14 of 14
SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1891727
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports, and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common Stock: 44,319,981 shares as of March 31, 1996
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
1996 1995
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 65,107 $ 52,399
Accounts receivable, net 58,469 56,032
Inventories 19,633 18,854
Note receivable from principal shareholder -- 10,291
Prepaid expenses and other 7,169 4,865
-------- --------
Total current assets 150,378 142,441
-------- --------
Net property, plant and equipment 64,195 62,276
Other notes receivable, net 3,187 3,187
Goodwill, less accumulated amortization of
$10,950 in 1996 and $10,625 in 1995 13,847 13,968
Other assets, less accumulated amortization
of $5,525 in 1996 and $5,638 in 1995 22,802 21,854
-------- --------
$254,409 $243,726
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,172 $ 2,512
Accrued expenses 25,862 26,490
Income tax payable 7,956 4,026
-------- --------
Total current liabilities 37,990 33,028
-------- --------
Deferred income taxes, net 661 374
-------- --------
38,651 33,402
-------- --------
Shareholders' equity:
Common stock; issued and outstanding 45,967
in 1996 and 44,331 in 1995 44 44
Additional paid-in capital 11,103 12,123
Retained earnings 204,330 197,290
Cumulative foreign currency translation
adjustment 636 1,052
Notes receivable from officers (355) (185)
-------- -------
215,758 210,324
-------- -------
$254,409 $243,726
======== ========
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months
ended
March 31,
--------------------
1996 1995
-------- ---------
Revenue:
Rental and service $ 56,790 $ 48,422
Sales and other 10,797 8,605
-------- --------
Total revenue 67,587 57,027
Rental expenses 37,246 33,427
Cost of goods sold 4,043 3,916
-------- --------
41,289 37,343
-------- --------
Gross profit 26,298 19,684
Selling, general and administrative
expenses 12,557 10,107
-------- --------
Operating earnings 13,741 9,577
Net interest income, 970 533
-------- --------
Earnings before income taxes 14,711 10,110
Income taxes 5,897 4,012
-------- --------
Net earnings $ 8,814 $ 6,098
======== ========
Earnings per common and common equivalent
share $ 0.19 $ 0.14
======== ========
Shares used in earnings per share
computations.... 45,967 45,115
======== ========
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
------------------
March 31,
------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net earnings $ 8,814 $ 6,098
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,476 5,814
Provision for uncollectible accounts receivable 408 (48)
Change in assets and liabilities:
Decrease (increase) in accounts receivable, net (2,920) 1,115
Decrease (increase) in notes receivable -- 2,489
Decrease (increase) in inventory ( 831) (1,349)
Decrease (increase) in prepaid and other assets (2,304) (782)
Increase (decrease) in accounts payable 1,633 1,508
Increase (decrease) in accrued expenses (670) (3,054)
Increase (decrease) in income taxes payable 4,333 656
Increase (decrease) in deferred income taxes (116) 173
------- -------
Net cash provided by operating activities 13,823 12,620
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (6,798) (4,427)
Decrease (increase) in inventory to be
converted into equipment for short-term rental (750) (3,750)
Dispositions of property, plant and equipment 250 185
Decrease in note receivable from principal
shareholder 10,000 --
Decrease in finance lease receivables -- 158
Increase in other assets (801) --
------- -------
Net cash provided (used) by investing
activities 1,901 (7,834)
------- -------
Cash flows from financing activities:
Borrowings (repayments) of notes payable and
long-term obligations -- (296)
Repayments of capital lease obligations -- (119)
Proceeds from the exercise of stock options 1,141 1,043
Purchase and retirement of treasury stock (2,331) --
Cash dividends paid to shareholders (1,666) (1,649)
------- -------
Net cash used by financing activities (2,856) (1,021)
------- -------
Effect of exchange rate changes on cash and
cash equivalents (160) 504
------- -------
Net increase in cash and cash equivalents 12,708 4,269
Cash and cash equivalents, beginning of year 52,399 43,241
------- -------
Cash and cash equivalents, end of year $65,107 $47,510
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the first three months for:
Interest $ 64 $ 210
Income taxes 310 4,048
See accompanying notes to condensed consolidated financial statements
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the accounts
of Kinetic Concepts, Inc. and all subsidiaries (the "Company").
