issues related to
patient treatment, assist in the establishment of protocols and
accumulate outcome data related to the treatment of the patient.
The clinical staff makes approximately 150,000 patient rounds
annually. KCTS accounted for approximately 61% of the Company's
total revenue in 1995.
KCI Home Care. KCI Home Care rents and sells products that
address the unique demands of the home health care market. In
January 1995, KCI Home Care started a transition from a combined
direct/dealer distribution system to distributing its products
exclusively through independent dealers. The Company believes
that selling through independent dealers gives it access to a
larger patient population and improves the overall contribution
from this business segment despite a reduction in per patient
revenue. KCI Home Care accounted for approximately 6% of the
Company's total revenue in 1995.
KCI International. KCI International offers the Company's
complete product line in ten foreign countries including Germany,
Austria, the United Kingdom, Canada, France, the Netherlands,
Switzerland, Australia, Italy and Sweden. In 1996, the Swedish
offices will be expanded to serve all of Scandinavia. In
addition, relationships with independent distributors in Latin
America, the Middle East, Asia and Eastern Europe allow KCI
International to serve the demands of a growing global market.
KCI International accounted for approximately 25% of the
Company's total revenue in 1995.
NuTech. NuTech manufactures and markets the PlexiPulse and
PlexiPulse All-in-1 System through an independent sales
representative network and is in the process of developing a
dedicated sales force. NuTech accounted for approximately 7% of
the Company's total revenue in 1995.
On June 15, 1995, the Company sold its medical equipment
leasing company, KCI Financial Services ("KCIFS") for cash.
KCIFS served as the leasing agent for the Medical Services
Division, certain assets of which were sold in September 1994.
In addition, on March 27, 1995, the Company sold the assets of
Medical Retro Design, Inc. ("MRD), a subsidiary that refurbished
standard hospital beds and furniture.
Products
The Company's "Continuum of Care" provides innovative
products and therapies across multiple care settings. The
Company's products include Pressure Relief/Pressure Reduction
products, Kinetic Therapy products, Bariatric Care products and
medical devices.
Pressure Relief/Pressure Reduction. The Company's Pressure
Relief products include a variety of framed beds and overlays
such as the KinAir III, TheraPulse, FluidAir Plus, HomeKair,
HomeKair DMS, DynaPulse, FirstStep Plus, FirstStep Select and
AirWorks Plus. The KinAir III has been shown to provide effective
skin care therapy in the treatment of pressure sores, burns and
post operative skin grafts and flaps, and to help prevent the
formation of pressure sores and certain other complications of
immobility. The TheraPulse provides continuous pulsating action
which gently massages the skin to help promote capillary and
lymphatic 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 skin grafts or flaps, burns and pressure
sores. The HomeKair bed and HomeKair DMS overlay are low-cost
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 FirstStep is an overlay
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 overlays with upgraded
design features. AirWorks Plus is a low-cost overlay which
provides pulsating air columns which assist in redistributing
pressure for better skin care.
Kinetic Therapy. The U.S. Center for Disease Control defines
Kinetic Therapy as lateral rotation of at least 40 degrees on
each side. The Company believes Kinetic Therapy is essential to
the prevention or effective treatment of pneumonia in immobile
patients. The Company's Kinetic Therapy products include the
TriaDyne, RotoRest, RotoRest Delta, BioDyne II and Q2 Plus. The
TriaDyne, introduced in mid-1995, provides patients in acute care
settings with three distinct therapies on an air suspension
surface. The TriaDyne applies Kinetic Therapy by rotating the
patient up to 40 degrees to each side and provides an industry-
first feature of simultaneously turning the patient's torso and
lower body in opposite directions while keeping the patient
positioned in the middle of the bed. The TriaDyne can also
provide percussion therapy to the patient's chest to loosen
mucous buildup in the lungs and pulsating therapy to promote
capillary circulation. The TriaDyne is built on Stryker
Corporation's critical care frame, which is narrow and more
suited to an ICU environment. The TriaDyne offers several other
novel features not available on other products. The RotoRest
Delta is a specialty bed which can rotate a patient up to a 62
degree angle on each side for the treatment of pulmonary
complications and prevention of pneumonia. The RotoRest has been
shown to improve the care of patients suffering from multiple
trauma, spinal cord injury, severe pulmonary complications,
respiratory failure and DVT. 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 and
chronic neurological disorders.
Bariatric Care. The Company markets a line of therapeutic
support surfaces and aids for patients suffering from obesity, a
market that had previously been underserved. These products not
only provide the proper support needed by obese patients, but
also enable nurses to care for these patients in a dignified
manner. Moreover, treating obese patients is also a significant
staffing issue for many health care facilities because moving and
handling these patients increases the risk of worker's
compensation claims by nurses. The use of the Company's Bariatric
products enables hospital staff to treat and move obese patients
in a safer manner while utilizing fewer hospital personnel. The
most advanced product in this line is the BariKare, which can
serve as a chair, bed or X-ray table. This product is used
generally for patients weighing from 300 to 500 pounds but can be
used for patients who weigh up to 850 pounds. The Company
believes that the BariKare is the most advanced product of its
type available today.
Medical Devices. The Company also rents and sells various
products manufactured by the Company other than patient support
surfaces. These products include the PlexiPulse, PlexiPulse All-
in-1 System and The V.A.C.
The PlexiPulse and PlexiPulse All-in-1 System are non-
invasive vascular assist devices that aid venous return by
pumping blood from the lower extremities to help prevent DVT and
reestablish microcirculation. The pumping action is created by
compressing specific parts of the foot or calf with specially
designed inflatable cuffs that are connected to a separate pump
unit. The cuffs are wrapped around the foot and/or calf and are
inflated in timed increments by the pump. The inflation
compresses a group of veins in the lower limbs and boosts the
velocity of blood flowing back toward the heart. This increased
velocity has been proven to significantly decrease formation of
DVT in non-ambulatory post-surgical and post-trauma patients. The
PlexiPulse is effective in preventing DVT, reducing edema and
improving lower limb blood circulation.
The Company also markets The V.A.C., a non-invasive, active
wound closure therapy that utilizes negative pressure. The V.A.C.
promotes healing in wounds, pressure ulcers and grafts that
frequently do not respond to conventional treatment. Treatment
protocols with The V.A.C. call for a proprietary foam material to
be fitted and placed in or on top of a wound and covered with an
airtight, occlusive dressing. The foam is attached to a separate
vacuum pump. When activated, the vacuum pump creates a negative
pressure in the wound that draws the tissue together. This vacuum
action stimulates blood flow on the surface of the wound, reduces
edema and decreases bacterial colonization, all of which
stimulate healing. The dressing material is replaced every 48
hours and fitted to accommodate the decreasing size of the wound
over time. This is a significant improvement over the traditional
method for treating wounds which requires the nursing staff to
clean and dress the wound every 8 to 12 hours.
Product Support -- The Clinical Advantage
Kinetic Concepts believes that it has a clinical advantage
in the patient support surface market. The Company's Clinical
Advantage program includes a variety of support services and a
growing database of clinical and patient outcome studies.
Clinical service to acute care and extended care facilities
begins with the placement of the patient on a Company product.
Trained Company clinicians make more than 150,000 regular patient
contacts annually. This staff is comprised of over 250 employees
with medical or clinical backgrounds; the sole responsibility of
approximately 130 of these clinicians is making patient rounds
and participating in treatment protocols. The Company's clinical
staff also offers comprehensive product training and education to
nurses. This direct patient and nurse contact enables the Company
to assist the hospital in collecting valuable data. In order to
effectively collect and process the data, the Company has
developed Odyssey and Genesis, two proprietary software programs.
Odyssey is sold to hospitals to enable them to standardize
the information collected on wound treatment protocols. With
Odyssey, health care providers can institute a comprehensive
wound care management system within their facility. Facilities
use Odyssey to collect data on their wound patients and
periodically send statistical information to Kinetic Concepts for
processing. When processed and returned to the facility, Odyssey
can generate reports comparing each individual patient's healing
progress with those of similar patients on an internal, regional
or national basis. This information enables each facility to
tailor the protocols of its wound management system to the
specific needs of its patients.
Genesis is being developed and will be implemented so that
the Company's staff clinicians can assist customers in tracking
patient outcomes. The Company's clinicians make regular rounds to
evaluate patients being treated with Kinetic Concepts' products.
At the hospital's direction, information related to the use of
the Company's products will be entered into a central database on
a daily basis. Information in the database can then be analyzed
to determine the effectiveness of specific treatment protocols
when compared against a larger sample. When sufficient
statistical data is collected, the database will assist
physicians in determining treatment protocols based upon the
range of outcome for certain patient conditions.
The Company also has an active program of sponsoring
independent clinical research. The Company believes that it has
the most comprehensive collection of clinical research supporting
the medical efficacy of its products of any company in its
industry. These studies support the cost-effectiveness of the
Company's products and provide the necessary clinical outcome
data demanded by today's health care providers.
The Company believes that the evolving health care
marketplace is moving toward a prospective reimbursement system
which will require actuarial information to predict patient
outcomes in order to develop appropriate pricing structures. This
valuable patient data and clinical research is central to the
Company's marketing effort of demonstrating patient outcomes.
Competition
The Company believes that the principal competitive factors
within the patient support surfaces marketplace are product
efficacy, clinical outcomes, service and price. The Company
believes that a national presence with full distribution
capabilities is important to serve large, sophisticated national
and regional health care group purchasing organizations ("GPOs")
and providers.
The Company contracts with both proprietary and voluntary
GPOs. Proprietary GPOs own all of the hospitals which they
represent and, as a result, can insure complete compliance with
an executed national agreement. Voluntary GPOs negotiate
contracts on behalf of member hospital organizations but cannot
insure that their members will comply with the terms of an
executed national agreement. Approximately 46% of the Company's
total revenue during 1995 was generated under national agreements
with GPOs.
The Company competes on a national level with Hill-Rom and
on a regional and local level with numerous other companies. In
certain international markets, the Company competes principally
with Hill-Rom. NuTech competes primarily with Kendall
International in the foot and leg compression market.
Market Outlook
The Company believes that it is well positioned to take
advantage of the following factors affecting the market for
health care products and services:
Increased pressure on health care providers to control costs
and improve patient outcomes. The pressure to control health care
costs intensified during 1993 as a result of the health care
reform debate and continues as Congress attempts to slow the rate
of growth of health care costs as part of an effort to balance
the federal budget. While the exact amount and nature of the
health care budget cuts are not final, the Company believes that
health care providers will continue to experience increased cost
control pressures.
Accelerating migration of patients from acute care
facilities into extended and home care settings. Prompted by cost
reduction pressures from government reimbursement programs,
private insurers and managed care organizations, health care is
now readily available in a wide variety of settings with a broad
variety of cost structures. The role of traditional hospitals has
been somewhat reduced to specific acute care functions such as
emergency and specialty units. Most rehabilitation now occurs in
extended care settings which currently account for approximately
9% of all U.S. health care expenditures. U.S. expenditures on
this market segment are currently in excess of $85 billion and
have grown at an average rate of approximately 10% per year since
1990.
The home has also gained tremendous importance in health
care. Costs associated with treating a patient in the home are
typically 40% to 70% less than if the patient were treated in a
hospital or nursing home. Total U.S. expenditures on home health
care are in excess of $20 billion annually and have grown at an
average rate of approximately 19% per year since 1990. The
accelerating migration of patients from acute care facilities
into extended and home care settings has created demand for
products which conform to the physical constraints of these
settings and match the relative acuity levels and cost
structures.
Consolidation of health care providers and national and
regional group purchasing organizations. Consolidation of health
care providers and national and regional group purchasing
organizations within the health care industry has greatly
increased the number of patients whose care is covered by a
national organization which, in turn, has resulted in greater
purchasing leverage for national health care provider
organizations. In order to minimize costs, these organizations
actively seek to place patients in the most cost effective care
setting. Serving a national account generally requires that a
vendor provide goods and services suitable for all care settings
across a broad regional or national area.
Growing demand for clinically proven and cost effective
therapies. Cost containment efforts have spread across all
aspects of the health care industry. Both private and government
reimbursement programs are moving toward systems which feature
prospective payments. Under this system, health care providers
receive a payment determined by historical cost to cover all
expenses associated with a specific illness. Expenses that exceed
the amount reimbursed must be borne by the provider. The risk of
bearing these expenses has prompted providers to demand
documentation that a product or procedure will deliver the
desired clinical outcome at a cost savings over traditional
therapies.
Patient demographics. U.S. Census Bureau statistics indicate
that the 65-and-over age group is the fastest growing population
segment and is expected to exceed 40 million by the year 2010.
Management of wounds and circulatory problems is crucial for
elderly patients. These patients frequently suffer from
deteriorating physical conditions and their wound problems are
often exacerbated by incontinence and poor nutrition.
Obesity is increasingly being recognized as a serious
medical complication. In 1994, approximately 650,000 patients in
U.S. hospitals had a principal or secondary diagnosis of obesity.
Obese patients tend to have limited mobility and thus are at risk
for circulatory problems and skin breakdown. Treating obese
patients is also a significant staffing issue for many health
care facilities and a cause of worker's compensation claims among
nurses.
Growth in international markets. Health care systems in
established economies are increasingly seeking methods to provide
improved care at a reduced cost and are thereby becoming aware of
the benefits of therapeutic patient support surfaces. The
delivery of improved levels of health care is also growing in
certain emerging economies.
Emergence of disease state niche markets. The industry trend
toward consolidation has yielded additional leverage to national
health care provider networks and these networks are beginning to
request packages of products and services that offer total
solutions to specific diseases such as diabetes or cancer. The
process of bundling disease state packages may create niche
markets for providers of specialty products and services. Those
providers with the appropriate logistical capabilities may have
the opportunity to serve these growing niche markets on a
national scale.
Research and Development
The focus of the Company's research and development program
has been to develop new products and make technological
improvements to existing products. Since January 1994, the
Company has introduced a number of new products including: the
TriaDyne, the BariKare, the PlexiPulse All-in-1 System and The
V.A.C., a product developed from technology licensed to the
Company. Expenditures for research and development represented
approximately 2% of the Company's total expenditures in 1995. The
Company intends to continue its research and development efforts.
Manufacturing
The Company's manufacturing processes for its specialty
beds, mattress overlays, mattress replacement systems and medical
devices include the manufacture of certain components, the
purchase of certain other components from suppliers and the
assembly of these components into a completed product. Mechanical
components such as blower units, electrical displays and air flow
controls consist of a variety of customized subassemblies which
are purchased from suppliers and assembled by the Company. The
Company believes it has an adequate source of supply for each of
the components used to manufacture its products.
Patents and Trademarks
The Company seeks patent protection in the United States and
abroad. As of December 31, 1995, the Company had 36 issued U.S.
patents relating to its specialized beds, mattresses and related
products. The Company also has 18 pending U.S. Patent
applications. During 1994, the Company successfully sought
protection of three of its patents in litigation against SSI. The
jury in this case found that three of the Company's patents on
the BioDyne and TheraPulse beds were valid and that SSI had
willfully infringed those patents. The case was settled prior to
the damages phase of the trial when SSI agreed to pay the Company
damages of $84.75 million and remove its Restcue bed from the
U.S. market.
