33
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, 1996
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 (Registrant's telephone number)
offices 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, 1997 was approximately
$298,691,592.
As of March 1, 1997, there were 42,818,044 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, 1996 (in Parts I
and II) and (b) Definitive Proxy Statement dated March 31, 1997 (the
"Proxy Statement") relating to the Company's 1997 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.................................. 16
Item 3. Legal Proceedings........................... 16
Item 4. Submission of Matters to a Vote
of Security Holders......................... 17
Item 4a. Executive Officers of the Registrant........ 17
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters............. 20
Item 6. Selected Financial Data..................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 8. Financial Statements and
Supplementary Data.......................... 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...... 20
PART III
Item 10. Directors and Executive Officers
of the Registrant........................... 23
Item 11. Executive Compensation...................... 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 23
Item 13. Certain Relationships and Related
Transactions................................ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................... 24
Signatures............................... 29
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 medical
devices, that treat and prevent the complications of immobility.
By preventing these complications or accelerating the healing
process, the Company's therapies 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
large or 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 whom have a medical or clinical background.
Sales are generated by a sales force of more than 300 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, in some
cases on a 24 hours-a-day, seven days-a-week basis. The Company
distributes its specialty patient support products to acute and
extended care facilities through a network of 144 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 specialty beds and overlays which
are delivered to the individual hospitals or nursing homes 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 300
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 200,000 patient rounds
annually. KCTS accounted for approximately 64%, 61% and 53%,
respectively, of the Company's total revenue in the years ended
December 31, 1996, 1995 and 1994.
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
through home medical equipment ("HME") providers. The Company
believes that selling through the home care provider network
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 5% of the Company's total revenue in 1996.
KCI International. KCI International offers the Company's
therapies and services in ten foreign countries including
Germany, Austria, the United Kingdom, Canada, France, the
Netherlands, Switzerland, Australia, Italy and Denmark. The
Denmark office has recently been 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%, 25% and 17%, respectively, of the Company's total revenue in
1996, 1995 and 1994. (See Note 13 of Notes to Consolidated
Financial Statements, included in the Company's Annual Report to
Shareholders, for information on foreign and domestic
operations.)
NuTech. NuTech manufactures and markets the PlexiPulse and
PlexiPulse All-in-1 System through an independent sales
representative network although this division is in the process
of developing a dedicated sales force. NuTech accounted for
approximately 6% of the Company's total revenue in 1996.
Therapies/Products
The Company's "Continuum of Care" is focused on preventing
and/or treating wound care patients, pulmonary patients, large or
obese patients and patients with circulatory problems by
providing innovative, outcome driven therapies across multiple
care settings. The Company's therapies include Pressure
Relief/Pressure Reduction, Kinetic Therapy, Bariatric Care,
Mechanical Compression and Negative Pressure 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 (R), TheraPulse, FluidAir Elite TM,
HomeKair (R), First Step (R) TriCell TM, DynaPulse (R), First
Step (R) Plus , First Step (R) Select and AirWorks (R) 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 a more aggressive form of treatment through
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 Elite 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 TriCell
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 First
Step family of overlays is designed to provide pressure relief
and help prevent pressure sores. AirWorks Plus is a low-cost
overlay which has air chambers which assist in redistributing
pressure for better skin care.
Kinetic Therapy. The U.S. Centers 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
and other pulmonary complications in immobile patients. The
Company's Kinetic Therapy products include the TriaDyne TM,
RotoRest (R), RotoRest (R) Delta, BioDyne (R) II and Q2 Plus TM.
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 and
RotoRest Delta are specialty beds 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 products
have 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 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 (R), 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. In 1996, the Company also introduced the
FirstStep Select Heavy Duty overlay which incorporates pressure-
relieving therapy in a design that supports patients weighing up
to 850 pounds.
Medical Devices. The Company also rents and sells various
products manufactured by the Company other than patient support
surfaces. These products include the PlexiPulse (R), PlexiPulse
All-in-1 System TM and The V.A.C. (R)
Mechanical Compression. The PlexiPulse and PlexiPulse All-in-
1 System are non-invasive vascular assistance devices that aid
venous return by pumping blood from the lower extremities to help
prevent DVT and re-establish 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
intermittent 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.
Negative Pressure. The Company also markets the Vaccum
Assisted Closure device ( 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 also 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 a serious wound every 8 to 12 hours.
Product Support -- The Clinical Advantage
The elements which provide KCI a Clinical Advantage in the
marketplace continue to evolve to meet the changing requirements
of today's healthcare provider. As both private and government
reimbursement programs continue to move towards systems where
facilities receive a fixed payment based only upon the patient's
initial diagnosis to cover all medical expenses, actuarial
information becomes more critical to predict patient outcomes and
to develop appropriate pricing structures. The collection of
this valuable data is central to KCI's effort of proving cost
effective patient outcomes.
At the foundation of KCI's Clinical Advantage is an active
program of sponsoring independent clinical research. KCI's
portfolio of over 50 active and completed studies supports the
medical efficacy and cost effectiveness of utilizing our products
and protocols as part of the healing and prevention process. In
addition, KCI research is focused on providing the outcome data
demanded by today's health care provider.
Health care providers around the world who utilize KCI
products and services experience aspects of The Clinical
Advantage every day. Whether it be an emergency placement of a
KCI TriaDyne or the V.A.C.; the participation in developing a
wound care management program; or daily patient rounds to assist
facility staff and collect clinical outcome data, trained KCI
team members make more than 200,000 regular patient rounds
annually. This staff is comprised of over 1000 employees with
more than 30% having a medical or clinical background. In order
for the hospital and KCI to collect and process the data, the
Company has developed Genesis, Odyssey, and PAO2, three
proprietary software programs.
Genesis is utilized by KCI staff clinicians to assist
customers in tracking asset utilization and patient outcomes.
Using hand held computers, KCI clinicians make regular rounds to
document the effect of KCI products on a patient's overall
outcome. At the facility's direction, this information is
entered into a central database and analyzed to determine the
effectiveness of specific treatment protocols.
Odyssey and PAO2 are sold to KCI customers to enable them to
standardize the information collected on their Wound Management
and Pulmonary Management Protocols, respectively. Health care
providers utilize both Odyssey and PAO2 as tools to document and
track complete wound and pulmonary management programs, including
the resultant patient outcome and the cost of achieving that
outcome. Facilities collect data on their wound and pulmonary
patients, and periodically share this information with KCI for
inclusion in a national database. KCI compiles the information
and can generate reports comparing a facility's program or
patient results with those of similar programs or patients on an
internal, regional or national basis. This information enables
each facility to continuously improve its wound and pulmonary
management programs, achieving the best outcome at the lowest
total cost of care.