The foregoing financial information reflects all
adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of
operations for the interim periods presented. Interim period
operating results are not necessarily indicative of the
results to be expected for the full fiscal year. The
financial information presented for the interim periods is
unaudited and subject to year-end audit and adjustments.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Inventories are
comprised of the following (in thousands):
March 31, December 31,
1996 1995
--------- ------------
Finished goods $ 2,901 $ 2,890
Work in process 2,310 1,040
Raw materials, supplies and parts 20,422 20,174
------- -------
25,633 24,104
Less amounts expected to be
converted into equipment for
short-term rental (6,000) (5,250)
------- -------
Total inventories $19,633 $18,854
======= =======
(3) NOTES RECEIVABLE
----------------
In August 1995, the Company loaned $10.0 million to James
R. Leininger, M.D., the Company's 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
accrued on the note at the annual rate of 7.94%. In January
1996, the note receivable and all accrued interest was
collected in full.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(4) SHARES USED IN EARNINGS PER COMMON AND
--------------------------------------
COMMON EQUIVALENT SHARE COMPUTATIONS
------------------------------------
The weighted average number of common and common equivalent
shares used in the computation of earnings per share is as
follows (in thousands):
Three months ended
March 31,
------------------
1996 1995
-------- -------
Average outstanding common shares 44,320 43,997
Average common equivalent shares -
dilutive effect of option shares 1,647 1,118
------ ------
Shares used in earnings per share
computations 45,967 45,115
====== ======
Earnings per common and common equivalent share are computed
by dividing net earnings by the weighted average number of
common and dilutive common equivalent shares outstanding during
the period. Dilutive common equivalent shares consist of stock
options (using the treasury stock method). Earnings per
share computed on a fully diluted basis is not presented as
it is not significantly different from earnings per share
computed on a primary basis.
(5) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is party to several lawsuits generally incidental
to its business 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
financial statements.
(6) NEW PRONOUNCEMENTS
------------------
Effective with the first quarter of 1996, the Company has
adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Statement 121 requires
that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Adoption of this new pronouncement had no effect on the
financial statements for the period.
During October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation," effective
for fiscal years beginning after December 15, 1995. The new
statement allows companies to continue accounting for stock-
based compensation under the provisions of APB Opinion 25
"Accounting for Stock Issued to Employees"; however, companies
are encouraged to adopt a new accounting method based on the
estimated fair value of employee stock options.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Companies that do not follow the new fair value based method
will be required to provide expanded disclosures in
footnotes to the financial statements. The Company has
elected to continue to account for its employee stock
compensation plans as prescribed under Opinion 25 and will
make the pro forma disclosures of net income and earnings
per share required by Statement 123 beginning with its
financial statements for the year ended December 31, 1996.
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of March 31, 1996, and
the related condensed consolidated statements of earnings for
the three month periods ended March 31, 1996 and 1995 and the
condensed consolidated statements of cash flows for the three month
periods ended March 31, 1996 and 1995. These condensed consolidated
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of
applying analytical review procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of December 31,
1995, and the related consolidated statements of earnings, capital
accounts, and cash flows for the year then ended (not presented
herein); and in our report dated February 6, 1996, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December
31, 1995, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has
been derived.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
April 17, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
First Quarter of 1996 Compared to First Quarter of 1995
- -------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the first quarter of
the prior year ($ in thousands):
Three Months Ended March 31,
----------------------------
Revenue Increase
Relationship (Decrease)
------------ ----------
1996 1995 $ Pct
---- ---- ------- ----
Revenue:
Rental and service 84% 85% $ 8,368 17%
Sales and other 16 15 2,192 25
---- ---- -------- ----
100% 100% 10,560 19
Rental expenses 55 59 3,819 11
Cost of goods sold 6 7 127 3
---- ---- -------- ----
Gross profit 39 34 6,614 34
Selling, general and
administrative expenses 19 17 2,450 24
---- ---- -------- ----
Operating earnings 20 17 4,164 43
Net interest (1) (1) 437 82
---- ---- -------- ----
Earnings before income taxes 22 18 4,601 46
Income taxes 9 7 1,885 47
---- ---- -------- ----
Net earnings 13% 11% $ 2,716 45%
==== ==== ========
The Company's revenue is derived from four primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Three months ended
March 31,
------------------
1996 1995
------- -------
Acute/Extended $42.1 $34.3
HomeCare 3.8 3.7
International 17.3 13.7
Medical Devices 4.4 3.7
Other (1) -- 1.6
------- -------
$67.6 $57.0
======= =======
(1) Consists of revenue of KCI Financial Services,
which was sold by the Company in June 1995.