Many of the Company's specialized beds, products and
services are offered under trademarks and service marks. The
Company has 25 registered trademarks and service marks in the
United States Patent and Trademark Office.
Employees
As of December 31, 1995, the Company had approximately 2,016
employees. The Company's employees are not represented by labor
unions and the Company considers its employee relations to be
good.
Government Regulation
United States. The Company's products are subject to
regulation by numerous governmental authorities, principally the
FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the
regulations promulgated thereunder, the FDA regulates the
clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for
devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
In the United States, medical devices are classified into
one of three classes (Class I, II or III) on the basis of the
controls deemed necessary by the FDA to reasonably ensure their
safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, premarket notification, and adherence
to GMPs) and Class II devices are subject to general and special
controls (e.g., performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III
devices are those devices which must receive premarket approval
by the FDA to ensure their safety and effectiveness (e.g., life-
sustaining, life- supporting and implantable devices, or new
devices which have been found not to be substantially equivalent
to legally marketed devices). All of the Company's current
products have been classified as Class I or Class II devices.
Before a new device can be introduced in the market, the
manufacturer must generally file an application for and obtain
FDA clearance of a 510(k) notification or approval of a Premarket
Approval ("PMA") Application. A 510(k) clearance will be granted
if the submitted information establishes that the proposed device
is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to certain Class III devices. The FDA
recently has been requiring a more rigorous demonstration of
substantial equivalence than in the past.
All devices manufactured or distributed by the Company are
subject to pervasive and continuing regulation by the FDA and
certain state agencies, including record keeping requirements and
mandatory reporting of certain adverse experiences resulting from
use of the devices. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain circumstances, by
the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for
unapproved uses.
Fraud and Abuse Laws. The Company is subject to federal and
state laws pertaining to health care fraud and abuse. In
particular, certain federal and state laws prohibit
manufacturers, suppliers, and providers from giving or receiving
kickbacks or other remuneration in connection with the purchase
or rental of health care items and services. The federal Medicare
and Medicaid anti-kickback statute provides both civil and
criminal penalties for, among other things, offering or paying
any remuneration to induce someone to refer patients to for, or
to purchase, lease, or order (or arrange for or recommend the
purchase, lease, or order of), any item or service for which
payment may be made by Medicare or certain federally-funded state
health care programs (e.g., Medicaid). This statute also
prohibits soliciting or receiving any remuneration in exchange
for engaging in any of these activities. The prohibition applies
whether the remuneration is provided directly or indirectly,
overtly or covertly, in cash or in kind. Violations of the law
can result in numerous sanctions, including criminal fines,
imprisonment, and exclusion from participation in the Medicare
and Medicaid programs.
These provisions have been broadly interpreted to apply to
certain relationships between manufacturers/suppliers, such as
the Company, and hospitals, skilled nursing facilities ("SNFs"),
and other potential purchasers or sources of referral. Under
current law, courts and the Office of Inspector General ("OIG")
of the United States Department of Health and Human Services
("HHS") have stated, among other things, that the law is violated
where even one purpose (as opposed to a primary or sole purpose)
of a particular arrangement is to induce purchases or patient
referrals.
The OIG has taken recent actions which suggest that
relationships between manufacturers/suppliers of DME or medical
supplies and SNFs (or other providers) currently may be under
scrutiny. In May 1995, the OIG announced an enforcement
initiative, "Operation Restore Trust," that targeted
investigation of fraud and abuse in a number of states (i.e.,
California, Florida, Illinois, New York, and Texas), focusing
specifically on the long-term care, home health, and DME
industries. Furthermore, in August 1995, the OIG issued a Special
Fraud Alert describing certain relationships between SNFs and
suppliers that the OIG viewed as abusive under the statute.
Several states also have anti-remuneration or other similar
laws that may restrict the payment or receipt of remuneration in
connection with the purchase or rental of medical supplies. State
laws vary in scope and have been infrequently interpreted by
courts and regulatory agencies, but may apply regardless of
whether Medicaid or Medicaid funds are involved.
The Company is also subject to federal and state laws
prohibiting the presentation (or the causing to be presented) of
claims for payment (by Medicare, Medicaid, or other third party
payers) that are determined to be false, fraudulent, or for an
item or service that was not provided as claimed. In one recent
case, a major DME manufacturer paid more than $4 million to
settle allegations that it had "caused to be presented" false
Medicare claims through advice that its sales force allegedly
gave to customers concerning the appropriate reimbursement coding
for its products.
Other Laws. The Company also is subject to numerous federal,
state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with
such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the
Company's ability to do business.
International. Sales of medical devices outside of the
United States are subject to regulatory requirements that vary
widely from country to country. Premarket clearance or approval
of medical devices is required by certain countries. The time
required to obtain clearance or approval for sale in a foreign
country may be longer or shorter than that required for clearance
or approval by the FDA and the requirements may vary. Failure to
comply with applicable regulatory requirements can result in loss
of previously received approvals and other sanctions and could
have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no
assurance that the FDA's failure to grant requests for
Certificates for Products for Export pending a satisfactory
resolution of the Warning Letter will not have a material adverse
effect upon the Company's ability to export its products.
Reimbursement
The Company's products are rented and sold principally to
hospitals, SNFs and DME suppliers who receive reimbursement for
the products and services they provide from various public and
private third-party payors, including the Medicare and Medicaid
programs and private insurance plans. As a result, demand for the
Company's products is dependent in part on the reimbursement
policies of these payors. The manner in which reimbursement is
sought and obtained for any of the Company's products varies
based upon the type of payor involved and the setting in which
the product is furnished and utilized by patients.
Medicare. Medicare is a federally-funded program that
reimburses the costs of health care furnished primarily to the
elderly and disabled. Medicare is composed of two parts: Part A
and Part B. The Medicare program has established guidelines for
the coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by
Medicare, a health care item or service furnished to a Medicare
beneficiary must be reasonable and necessary for the diagnosis or
treatment of an illness or injury or to improve the functioning
of a malformed body part. This has been interpreted to mean that
the item or service must be safe and effective, not experimental
or investigational (except under certain limited circumstances
involving devices furnished pursuant to an FDA-approved clinical
trial), and appropriate. Specific Medicare guidelines have not
currently been established addressing under what circumstances,
if any, Medicare coverage would be provided for the use of the
PlexiPulse or The V.A.C.
The methodology for determining the amount of Medicare
reimbursement of the Company's products varies based upon, among
other things, the setting in which a Medicare beneficiary
receives health care items and services. Most of the Company's
products are furnished in a hospital, SNF or the beneficiary's
home.
Hospital Setting. With the establishment of the prospective
payment system in 1983, acute care hospitals are now generally
reimbursed by Medicare for inpatient operating costs based upon
prospectively determined rates. Under the prospective payment
system, acute care hospitals receive a predetermined payment rate
based upon the Diagnosis-Related Group ("DRG") which is assigned
to each Medicare beneficiary who is a hospital inpatient,
regardless of the actual cost of the services provided. Certain
additional or "outlier" payments may be made to a hospital for
cases involving unusually long lengths of stay or high costs.
However, outlier payments based upon length of stay are gradually
being phased out and will be eliminated effective with fiscal
year 1998. Furthermore, pursuant to regulations issued in 1991,
and subject to a ten-year transition period, the capital costs of
acute care hospitals (such as the cost of purchasing or renting
the Company's specialty beds) are also reimbursed by Medicare
pursuant to an add-on to the DRG-based payment amount.
Accordingly, acute care hospitals generally do not receive direct
Medicare reimbursement under PPS for the distinct costs incurred
in purchasing or renting the Company's products. Rather,
reimbursement for these costs is deemed to be included within the
DRG-based payments made to hospitals for the treatment of
Medicare-eligible inpatients who utilize the products. Since PPS
rates are predetermined, and generally paid irrespective of a
hospital's actual costs in furnishing care, acute care hospitals
have incentives to lower their inpatient operating costs by
utilizing equipment and supplies that will reduce the length of
inpatient stays, decrease labor, or otherwise lower their costs.
Certain specialty hospitals (e.g., long-term care,
rehabilitation and childrens hospitals) also use the Company's
products. Such specialty hospitals currently are exempt from the
prospective payment system and, subject to certain cost ceilings,
are reimbursed by Medicare on a reasonable cost basis for
inpatient operating and capital costs incurred in treating
Medicare beneficiaries. Consequently, long-term care hospitals
may receive separate Medicare reimbursement for reasonable costs
incurred in purchasing or renting the Company's products.
Skilled Nursing Facility Setting. SNFs which purchase or
rent the Company's products may be reimbursed directly under
Medicare Part A for some portion of their incurred costs.
Generally speaking, only the costs of treatment during the first
100 days of a qualifying spell of illness are subject to Medicare
reimbursement. The costs incurred by SNFs in furnishing care to
Medicare beneficiaries are categorized as either routine costs or
ancillary costs. Routine costs are those costs which are incurred
for items and services routinely furnished to all patients (e.g.,
general nursing services, items stocked in gross supply).
Ancillary costs are considered those costs which are incurred for
items or services ordered to treat a condition of a specific
patient and which are not generally furnished to most patients.
Ancillary costs are not subject to the routine cost limits. Given
the current routine cost limits, SNFs may be more inclined to
purchase or rent products which are reimbursed by Medicare as
ancillary items or services than if these products were
reimbursed as routine items or services. At present, the
Company's specialty beds are classified under Medicare Part A as
ancillary items. HCFA currently interprets the definition of
ancillary items to include certain support surfaces such as low
air loss mattress replacements, bed overlay systems and air
fluidized therapy. Neither The V.A.C. nor the PlexiPulse have yet
been classified as ancillary items when furnished in a SNF
setting.
Home Setting. The Company's products are also furnished to
Medicare beneficiaries in the home settings. Medicare reimburses
beneficiaries, or suppliers accepting assignment, for the
purchase or rental of DME for use in the beneficiary's home or a
home for the aged (as opposed to use in a hospital or skilled
nursing facility setting). Provided that various Medicare
coverage criteria are met, certain of the Company's products,
including air fluidized beds, air-powered flotation beds and
alternating air mattresses, are reimbursed in the home setting
under the DME category known as "Capped Rental Items." Pursuant
to the fee schedule payment methodology for this category,
Medicare pays a monthly rental fee (for a period not to exceed
fifteen months) equal to 80% of the lesser of the supplier's
actual rental charge or the established fee schedule amount for
the item. Guidelines concerning under what circumstances, if any,
The V.A.C. or the PlexiPulse will be covered and reimbursed by
DME have not been established.
Medicaid. The Medicaid program is a cooperative
federal/state program that provides medical assistance benefits
to qualifying low income and medically-needy persons. State
participation in Medicaid is optional and each state is given
discretion in developing and administering its own Medicaid
program, subject to certain federal requirements pertaining to
payment levels, eligibility criteria and minimum categories of
services. The Medicaid program finances approximately 50% of all
care provided in skilled nursing facilities nationwide. The
Company sells or rents its products to SNFs for use in furnishing
care to Medicaid recipients. SNFs, or the Company, may seek and
receive Medicaid reimbursement directly from states for the
incurred costs. However, the method and level of reimbursement,
which generally reflects regionalized average cost structures and
other factors, varies from state to state.
Private Payors. Many private payors, including indemnity
insurers, employer group health insurance programs and managed
care plans, presently provide coverage for the purchase and
rental of the Company's products. The scope of coverage and
payment policies varies among private payors. Furthermore, many
such payors are investigating or implementing methods for
reducing health care costs, such as the establishment of
capitated or prospective payment systems.
Uncertainty of Health Care Reform. There are widespread
efforts to control health care costs in the U.S. and worldwide.
Various federal and state legislative initiatives regarding
health care reform and similar issues continue to be at the
forefront of social and political discussion. For example, the
United States Congress is currently considering various
legislative proposals to reform the Medicare and Medicaid
programs. Some current proposals call for reduced payments to
hospitals under the prospective payment system, limitations on
payment for and recognition of ancillary items or services,
establishment of a prospective payment system for Medicare
reimbursement of SNF costs, freezes in DME fee schedule payment
amounts, and the establishment of a "block grant" program that
would give states greater discretion in designing and
administering state Medicaid programs. If enacted into law, any
of these proposals could affect future demand for and
reimbursement of the Company's products. The Company believes
that government and private efforts to contain or reduce health
care costs are likely to continue. These trends may lead third-
party payors to deny or limit reimbursement for the Company's
products, which could negatively impact the pricing and
profitability of, or demand for, the Company's products.
Item 2. Properties
The Company's corporate headquarters are currently located
in a 170,000 square foot building in San Antonio, Texas which was
purchased by the Company in January 1992. The Company utilizes
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 ("Novamedix") 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
ancillary 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 adverse effect on
the Company's business, financial condition or results of
operations.
On August 16, 1995, the Company filed a civil antitrust
lawsuit against Hillenbrand Industries, Inc. and one of its
subsidiaries, Hill-Rom. The suit was filed in the United States
District Court for the Western District of Texas. The suit
alleges that Hill-Rom used its monopoly power in the standard
hospital bed business to gain an unfair advantage in the
specialty hospital bed business. Specifically, the allegations
set forth in the suit include a claim that Hill-Rom required
hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on
products over which they have monopoly power -- hospital beds and
head wall units. The suit further alleges that Hill-Rom engaged
in activities which constitute predatory pricing and refusals to
deal. Hill-Rom has filed an answer denying the allegations in the
suit. Although discovery is just beginning and it is not possible
to predict the outcome of this litigation or the damages which
might be awarded, the Company believes that its claims are
meritorious.
The Company is a 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. In the opinion of management, the disposition of
these matters will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The manufacturing and marketing of medical products
necessarily entails an inherent risk of product liability claims.
The Company currently has certain product liability claims
pending for which provision has been made in the Company's
financial statements. Management believes that resolution of
these claims will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company has not experienced any significant losses due to
product liability claims and currently maintains umbrella
liability insurance coverage.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security
holders during the fourth fiscal quarter of 1995.
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 1996 annual meeting of directors and until his
successor is duly elected and qualified. The executive officers
of the Company and their ages and positions as of March 1, 1996
are as follows:
Name Age Position
Raymond R. Hannigan 56 Director, President and
Chief Executive Officer
Peter A. Leininger, M.D. 53 Director and Executive Vice
President
Bianca A. Rhodes 37 Senior Vice President,
Finance and Chief Financial
Officer
Dennis E. Noll 41 Senior Vice President,
General Counsel and
Secretary
Frank DiLazzaro 37 President, KCI
International
Christopher M. Fashek 46 President, KCI Therapeutic
Services
Daniel R. Puchek 43 President, NuTech
Joshua H. Levine 37 Vice President and General
Manager, KCI Home Care
John H. Vrzalik, Sr 53 Vice President, Engineering
Martin J. Landon 36 Vice President, Accounting
and Corporate Controller
Michael J. Burke 48 Vice President,
Manufacturing
Scott S. Brooks 47 Vice President, National
Accounts
Larry P. Baker 42 Vice President, Corporate
Services
George P. Peace 40 Vice President, Information
Systems
Raymond R. Hannigan joined the Company as its President and
Chief Executive Officer in November 1994 and has served as a
director of the Company since 1994. From January 1991 to November
1994, Mr. Hannigan was the President of the International
Division of Sterling Winthrop Consumer Health Group (a
pharmaceutical company with operations in over 40 countries), a
wholly-owned subsidiary of Eastman Kodak. From May 1989 to
January 1991, Mr. Hannigan was the President of Sterling Drug
International.