KCI's integrated clinical database consisting of the
Genesis, Odyssey, an PAO2 information platforms combined with an
extensive clinical field presence, and clinically proven
therapies and protocols define KCI's unique product support
advantage in the marketplace, The Clinical Advantage.
Competition
The Company believes that the principal competitive factors
within the patient support surfaces marketplace are product
efficacy, clinical outcomes, service and cost of care. 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 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 47% of the Company's
total revenue during 1996 was generated under national agreements
with GPOs.
In November 1996, the Company announced that it had been
advised by Premier Purchasing Partners, L.P., that its bid to be
the primary supplier for the newly combined group had been
awarded to another vendor. Premier is a new voluntary group
purchasing organization which was formed as a result of the
merger of three separate group purchasing organizations. Revenue
from hospitals within Premier for 1996 accounted for
approximately 10% of the Company's total revenue. Because
facilities within Premier are not committed to do business with
the group's primary vendor, it is difficult to predict the
ultimate effect of the new agreement on revenue and operating
profits. Management expects that a portion of the revenue will
be retained.
The Company competes on a national level with Hill-Rom,
Kendall and Invacare and on a regional and local level with
numerous other companies. The Company competes principally with
Invacare in the home care segment. 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:
Continuing pressure on health care providers to control
costs and improve patient outcomes. The pressure to control
health care costs has intensified since 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 any health care budget cuts are not yet determined, 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
8% of all U.S. health care expenditures. U.S. expenditures on
this market segment are currently in excess of $70 billion and
have grown at an average rate of approximately 9% per year since
1990.
The home care setting 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 $25 billion annually and have
grown at an annual rate of 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 payment. Under this system, health care providers
receive a fixed 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 75 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 TriCell, the First Step Select Heavy
Duty, the FluidAir Elite, 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 1996. 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, 1996, 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. Many of the Company's specialized beds, products
and services are offered under trademarks and service marks. The
Company has 27 registered trademarks and service marks in the
United States Patent and Trademark Office.
Employees
As of December 31, 1996, the Company had approximately 2,066
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
Food and Drug Administration ("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, 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 durable medical
equipment 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
durable medical equipment ("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
payors) that are determined to be false, fraudulent, or for an
item or service that was not provided as claimed. In one 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.
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.
Reimbursement
The Company's products are rented and sold principally to
hospitals, Extended Care facilities and HME providers 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 ("PPS"), 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
PPS 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 provided 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 Part B
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 established allowable
charge 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 PPS for Medicare reimbursement of SNF costs,
freezes in DME fee schedule payment amounts, and the
establishment of new programs 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
89,000 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 and
currently serves as NuTech division headquarters. 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 is
being 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 144 domestic distribution
centers, including each of its seven regional headquarters, which
range in size from 1,500 to 18,000 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 manufactures 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. Initial
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.
On October 31, 1996 the Company received a counterclaim
which had been filed by Hillenbrand Industries, Inc. in the
antitrust lawsuit which the Company filed in 1995. The
counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable KCI to monopolize the bed
market. Although it is not possible to predict the outcome of
this litigation, the Company believes that the counterclaim is
without merit.
In late December 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc., filed a lawsuit against the Company alleging
that the Company's TriaDyne bed infringes a patent issued to Hill-
Rom December 24, 1996. This suit was filed in the United States
District Court for the District of South Carolina. Substantive
discovery in the case has not begun. Based upon its preliminary
investigation, the Company does not believe that the TriaDyne bed
infringes the Hill-Rom patent or that this lawsuit will have a
material adverse impact on the marketing of the TriaDyne bed.
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 adequate
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 1996.
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 1997 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, 1997
are as follows:
Name Age Position
Raymond R. Hannigan 57 Director, President and
Chief Executive Officer
Peter A. Leininger, M.D. 54 Director and Executive Vice
President
Bianca A. Rhodes 38 Senior Vice President,
Finance and Chief Financial
Officer
Dennis E. Noll 42 Senior Vice President,
General Counsel and
Secretary
Frank DiLazzaro 38 President, KCI
International
Christopher M. Fashek 47 President, KCI Therapeutic
Services
Richard C. Vogel 43 Vice President and General
Manager, NuTech
Michael C. Wells 44 Vice President and General
Manager, KCI Home Care
John H. Vrzalik, Sr 54 Vice President, Engineering
Martin J. Landon 37 Vice President, Accounting
and Corporate Controller
Michael J. Burke 49 Vice President,
Manufacturing
Scott S. Brooks 48 Vice President, National
Accounts
Larry P. Baker 43 Vice President, Corporate
Services
George P. Peace 41 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.
Richard C. Vogel joined the Company as its Vice President
and General Manager, NuTech on July 1, 1996. From 1989 to 1996,
Mr. Vogel served as Executive Vice President of Vestar, Inc., a
California-based biotechnology company.
Michael C. Wells joined the Company as Regional Vice
President, KCTS, in August 1994 and served in that role until
June 1996 when he was promoted to the position of Vice President
and General Manager, KCI Home Care. Prior to joining the
Company, he served in Sales Management and Infusion Management
roles from 1988 to August 1994 with Homedco, which currently
operates today as the Apria Healthcare Group. From 1978 to 1988,
Mr. Wells held Marketing and Sales Management positions with
Baxter Healthcare, formerly American Hospital Supply Corporation.
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 ("Common Stock") trades on The
Nasdaq Stock Market under the symbol: KNCI. The range of the
high and low bid prices of the Common Stock for each of the
quarters during the 1996 and 1995 fiscal years is contained on
the inside back cover of the Company's 1996 Annual Report to
Shareholders under the caption "Market Prices of Common Stock"
and is incorporated herein by reference.
The Company's Board of Directors declared quarterly cash
dividends on the Common Stock in 1996 and 1995. The cash
dividends totaled $0.15 per common share in each of 1996 and
1995. 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, 1997, the approximate number of holders of
record of the Common Stock was 417.
Item 6. Selected Financial Data
Incorporated in this Item 6, by reference, is that portion
of the Company's 1996 Annual Report to Shareholders appearing on
page 13 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 1996 Annual Report to Shareholders appearing on
pages 14 to 22 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, Shareholders' Equity and notes thereto
and Independent Auditors' Report appearing on pages 23 to 39 in
the Company's 1996 Annual Report to Shareholders. (See Item 14(a)
of this Report.)