Total revenue in the first quarter of 1996 increased by
$10.6 million or 19% to $67.6 million from $57.0 million in the first
quarter of 1995. Revenue from the Company's specialty patient
surface business was $45.9 million, up $7.9 million or 21% from the
first quarter of 1995. This increase was due to new product
introductions, primarily the TriaDyne and increased patient days
in the nursing home and rehabilitation (extended care) market.
Revenue in the Home Care segment increased slightly from the
prior-year period, however, patient days were up nearly 30%
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
from the first three months of 1995. This change in average
rental price reflects the Company's shift to an independent dealer
network during 1995. The dealer network provides 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 expenses.
Revenue from the Company's international operations was $17.3
million, up 26% from the first quarter of 1995. Increased
market penetration and increased sales contributed towards the
higher revenue. Revenue from medical device operations increased
19% to $4.4 million in the first quarter of 1996 due primarily to
greater market penetration.
Rental expenses were 66% of total rental revenue in the
first quarter of 1996 compared to 69% in the first quarter of
1995. This decrease is primarily attributable to the increase in
rental revenue, as the majority of rental expenses are relatively
fixed, combined with reduced depreciation on the rental fleet.
Gross profit increased $6.6 million or 34% to $26.3 million in
the first quarter of 1996 from $19.7 million in the first quarter of
1995 due to the increase in revenue as well as the controlled
growth in rental expenses.
Selling, general and administrative expenses increased
$2.5 million, or 24%, to $12.6 million in the first quarter of
1996 from $10.1 million in the first quarter of 1995. As a
percentage of total revenue, selling, general and administrative
expenses were at 19% in the first quarter of 1996 as compared with
18% in the first quarter of 1995. The increase is due in part to
costs associated with certain key investments, e.g. improved
marketing and information systems.
Operating earnings for the period increased $4.2 million, or
43%, to $13.7 million compared to $9.6 million in the prior-year
quarter resulting largely from broad-based revenue growth.
Net interest income for the three months ended March 31, 1996
was $1 million compared to $0.5 million in the prior year. This
increase was due to interest recognized on the note receivable from
Mediq/PRN. Interest on this note is paid quarterly, in arrears,
beginning in 1996.
The Company's effective income tax rate in the first quarter
of 1996 was 40%, consistent with the first quarter of 1995.
Net earnings increased $2.7 million, or 45%, to $8.8 million
in the first quarter of 1996 from $6.1 million in the first
quarter of 1995. This increase was due to the relative
decrease in rental expenses, increased net interest income and the
change in revenue as discussed above.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the
Company during the first quarter of 1996 and other factors resulted
in changes to the Company's balance sheet as follows:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Inventory at March 31, 1996 increased $0.7 million, or 4%,
to $19.6 million from $18.9 million at December 31, 1995 primarily
due to new product introductions and further market expansion
internationally. In late 1995, the Company began operations in
both Italy and Sweden.
The note receivable from principal shareholder at December
31, 1995 of $10.3 million, including accrued interest, was
collected in full during the first quarter.
Net property, plant and equipment at March 31, 1996 increased
$1.9 million, or 3%, to $64.2 million from $62.3 million at
December 31, 1995 due to additions to rental equipment
and computer hardware/software in excess of depreciation and
dispositions. Capital expenditures were $6.8 million during the
first quarter of 1996 as the Company invested in new products for
its rental fleet and new computer systems.