Peter A. Leininger, M.D., joined the Company as its Vice
President, Medical in 1978, became Chief Administrative Officer
and Senior Vice President of the Company in January 1994 and was
named Executive Vice President in September 1995. Dr. Peter
Leininger became a member of the Company's Board of Directors in
1980. Prior to 1978, Dr. Peter 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.
Bianca A. Rhodes joined the Company as its Senior Vice
President, Finance and Chief Financial Officer in 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. and prior to 1990, Ms. Rhodes served as Corporate Treasurer
of Intelogic Trace, Inc.
Dennis E. Noll joined the Company in February 1992 as its
Senior Corporate Counsel and was appointed Vice President,
General Counsel and Secretary in January 1993. Mr. Noll was
promoted to Senior Vice President in September 1995. Prior to
joining the Company in February 1992, Mr. Noll was a shareholder
of the law firm of Cox & Smith Incorporated.
Frank DiLazzaro joined the Company in 1988 as General
Manager, KCI Medical Canada. Mr. DiLazzaro served as Vice
President, KCI International, Inc. from June 1989 to December
1992. Mr. DiLazzaro has served as President, KCI International,
Inc. since January 1993 and was Vice President, Marketing from
April 1993 to September 1995.
Christopher M. Fashek joined the Company in February 1995 as
President, KCTS. Prior to joining the Company, he served as
General Manager, Sterling Winthrop, New Zealand since February
1993, and served as Vice President Sales of Sterling Health USA
from 1989 until February 1993.
Daniel R. Puchek joined the Company as its Vice President,
KCI International in 1987 and became Vice President, Corporate
Development in February 1991. In August 1991, Mr. Puchek began
serving as President, NuTech.
Joshua H. Levine joined the Company in November 1992, as
Senior Director, was promoted to National Sales Manager, Home
Care Business in November 1993, and became Vice President and
General Manager, KCI Home Care in July 1994. From April 1991 to
November 1992, Mr. Levine served as Area Business Development
Manager, Oncology Division for CareMark, Inc. (a home infusion
company). Prior to April 1991, Mr. Levine was District Manager
of the Company.
John H. Vrzalik, Sr. joined the Company in 1977, was
promoted to Vice President, Engineering in 1979 and has served in
that position since that time.
Martin J. Landon joined the Company in May 1994 as Senior
Director of Corporate Development and was promoted to Vice
President, Accounting and Corporate Controller in October 1994.
From 1987 to May 1994, Mr. Landon worked for Intelogic Trace,
Inc., most recently serving as Vice President, Chief Financial
Officer.
Michael J. Burke joined the Company in September 1995 as
Vice President, Manufacturing. Prior to joining the Company, Mr.
Burke worked for Sterling Winthrop, Inc., a Division of Eastman
Kodak Company, for 25 years, most recently serving as General
Manager, Sterling Health HK/China since 1992.
Scott S. Brooks, Vice President, National Accounts, joined
the Company in June 1990 as Director of Sales and Marketing of
KCI Medical Services. From April 1991 to March 1993, Mr. Brooks
served as Regional Vice President of KCI Therapeutic Services,
Inc. From April 1993 to February 1994, Mr. Brooks served as Vice
President, National Accounts of the Company. From March 1994 to
March 1995, Mr. Brooks served as the President of Medical Retro
Design, a subsidiary of the Company. Prior to June 1990, Mr.
Brooks served as Vice President of Simmons Healthcare.
Larry P. Baker joined the Company in 1987 as the Director of
Human Resources. Since 1993, Mr. Baker has held the position of
Vice President, Corporate Services.
George P. Peace joined the Company in November 1994 as Vice
President of Information Systems. From October 1992 to October
1994, Mr. Peace served as Vice President of Information Systems
of La Quinta Inns Inc. Prior to October 1992, Mr. Peace served
as Director of Information Systems Operations of La Quinta Inns
Inc.
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
1995 and 1994 fiscal years is contained on the inside back cover
of the Company's 1995 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 stock in 1995 and 1994. The
cash dividends totaled $.15 per common share in each of 1995 and
1994. 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, 1996, the approximate number of holders of
record of the Company's Common Stock was 456.
Item 6. Selected Financial Data
Incorporated in this Item 6, by reference, is that portion
of the Company's 1995 Annual Report to Shareholders appearing on
page 12 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 1995 Annual Report to Shareholders appearing on
pages 13 to 18 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 19 to 32 in the
Company's 1995 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.
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 2 to 5 therein under the caption "Election of Directors"
and on page 17 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 8
to 10 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 8 under the caption "Securities Holdings of Principal
Shareholders, Directors and Officers."
Item 13. Certain Relationships and Related Transactions
In August 1995, the Company loaned $10.0 million to James R.
Leininger, M.D., the principal shareholder and chairman of the
Company's Board of Directors. The note was secured by a Stock
Pledge Agreement covering one million shares of common stock of
Kinetic Concepts, Inc. Interest accrued at the rate of 7.94% per
annum. In January 1996, upon completion of the secondary stock
offering by Dr. Leininger and certain other related selling
shareholders, the note and all accrued interest was paid in full.
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 1995
Annual Report to Shareholders, are filed as a part of
this report:
Consolidated Balance Sheets as of December 31, 1995
and 1994
Consolidated Statements of Earnings for the three
years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the three
years ended December 31, 1995, 1994 and 1993
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, 1995, 1994 and 1993
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, 1995 are filed as part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts -
Years ended December 31, 1995, 1994 and 1993
All other schedules have been omitted as the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or
because the information required is included in the
financial statements and notes thereto.
3. Exhibits
The following exhibits are filed as a part of this Report:
Exhibit Description
11.1 Earnings Per Share Computation.
13.1 Kinetic Concepts, Inc. 1995 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 dated March 28,
1996 to incorporation by reference of their reports
dated February 6, 1996 in Registration
Statements on Form S-8 previously filed by the
Company.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Antonio, State of
Texas on March 28, 1996.
KINETIC CONCEPTS, INC.
By: /s/ 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.
Signatures Title Date
/s/ JAMES R. LEININGER, M.D. Chairman of the March 28, 1996
____________________________ Board of Directors
James R. Leininger, M.D.
/s/ RAYMOND R. HANNINGAN Chief Executive March 28, 1996
___________________________ Officer and
Raymond R. Hannigan President
/s/ BIANCA A. RHODES Chief Financial March 28, 1996
___________________________ Officer and Senior
Bianca A. Rhodes Vice President
(Principal Accounting
Officer)
/s/ PETER A. LEININGER, M.D. Director March 28, 1996
___________________________
Peter A. Leininger, M.D.
/s/ SAM A. BROOKS Director March 28, 1996
___________________________
Sam A. Brooks
/s/ FRANK A. EHMANN Director March 28, 1996
___________________________
Frank A. Ehmann
/s/ BERNHARD T. MITTEMEYER,M.D. Director March 28, 1996
______________________________
Bernhard T. Mittemeyer, M.D.
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 6, 1996, we reported on the consolidated
balance sheets of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1995 and 1994, 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, 1995, as
contained in the 1995 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 1995. 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.
/s/ KPMG PEAT MARWICK LLP
_________________________
KPMG Peat Marwick LLP
San Antonio, Texas
February 6, 1996
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1995
Additions Additions 12/31/93
Balance Charged Charged Balance
at to Costs to Other at End of
Description Beginning and Accounts Deductions Period
of Period Expenses
___________ __________ ________ ________ __________ _________
Allowance for
doubtful
accounts $6,975 $5,330 $ - $4,805 $7,500
Additions Additions 12/31/94
Balance Charged Charged Balance
at to Costs to Other at End of
Description Beginning and Accounts Deductions Period
of Period Expenses
___________ __________ _________ _________ ____________ _________
Allowance for
doubtful
accounts $7,500 $1,429 $ - $ 329 $8,600
Additions Additions 12/31/95
Balance Charged Charged Balance
at to Costs to Other at End of
Description Beginning and Accounts Deductions Period
of Period Expenses
____________ __________ _________ _________ __________ _________
Allowance for
doubtful
accounts $8,600 $1,883 $ - $4,306 $6,177
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
Year ended December 31,
1995 1994 1993
________ ________ _________
Earnings before income taxes,
minority interest, extraordinary
item andcumulative effects of
changes in accounting
principles $ 48,346 $119,550 $ 14,627
Income Taxes (19,905) (55,949) (7,175)
Minority interest in subsidiary loss - 40 560
Net earnings before extraordinary -------- -------- ---------
item and cumulative effects of
changes in accounting
principles 28,441 63,641 8,012
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 28,441 64,383 8,062
Dividends and accretion related to
preferred stock - - (171)
Net earnings available to common ________ ________ ________
shareholders $ 28,441 $ 64,383 $ 7,891
Shares used in earnings per share
computations 45,457 44,143 44,627
Earnings per share:
Earnings before extraordinary item
and cumulative effects of changes
in accounting principles $ 0.63 $ 1.44 $ 0.18
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
_______ _______ _______
$ 0.63 $ 1.46 $ 0.18
Shares used in earnings per share
computations - assuming full
dilution 45,914 44,709 44,634
Earnings per share - assuming full
dilution:
Earnings before extraordinary item
and cumulative effects of changes
in accounting principles $ 0.63 $ 1.42 $ 0.18
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
_______ _______ _______
$ 0.63 $ 1.44 $ 0.18
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
COMPUTATION OF SHARES USED IN EARNINGS PER SHARE COMPUTATIONS
Year ended December 31,
1995 1994 1993
Average outstanding common shares 44,183 43,912 44,249
Average common equivalent shares - dilutive
effect of option shares 1,274 231 378
------ ------ ------
Shares used in earnings per share computation 45,457 44,143 44,627
====== ====== ======
SHARES USED IN EARNINGS PER SHARE COMPUTATIONS ASSUMING FULL DILUTION
Year ended December 31,
1995 1994 1993
Average outstanding common shares 44,183 43,912 44,249
Average common equivalent shares - dilutive
effect of option shares 1,731 797 385
------ ------ ------
Shares used in earnings per share computation
-assuming full dilution 45,914 44,709 44,634
====== ====== =======
Kinetic Concepts develops and markets innovative therapeutic
healing systems that address skin breakdown, circulatory
problems, and pulmonary complications. Our healing systems
consist of specialty beds, mattress replacement systems, and
related medical devices. We serve multiple care settings, both
in the United States and abroad.
Table of contents
Letter to Shareholders 2-3
Change and KCI 4-11
Financial Summary 12-13
Management's Discussion and 14-20
Analysis
Financial Statements and Notes 21-31
Report of Independent Public 32
Accountants
Investor Information Inside back cover
FINANCIAL HIGHLIGHTS
(in millions, except per 1995 1 1994 2 1993 1992 1991
share data)
- ---------------------------------------------------------------
Revenue $243.4 $269.6 $268.9 $278.5 $248.7
Operating earnings 43.8 124.1 20.5 55.1 48.8
Net Earnings 28.4 64.4 8.1 28.5 24.8
Earnings per share 0.63 1.46 0.18 0.63 0.49
Cash flow provided by
operations 56.8 96.5 56.5 58.0 60.2
1 Results were negatively affected
by $927,000 or $0.02 per share in
non-recurring items.
2 Results include $43.1 million or
$0.98 per share from several
non-recurring gains.
The health care industry is changing and that's good for Kinetic
Concepts. There are more sick people than ever before, and they
need solutions to their problems. That's good for Kinetic
Concepts because our therapies have been proven effective in the
lab and with the patient. Health care providers have to squeeze
a dollar farther than ever before, and they need therapies that
are cost effective. That's good for Kinetic Concepts because we
not only save lives, we save money that can save more lives. And
that's good for everyone.
Dear Fellow Shareholders,
Change continues to shape the health care industry. Driven by
efforts to control health care spending at all levels, stemming
the rise in medical costs has become a national priority. As a
result, health care providers are consolidating at an
unprecedented rate in order to gain operating synergies and
purchasing leverage. The changing health care landscape has also
affected the patient as care providers are increasingly turning
the home into a place of healing.
Many of these changes can be good for both Kinetic Concepts and
our industry. The growing emphasis on improved patient outcomes
at a lower cost is really what Kinetic Concepts is all about.
What's exciting about this change is that the marketplace is
discovering what we've known all along -- prevention of serious
medical complications is far more effective and less expensive
than treating an illness once it develops.
Our annual report to you highlights four key changes in the
health care industry and describes how these changes can benefit
KCI. These changes are:
1. The increased pressure on health care providers to
reduce costs,
2. The migration of patients away from acute care
facilities into new care settings,
3. The consolidation of health care providers, and
4. The global focus on improved health care.
We have positioned KCI to embrace and take advantage of the
changes in the marketplace. During the past two years we sold
several underperforming assets, radically improved core
operations and successfully settled a patent infringement lawsuit
against a major competitor, all of which have enabled the
profitability of our core business to rebound. This is best
reflected by our earnings per share, which have increased 250% in
the past two years.
One of the reasons we've improved our financial performance is
that we've sharpened our marketing focus to emphasize the
effectiveness of our products. Unlike many of our competitors,
we can demonstrate the effectiveness of our products with our
extensive collection of clinical research. These are studies
conducted by teaching hospitals and other institutions that
compare the medical efficacy of our specialty products with non-
specialized treatment protocols. These studies overwhelmingly
demonstrate that KCI's products produce patient outcomes much
superior to traditional treatments. We call this our Clinical
Advantage and it has been very successful in building awareness
of Kinetic Concept's unique therapeutic benefits, as well as in
easing the price erosion that has been common among providers of
medical products and services.
Core business growth strategies - Each of our operating segments
has a blueprint to ensure future revenue growth. Here's a look
at what we are doing:
Acute and Extended Care - To better serve the needs of our
acute care and extended care markets, we have added KCI's
TriaDyne critical care specialty bed and our BariKare bed
for large patients to our continuum of surfaces. Strong
demand for these premium products and our full product line
have resulted in increased patient therapy days and higher
average rental rates.
Home Care - Since the start of 1995, we have served the
growing home care market through top-quality partners such
as Apria, American HomePatient and others. Shifting to a
dealer network has let us build on each other's strengths as
we participate in the growing home health care market with
only minimal increases in our infrastructure.
International - In late 1995 we opened sales offices in
Italy and Sweden, bringing the number of international
markets we serve to 10. Revenue growth from our
international operations continues to outpace our domestic
business, and we have strong global growth opportunities.