Item 9. Changes in and Disagreements with Accountants on
Accounting Matters and Financial Disclosure
KPMG Peat Marwick LLP was the Company's certifying
accountant for the year ended December 31, 1996. On February 18,
1997, the Board of Directors of the Company, upon the
recommendation of the Audit Committee, voted to engage the
accounting firm of Ernst & Young LLP as the Company's certifying
accountant for the year ending December 31, 1997. The
Company's previous certifying accountant, KPMG Peat Marwick LLP,
was notified on February 21, 1997 that it will be dismissed
effective upon the completion and filing of the Company's 1996
Annual Report on Form 10-K. On February 24, 1997, the Company
notified Ernst & Young LLP that it would be engaged as the
Company's certifying accountant for the 1997 fiscal year.
The reports of KPMG Peat Marwick LLP on the Company's
financial statements for the two fiscal years ended December 31,
1995 and 1996 did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31,
1995 and 1996 and in the subsequent interim period through the
date of dismissal, there were no disagreements with KPMG Peat
Marwick LLP on any matters of accounting principles, financial
statement disclosure or audit scope and procedures which, if not
resolved to the satisfaction of KPMG Peat Marwick LLP would have
caused the firm to make reference to the matter in their report.
The change in certifying accountant came as the conclusion
to a Request for Proposal issued by the Company in 1996. The
newly engaged firm, Ernst & Young LLP, has been providing
property and income tax planning services to the Company since
1995.
The Company has requested KPMG Peat Marwick LLP to furnish a
letter addressed to the Securities and Exchange Commission
stating whether it agrees with the above statements. A copy of
the letter is attached as Exhibit 16 to this report.
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 for the 1997
Annual Meeting of Shareholders appearing on pages 1 to 3 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 for the 1997 Annual
Meeting of Shareholders appearing on pages 7 to 10 under the
caption "Executive Compensation" and on page 3 therein under the
caption "Director Compensation" and also on page 4 therein under
the caption "Compensation Committee Interlocks and Insider
Participation."
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 for the 1997 Annual
Meeting of Shareholders appearing on pages 4 to 6 under the
caption "Securities Holdings of Principal Shareholders, Directors
and Officers."
Item 13. Certain Relationships and Related Transactions
Incorporated in this Item 13, by reference, is that portion
of the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders, appearing on page 11 under the caption
"Certain Transactions."
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 1996
Annual Report to Shareholders, are filed as a part of
this report:
Consolidated Balance Sheets as of December 31, 1996
and 1995
Consolidated Statements of Earnings for the three
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the three
years `ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1996, 1995 and
1994
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, 1996 are filed as part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts -
Years ended December 31, 1996, 1995 and 1994
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
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by
reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company,
Inc. (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed
as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery
trucks (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1,
1989 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein
by reference).
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
Exhibits (continued)
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form 8-
K dated October 17, 1994, and incorporated
herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic
Services, Inc. and Voluntary Hospitals of
America, Inc.
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P.
10.20 KCI Management 1994 Incentive Program
10.21 KCI Employee Benefits Trust Agreement
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment.
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment.
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan.
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes.
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1995 and incorporated herein by reference).
*10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan.
*10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan
* 11.1 Earnings Per Share Computation.
* 13.1 Kinetic Concepts, Inc. 1996 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)
* 16.1 Letter from KPMG Peat Marwick LLP to the
Securities and Exchange Commission regarding
agreement with statements made by Registrant
under Item 9 of its Form 10-K dated March 28,
1997.
* 22.1 List of Subsidiaries.
* 23.1 Consent by KPMG Peat Marwick dated March 28,
1997 to incorporation by reference of their
reports dated February 5, 1996 in
Registration Statements on Form S-8
previously filed by the Company.
* 27.1 Financial Data Schedule
Note: (*) Exhibits filed herewith.
(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, 1997.
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, 1997
- - --------------------------- Board of Directors
James R. Leininger, M.D.
/s/ RAYMOND R. HANNINGAN Chief Executive March 28, 1997
- - -------------------------- Officer and
Raymond R. Hannigan President
/s/ BIANCA A. RHODES Chief Financial March 28, 1997
- - -------------------------- Officer and
Bianca A. Rhodes Senior Vice President
(Principal Accounting
Officer)
/s/ PETER A. LEININGER, M.D. Director March 28, 1997
- - ----------------------------
Peter A. Leininger, M.D.
/s/ SAM A. BROOKS Director March 28, 1997
- - ----------------------------
Sam A. Brooks
/s/ FRANK A. EHMANN Director March 28, 1997
- - ---------------------------
Frank A. Ehmann
/s/ WENDY L. GRAMM, PhD Director March 28, 1997
- - ---------------------------
Wendy L. Gramm, PhD
/s/ BERNHARD T. MITTEMEYER,M.D. Director March 28, 1997
- - -------------------------------
Bernhard T. Mittemeyer,M.D.
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 5, 1997, we reported on the consolidated
balance sheets of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31,
1996, as contained in the 1996 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 1996. 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 5, 1997
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1996
Balance Additions Additions 12/31/94
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- - ----------- ---------- ---------- -------- ----------- ---------
Allowance for
doubtful
accounts $7,500 $1,429 $ - $ 329 $8,600
======= ====== ======= ====== =======
Balance Additions Additions 12/31/95
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- - ----------- ---------- -------- -------- ---------- ----------
Allowance for
doubtful
accounts $8,600 $1,883 $ - $4,306 $6,177
====== ====== ======= ====== ======
Balance Additions Additions 12/31/96
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- - ---------- ---------- ---------- --------- ---------- ----------
Allowance for
doubtful
accounts $6,177 $2,457 $ - $1,102 $7,532
====== ====== ======== ======= =======
6
95ESOP2.doc
KINETIC CONCEPTS, INC.
SENIOR EXECUTIVE STOCK OPTION PLAN
1. Purpose.
The Kinetic Concepts, Inc. Senior Executive Stock Option
Plan (the "Plan") is intended to promote the best interests of
the Company and its shareholders by enabling the Company to
attract and retain senior executives of exceptional ability as
Senior Executives, giving an incentive to senior executives of
the Company by providing them with an opportunity to participate
in the Company's growth and rewarding those senior executives who
contribute to the operating progress and earning power of the
Company.
2. Definitions.
The following terms shall have the following meanings
when used herein unless the context clearly otherwise requires:
(a) "Change of Control Event" means a merger or
consolidation to which the Company is a party (other than as the
surviving entity), the sale or transfer of a majority of the
outstanding shares of the Common Stock, the transfer of all or
substantially all of the assets of the Company, or the Company's
liquidation or dissolution.