Accrued expenses at March 31, 1996 decreased $0.6 million, or
2%, to $25.9 million from $26.5 million at December 31, 1995 due
primarily to the payment of 1995 management bonuses in the first
quarter of 1996.
Market Trends
- -------------
The health care industry is facing various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities
and rehabilitation centers) and home care settings, the
consolidation of health care providers and national and regional
group purchasing organizations and the growing demand for
clinically proven and cost effective therapies. In addition,
Congress continues to debate federal health care expenditures
in an attempt to slow the rate of growth and balance the
federal budget. As a result, the Company believes that health
care providers will continue to experience heightened cost
control pressures.
Industry trends including pricing pressures, the consolidation
of health care providers and national and regional group
purchasing organizations and a shift in market demand toward lower-
priced products such as mattress overlays have had the impact of
reducing the Company's average daily rental rates on its products.
These industry trends, together with the increasing migration of
patients from acute care to extended and home care settings have
had an effect of reducing the Company's historical revenue from
acute care facilities. The Company expects these industry trends
to continue. The Company 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 introductions of the
TriaDyne and BariKare beds will enable it to further penetrate this
market.
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will continue
because certain U.S. health care providers are purchasing
products that are less expensive and easier to maintain such
as medial devices, mattress overlays and mattress replacement
systems. In addition, international health care providers tend to
purchase products more often than U.S. health care providers, and
the Company's revenue from international operations represents an
increasing portion of the Company's total revenue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings
- -----------------
The Company is party to several lawsuits arising in the
ordinary course of its business and is contesting adjustments
proposed by the Internal Revenue Service to prior years' tax
returns. Provisions have been made in the Company's financial
statements for estimated exposures related to these lawsuits and
adjustments. See "Item 1. Financial Statements". In the opinion
of management, the disposition of these items will not have
a material adverse effect on the Company's business, financial
condition or results of operations.
The manufacturing and marketing of medical products
necessarily entails an inherent risk of product liability claims.
The Company currently has certain liability claims pending for
which provision has been made in the Company's financial
statements. Management believes that resolution of these claims
will not have a material adverse effect on the Company's business,
financial condition or results of operations. The Company has
not experienced any significant losses due to product liability
claims and currently maintains umbrella liability insurance coverage.
Liquidity and Capital Resources
- -------------------------------
During the first quarter of 1995, the Company generated net
cash provided by operating activities of $13.8 million compared to
$12.6 million in the prior year period. At March 31, 1996, cash
and cash equivalents totaling $65.1 million were available for
general corporate purposes. Additionally, the Company maintains a
Credit Agreement with a bank as an agent for itself and certain
other financial institutions. The Credit Agreement currently
permits borrowings of up to $50.0 million. At March 31, 1996,
the entire amount of the Credit Agreement was available. The Company
believes that current cash reserves combined with operating cash
flows during the next twelve month period will be sufficient to
provide for new investments in equipment and any working capital
needed during the period.
At March 31, 1996, the Company was committed to
purchase approximately $700,000 of inventory associated with a new
product over the remainder of this year. The Company did not have
any other material purchase commitments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of all exhibits filed or included as part of
this quarterly report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------ ------------
15 Filed herewith Letter from KPMG
Peat Marwick LLP
dated April 17, 1996
27 Filed herewith Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /s/ JAMES R. LEININGER, M.D.
-----------------------------
James R. Leininger, M.D.
Chairman of the Board
By: /s/ RAYMOND R. HANNIGAN
------------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /s/ BIANCA A. RHODES
---------------------
Bianca A. Rhodes
Senior Vice President,
Chief Financial Officer
and Chief Accounting
Officer
Date: May 14, 1996
Kinetic Concepts, Inc.
San Antonio, Texas
Ladies and Gentlemen:
Re: Registration Statement on Form 10-Q
With respect to the subject registration statement on Form
10Q, we acknowledge our awareness of the use therein of our
report dated April 17, 1996 related to our review of interim
financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933,
such report is not considered part of a registration
statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of
sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
May 14, 1996
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