Medical Devices -- During 1995, we introduced the PlexiPulse
All-in-1 System to our product line. The PlexiPulse All-in-
1 System is not only highly effective at preventing lower
limb blood clotting, but it has the added benefit of
lowering inventory and operating costs for facilities that
offer this treatment. Late last year we also introduced our
revolutionary wound closure device, The V.A.C., in the
United States after its successful introduction in Europe 18
months ago.
One of the most exciting changes you'll see in 1996 is the
introduction of vastly improved information systems. We have
upgraded our financial information systems so that we now have
real-time visibility into the operations of all of our service
centers, each of our products and every one of our more than
6,000 customer accounts. In addition, our team members in the
field are all connected to our Genesis system, which they use to
collect patient data, track our assets and manage accounts. As
we combine the information gathered through Genesis with our
existing Odyssey wound management software program, we provide
our customers with insights into their treatment protocols and
likely patient outcomes that simply weren't available before.
In January 1996 we completed a successful secondary offering of
nearly 8.8 million shares of our stock. The shares were held by
the Leininger family and various charitable trusts, and their
sale has greatly improved the liquidity of our company's stock.
We welcome our new shareholders and hope that they share our
enthusiasm for the future.
Another change we hope to see in 1996 is a sharpened focus by
everyone at Kinetic Concepts on further improving our operating
profit margins through revenue growth and cost controls. One
thing, however, that will not change in 1996 is our emphasis on
recruiting, developing, training and motivating skilled and
competent KCI team members. Our successes reflect the
involvement of every single individual in this company. We both
believe that our future successes will rest on the quality,
integrity and competence of our dedicated team members. We'd
like to finish this letter by once again thanking and commending
our team members who share our mission, beliefs and core values.
/s/ JAMES R. LEININGER, M.D. /s/ RAYMOND R. HANNIGAN
____________________________ _____________________________
Chairman of the Board of Directors President and Chief Executive
Officer
#1 -- Increased pressure on costs and patient outcomes.
Cost containment efforts have spread across all aspects of
the health care industry. Both private and government
reimbursement programs are moving toward systems where facilities
receive a fixed payment, based on each patient's diagnosis, to
cover all medical expenses. Expenses that exceed the fixed
amount are paid by the facility, not the patient. This type of
system puts tremendous pressure on facilities to eliminate
additional treatment costs due to secondary patient complications
such as pneumonia or pressure ulcers.
Kinetic Concepts has a full line of products that prevent
and treat the medical complications that patients often encounter
in a hospital or nursing home. The cost of using these products
is far less than the alternate cost of treating a complication
once it develops. For example, the company's Kinetic Therapy
products rotate the patient laterally at least 40 degrees to each
side. This therapy has been demonstrated to dramatically reduce
the incidence of hospital-acquired pneumonia as well as reduce
the length of time spent in a hospital or intensive care unit,
all at a cost of less than $200 per day. In contrast, a case of
pneumonia can easily add $18,000 to the cost of a patient's stay
in a hospital.
We prove the effectiveness of our therapies to our customers
with an extensive collection of clinical studies published in
respected peer reviewed medical journals. These studies support
the cost effectiveness of our products and provide the necessary
outcome data demanded by health care providers.
Being able to provide cost savings is important in light of
efforts to control the federal government's expenditures on
health care. Even through we usually receive payment for our
products from a facility, approximately 35% of our total revenue
ultimately comes from Medicare or Medicaid. Our ability to meet
the demands of government reimbursement programs for cost
effectiveness is more important than ever.
KINETIC THERAPY'S COST ADVANTAGE
Treatment Outlook for a With Kinetic Without Kinetic
Critically Ill Blunt Therapy Therapy
Trauma Victim
- ------------------------------------------------------------
Days on a ventilator 4 7
Days in intensive care 5 8
Total days in hospital 20 45
Total cost of hospital
stay $33,500 $51,500
____________________________________________________________
Kinetic Therapy Cost $18,000
Savings
- ------------------------------------------------------------
Kinetic Therapy can greatly reduce a patient's cost of care
by reducing the total time spent in a hospital as well as the
costly intensive care unit.
We have the most extensive collection of clinical research
studies in our industry. Care providers look to these studies to
be sure that when they prescribe a Kinetic Concepts therapy, they
can be certain that it will deliver the desired outcome.
(Photo of TriaDyne specialty bed) Critical care patients take a
turn for the better on the KCI TriaDyne. It's Kinetic Therapy
rotates the patient to keep lungs clear of fluids and keep
pneumonia at bay while its percussion and pressure relief
features speed recovery, increase comfort and ease the workload
for nurses.
# 2 -- Migration of patients away from acute care facilities
Prompted by cost reduction pressures from government
reimbursement programs, private insurers and managed care
organizations, health care is now readily available in a wide
variety of settings. The role of traditional hospitals has been
somewhat reduced to more specific functions such as emergency and
specialty units. Most rehabilitation now occurs in extended care
settings as well as in the home.
We are able to provide therapies to patients in these non-
acute care settings through our national distribution network and
a broad product line that provides our Continuum of Care. Our
products range from specialty beds such as the TriaDyne, which is
designed for severely injured patients, to inflatable mattress
overlays designed for use in the home. We also have 250 full-
time clinicians on our team who make regular patient rounds and
who offer insights into the appropriate surfaces for a patient
entering a new care setting. Our broad product line and clinical
data give us the tools to access patients across all care
settings. With an increasing number of patients covered by
managed care systems, the ability to provide a seamless
transition for a patient's movement from hospital to
rehabilitation center to home is essential.
The home is gaining importance as a care setting. Changes
in federal reimbursement programs as well as commercial payor
sources have made our therapies more widely accessible in the
home market. We are capitalizing on the growth of home health
care by accessing these patients through independent medical
equipment dealers. We currently have more than 700 dealer
distribution points, and we plan to double that number during
1996 to take advantage of this growing market.
Changes in Care Settings for Acute Extended Home
a Typical Patient on
Mechanical Ventilation
1985 20 Days 20 Days 8 Days
1995 4 Days 14 Days 30 Days
Care providers are moving patients to the least expensive care
setting as soon as possible. Shown to the right are just a few
of the more than two patient support dozen products KCI offers to
speed healing.
Nature has an answer for everything, but sometimes it needs some
help. The PlexiPulse All-in-1 System duplicates the natural
blood-pumping action of walking for patients who are confined to
a bed. Keeping the blood moving prevents dangerous clots from
forming, so patients can get back on their feet.
#3 -- Consolidation of health care providers and national group
purchasing organizations
Consolidation of health care providers and national group
purchasing organizations (GPOs) within the health care industry
has greatly increased the number of patients whose care is
covered by a national organization. This increased patient base
in turn gives the providers and GPOs increased purchasing
leverage. These organizations not only want favorable pricing,
they want to deal with as few vendors as possible to minimize
their operating costs.
This trend towards consolidation is a plus for Kinetic
Concepts because our national distribution system and broad
product line are key differentiators that set us apart from our
competitors. Our broad range of products meets the changing
support surface needs of a patient across all care settings, and
we have tailored our distribution network to meet the unique
needs of our customers.
Acute and extended care: We maintain a network of 143 service
centers across the United States that are on call 24 hours a day.
When a trauma patient enters an intensive care unit, the need for
a specialty bed is immediate. We respond to that need with a
nationwide service team that can have our products delivered to
major trauma centers in the United States within two hours. The
patient surface needs of an extended care patient can also change
rapidly and the same service team that serves acute care
facilities also supports the needs of extended care facilities.
Home care: This growing market is served through more than 700
independent dealer outlets with that number growing rapidly as we
partner with more durable medical equipment providers serving the
home market. Much of the growth in home health care is
attributable to the increasing elderly population in the United
States. The vast majority of pressure ulcers are found on
patients over the age of 65, and that segment is also the fastest
growing portion of the U.S. population.
Percentage of U.S. Population Covered
by 25 Largest Health Care Providers
1985 1990 1995
3.6% 5.1% 6.9%
Emergence of Disease State Niche Markets
The industry trend toward consolidation has yielded additional
leverage to national care providers to demand packages of
products and services that offer total solutions to specific
diseases. We are currently developing the skin wound management
portion of a total patient care package that would be offered in
conjunction with several leading manufacturers of health care
products.
Patient information is a vital ingredient in any providers' plans
to provide cost effective medical care. Through our proprietary
Genesis and Odyssey software management programs, we and our
customers can track statistical patient data, refine treatment
protocols and quantify the clinical outcomes of our therapies.
These programs give us an advantage in establishing long-term
relationships with national managed care organizations.
(Photo of BariKare bed) The special needs of large patients are
largely unaddressed in today's hospitals. The BariKare serves as
a bed, chair and x-ray table for patients weighing up to 850
pounds. It also lets nurses care for these special patients in a
safe and dignified manner.
#4 -- Global focus on improved health care
Health care systems in established economies are increasingly
seeking methods to provide improved care at a reduced cost. Many
of these systems, particularly in western Europe, are government-
supported and are experiencing the same cost control pressures
that began to affect our own Medicare/Medicaid system several
years ago.
In addition, emerging nations are beginning to seek ways to
provide improved levels of health care, although they may lack
the financial resources of more established economies. As a
result, health care systems across the world are becoming aware
of the cost effective benefits that therapeutic patient support
surfaces can provide. These products are particularly effective
when protocols dictate their usage in a preventative mode.
Kinetic Concepts is well positioned for global growth
opportunities. We have direct operations in 10 international
markets within western Europe, as well as in Canada and
Australia. We use independent dealers in other selected markets
such as Latin and South America, and we are actively exploring
both direct and joint venture operations in Asia.
Health Care Dynamics for KCI's
International Markets
1994 1993 % of GNP
Population Health Care Spent on
(millions) Spending Health
(billions) Care
----------- ----------- ----------
U.S.A. 258 $831 14.1%
Germany 81 155 8.6
U.K. 58 71 7.1
Austria 8 19 9.3
Switzerland 7 26 8.9
France 57 118 9.8
Canada 28 61 10.2
Australia 18 25 8.5
Italy 57 95 8.6
Sweden 9 10 7.5
Netherlands 15 22 9.3
Overseas Success Story -- KCI's revolutionary The V.A.C. medical
device was introduced in Europe in mid-1994. Its clinical
success overseas proved to KCI that this extraordinary device was
indeed a world-class therapy.
International distribution network -- 45 service centers, 200
service technicians, rental fleet of 5,800+ patient surfaces and
medical devices
(Photo of The V.A.C.) Problem wounds need special solutions. The
V.A.C. (Vacuum Assisted Closure) closes wounds when other methods
fail. It uses a pump and a special sponge to create suction
within a wound, drawing the skin together. For some patients,
The V.A.C. is the only answer and only KCI has The V.A.C.
<TABLE>
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Earnings Data:
Revenue:
Rental and service $206,653 $228,832 $232,250 $244,905 $223,192
Sales and other 36,790 40,814 36,622 33,586 25,529
Total revenue 243,443 269,646 268,872 278,491 248,721
Rental expenses 137,420 159,235 169,687 156,682 146,112
Cost of goods sold 13,729 19,388 18,666 18,987 14,238
Gross profit 92,294 91,023 80,519 102,822 88,371
Selling, general and
administrative expenses 48,502 51,813 53,279 47,710 39,538
Unusual items(1) -- (84,868) 6,705 -- --
Operating earnings 43,792 124,078 20,535 55,112 48,833
Interest expense (income),
net (4,554) 4,528 5,908 7,195 6,736
Earnings before income
taxes, minority interest,
extraordinary item and
cumulative effect of
changes in accounting
principle 48,346 119,550 14,627 47,917 42,097
Income taxes 19,905 55,949 7,175 19,405 17,260
Earnings before minority
interest, extraordinary
item and cumulative
effect of changes in
accounting principle 28,441 63,601 7,452 28,512 24,837
Minority interest in
subsidiary loss -- 40 560 -- --
Extraordinary item -- debt
extinguishment, net -- -- (400) -- --
Cumulative effect of change
in accounting for inventory
(2) -- 742 -- -- --
Cumulative effect of change
in accounting for income
taxes (3) -- -- 450 -- --
Net earnings $28,441 $64,383 $ 8,062 $28,512 $24,837
Earnings per share $ 0.63 $ 1.46 $ 0.18 $ 0.63 $ 0.49
Shares used in earnings per
share computations 45,457 44,143 44,627 45,060 50,469
Cash flow provided by
operations $56,782 $96,451 $56,538 $58,007 $60,241
Cash dividends paid to common
shareholders $ 6,631 $ 6,588 $ 6,638 $ 6,277 $ 6,047
Cash dividends per share paid
to common shareholders $ .15 $ .15 $ .15 $ .14 $ .12
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
As of December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Working capital $109,413 $ 90,791 $ 60,907 $ 55,473 $ 32,206
Total assets $243,726 $232,731 $284,573 $286,915 $277,820
Long-term obligations --
noncurrent (4) $ -- $ 2,636 $101,889 $102,237 $101,781
Minority interest $ -- $ -- $ 40 $ 990 $ --
Redeemable convertible
preferred stock $ -- $ -- $ -- $ 3,307 $ 3,034
Other capital accounts $210,324 $185,423 $125,707 $123,813 $ 99,182
</TABLE>
(1) See Note 11 of Notes to Consolidated Financial Statements for
information on unusual items.
(2) See Note 1 of Notes to Consolidated Financial Statements for
information on cumulative effect of change in method of accounting
for inventory.
(3) See Note 8 of Notes to Consolidated Financial Statements for
information on cumulative effect of change in method of accounting
for income taxes.
(4) See Notes 6 and 7 of Notes to Consolidated Financial Statements for
information concerning the Company's borrowing arrangements and
lease obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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.
The pressure to control health care costs intensified during 1993 as a
result of the health care reform debate and has continued through 1995
as Congress attempts to slow the rate of growth of federal health care
expenditures as part of its effort to balance the federal budget.
While the exact amount and nature of the federal health care budget
cuts are not final, the Company believes that health care providers
will continue to experience increased cost control pressures. The
expected reductions in future hospital payment rates will increase the
cost pressures on hospitals but the Company does not believe that the
manner in which hospitals are currently reimbursed will change
materially in the foreseeable future. However, current Congressional
proposals would change the method of reimbursement in the extended and
home care settings from retrospective cost-based systems to prospective
payment systems similar to the system adopted for hospitals in 1983.
In a prospective payment system, reimbursement is based on national
averages of costs for the care of a patient with a specific diagnosis
instead of on costs actually incurred and decisions on selecting the
products and services used in patient care are based on clinical and
cost effectiveness.
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 the effect of reducing the
Company's historical revenue from acute care facilities. The Company
expects these industry trends to continue. The Company is addressing
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 introduction of
the TriaDyne and BariKare beds will enable it to further penetrate this
market.
Beginning in 1993, the Company restructured its management and
operations to meet the needs of the changing health care environment.
The Company began assembling a new management team that has
concentrated on the Company's core lines of business, divested three
underperforming businesses and implemented various programs to reduce
the Company's operating costs and to improve its information systems.