(b) "Code" means the Internal Revenue Code of
1986, as it may be amended from time to time.
(c) "Committee" means a committee of the Board of
Directors appointed by the Board of Directors consisting of at
least two (2) members of the Board of Directors, each of whom is
both a Disinterested Person and an Outside Director.
(d) "Company" means KINETIC CONCEPTS, INC., a
Texas corporation, any successor in interest to the Company.
(e) "Company Stock" means common stock, par value
$.001 per share, of the Company.
(f) "Disinterested Person" means a member of the
Board of Directors who has not, during the one year prior to
service on the Committee, or during his service on the Committee,
been granted or awarded equity securities pursuant to this Plan
or any other plan of the Company or any of its affiliates (except
such grants or awards permitted to be received by a
"disinterested person" under Rule 16b-3).
(g) "Effective Date" means October 27, 1995.
(h) "Eligible Senior Executive" means any Senior
Executive of the Company or any subsidiary who is determined (in
accordance with the provisions of Article 5 hereof) to be
eligible to be granted an Option.
(i) "Exercise Price" means the price at which a
share of Company Stock may be purchased by a particular
Participant pursuant to the exercise of an Option, as determined
in accordance with Article 8 hereof.
(j) "Good Cause" shall be deemed to exist if the
Eligible Senior Executive willfully breaches or habitually
neglects his duties or willfully violates reasonable and
substantial rules governing employee performance.
(k) "Option Instrument" means an instrument
delivered by the Company to the Participant setting forth the
specific terms and conditions of an Option as well as the
specific terms and conditions under which Company Stock may be
purchased by such Participant pursuant to the exercise of such
Option. Such Option Instrument shall be subject to the
provisions of this Plan (which shall be incorporated by reference
therein) and shall contain such provisions as the Committee, in
its sole discretion, may authorize.
(l) "Option" means the right of a Participant to
purchase shares of Company Stock in accordance with the terms of
this Plan and the Option Agreement between such Participant and
the Company. An "Option" is not intended, and shall not be
treated, as meeting the requirements of Section 422 of the Code.
(m) "Outside Director" shall have the meaning
given to it in the Section 162(m) Regulations.
(n) "Participant" means any Eligible Senior
Executive who has been granted an Option.
(o) "Rule 16b-3" shall mean Rule 16b-3
promulgated under Section 16 of the Securities Exchange Act of
1934, as amended.
(p) "Section 162(m) Regulation" shall mean the
regulations promulgated under Section 162(m) of the Code, as may
be amended from time to time.
3. Adoption and Administration of Plan.
This Plan shall be effective as of October 27, 1995.
The Plan shall be administered by, and grants under the Plan
shall be made by, the Committee. Any action taken by the
Committee with respect to the implementation, interpretation or
administration of this Plan shall be final, conclusive and
binding.
4. Shares of Company Stock Issued Pursuant to this Plan.
(a) The number of shares of Company Stock which
may be issued in the aggregate by the Company under this Plan
pursuant to the exercise of Options granted hereunder shall not
exceed 1,400,000 shares, which number may be increased only by a
resolution adopted by the Board of Directors of the Company.
Such shares of Company Stock may be issued out of the authorized
and unissued or reacquired Company Stock of the Company. Any
shares of Company Stock subject to an Option which expires, is
surrendered to the Company by the Participant or is terminated
unexercised as to such shares may once again be subject to an
Option under this Plan. To the extent there shall be any
adjustment pursuant to the provisions of Article 12 hereof, the
aforesaid number of shares shall be appropriately adjusted.
(b) Subject to adjustments pursuant to the
provisions of Article 12 hereof, the number of shares of the
Company Stock which may be covered by Options granted hereunder
to any Participant during any fiscal year shall not exceed
200,000 shares. If an Option is canceled, the canceled Option
shall continue to be counted toward such share limit for the year
granted.
5. Eligibility and Awards.
Only members of the Company's Executive Committee (as
determined by the Company's Chief Executive Officer) shall be
eligible to participate in this Plan and be granted Options
hereunder. The Committee shall determine, at any time and from
time to time thereafter, (a) which Eligible Senior Executives
shall be granted Options, (b) the number of shares of Company
Stock subject to each Option to be granted to an Eligible Senior
Executive, (c) the Exercise Price of each Option, and (d) the
other terms of each particular Option, including, without
limitation, the term during which such Option shall remain in
effect, which term shall not be greater than ten (10) years. The
members of the Committee are not eligible to receive options
under the Plan during their term on the Committee. The Chairman
of the Board of Directors and each non-employee member of the
Board of Directors are not eligible to receive options under the
Plan.
6. Grant, Exercise Rights and Termination of Options.
(a) As soon as practicable after an Option is
granted by the Committee, the appropriate officer or officers of
the Company shall give notice to such effect to the person
granted an Option, which notice shall be accompanied by a copy or
copies of the Option Instrument.
(b) An Eligible Senior Executive shall have an
Option and shall become a Participant under an Option Agreement
in accordance with the terms of this Plan, the terms of this
Option Instrument and on such other terms as the Committee shall
determine.
(c) Any Option granted pursuant to this Plan must
be granted within ten (10) years from the Effective Date.
(d) Only vested portions of an Option are
exercisable. An Option may be exercised in accordance with this
Plan and the Option Instrument and only if compliance with all
applicable federal and state securities laws can be effected. An
Option may be exercised by the payment to the Company of the
aggregate Exercise Price, as provided under Article 8 hereof, for
the shares of Company Stock to be purchased in accordance with
the terms of this Plan and the Option Instrument. Such Option is
not transferable or assignable, voluntarily or involuntarily, or
by operation of law (including, without limitation, the laws of
Bankruptcy), except that they are transferable by will or by the
laws of descent and distribution or pursuant to a qualified
domestic relations order (as defined in the Code).
(e) The Committee may delegate to the appropriate
officer of the Company the authority to prepare, execute and
deliver an Option Instrument reflecting an Option granted under
this Plan in substantially the form approved by the Committee;
provided, however, that any such Option Instrument shall be
consistent with the terms and conditions of this Plan.
7. Vesting.
The vesting of the Options granted under the Plan shall be
determined by the Committee and set forth in the Option
Instrument delivered to a Participant in connection with each
grant.
8. Exercise Price.
The determination of the Exercise Price shall be made
by the Committee in its sole discretion. The determination of
the Exercise Price may be determined by utilizing the average
daily closing price of the Company's Common Stock as reported on
the NASDAQ National Market System (the "Daily Closing Price")
during the thirty (30) day period prior to the date of grant or
the Daily Closing Price on the day following the date of grant.