On September 30, 1994, the Company sold certain assets of its Medical
Services Division ("Medical Services") which rented movable critical
care and life support equipment. On March 27, 1995, the Company sold
the assets of Medical Retro Design, Inc. ("MRD"), a subsidiary that
refurbished standard hospital beds and furniture. On June 15, 1995,
the Company sold all of the stock of KCI Financial Services, Inc.
("KCIFS"), a medical equipment leasing company.
Generally, the Company's customers prefer to rent rather than
purchase patient support surfaces, due to such considerations as high
initial capital outlays and extensive maintenance requirements. As a
result, rental revenues are a high percentage of the overall revenues
of the Company. 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 revenues. Because of the cost pressures within the
health care industry, patients are leaving the acute care setting
sooner, thereby increasing the demand for the Company's products in the
extended and home care settings. This demand increases the utilization
of certain of the Company's products which were originally developed
for acute care settings and provides an additional market for sales of
low-cost products such as mattress overlays and mattress replacement
systems.
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the prior year ($ in
thousands):
<TABLE>
<CAPTION> Year Ended December 31,
Revenue Increase
Relationship (Decrease)
1995 1994 $ Pct
<S> <C> <C> <C> <C>
Revenue:
Rental and service 85% 85% $(22,179) (10%)
Sales and other 15 15 (4,024) (10)
---- ---- ---------
100% 100% (26,203) (10)
Rental expenses 56 59 (21,815) (14)
Cost of goods sold 6 7 (5,659) (29)
---- ---- ---------
Gross profit 38 34 1,271 1
Selling, general and
administrative expenses 20 19 (3,311) (6)
Unusual items -- (31) 84,868
---- ---- ---------
Operating earnings 18 46 (80,286) (65)
Interest (income) expense, net (2) 1 (9,082) (201)
---- ---- ---------
Earnings before income
taxes,minority interest,
and cumulative effect of
change in accounting
principle 20 45 (71,204) (60)
Income taxes 8 21 (36,044) (64)
---- ---- ---------
Earnings before minority
interest and cumulative
effect of change in
accounting principle 12 24 (35,160) (55)
Minority interest in subsidiary
loss -- -- (40) --
Cumulative effect of change in
accounting principle -- -- (742) --
---- ---- ------- ----
Net earnings 12% 24% $(35,942) (56%)
</TABLE>
The Company's revenue is derived from five primary markets. The
following table sets forth, for the periods indicated, the amount of
revenues derived from each of these markets ($ in millions):
Year Ended December31,
1995 1994
Acute $111.0 $109.1
Extended 37.5 34.5
Home 14.7 14.1
International 60.7 46.4
Medical devices 16.9 13.9
Other(1) 2.6 51.6
------ ------
$243.4 $269.6
====== ======
(1) Consists of revenue of Medical Services, KCIFS, MRD and
other sales.
Unusual Items. In September 1994, the Company settled a patent
infringement suit against its principal competitor, Support Systems
International, Inc. ("SSI"), a predecessor in interest to Hill-Rom,
Inc., for $84.8 million. In connection with the settlement, SSI agreed
to withdraw its high-end specialty bed from the market. The
comparability of the Company's financial results for the years ended
December 31, 1995 and 1994 was significantly impacted by this
settlement and the pre-tax gain of $10.1 million from the sale of
certain assets of Medical Services. Partially offsetting these items
were certain miscellaneous unusual items, primarily dispositions of
overstocked inventory and underutilized rental assets and a write-down
of the carrying value of the assets of MRD which had a negative impact
of $6.8 million. The following is a summary of the unusual items
recorded in the prior year (in thousands):
SSI patent litigation settlement $ 84,750
Legal fees related to SSI patent litigation
settlement (3,154)
Pre-tax gain on sale of Medical Services 10,121
Miscellaneous (6,849)
Unusual items in operating earnings $ 84,868
Each following reference to "on a pro forma basis" shall mean
that the results for the period have been adjusted to reflect the
sales of Medical Services and KCIFS as if such sales had occurred on
January 1, 1994.
Total Revenue. Total revenue in 1995 was $243.4 million, a
decrease of $26.2 million or 9.7% from 1994. This decrease was
directly attributable the sale of Medical Services in September 1994.
Medical Services generated $43.8 million in revenue during 1994. On a
pro forma basis, total revenue for 1995 would have increased by $19.9
million or 9.0% to $242.0 million from $222.1 million in 1994
primarily as a result of growth in the Company's international
operations combined with smaller increases in each of the Company's
other primary markets. Revenue from acute care facilities was $111.0
million in 1995, an increase of $1.9 million or 1.7% from 1994
primarily as a result of increased therapy days in the acute care
setting, due partly to the successful introduction of new products,
including the BariKare and the TriaDyne, offset by a continuing shift
in product mix toward lower-cost overlays. Revenue from extended care
settings in 1995 was $37.5 million, an increase of $3.0 million or
8.7% from 1994, primarily due to increased patient days as patients
migrated from high-cost, acute care settings to lower-cost, extended
care settings. Revenue from home care settings was $14.7 million, an
increase of $0.6 million or 4.3% from 1994 which reflects the
Company's decision to shift to an independent dealer network at the
beginning of the year. This network provides easier access to a
larger patient population; however, 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 expense.
Revenue from the Company's international operations was $60.7 million
in 1995, up $14.3 million or 30.8% from 1994. Increased market
penetration and increased product sales contributed to this higher
international revenue. In addition, international operations
benefited from favorable currency exchange rate fluctuations which
accounted for $6.6 million of the revenue increase. Revenue from
medical device operations was $16.9 million in 1995, an increase of
$3.0 million or 21.6% from 1994, primarily as a result of greater
market penetration of the PlexiPulse.
Rental Expenses. Rental expenses consist largely of personnel
costs, depreciation of the Company's rental equipment and related
facility costs. Rental expenses for 1995 were $137.4 million, a
decrease of $21.8 million or 13.7% from 1994. This decrease was a
result of the sale of Medical Services in September 1994. On a pro
forma basis, rental expenses for 1995 would have been $137.4 million,
an increase of $2.2 million or 1.6% over 1994. On a pro forma basis,
as a percentage of total revenue, rental expenses would have been
56.8% in 1995 compared to 60.9% in 1994. This decrease is primarily
attributable to the pro forma increase in revenue, as the majority of
these costs are relatively fixed, combined with a reduction in field
headcount and depreciation expense.
Gross Profit. Gross profit in 1995 was $92.3 million, an
increase of $1.3 million or 1.4% over 1994. On a pro forma basis,
gross profit in 1995 would have been $90.8 million, an increase of
$16.5 million or 22.2% from 1994. On a pro forma basis, as a
percentage of revenue, gross profit margin would have increased to
37.5% in 1995 from 33.5% in 1994 as a result of the increase in pro
forma revenue, the relatively fixed nature of the rental expenses, and
the reduction in headcount and depreciation expense as discussed
above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses for 1995 were $48.5 million, a decrease of
$3.3 million or 6.4% from 1994 as a result of the sale of Medical
Services in September 1994. On a pro forma basis, selling, general
and administrative expenses would have been $44.7 million, an increase
of $9.0 million or 25.3% in 1995 from 1994. On a pro forma basis, as
a percentage of revenue, selling, general and administrative expenses
would have been 18.5% in 1995 compared to 16.1% in 1994. These
increases related primarily to common overhead costs, previously
allocated to Medical Services, which have been absorbed by the
Company, and costs associated with certain key investments, e.g.
improved information systems. 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 total 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.
Operating Earnings. Operating earnings for 1995 were $43.8
million, a decrease of $80.3 million or 64.7% from 1994, primarily as
a result of the one-time benefit of the patent litigation settlement
and the sale of Medical Services in 1994. On a pro forma basis, and
excluding the patent litigation settlement and the other unusual
items, operating profit margin would have been $46.1 million, an
increase of $7.5 million or 19.4% from 1994. On a pro forma basis and
excluding the patent litigation settlement and the other unusual
items, as a percentage of revenue, operating earnings would have
increased to 19.1% for 1995 from 17.4% in 1994 substantially due to
the improved gross profit discussed above.
Net Interest Income. Net interest income for 1995 was $4.6
million as compared to net interest expense of $4.5 million in 1994.
This change was a result of the repayment of the Company's outstanding
long-term debt at the end of the third quarter of 1994. On a pro
forma basis, net interest income for 1995 would have been $4.9 million
compared to net interest income of $1.2 million in 1994. This
difference was primarily due to the fact that the 1995 results include
interest income and a reduction in interest expense resulting from the
additional cash provided by the patent litigation settlement. In
addition, interest income for 1995 included $1.7 million representing
the principal received in excess of the discounted value of the
Mediq/PRN notes.
Income Taxes. The Company's effective income tax rate for 1995
was 41.2% compared to 46.8% in 1994. This decrease was primarily a
result of the recognition in 1995 of certain foreign tax credits and
the write-off of the goodwill associated with Medical Services in
September 1994.
Net Earnings. Net earnings for 1995 were $28.4 million, or $0.63
per share, a decrease of $36.0 million from $64.4 million, or $1.46
per share, in 1994. This decrease was primarily due to the benefit
from the patent litigation settlement in 1994 and the net loss from
the sale of KCIFS in 1995, and offset in part by the net loss from the
sale of Medical Services and other unusual items in 1994. On a pro
forma basis and excluding the effect of the patent litigation
settlement and other unusual items, net earnings would have increased
by 38.6% to $29.4 million or $0.65 per share in 1995 from $21.2
million, or $0.48 per share, in 1994. On a pro forma basis and
excluding the effect of the patent litigation settlement and other
unusual items, as a percentage of revenue, net margin would have
increased to 12.1% in 1995 from 9.5% in 1994, primarily as a result of
the improvement in gross profit discussed above.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
- ---------------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the prior year ($ in
thousands):
<TABLE>
<CAPTION> Year Ended December 31,
Revenue Increase
Relationship (Decrease)
1994 1993 $ Pct
<S> <C> <C> <C> <C>
Revenue:
Rental and service 85% 86% $(3,418) (1%)
Sales and other 15 14 4,192 11
---- ---- -------- ----
100% 100% 774 -
Rental expenses 59 63 (10,452) (6)
Cost of goods sold 7 7 722 4
---- ---- -------- ----
Gross profit 34 30 10,504 13
Selling, general and
administrative expenses 19 20 (1,466) (3)
Unusual items (31) 2 (91,573)
---- ---- ---------
Operating earnings 46 8 103,543 504
Interest (income) expense, net 1 2 (1,380) (23)
---- ---- ---------
Earnings before income
taxes,minority interest,
extraordinary item and
cumulative effect of
change in accounting
principle 45 6 104,923
Income taxes 21 3 48,774 680
Earnings before minority
interest, extraordinary
item and cumulative
effect in accounting
principle 24 3 56,149 753
Minority interest in subsidiary
loss -- -- (520) --
Extraordinary item-debt
extinguishment -- -- 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 24% 3% $ 56,321 699%
===== ==== ======== =====
</TABLE>
The Company's revenue is derived from five primary markets. The
following table sets forth, for the periods indicated, the amount of
revenues derived from each of these markets ($ in millions):
Year Ended December 31
----------------------
1994 1993
-------- ---------
Acute $109.1 $120.7
Extended 34.5 29.1
Home 14.1 8.9
International 46.4 39.6
Medical devices 13.9 7.3
Other(1) 51.6 63.3
-------- --------
$269.6 $268.9
======== ========
(1) Consists of revenue of Medical Services, KCIFS, MRD and
other sales.
Unusual Items. The Company's financial results for the year ended
December 31, 1994 were significantly impacted by (i) the patent
litigation settlement in September 1994 with SSI for $84.8 million and
(ii) the disposition of certain assets of Medical Services on September
30, 1994 for a pre-tax gain of $8.1 million. During the fourth quarter
of 1994, the Company recognized a $2.0 million pre-tax gain as a result
of the collection of Medical Services' accounts receivable which had
not been included in the sale. These receivables had been reserved at
the time of the sale. Partially offsetting these gains were certain
other unusual items, primarily dispositions of overstocked inventories
and underutilized rental assets, a write-down of the carrying value of
the assets of MRD and an addition to the Company's reserve account for
product liability claims. Collectively, these items had a negative pre-
tax earnings impact of $6.8 million. A portion of the proceeds from
the patent litigation settlement and the sale of Medical Services was
used to pay down outstanding debt as well as to pay associated income
taxes.
Total Revenue. Total revenue in 1994, including revenue from
Medical Services and KCIFS, increased by less than 1% to $269.6 million
from $268.9 million in 1993 due to the increased revenue from several
of the Company's markets being offset by a decrease in acute care
revenue. Revenue from acute care facilities was $109.1 million, a
decrease of $11.6 million or 9.6% from 1993. This decrease was a
result of the Company's receiving lower average rental prices for its
products due to industry pricing pressures and an increase in the
proportion of rentals of lower-priced products as a percentage of total
product mix. Revenue from extended care settings was $34.5 million, an
increase of $5.4 million or 18.7% from 1993 due to a shift in patient
therapy days to extended care settings from acute care settings.
Revenue from home care settings was $14.1 million, an increase of $5.2
million or 59.2% from 1993 caused by the increased migration of
patients to home care settings. Revenue from international operations
increased $6.9 million or 17.4% to $46.4 million in 1994 primarily due
to increased market penetration in Germany and Austria. Revenue from
medical devices increased by $6.6 million or 90.8% to $13.9 million in
1994 primarily as a result of the introduction of the PlexiPulse into
new geographic markets within the United States.
Rental Expenses. Rental expenses for 1994 were $159.2 million, a
decrease of $10.5 million or 6.2% from 1993. As a percentage of
revenue, rental expenses were 59.1% in 1994 compared to 63.1% in 1993.
This decrease was a result of the sale of Medical Services in September
1994, lower depreciation expense and an overall effort to control
costs.
Gross Profit. Gross profit increased by 13.0% to $91.0 million in
1994 from $80.5 million in 1993. As a percentage of revenue, gross
profit margin increased to 33.7% in 1994 from 29.9% in 1993, primarily
due to the reduced depreciation expense and cost control efforts
discussed above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses decreased $1.5 million, or 2.8%, to $51.8
million in 1994 from $53.3 million in 1993. As a percentage of
revenue, selling, general and administrative expenses were 19.2% in
1994 compared to 19.8% in 1993. These decreases primarily relate to
lower expenses in the corporate office and field organizations
(primarily from headcount reductions) caused by the sale of Medical
Services in September 1994 and a reduction in bad debt expenses.
Operating Earnings. Operating earnings increased $103.6 million
to $124.1 million in 1994 from $20.5 million in 1993. This increase
was directly attributable to the patent litigation settlement and the
pre-tax gain on the sale of Medical Services. Excluding the patent
litigation settlement and the other unusual items, operating earnings
would have increased by $12.0 million or 43.9% to $39.2 million in 1994
from $27.2 million in 1993. Excluding the patent litigation settlement
and other unusual items, as a percentage of revenue, operating margin
would have increased to 14.5% in 1994 from 10.1% in 1993, primarily as
a result of the decreased rental expense discussed above and, to a
lesser extent, lower selling, general and administrative expenses.