The fair market value of the shares of Company Stock shall be
determined for purposes of this Plan by the Committee and such
determination by the Committee shall be final, conclusive and
binding upon each Participant and the Company for purposes of
this Plan.
9. Payment for Shares of Company Stock.
The Option Agreement may permit payment in cash or in
the equivalent fair market value of previously owned Company
Stock or any combination thereof. The Option Instrument may
further permit the Participant to elect to have the Company
withhold from the shares of Company Stock which the Participant
is entitled to receive pursuant to the exercise of an Option, an
amount of Company Stock having a value equal to the amount
required to be withheld for income taxes under the Code or
otherwise.
10. Costs and Expenses.
All costs and expenses with respect to the adoption,
implementation, interpretation and administration of this Plan
shall be borne by the Company; provided, however, that, except as
otherwise specifically provided in this Plan or the applicable
Option Agreement between the Company and a Participant, the
Company shall not be obligated to pay any costs or expenses
(including legal fees) incurred by any Participant in connection
with any Option or Option Agreement, this Plan or any Company
Stock held by any Participant.
11. No Prior Right of Award.
Nothing in this Plan shall be deemed to give any Senior
Executive of the Company, or his legal representatives or
assigns, or any other person or entity claiming under or through
him, any contract or other right to participate in the benefits
of this Plan. NOTHING IN THIS PLAN SHALL BE CONSTRUED AS
CONSTITUTING A COMMITMENT, GUARANTEE, AGREEMENT OR UNDERSTANDING
OF ANY KIND OR NATURE THAT THE COMPANY SHALL CONTINUE TO EMPLOY
OR OTHERWISE ENGAGE ANY INDIVIDUAL (WHETHER OR NOT A
PARTICIPANT). THIS PLAN SHALL NOT EFFECT THE RIGHT OF THE
COMPANY TO TERMINATE THE EMPLOYMENT OR OTHER ENGAGEMENT OF ANY
INDIVIDUAL (WHETHER OR NOT A PARTICIPANT) AT ANY TIME AND FOR ANY
REASON WHATSOEVER. No change of a Participant's duties as a
Senior Executive of the Company shall result in a modification of
the terms of any rights of such Participant under this Plan or
any Option Instrument executed by such Participant.
12. Changes in Capital Structure.
Subject to any required action by the shareholders of
the Company and the provisions of the Texas Business Corporations
Act, the number of shares of Company Stock which has been
authorized or reserved for issuance hereunder (whether such
shares are unissued, reacquired or subject to an option that
expired, was surrendered or terminated unexercised as to such
shares) as well as the Exercise Price then existing with respect
to each share of Company Stock then subject to this Plan, shall
be proportionately adjusted for (i) any division or combination
of any of the shares of capital stock of the Company, (ii) any
dividend payable in shares of capital stock of the Company or
(iii) any reclassification of shares of capital stock of the
Company.
13. Amendment or Termination of Plan.
Except as otherwise provided herein, this Plan may be
amended or terminated in whole or in part by the Board of
Directors of the Company (in its sole discretion); provided,
however, to the extent required to comply with the requirements
of Rule 16b-3, as then in effect, or the Section 162(m)
Regulations, any amendment to the Plan shall be subject to the
approval of such amendment by the shareholders of the Company.
No such action shall adversely affect or alter any right or
obligation with respect to any Option or Option Instrument then
in effect, except to the extent that any such action shall be
required or desirable (in the opinion of the Company or its
counsel) in order to comply with any rule or regulation
promulgated or proposed under the Code by the Internal Revenue
Service.
14. Burden and Benefit.
The terms and provisions of this Plan shall be binding
upon, and shall inure to the benefit of, each Participant and
such Participant's executors and administrators, estate, heirs
and personal and legal representatives.
15. Choice of Law.
This Plan shall be governed by, and construed in
accordance with, the laws of the State of Texas without
application of conflict of laws principles.
This Plan was approved by the Company's Board of Directors
on this 5th day of December, 1996 to be effective as of the
Effective Date.
/s/ JAMES R. LEININGER, M.D. /s/ FRANK A. EHMANN
___________________________ _____________________________
James R. Leininger, M.D. Frank A. Ehmann
/s/ PETER A. LEININGER, M.D. /s/ WENDY L. GRAMM,PH.D.
___________________________ _____________________________
Peter A. Leininger, M.D. Wendy L. Gramm, Ph.D.
/s/ RAYMOND R. HANNIGAN /s/ BERNHARD T. MITTEMEYER,M.D.
___________________________ ___________________________
Raymond R. Hannigan Bernhard T. Mittemeyer, M.D.
/s/ SAM A. BROOKS
___________________________
Sam A. Brooks
KINETIC CONCEPTS, INC.
NON-STATUTORY STOCK OPTION
TERMS OF GRANT
____________, 199_
1. Grant of Option. Kinetic Concepts, Inc. (the "Company") hereby
grants ("Participant") the right (the "Option") to
purchase shares (the "Shares") of the common
stock, par value $.001 per share (the "Common Stock"), of the Company
at a price of __________________ Dollars ($____) per Share (the
"Exercise Price") in accordance with the terms of the 1995 Kinetic
Concepts, Inc. Senior Executive Stock Option Plan (the "Plan"). The
Committee, exercising good faith, has determined that the Option
Exercise Price is equal to at least one hundred percent (100%) of
the fair market value of each Share on the date hereof.
Notwithstanding any provision in this Agreement to the contrary, in
the event that the Plan is not approved by the shareholders of the
Company, the Option shall automatically become void.
2. Duration of Option. The Option shall remain in effect during
the period commencing as of the date hereof and ending on the
earliest of (i) the date all of the Shares are purchased, (ii) three
months from the date of the termination of employment of Participant,
for any reason other than the death or permanent disability of the
Participant, (iii) six months from the date of the termination of
employment of the Participant as a result of the death or permanent
disability of the Participant, or, (iv) 5:00 p.m. C.S.T. on the date
which is ten (10) years from the date of this Option grant. In the
event of a dispute between the Participant and the Company as to the
termination of thean Option, the decision of the Committee with
respect to such matter, determined in good faith, shall be final,
binding and conclusive on the Participant. The Company shall give
Participant prior written notice of any Change of Control Event (as
defined in the Plan) and the last day on which Participant may
exercise the Option. In the event of a Change of Control Event, the
vesting of the Option, to the extent it is still in effect under this
Article 2 and has not been forfeited pursuant to Section 3 hereof,
shall be accelerated and the Option shall immediately become fully
vested and exercisable. Participant may, upon compliance with all
the terms of the Plan, purchase any or all of the Shares on or prior
to the last day specified in such notice by the Company, and, to the
extent the Option shall not be exercised, it shall expire at 5:00
p.m. C.S.T. on the last day specified in such notice by the Company.