Net Interest Expense. Net interest expense in 1994 was $4.5
million compared to $5.9 million in 1993 as a result of the reduction
of the Company's long-term debt at the end of the third quarter of 1994
as well as the interest earned on the Mediq/PRN notes.
Income Taxes. The Company's effective income tax rate in 1994 was
46.8% compared to 49.1% in 1993. This decrease is primarily
attributable to the fact that the nondeductibility of goodwill written
off in connection with the sale of Medical Services was offset by the
impact of the patent litigation settlement. The patent litigation
settlement contributed approximately 68% of the Company's pre-tax
earnings and was taxed at the full statutory rate.
Other. During 1994, the cumulative losses allocated to the
minority interest holder of MRD exceeded the balance of such holder's
investment. As a result, the Company recognized $3.8 million of
losses. These losses and the diminished opportunities within the
refurbishment business contributed towards the Company's decision to
liquidate the assets and discontinue the operations of MRD.
Concurrently, the Company wrote off unamortized goodwill of $1.5
million and wrote down inventories to net realizable value.
Change in Accounting Principles. During the first quarter of
1994, the Company recorded the cumulative effect of a change in its
inventory accounting method which resulted in a one-time after-tax
earnings increase of $742,000, or $0.02 per share.
Net Earnings. Net earnings in 1994 were $64.4 million, or $1.46
per share, an increase of $56.3 million from $8.1 million, or $0.18 per
share, in 1993, primarily as a result of the patent litigation
settlement. Excluding the effect of the patent litigation settlement
and the other unusual items only, net earnings would have increased by
80.5% to $22.0 million, or $0.50 per share, in 1994 from $12.2 million,
or $0.27 per share, in 1993. Excluding the effect of the patent
litigation settlement and the other unusual items, as a percentage of
revenue, net earnings would have increased to 8.1% in 1994 from 4.5% in
1993, primarily as a result of reductions in depreciation expense,
selling, general and administrative expenses and interest expense.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
- ---------------------------------------------------------------------
Total Revenue. Total revenue in 1993 decreased by 3.5% to $268.9
million from $278.5 million in 1992 primarily as a result of a decline
in revenue from acute care facilities. Revenue from acute care
facilities was $120.7 million, a decrease of $18.6 million or 13.3%
from 1992. This decrease was caused by the uncertainty created by the
health care reform debate, which led to increased cost control
pressures. In addition, the shift in the Company's product mix toward
lower-priced products such as mattress overlays, the increased
migration of patients from acute care settings to extended and home
care settings and the Company's loss of market share in the acute care
setting contributed to this decrease. Revenue from extended care
settings was $29.1 million, an increase of $2.8 million or 10.8% from
1992 as a result of the patient migration discussed above. Revenue
from home care settings was $8.9 million, a decrease of $1.3 million
or 13.2% from 1992, due to a significant reduction in reimbursement
rates for the HomeKair bed which was partially offset by increased
rentals of this product. Revenue from international operations in 1993
was $39.6 million, a decrease of $0.4 million or 1.1% from 1992.
Revenue from medical devices increased $5.6 million from $1.7 million
in 1992 to $7.3 million in 1993 due to increased market acceptance of
the PlexiPulse.
Rental Expenses. Rental expenses for 1993 were $169.7 million, an
increase of $13.0 million or 8.3% from $156.7 million in 1992. As a
percentage of revenue, rental expense was 63.1% in 1993 compared to
56.3% in 1992. The increase was primarily a result of additional costs
incurred related to the formation of operating divisions by the
Company which resulted in additional sales and service management
functions.
Gross Profit. Gross profit decreased by $22.3 million or 21.7% to
$80.5 million in 1993 from $102.8 million in 1992. As a percentage of
revenue, gross profit decreased to 29.9% in 1993 from 36.9% in 1992,
primarily due to the decline in revenue and the additional costs
incurred resulting from the formation of operating divisions by the
Company discussed above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $5.6 million or 11.7% to $53.3
million in 1993 from $47.7 million in 1992. As a percentage of
revenue, selling, general and administration expenses were 19.8% in
1993 compared to 17.1% in 1992. These increases were primarily
attributable to the write-off of accounts receivable and start-up
expenses related to the Company's two newest lines of business, NuTech
and MRD.
Unusual Items. During the fourth quarter of 1993, the Company
recorded unusual items of $6.7 million which reduced net earnings by
approximately $4.1 million (net of tax benefit of $2.6 million), or
$0.09 per share. The Company recognized charges included in unusual
items totaling $4.8 million, primarily related to dispositions of
overstated inventories and underutilized rental assets. Unusual items
also included a provision for anticipated losses of $1.0 million
related to product liability claims resulting from one of the
Company's insurance carriers being placed into receivership, and a
provision of $0.9 million relating to severance costs and costs
anticipated for the relocation of certain operations.
Operating Earnings. Operating earnings decreased by 62.7% to
$20.5 million in 1993 from $55.1 million in 1992. Excluding the effect
of the unusual items referred to above, operating earnings would have
decreased by 50.6% to $27.2 million in 1993 from $55.1 million in
1992. Excluding the effect of the unusual items, as a percentage of
revenue, operating earnings would have decreased to 10.1% in 1993 from
19.8% in 1992, primarily as a result of the decline in revenue, the
costs incurred related to the formation of operating divisions by the
Company and the increase in rental and selling, general and
administrative expenses discussed above.
Net Interest Expense. Net interest expense in 1993 was $5.9
million compared to $7.2 million in 1992 primarily due to a reversal
of interest accrued in prior years related to a contingent liability
that was never realized. The effect of this reversal was partially
offset by an increase in the Company's borrowings under its credit
facilities and accrued interest related to prior year tax liabilities.
Income Taxes. The Company's effective tax rate in 1993 was 49.1%,
compared to 40.5% in 1992. The increase in the effective tax rate was
attributable to (i) an increase in the marginal statutory federal
income tax rate from 34% to 35%, (ii) an increase in international
taxable earnings (which are subject to a tax rate higher than the
marginal U.S. statutory rate) as a percentage of taxable income, (iii)
an increase in non-deductible expenses (primarily goodwill
amortization) as a percentage of taxable income and (iv) losses of MRD
which were non-deductible for federal and state tax purposes. The
increases were partially offset by tax benefits related to the
recapitalization of the Company's Canadian and French subsidiaries.
Other. In the fourth quarter of 1993, the Company refinanced its
existing debt facility which resulted in an extraordinary charge of
$0.4 million, net of a $0.3 million tax benefit, or $0.01 per share.
Change in Accounting Principles. During 1993, the Company also
recorded the cumulative effect of a change in accounting principles
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. Net earnings decreased by 71.7% to $8.1 million, or
$0.18 per share, in 1993 from $28.5 million, or $0.63 per share, in
1992, as a result of the decline in revenue and increase in rental and
selling, general and administrative expenses discussed above.
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 decline in revenue and the increase
in rental expenses and selling, general and administrative expenses
discussed above.
Financial Condition
The change in revenue and expenses experienced by the Company
during 1995, as well as the impact of the KCIFS sale, resulted in
changes to the Company's balance sheet as follows:
Total finance lease receivables decreased $15.3 million and note
payable and total long-term obligations decreased $7.9 million from
December 31, 1994 due to the sale of KCIFS in the second quarter of
1995.
Note receivable from principal shareholder at December 31, 1995 of
$10.3 million relates to a $10.0 million loan (plus accrued interest)
made to James R. Leininger, M.D., the principal shareholder and
chairman of the Company's Board of Directors in August 1995. In
January 1996, the note receivable was collected in full.
Other notes receivable at December 31, 1995 decreased $6.0
million, or 65.4% to $3.2 million from $9.2 million at December 31,
1994 due to payments received during 1995.
Income taxes payable decreased $4.0 million to $4.0 million at
December 31, 1995 from $8.0 million at December 31, 1994 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 1995 were $15.1 million compared to payments of $57.3
million for 1994.
Deferred income taxes at December 31, 1995 were $0.4 million
compared to a deferred tax benefit of $4.1 million at December 31,
1994. The change from the prior year is primarily due to depreciation
on an asset subject to a leveraged lease which was acquired by the
Company in December of 1994.
Income Taxes
The provision for deferred income taxes is based on the asset and
liability method and represents the change in the deferred income tax
accounts during the year. Under the asset and liability method of FAS
109, deferred income taxes are recognized for the future tax
consequences attributable to 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.
At the end of 1995 the net impact of these timing issues resulted
in a net deferred tax liability comprised of deferred tax liabilities
totalling $6.4 million offset by deferred tax assets totaling $6.0
million. During 1994, the net impact of these timing issues resulted in
a net deferred tax asset versus the net deferred tax liability
recognized in 1995. Primary components of these future tax benefits
include reserves for uncollectible accounts receivable and reserves for
inventory.
Legal Proceedings
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for the
Western District of Texas. Novamedix 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 adverse effect on the
Company's business, financial condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust lawsuit
against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-
Rom. The suit was filed in the United States District Court for the
Western District of Texas. The suit alleges that Hill-Rom used its
monopoly power in the standard hospital bed business to gain an unfair
advantage in the specialty hospital bed business. Specifically, the
allegations set forth in the suit include a claim that Hill-Rom
required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products
over which they have monopoly power -- hospital beds and head wall
units. The suit further alleges that Hill-Rom engaged in activities
which constitute predatory pricing and refusals to deal. Hill-Rom has
filed an answer denying the allegations in the suit. Although
discovery is just beginning and it is not possible to predict the
outcome of this litigation or the damages which might be awarded, the
Company believes that its claims are meritorious.
The Company is party to several lawsuits arising in the ordinary
course if 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 "Consolidated 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.
Liquidity and Capital Resources
At December 31, 1995, the Company had current assets of $142.4
million and current liabilities of $33.0 million resulting in a working
capital surplus of $109.4 million, compared to a surplus of $90.7
million at December 31, 1994.
In 1995, the Company made net capital expenditures of $33.9
million. The 1995 capital expenditures primarily relate to the
Company's new TriDyne and BariKare products and the design and
development of new information systems. Other than the committed
capital expenditure for new product inventory for $1.6 million, the
Company has no material long-term capital commitments.
The Company's Credit Agreement permits unsecured borrowings of up
to $50.0 million. At December 31, 1995, the entire borrowing base of
$50.0 million was available. The interest rate payable on borrowings
under the Credit Agreement is, at the election of the Company, the
Bank of America's reference rate or the London interbank offered rate
quoted to Bank of America for one, two, three or six month Eurodollar
deposits adjusted for appropriate reserves plus 40 basis points. The
Credit Agreement requires that the Company maintain specified ratios
and meet certain financial targets and also contains certain customary
covenants. At December 31, 1995, the Company was in compliance with
all covenants.
During 1995, the Company generated $56.8 million in cash from
operating activities compared to $96.5 million in the prior year. The
primary reason for this difference was the sale of Medical Services and
the patent litigation settlement. Investment activities for 1995 used
$42.9 million, including net capital expenditures of $33.9 million and
a $10.0 million loan to James R. Leininger, M.D., chairman of the
Company's Board of Directors. As of January 31, 1996, subsequent to
the secondary sale of common shares by Dr. Leininger and certain
related selling shareholders, the loan to Dr. Leininger was paid in
full. Financing activities for 1995 used $5.6 million consisting
primarily of dividends paid to shareholders.
At December 31, 1995, cash and cash equivalents totaling $52.4
million were available for general corporate purposes. Based upon the
current level of operations, the Company believes that cash flow from
operations and cash reserves will be adequate to meet its anticipated
requirements for working capital and capital expenditures through 1996.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION> December 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,399 $ 43,241
Accounts receivable, net 56,032 55,456
Finance lease receivables, current -- 8,051
Inventories 18,854 18,167
Note receivable from principal shareholder 10,291 --
Notes receivable, current, net -- 6,014
Prepaid expenses and other 4,865 4,474
------- -------
Total current assets 142,441 135,403
------- -------
Net property, plant and equipment 62,276 51,357
Finance lease receivables, net of current -- 7,242
Other notes receivable, net 3,187 3,187
Goodwill, less accumulated amortization of
$10,625 in 1995 and $9,105 in 1994 13,968 15,476
Other assets, less accumulated amortization
of $5,638 in 1995 and $8,012 in 1994 21,854 15,989
Deferred income tax benefit, net -- 4,077
-------- --------
$243,726 $232,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,512 $ 4,079
Note payable -- 1,878
Current installments of long-term
obligations -- 3,410
Accrued expenses 26,490 27,280
Income tax payable 4,026 8,025
------ ------
Total current liabilities 33,028 44,672
------ ------
Long-term obligations, excluding current
installments -- 2,636
Deferred income taxes, net 374 --
------- ------
33,402 47,308
------- ------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock; issued and outstanding 44,331
in 1995 and 43,921 in 1994 44 44
Additional paid-in capital 12,123 10,053
Retained earnings 197,290 175,480
Cumulative foreign currency translation
adjustment 1,052 (154)
Notes receivable from officers (185) --
------- -------
210,324 185,423
------- -------
$243,726 $232,731
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
<TABLE>
<CAPTION> Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Revenue:
Rental and service $206,653 $228,832 $232,250
Sales and other 36,790 40,814 36,622
-------- -------- --------
Total revenue 243,443 269,646 268,872
-------- -------- --------
Rental expenses 137,420 159,235 169,687
Cost of goods sold 13,729 19,388 18,666
-------- ------- --------
151,149 178,623 188,353
-------- ------- --------
Gross profit 92,294 91,023 80,519
Selling, general and administrative
expenses 48,502 51,813 53,279
Unusual items -- (84,868) 6,705
-------- ------- -------
Operating earnings 43,792 124,078 20,535
Interest expense (income), net (4,554) 4,528 5,908
-------- ------- -------
Earnings before income
taxes, minority interest,
extraordinary item and
cumulative effect of
changes in accounting
principle 48,346 119,550 14,627
Income taxes 19,905 55,949 7,175
-------- ------- ------
Earnings before minority
interest, extraordinary
item and cumulative
effect of changes in
accounting principle 28,441 63,601 7,452
Minority interest in subsidiary loss -- 40 560
Extraordinary item -- debt
extinguishment, net -- -- (400)
Cumulative effect of change in
accounting for inventory -- 742 --
Cumulative effect of change in
accounting for income taxes -- -- 450
------ ------ -------
Net earnings $28,441 $64,383 $8,062
====== ====== =======
Earnings per common and common
equivalent share:
Earnings before extraordinary item
and cumulative effect of changes
in accounting principle $ 0.63 $ 1.44 $ 0.18
Extraordinary item -- -- (0.01)
Cumulative effect of change in
accounting for inventory -- 0.02 --
Cumulative effect of change in
accounting for income taxes -- -- 0.01
------- ------- --------
Earnings per share $ 0.63 $ 1.46 $ 0.18
======= ======== ========
Shares used in earnings per share
computations 45,457 44,143 44,627
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION> Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $28,441 $ 64,383 $ 8,062
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 22,760 38,795 47,884
Provision for uncollectible accounts
receivable 1,883 1,100 5,330
Noncash portion of unusual items -- 4,797 4,832
Loss (gain) on KCIFS and Medical Services
dispositions 2,933 (10,121) --
Change in assets and liabilities net of
effects from purchase of subsidiaries and
unusual items:
Decrease (increase) in accounts
receivable, net (2,695) 7,316 (2,481)
Decrease (increase) in notes receivable 6,014 (9,201) --
Decrease (increase) in inventory (998) 2,735 (1,326)
Decrease (increase) in prepaid and other
assets (593) (3,947) (5,437)
Increase (decrease) in accounts payable (895) (3,672) 666
Increase (decrease) in accrued expenses (520) 2,781 3,930
Increase (decrease) in income taxes
payable (3,999) 5,378 (2,889)
Increase (decrease) in deferred income
taxes 4,451 (11,787) (2,033)
-------- -------- --------
Net cash provided by operating
activities 56,782 96,451 56,538
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment (36,104) (13,814) (33,402)
Decrease (increase) in inventory to be
converted into equipment for short-
term rental (1,000) 4,250 (3,865)
Dispositions of property, plant and
equipment 3,231 2,869 2,773
Businesses acquired in purchase
transactions, net of cash acquired -- -- (4,240)
Proceeds from sale of KCIFS and Medical
Services divisions 7,182 65,300 --
Decrease (increase) in finance lease
receivables, net 339 (1,561) (419)
Note received from principal shareholder (10,000) -- --
Increase in other assets (6,531) (9,230) (4,412)
-------- ------- -------
Net cash provided (used) by
investing activities (42,883) 47,814 (43,565)
-------- ------- --------
Cash flows from financing activities:
Borrowings (repayments) of notes payable
and long-term obligations (800) (102,625) 7,277
Repayments of capital lease obligations (64) (2,382) (3,526)
Proceeds from the exercise of stock options 4,919 915 632
Payments for retirement of preferred stock -- -- (3,452)
Purchase and retirement of treasury stock (2,849) (1,157) (2,951)
Cash dividends paid to shareholders (6,631) (6,588) (6,664)
Other (185) (791) (101)
-------- -------- -------
Net cash used by financing activities (5,610) (112,628) (8,785)
-------- -------- -------
Effect of exchange rate changes on cash and
cash equivalents 869 1,324 (871)
------- -------- -------
Net increase in cash and cash equivalents 9,158 32,961 3,317
Cash and cash equivalents, beginning of
year 43,241 10,280 6,963
------- ------- -------
Cash and cash equivalents, end of year $52,399 $ 43,241 $10,280
</TABLE>
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Capital Accounts
Three Years Ended December 31, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION> Notes
Cumulative Receivable
Foreign from Officers
Additional Currency for Exercise
Preferred Common Paid-In Retained Translation Treasury Loan to of Stock
Stock Stock Capital Earnings Adjustment Stock ESOP Options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------- ----- -------- -------- ---------- -------- ------- ---------
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 -- -- 3,148 -- -- -- -- --
Accretion of
preferred stock .. 145 -- -- (145) -- -- -- --
Treasury stock
purchased .. -- -- -- -- -- (2,951 ) -- --
Cash dividends
on common and
preferred stock --
$0.15 per share -- -- -- (6,664) -- -- -- --
Payments on loan
to ESOP .. -- -- -- -- -- -- 526 --
Purchase and
retirement of
perferred 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 -- -- 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) -- -- --
Net earnings .. -- -- -- 28,441 -- -- -- --
Exercise of
stock options .. -- -- 4,024 -- -- -- -- (185)
Tax benefit
realized from
stock option plan -- -- 895 -- -- -- -- --
Treasury stock
purchased -- -- -- -- -- (2,849) -- --
Treasury stock
retired -- -- (2,849) -- -- 2,849 -- --
Cash dividends
on common stock--
$0.15 per share -- -- -- (6,631) -- -- -- --
Foreign currency
translation adjustment -- -- -- -- 1,206 -- -- --
---- ----- -------- -------- ------- ------- ------ -----
Balances at
December 31, 1995 $ -- $ 44 $12,123 $197,290 $1,052 $ -- -- $ (185)
======= ===== ======== ======== ====== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Kinetic Concepts, Inc. ("KCI") and all subsidiaries
(collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain reclassifications of amounts related to prior years have
been made to conform with the 1995 presentation.
(b) Nature of Operations and Customer Concentration
-----------------------------------------------
The Company designs, manufactures, markets and distributes
therapeutic products, primarily specialty hospital beds, mattress
overlays and mattress replacement systems, that treat and prevent
the complications of immobility. The principal markets for the
Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities
throughout the U.S. and Western Europe. Receivables from these
customers are unsecured.
The Company operates in ten foreign countries including Germany,
Austria, the United Kingdom, Canada, France, the Netherlands,
Switzerland, Australia, Sweden and Italy. (see Note 12).
The Company contracts with both proprietary and voluntary
purchasing organizations ("GPOs"). Proprietary GPOs own all of
the hospitals which they represent and, as a result, can ensure
complete compliance with an executed national agreement.
Voluntary GPOs negotiate contracts on behalf of member hospital
organizations but cannot ensure that their members will comply
with the terms of an executed national agreement. Approximately
46% of the Company's revenue during 1995 was generated under
national agreements with GPOs.
(c) Revenue Recognition
-------------------
Service and rental revenue are recognized as services are
rendered. Sales and other revenue are recognized when products
are shipped. Through June 15, 1995, the Company leased certain
medical equipment under long-term lease agreements which were
accounted for as direct financing leases. Unearned interest was
amortized to income over the term of the lease using the interest
method. (see Note 2).
(d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an
original maturity of ninety days or less to be cash equivalents.
(e) 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 $742,000 (after
reduction of income taxes of $455,000), or $0.02 per share, which
reflects the cumulative effect of this change for the periods
prior to January 1, 1994. The pro forma 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.
(f) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Betterments
which extend the useful life of the equipment are capitalized.
(g) 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.
(h) 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 Company's strategic focus.
(i) Other Assets
------------
Other assets consist principally of patents, trademarks, system
development costs, long-term investments, cash and investments
restricted for use by the Company's captive insurance company,
and the estimated residual value of an asset subject to a
leveraged lease. Patents and trademarks are amortized over the
estimated useful life of the respective asset using the straight-
line method.
(j) 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.
(k) 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.
(l) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(m) 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 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.
(n) 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.
(o) New Pronouncements
------------------
Accounting for Asset Impairment
- -------------------------------
During March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." The Company is required to adopt
Statement 121 in the fiscal year beginning January 1, 1996.
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. The Company has not completed all of the
analysis required to estimate the impact of the new statement;
however, the adoption of Statement 121 is not expected to have a
material adverse impact on the Company's financial position or
the results of its operations at the time of adoption.
Accounting for Stock-Based Compensation
- ---------------------------------------
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation. 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 is subject to the disclosure requirements of
Statement 123 in the fiscal year beginning January 1, 1996.
NOTE 2. Acquisitions and Dispositions
-----------------------------
On June 15, 1995, the Company sold KCI Financial Services
("KCIFS") to Cura Capital Corporation ("Cura") for cash under a
Stock Purchase Agreement. Upon consummation of this transaction,
Cura acquired all of the outstanding capital stock of KCIFS.
Total proceeds from the sale were $7.2 million. This transaction
resulted in a pre-tax loss of $2.9 million which is reflected in
selling, general and administrative expenses in 1995. In
addition, the Company and its affiliates agreed not to provide
lease financing for medical equipment manufactured by third
parties for a period of three years. KCIFS served as the leasing
agent for Medical Services, certain assets of which were sold in
September 1994. The operating results of KCIFS for 1995 and 1994
were not material as compared to the overall results of the
Company.
In December of 1994, the Company adopted a plan to liquidate the
assets of Medical Retro Design, Inc. ("MRD"). Pursuant to that
plan, the Company sold certain operating assets of MRD to HBR
Healthcare Co. under an Asset Purchase Agreement effective March
27, 1995. The sales price was approximately $250,000. In
conjunction with the sale, KCI and its affiliates agreed not to
refurbish certain hospital beds and related furniture for a
period of three years. Goodwill of $1.5 million associated with
MRD was written off in 1994. The write-off was treated as an
unusual item. The operating results of MRD for 1995 and 1994
were immaterial to the overall results of the Company.
On September 30, 1994, the Company sold certain assets (the
"Assets") used exclusively by Medical Services to Mediq/PRN under
an Asset Purchase Agreement. Upon consummation of this
transaction, Mediq/PRN acquired the Assets and assumed certain
liabilities of Medical Services. The sales price was
approximately $84.1 million. In conjunction with the sale, the
Company and its affiliates agreed not to rent or distribute a
portfolio of critical care and life support equipment for five
years.
Gross proceeds included a cash payment of approximately $65.3
million and promissory notes in the aggregate principal amount of
$18.8 million. The net proceeds of $72.8 million, pretax gain of
$10.1 million, and after-tax net loss of $2.5 million were
calculated, as follows (in thousands):
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
-------
Pre-tax gain on disposition 10,121
-------
Tax expense (12,601)
-------
Net loss on disposition $(2,480)
=======
Tax expense exceeded the pretax gain amount due to the
nondeductibility of $25.8 million in unamortized goodwill.
Assuming the sale had been consummated as of the beginning of
1994 and 1993 and excluding the after-tax loss on disposition,
pro forma operating results of the Company would be as follows
(in thousands):
Year Ended December 31,
-----------------------
1994 1993
---------- ---------
Revenue $225,800 $212,882
Net earnings $ 71,116 $ 8,064
Earnings per share $ 1.61 $ 0.18
Shares used 44,143 44,627
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 fair
value of assets acquired, including goodwill, was $5.1 million
and liabilities assumed were $0.9 million. 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 Medical Services and the
unamortized goodwill was written off.
NOTE 3. Notes Receivable
----------------
In August 1995, the Company loaned $10.0 million to James R.
Leininger, M.D., the principal shareholder and chairman of the
Company's Board of Directors. The note was secured by a Stock
Pledge Agreement covering one million shares of common stock in
Kinetic Concepts, Inc. Interest was payable in annual
installments at the rate of 7.94%. In January 1996, the note
receivable was collected in full.
Other notes receivable includes notes received from Mediq/PRN as
part of the proceeds on the sale of Medical Services effective
September 30, 1994. The values of the various notes receivable at
December 31, 1995 and December 31, 1994 for accounting purposes
are described below (in thousands):
Year Ended December 31,
--------------------------
Principal Balance Stated
1995 1994 Interest
------- ------- --------
Rate
----
Note from PRN Holding, Inc. with
interest due quarterly in
arrears beginning March, 1996
and principal due
September, 1999 $10,000 $10,000 10%
Notes from Mediq/PRN due in 10
equal monthly installments
beginning December, 1994 -- 5,404 --
Note from Mediq/PRN due in 12
equal monthly installments
beginning December, 1994 -- 2,734 8%
Miscellaneous -- 4 --
------ ------
Total 10,000 18,142
Less discount and valuation
allowance (6,813) (8,941)
Less amounts classified as
current -- (6,014)
Notes receivable, noncurrent $ 3,187 $ 3,187
======= =======
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 (in thousands):
December 31,
--------------
1995 1994
---- ----
Trade accounts receivable $60,149 $61,722
Employee and other receivables 2,060 2,334
------- -------
62,209 64,056
Less allowance for doubtful
receivables 6,177 8,600
------- -------
$56,032 $55,456
======= =======
Inventories are comprised of the following (in thousands):
December 31,
------------
1995 1994
---- -----
Finished goods $ 2,890 $ 3,086
Work in process 1,040 1,642
Raw materials, supplies and parts 20,174 17,689
------- -------
24,104 22,417
Less amounts expected to be
converted into equipment for
short-term rental 5,250 4,250
------- -------
$18,854 $18,167
======= =======
Net property, plant and equipment consists of the following (in
thousands):
December 31,
--------------
1995 1994
---- ----
Land 742 742
Buildings 11,089 9,882
Equipment for short-term rental 110,858 117,745
Machinery, equipment and furniture 30,256 29,041
Leasehold improvements 725 633
Inventory to be converted into
equipment 5,250 4,250
------ ------
158,920 162,293
Less accumulated depreciation and
amortization 96,644 110,936
------ -------
$62,276 $51,357
Accrued expenses consist of the following (in thousands):
December 31,
-------------
1995 1994
----- ------
Payroll, commissions and related
taxes $12,589 $11,450
Insurance accruals 3,470 4,143
Accruals related to disposition of
Medical Services 178 1,524
Other accrued expenses (Note 11) 10,253 10,163
------- -------
$26,490 $27,280
======= =======
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
-----------------
Through June 15, 1995, the Company leased medical equipment to
hospitals, nursing homes, doctors and others through KCIFS.
Equipment leases that met the criteria for direct financing
leases were carried at the gross investment in the lease less
unearned income. Any equipment which did not meet the criteria
for a direct financing lease was 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 balance sheet at a cost of $3.4 million and
accumulated depreciation of $1.2 million. The carrying amounts
of these leases approximated fair market value. At December 31,
1995, there were no remaining finance or operating lease
receivables (see Note 2).
NOTE 6. Note Payable and Long-Term Obligations
--------------------------------------
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 May 8, 1995 and
provides for a $50 million one-year revolving credit facility
with a two-year renewal option. Any advances under the Credit
Agreement are due at the end of the period covered by the Credit
Agreement. At December 31, 1995, the entire $50 million balance
was available.
The interest rate payable on borrowings under the Credit
Agreement is at the election of the Company: (i) the Bank's
reference rate, or (ii) the London inter-bank offered rate quoted
to the Bank for one, two, three, or six month Eurodollar deposits
adjusted for appropriate reserves ("LIBOR") plus 40 basis points.
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 contract of the Company, and
establishes various fees to be paid by the Company. At December
31, 1995, the Company was in compliance with all covenants.
In the fourth quarter of 1993, the Company recorded an
extraordinary item of $400,000, net of $267,000 tax benefit, or
$0.01 per share related to the refinancing of its then-existing
debt facility.
At December 31, 1994, KCIFS had a note payable which provided for
borrowings up to a maximum of $5.0 million with a bank. At
December 31, 1994, $1.9 million was due on demand on the note
payable. The term loan portion of this obligation is included in
long-term obligations below. Interest on the note payable was at
the bank's base lending rate plus one-half of one percent (9% at
December 31, 1994).
A summary of long-term obligations follows (in thousands):
December 31,
-------------
1995 1994
----- -----
Nonrecourse notes payable to financial
institutions, interest rates ranging
from 10.5% to 13.5%, payable
through October 1998 $ -- $ 891
Other notes -- 5,155
------- ------
-- 6,046
Less current installments -- 3,410
------- ------
Long-term obligations, excluding current
installments $ -- $2,636
======= ======
The carrying value of the Company's long-term debt obligations
approximates their face value based on current rates for similar
types of debt.