Upon expiration of the Option, the Participant shall have no further
rights in or under the Options or to the Shares which have not been
purchased by such time.
3. Vesting and Exercise of Option.
The Option shall vest and may be exercised by Participant as
follows:
A. The Option will vest in twenty-five percent (25%) one-
quarter third increments on December 31st of each of the first
three four full calendar years following the date of the grant
of the Option (or in a later year as provided hereinbelow) (a
"Vesting Year"), provided, however, the Option will not vest in
a particular Vesting year unless: the Company has achieved 100%
of the Company's annual corporate plan approved by the Board of
Directors for that Vesting year. This calculation will be made
based on the methodology established for senior level corporate
employees, under the Company's 1996 Management Incentive Plan.
In addition, in the event the average closing price of the
Company's common stock in the month of December of any Vesting
Year ("Average Closing Price") does not exceed the Average
Closing Price for the prior year by at least twenty (20%)
percent and such an event occurs in two consecutive Vesting
years, then the portions of the Option scheduled to vest in the
second consecutive year shall not vest and all unvested portions
of the Option shall not be eligible to vest during the first
four Vesting Years of the Option (except in the event of a
Change of Control). Notwithstanding the above and subject to
the earlier termination of the Option pursuant to clauses (i),
(ii) and (iii) of Section 1 hereof, the Option granted hereunder
shall vest, to the extent not previously vested pursuant to this
Section 3A, six months prior to the date which is ten (10) years
from the date of grant (____________, 199_) and shall
remain outstanding until the expiration of the term of the
Option as specified herein.
B. Any vested portion of the Option eligible to be exercised
by Participant and not which has not been previously exercised
may be exercised up to the time of expiration of the Option.
Notwithstanding the above, and except in the event of a Change
of Control or the termination of the Participant without Good
Cause (as defined in the Plan), the Option shall not be
exercisable until the third anniversary of the grant of the
Option. The Option may be exercised only during the thirty (30)
day period which begins two (2) full days after the Company
issues a quarterly or annual earnings release; provided,
however, that the Committee, in its sole discretion, may permit
the Option to be exercised in whole or in part at times other
than that stated above. The Option may be exercised only in
amounts of one hundred (100) shares or whole multiples thereof;
provided, however, that this restriction shall not apply to the
purchase by Participant of all outstanding vested Shares. In no
event shall Participant be entitled to purchase a fractional
share. Notwithstanding any provision in this Agreement to the
contrary, if the Participant ceases to be an employee of the
Company for any reason, the Participant shall have no rights
with respect to the portion of the Option that is not then
vested and the unvested portion of the Option shall be
automatically forfeited. The Option may be exercised only if
compliance with all applicable federal and state securities laws
can be effected and only by (i) Participant's completion,
execution and delivery to the Company of a notice of exercise,
and (ii) the payment to the Company of the Exercise Price.
Except in the event of the death of a Participant, in which
event Participant's estate, executors or administrators,
personal or legal representatives or heirs may exercise this
Option in accordance with the terms of Subsection 3CB hereof,
this the Option or any of the rights thereunder may be exercised
by the Participant or permitted transferee only and may not be
transferred or assigned in whole or in part, whether
voluntarily, involuntarily or by operation of law (including,
without limitation the laws of bankruptcy) other than by will or
the laws of descent and distribution or pursuant to a qualified
domestic relations order.
C. In the event of the death of a Participant, Participant's
estate, executors or administrators, or personal or legal
representatives shall be entitled, for a period of six (6)
months following the date of Participant's death, to exercise
the Option, but only to the extent that Participant was entitled
to exercise the Option on the date of such death and subject to
the earlier expiration of the Option pursuant to Section 2
hereof.. Any person so desiring to exercise Participant's the
Option shall be required, as a condition to the exercise of the
Option, to furnish to the Company such documentation as the
Company shall deem satisfactory to evidence the authority of
such person to exercise the Option on behalf of the
Participant's estate.
D. Payment of the Exercise Price shall be made in cash and/or
upon approval by the Committee by surrender by the Participant
of a sufficient number of shares of the Company's sStock
(previously acquired by the Participant) valued at the fair
market value of such shares. The Committee may, upon such terms
and conditions as it deems appropriate, accept the surrender by
Participant of Participant's right to exercise the Option, in
whole or in part, and authorize a cash payment in consideration
therefore. As a condition to the issuance of Company Stock
pursuant to this the Option, the Participant authorizes the
Company to withhold in accordance with applicable law, from any
regular cash compensation payable to Participant, any taxes
required to be withheld by the Company under federal, state or
local law as a result of Participant's exercise of this Option.
4. Employment of Participant. Nothing in this oOption grant shall
be construed as constituting a commitment, guarantee, agreement or
understanding of any kind or nature that the Company shall continue
to employ Participant, nor shall this oOption grant affect the right
of the Company to terminate the employment of Participant at any time
and for any reason. No change of Participant's duties as an employee
of the Company shall result in, or be deemed to be, a modification of
any of the terms of this option grant.
5. Terms and Conditions of Plan. The terms and conditions included
in the Plan are incorporated by reference herein, and to the extent
that any conflict may exist between any term or provision of this
option grant and any term or provision of the Plan, such term or
provision of the Plan shall control. The Plan and this oOption grant
set forth all of the understanding between the parties hereto with
respect to the Option and the Shares, and there are no promises,
agreements, or understandings, express or implied, between them with
respect to the Option or the Shares other than as set forth herein or
in the Plan. This The oOption grant shall be construed and enforced
in accordance with the laws of the State of Texas.
This option grant The Option may be amended as required or desirable
(in the opinion of the Company or its counsel) in order to comply
with any rule or regulation promulgated or proposed under the Code by
the Internal Revenue Service.
KINETIC CONCEPTS, INC.
By:
____________________________
Raymond R. Hannigan,
President &
Chief Executive Officer
Exhibit 11.1
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
Year ended December 31,
1996 1995 1994
-------- -------- -------
Earnings before income taxes,
minority interest and cumulative
effect of change in accounting
principles...................... $ 64,441 $ 48,346 $119,550
Income taxes (25,454) (19,905) (55,949)
Minority interest in subsidiary loss - - 40
-------- ------- -------
Net earnings before cumulative effect
of change in accounting principles 38,987 28,441 63,641
Cumulative effect of change in method
of accounting for inventory - - 742
_______ _______ _______
Net earnings $ 38,987 $ 28,441 $ 64,383
======= ======= =======
Shares used in earnings per share
computations 45,489 45,457 44,143
======= ======= =======
Earnings per share:
Earnings before cumulative effect
of change in accounting
principles...................... $ 0.86 $ 0.63 $ 1.44
Cumulative effect of change in
method of accounting for
inventory - - 0.02
_______ _______ _______
$ 0.86 $ 0.63 $ 1.46
======= ====== =======
Shares used in earnings per share
computations - assuming full
dilution 45,584 45,914 44,709
====== ====== ======
Earnings per share - assuming full
dilution:
Earnings before cumulative effect
of change in accounting
principles....................... $ 0.86 $ 0.63 $ 1.42
Cumulative effect of change in
method of accounting for
inventory...................... - - 0.02
_______ _______ _______
$ 0.86 $ 0.63 $ 1.44
======= ======= =======
Exhibit 11.1 (Continued)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(In thousands, except per share data)
COMPUTATION OF SHARES USED IN EARNINGS PER SHARE COMPUTATIONS
Year ended December 31,
1996 1995 1994
-------- -------- -------
Average outstanding common shares 43,958 44,183 43,912
Average common equivalent shares -
dilutive effect of option shares 1,531 1,274 231
------ ------ ------
Shares used in earnings per share
computation...................... 45,489 45,457 44,143
SHARES USED IN EARNINGS PER SHARE COMPUTATIONS ASSUMING FULL
DILUTION
Year ended December 31,
1996 1995 1994
------- ------ ------
Average outstanding common shares 43,958 44,183 43,912
Average common equivalent shares -
dilutive effect of option shares 1,626 1,731 797
------ ------ ------
Shares used in earnings per share
computation - assuming full
dilution..................... 45,584 45,914 44,709
====== ====== ======
Exhibit 13.1
TABLE OF CONTENTS
20 Years of Clinical Excellence 1
Letter to Shareholders 2-3
Delivering Therapies -- Not
Equipment 4
KCI's Clinical Advantage 7
The Most Clinically Proven,
Product Line in the Industry 8
Building on a Foundation of
Performance 11
Our Product Continuum 12
Financial Table of Contents 13
Year Ended December 31,
- - ----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
(in millions, except per 1996 1995 1994 2 1993 1992
share data)
- - -----------------------------------------------------------------
Revenue
$269.9 $243.4 $269.6 $268.9 $278.5
Operating earnings 55.4 43.8 124.1 20.5 55.1
Net earnings 39.0 28.4 64.4 8.1 28.5
Earnings per share 0.86 0.63 1.46 0.18 0.63
Cash flow provided by
operations........... 62.2 56.8 96.5 56.5 58.0
1 See Consolidated Financial Statements and the Notes
thereto on page 22.
2 Results include $43.1 million, or $0.98 per share,
from several non-recurring gains.
The Letter to Shareholders, Management's Discussion and Analysis of
Financial Condition and Results of Operations and other information
provided in this annual report contain forward-looking statements that
involve risks and uncertainties, including but not limited to,
projections of future operating results, market penetration and the
financial condition of the Company. Certain risk factors that may
impact the forward-looking statements set forth herein are detailed
from time to time in the Company's Securities and Exchange Commission
filings.
20 YEARS OF CLINICAL EXCELLENCE
TWENTY YEARS AGO, KINETIC CONCEPTS, INC. WAS FOUNDED TO IMPROVE THE
QUALITY OF CARE FOR CRITICALLY ILL PATIENTS. DR. JIM LEININGER, AN
EMERGENCY ROOM PHYSICIAN, NOTICED THAT HIS PATIENTS WOULD OFTEN SURVIVE
SERIOUS PHYSICAL TRAUMA, ONLY TO DEVELOP LIFE- THREATENING
COMPLICATIONS AS A RESULT OF IMMOBILITY. BECAUSE OF HIS CONCERN, HE
PURCHASED THE RIGHTS TO MANUFACTURE A SPECIAL ROTATING HOSPITAL BED
THAT HE BELIEVED COULD PREVENT SUCH COMPLICATIONS AND, AS A RESULT,
SAVE LIVES. THE BED, THE ROTOREST, PROVIDED KINETIC THERAPY: LATERAL
ROTATION OF 40 DEGREES TO EACH SIDE, PREVENTING FLUID BUILD-UP IN THE
LUNGS. FROM THAT FIRST BED AND A MAN WITH A VISION, KINETIC CONCEPTS
HAS GROWN INTO A GLOBAL CORPORATION THAT DEVELOPS AND MARKETS A BROAD
RANGE OF INNOVATIVE HEALING SYSTEMS, INCLUDING SPECIALTY BEDS, MATTRESS
REPLACEMENT SYSTEMS AND RELATED MEDICAL DEVICES THAT ADDRESS SKIN
BREAKDOWN, CIRCULATORY COMPLICATIONS AND PULMONARY PROBLEMS ASSOCIATED
WITH PATIENT IMMOBILITY. WE CELEBRATED OUR TWENTIETH ANNIVERSARY OF
SAVING LIVES AND IMPROVING CLINICAL OUTCOMES DURING 1996, AND HAD AN
OPPORTUNITY TO REFLECT ON THE MANY CHANGES AND ACCOMPLISHMENTS THAT
HAVE TAKEN PLACE ALONG THE WAY. WHAT REMAINS UNCHANGED IN THOSE 20
YEARS IS OUR COMMITMENT -- AT EVERY LEVEL OF THE COMPANY -- TO PROVIDE
CLINICAL EXCELLENCE AND IMPROVE PATIENTS' LIVES. OUR PATIENT OUTCOMES
SPEAK FOR THEMSELVES.
DEAR FELLOW SHAREHOLDERS
Meeting clinical challenges and providing solutions. All of our
collective efforts at Kinetic Concepts, Inc. are focused on this
fundamental goal of patient care. At every level of our organization,
we focus on improving patient outcomes -- integrating all the products,
therapies and services needed to optimize patient recovery and quality
of life in the most cost-effective way possible.
As the health care industry changes, we at KCI find ourselves on
the vanguard of this changing marketplace. We believe we can best
serve cost-conscious health care providers by offering cost-effective
therapeutic systems that reduce the incidence of pulmonary
complications and skin breakdown and accelerate wound healing. Our
team members have accepted this challenge.
The recent emphasis on the efficacy of health care delivery is
nothing new to us at KCI. Our therapies have always been designed to
help patients heal faster and to improve patient outcomes and quality
of life. Ultimately, this reduces costs. It is a process that
benefits not only our patients but also medical care providers,
hospitals, insurers and ultimately our shareholders.