Interest paid on debt during 1995, 1994 and 1993 amounted to $0.4
million, $5.4 million and $7.0 million, respectively.
NOTE 7. Leasing Obligations
-------------------
The Company 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 $12.0 million, $10.9 million and $11.1
million for the years ended December 31, 1995, 1994 and 1993,
respectively.
Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of December 31, 1995 are as follows:
Operating
Leases
--------
1996 $8,396
1997 5,389
1998 3,296
1999 1,861
2000 1,182
Later years 302
-------
Total minimum lease payments $20,426
=======
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 $450,000 was determined as of January 1, 1993, and is reported
separately in the consolidated statement of earnings for the year
ended December 31, 1993.
Earnings before income taxes consists of the following (in
thousands):
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- -----
Domestic $37,542 $110,287 $10,022
Foreign 10,804 9,263 4,605
------- ------- -------
$48,346 $119,550 $14,627
======= ======== =======
Income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Year Ended December 31, 1995
----------------------------
Current Deferred Total
------- -------- -------
Federal $ 8,148 $ 4,174 $12,322
State 2,140 277 2,417
International 5,166 0 5,166
------- ------- --------
$15,454 $ 4,451 $19,905
======= ======= =======
Year Ended December 31, 1994
----------------------------
Current Deferred Total
------- -------- -----
Federal $56,697 $(11,031) $45,666
State 8,212 (756) 7,456
International 3,282 -- 3,282
------- --------- -------
$68,191 $(11,787) $56,404
======= ======== =======
Year Ended December 31, 1993
----------------------------
Current Deferred Total
------- -------- ------
Federal $ 4,483 $(1,071) $ 3,412
State 1,565 (574) 991
International 2,710 62 2,772
------- ------- -------
$ 8,758 $(1,583) $ 7,175
======= ======= =======
Income tax expense attributable to income from continuing
operations differed from the amounts computed by applying the
statutory tax rate of 35 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Computed "expected" tax expense $16,921 $41,843 $5,119
Goodwill 533 9,307 824
State income taxes, net of Federal
benefit 1,571 4,846 644
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 1,836 350 1,159
Utilization of foreign net operating
loss carryforwards (231) (814) (1,319)
Nonconsolidated foreign net
operating loss 492 566 --
Foreign, other (1,450) 271 (135)
Effect of change in inventory
accounting method -- 455 --
Other, net 233 (420) (169)
------ ----- -------
$19,905 $56,404 $7,175
======= ======= =======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and December 31, 1994 are
presented below:
1995 1994
---- ----
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts $3,591 $3,083
Intangible assets, deducted for book
purposes but capitalized and amortized
for tax purposes 323 51
Net operating loss carryforwards 492 1,193
Inventories, principally due to additional
costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986 702 1,064
Notes receivable, basis difference 397 679
Legal fees, capitalized and amortized for
tax purposes 402 672
Other 560 139
------ ------
Total gross deferred tax assets 6,467 6,881
Less valuation allowance (492) (1,193)
------ ------
Net deferred tax assets 5,975 5,688
Deferred Tax Liabilities:
Plant and equipment, principally due to
differences in depreciation and basis (5,686) (1,032)
Accrued liabilities, not currently
deductible for tax purposes -- (256)
Deferred state tax liability (421) (144)
Other (242) (179)
------ ------
Total gross deferred tax liabilities (6,349) (1,611)
Net deferred tax asset (liability) $ (374) $4,077
====== ======
</TABLE>
At December 31, 1995, the Company had $1.3 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 $616,000 can be
used indefinitely and the remainder expire from 1997 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. In accordance with the Company's
accounting policy, U.S. deferred taxes have not been provided on
undistributed earnings of foreign subsidiaries at the end of
1995, as the Company intends to reinvest these earnings
permanently in the foreign operations or to repatriate such
earnings only when advantageous for the Company to do so. The
amount of the unrecognized tax liability for these undistributed
earnings is not material at the end of 1995 due to the
availability of foreign tax credits.
Income taxes paid during 1995, 1994, and 1993 were $15.1 million,
$57.3 million and $13.3 million, respectively.
NOTE 9. Shareholders' Equity and Employee Benefit Plans
-----------------------------------------------
Common Stock
The Company is authorized to issue 100 million shares of Common
Stock, $.001 par value (the "Common Stock"). The number of shares
of Common Stock issued and outstanding at the end of 1995 and
1994 was 44,331,000 and 43,921,000, respectively.
Treasury Stock
In February, 1993, the Company's Board of Directors approved a
program to repurchase up to 3,000,000 shares of its Common Stock.
The Company repurchased 372,000 shares during 1995 and 237,000
shares during 1994. 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 372,000 and 1,779,000 treasury
shares in 1995 and 1994, respectively.
Preferred Stock
The Company is authorized to issue up to 20 million shares of
Redeemable Preferred Stock, par value $0.001 per share, in one or
more series. As of December 31, 1995 and December 31, 1994, 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 5,750,000 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 (in thousands, except per share
data):
Option Price
Shares Per Share
------- ----------------
Outstanding, January 1, 1993 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
Granted 865 $5.50 to $11.75
Canceled (277) $3.375 to $8.1875
Exercised (760) $3.375 to $6.75
-------
Outstanding, December 31, 1995 2,795 $3.00 to $11.75
=======
As of December 31, 1995 and 1994, 1.0 million and 1.1 million
options were exercisable and 834,000 and 1,423,000 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 300,000
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 (in thousands, except per share data):
Shares Option Price Per
Share
-------- ----------------
Outstanding, January 1, 1993 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 $5.25
--------
Outstanding, December 31, 1994 62 $3.75 to $9.375
Granted 8 $8.125 to $9.25
Exercised (32) $4.125 to $5.875
Lapsed -- $--
--------
Outstanding, December 31, 1995 38 $3.75 to $9.375
========
In July, 1991, the Company granted options to three non-employee
directors of the Company to acquire a total of 30,000 shares of
the Company's Common Stock at $5.00 per share (the fair market
value at date of grant). At December 31, 1995, 20,000 options are
exercisable and expire ten years from the grant date.
In addition, in April, 1993, the Company granted a warrant to
AmHS Purchasing Partners, L.P. ("AmHS") to acquire 150,000 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 440,000
of his shares at fair market value of $5.74 to the newly
appointed Chief Executive Officer.
The 1995 Kinetic Concepts, Inc. Senior Executive Management Stock
Option Plan (the "Senior Executive Stock Option Plan") covers a
total of 1.4 million shares of the Company's Common Stock and may
be granted to certain senior executives of the Company at the
recommendation of the Chief Executive Officer and discretion of
the Company's Board of Directors. The exercise price for each
share of common stock covered by an option shall be established
by the Board of Directors but may not in any case be less than
the fair market value of the shares of common stock of the
company on the date of grant. Vesting of options granted is
subject to certain terms and conditions. The Senior Executive
Stock Option Plan is subject to final approval by the Company's
shareholders.
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, 1995, and December 31, 1994, 566,772 and
500,000 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 1995,
1994, and 1993 amounted to $263,000, $476,000 and $594,000,
respectively. ESOP expense in 1994 and 1993 included $5,000 and
$55,000, respectively, of interest expense related to a loan
agreement with a bank.
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 1995, 1994 and 1993, $265,000,
$314,000 and $308,000, 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.
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.
See discussion of self-insurance program at Note 1 and leases at
Note 7.
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 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 (in thousands):
1995 1994 1993
---- ---- -----
SSI settlement, net of legal fees $ -- $81,596 $ --
Gain from Medical Services sale (Note 2) -- 10,121 --
Equipment and inventory write-downs -- (4,045) (4,850)
Other -- (2,804) (1,855)
------ -------- --------
Unusual items in operating
earnings $ -- $84,868 $(6,705)
------ ------- --------
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 included provisions of $900,000 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:
Year Ended December 31, 1995
----------------------------
Domestic Foreign Eliminations Consoliadated
-------- ------- ------------ -------------
Total revenue:
Unaffiliated
customers $182,754 $60,689 $ -- $243,443
Intercompany
transfers 6,991 -- $ (6,991) --
--------- ------- --------- --------
Total $189,745 $60,689 $ (6,991) $243,443
--------- ------- --------- --------
Operating earnings $ 33,779 $10,845 $ (832) $ 43,792
========= ======= ========= ========
Total assets:
Identifiable
assets $157,615 $43,787 $(10,075) $191,327
========= ======= =========
Corporate assets 52,399
--------
Total assets $243,726
========
Year Ended December 31, 1994
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
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
========
Year Ended December 31, 1993
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated
customers $229,301 $39,571 $ -- $268,872
Interrcompany
transfers 3,644 -- (3,644) --
-------- ------- -------- --------
Total $232,945 $39,571 $ (3,644) $268,872
======== ======= ======== ========
Operating earnings $ 14,941 $ 6,093 $ (479) $ 20,535
======== ======= ======== ========
Total assets:
Identifiable assets $244,495 $37,285 $ (7,487) $274,293
======== ======= ======== ========
Corporate assets 10,280
--------
Total assets $284,573
========
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 of cash and cash equivalents.
NOTE 13. Quarterly Financial Data (Unaudited)
------------------------------------
The unaudited consolidated results of operations by quarter are
summarized below:
Year Ended December 31, 1995
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $57,027 $59,790 $61,606 $65,020(a)
Operating earnings $ 9,577 $ 8,717 $12,734 $12,764
Net earnings $ 6,098 $ 5,716 $ 8,535 $ 8,092
Earnings per common and
common equivalent share $0.14 $0.13 $0.19 $0.18
Year Ended December 31, 1994
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
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)
(a) See discussion of acquisitions/dispositions at Note 2.
(b) See discussion of unusual items at Note 11 and extraordinary
item at Note 6.
Earnings per share for the full year may differ from the sum
total of the quarterly earnings per share due to rounding
differences.
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, 1995
and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 8 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.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 6, 1996
BOARD OF DIRECTORS
JAMES R. LEININGER, M.D.
Chairman of the Board of Directors
RAYMOND R. HANNIGAN
President and Chief Executive Officer
PETER A. LEININGER, M.D.
Executive Vice President
SAM A. BROOKS
Chairman, National Imaging Affiliates, Inc.
FRANK A. EHMANN
Retired
Former Executive Vice President and Co-Chief Operating Officer
Baxter Travenol Laboratories, Inc.
BERNHARD T. MITTEMEYER, M.D.
Executive Vice President and Provost,
Texas Tech University Health Science Center
CORPORATE OFFICERS
RAYMOND R. HANNIGAN
President and Chief Executive Officer
PETER A. LEININGER, M.D.
Executive Vice President
BIANCA A. RHODES
Senior Vice President, Finance and Chief Financial Officer
DENNIS E. NOLL
Senior Vice President, General Counsel and Secretary
MICHAEL J. BURKE
Vice President, Manufacturing
OPERATING DIVISION EXECUTIVES
CHRISTOPHER M. FASHEK
President
KCI Therapeutic Services, Inc.
FRANK DiLAZZARO
President
KCI International, Inc.
DANIEL R. PUCHEK
President
KCI New Technologies, Inc.
JOSH H. LEVINE
Vice President and General Manager
KCI Home Care Division
INVESTOR INFORMATION
BIANCA A. RHODES
Senior Vice President, Finance and Chief Financial Officer
210-524-9000
FORM 10-K
A copy of the Company's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge
from Investor Relations, Kinetic Concepts, Inc.
LISTED
NASDAQ National Market System, Ticker Symbol KNCI
TRANSFER AGENT AND REGISTRAR
FIRST NATIONAL BANK OF BOSTON
c/o BostonEquiServe
Shareholder Services Division
P.O. Box 644
Boston, MA 02102-0644
(617) 575-3400
ANNUAL MEETING
The Company's annual meeting of shareholders will be held on
Tuesday, May 14, 1996 at 9:00 a.m. (local time) at:
Embassy Suites Hotel
7750 Briaridge
San Antonio, TX 78230
AUDITORS
KPMG PEAT MARWICK LLP
112 East Pecan
Suite 2400
San Antonio, Texas 78205
MARKET PRICES OF COMMON STOCK
1995 1994
High Low High Low
------ ------ ----- -----
First Quarter 8.250 6.563 4.250 3.750
Second Quarter 8.125 6.625 4.250 3.375
Third Quarter 11.625 7.000 5.875 3.375
Fourth Quarter 13.000 10.000 6.875 5.375
TRADEMARKS - TriaDyne TM, BariKare(R), PlexiPulse(R), All-in-1
System,The V.A.C. TM, TheraPulse(R), KinAir(R), DynaPulse TM,
FirstStep(R), and HomeKair(R) are trademarks of Kinetic Concepts, Inc.
Clinical Advantage SM, Kinetic Therapy SM, Genesis SM, Odyssey SM,
and Continuum of Care SM, are service marks of Kinetic Concepts, Inc.
These products are subject to patent and/or pending patent.
(C) Copyright 1996 Kinetic Concepts, Inc.
EXHIBIT 22.1
KCI SUBSIDIARIES
A. Kinetic Concepts, Inc., a Texas corporation
(Tax ID #74-1891727)
Subsidiaries:
1. KCI Therapeutic Services, Inc., a Delaware
corporation
(Tax ID #74-2152396)
2. KCI International, Inc., a Delaware corporation
(Tax ID #51-0307888)
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 Klinikausstattung
Gesellschaft mbH, an Austrian corporation -
DISSOLVED IN 1994]
3. KCI Financial Services, Inc., a Delaware
corporation (Tax ID #87-0490775)
4. KCI New Technologies, Inc., a Delaware corporation
(Tax ID #74-2615226)
5. KCI Properties Limited, a Texas limited liability
company, (Tax ID #74-2621178)
6. KCI Real Property Limited, a Texas limited
liability company, dba Premier Properties (Tax ID
#74-2644430)
7. Medical Retro Design, Inc., a Delaware corporation
(Tax ID #74-2652711)
8. KCI Clinical Systems, Inc., a Delaware
corporation (Tax ID #74-2675416)
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 6, 1996, relating to the
consolidated balance sheets of the Company as of December
31, 1995 and 1994, 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, 1995,
which report appears in the 1995 annual report to
shareholders which is incorporated by reference in the
December 31, 1995 annual report on Form 10-K of the Company
and our report dated February 6, 1996, relating to the
related financial statement schedule as of and for each of
the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 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.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 52,399
<SECURITIES> 0
<RECEIVABLES> 72,500
<ALLOWANCES> 6,177
<INVENTORY> 18,854
<CURRENT-ASSETS> 142,441
<PP&E> 158,921
<DEPRECIATION> 96,644
<TOTAL-ASSETS> 243,726
<CURRENT-LIABILITIES> 33,028
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 210,280
<TOTAL-LIABILITY-AND-EQUITY> 243,726
<SALES> 36,790
<TOTAL-REVENUES> 243,443
<CGS> 13,729
<TOTAL-COSTS> 185,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,883
<INTEREST-EXPENSE> (4,554)
<INCOME-PRETAX> 48,346
<INCOME-TAX> 19,905
<INCOME-CONTINUING> 28,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,441
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