THE KCI CLINICAL ADVANTAGE TM.
Our focus is best exemplified by what we call the Clinical
Advantage TM. Based on a conviction that therapeutic solutions to
medical problems must withstand rigorous clinical review before being
implemented, we sponsor a wide variety of clinical studies which are
subject to vigorous external review. Our studies document both medical
efficacy and economic efficiency.
This is important because health care delivery systems are being
re-examined by care providers on an item-by-item basis for their effect
on achieving cost effective patient outcomes. On an even more
fundamental level, we want to ensure that each patient who depends on
KCI's therapeutic healing systems will benefit from our thorough
attention to outcomes testing and research.
During 1996, we estimate that KCI was involved in the care of more
than half a million people. We have also expanded our geographic reach
to include all 50 U.S. states and more than 30 countries globally.
All over the world, our team is making a difference.
THE KCI CONTINUUM OF CARE TM.
No matter what the care setting, our commitment to healing
patients faster remains paramount. Whether in an acute, extended care
or home setting, we can accommodate a patient's needs with the
broadest, most clinically proven product line in the industry. In
addition, new technologies and devices are expanding the therapies we
can offer within our continuum.
ACCOMPLISHMENTS.
1996 was a key year for KCI in enhancing and extending patient
outcome research through clinical studies and our proprietary software.
And in November, we launched our innovative V.A.C.(R) wound-care device
in the United States following a successful introduction in Europe.
Financially, 1996 was an outstanding year for KCI. Our focused
initiatives in production, finance and distribution produced strong
year-over-year earnings results. We completed an eight-million share
secondary offering, increasing the liquidity of KCI's stock
substantially. We also purchased and retired more than 2.5 million
shares of KCI common stock, further reinforcing our strong earnings-per-
share. Both our gross and operating margins strengthened significantly
in 1996, with our margins increasing by approximately two percentage
points.
Our margins have improved because our operations are leaner. Our
business model continues to produce strong cash flows. We are debt
free and our balance sheet remains one of the strongest in our
industry. We are positioned better than ever.
[Earnings Per Share Graph]
$.18 $.57 $.63 $.86
1993 1994 1995 1996
Note: Excludes effects of Unusual Items
THE FUTURE.
We have produced an ambitious strategic plan for 1997 and beyond.
We have surveyed the opportunities ahead of us and the changes and
challenges within the industry that will affect our business. Some of
the initiatives on our agenda are:
* We remain committed to revenue growth. In 1996, revenue grew 11%
overall. This was accomplished through a combination of market
expansion and penetration plus key market share gains.
* KCI's financial strategy also focuses on growing our bottom line at
a faster rate than revenue. We believe there is still opportunity
to make our product and distribution processes more efficient.
* We intend to continue our efforts to differentiate KCI from our
competition by leveraging our principal competitive advantage -- our
ability to deliver enhanced patient outcomes and demonstrate the
effectiveness of Kinetic Therapy TM. Third-party payors are
increasingly interested in understanding how well a therapy works
and how it will impact their average cost of care. For this
purpose, KCI has developed the Genesis software system to accumulate
and analyze the information collected by KCI's clinicians in their
patient rounds and the Odyssey software program that assists KCI's
clinicians and their customers in tracking wound-care outcomes and
evaluating treatment protocols. A similar system, PAO2, has been
developed for pulmonary care.
* KCI will aggressively seek new technologies and high-end technical
products to enhance and extend our product line, such as the
V.A.C.(R) wound-care system, which is receiving strong acceptance in
the U.S. medical community, just as it did in Europe.
* The breadth and efficacy of our product line and reach of our
distribution network clearly give KCI a competitive advantage. Our
pipeline of future products is more exciting than ever.
* With almost $60 million in cash and no debt, KCI is well positioned
to make product and company acquisitions that fit our business
model and are accretive. We will also continue to repurchase KCI
common stock, which in 1996 was at the top of our investment list.
Our people have made KCI a success. Their enthusiasm, hard work
and passion for our Company's mission have brought about great
change. They share our energy and commitment to meeting the
challenges of the future.
We believe that the mission of a medical-care company should be
improving patient outcomes. Therapeutic healing saves lives and
reduces the average cost of care. We are proud that our products
have touched the lives of so many people. Whether the patient is
Christopher Reeve, Boris Yeltsin, Stan Fox or any of the thousands
of people our efforts and products have helped, we at KCI are
"People with Purpose." We measure success not just by how many beds
or devices we place, but more importantly, by how effective our
products and people are in healing patients. You can expect KCI's
continued commitment to success in 1997.
/s/ James R. Leininger, M.D.
- - ----------------------------------
JAMES R. LEININGER, M.D.
Chairman of the Board of Directors
/s/ Raymond R. Hannigan
- - ----------------------------------
RAYMOND R. HANNIGAN
President and Chief Executive Officer
[PICTURE OF RAY HANNIGAN AND JIM LEININGER]
[ GRAPH OF PERCENTAGE OF U.S. POPULATION 65 OR OLDER]
Year
--------------------
1950 2000 2050
8.1% 12.8% 20.4%
DELIVERING THERAPIES -- NOT EQUIPMENT
Kinetic Concepts is a therapeutic company, a people company. We
are service-oriented and solution-driven. With an overriding
motivation of delivering therapies that improve patient outcomes, KCI
today is 2,000 employees worldwide including a domestic network of 250
staff clinicians and 575 service technicians, all committed to KCI's
mission of improving the quality of life through healing.
When we receive a call that a patient is being transported to a
major trauma center, KCI's immediate response is to deliver one of our
life-saving therapies and assist in patient movement. We can reach any
major trauma center in the U.S. within two hours. We are on call 365
days a year, seven days a week, 24 hours a day, always prepared to
bring KCI`s healing surfaces and devices to patients who need them.
Whether in an acute, subacute, extended or home care setting, our
trained clinicians and technicians work with health care professionals
to offer technical expertise on the use of our products and individual
attention to ensure the success of our therapies.
Reinforcing our global emphasis on improved health care, Kinetic
Concepts has direct operations in eight international markets in
western Europe, as well as in Canada and Australia. Our international
distribution network encompasses 45 service centers where 200 service
technicians deliver therapeutic patient support surfaces, specialty
beds and medical devices. Through independent dealers, we also serve
21 additional international markets throughout the world.
MEETING THE NEEDS OF A CHANGING PATIENT POPULATION
Patients are our focus in all that we do at KCI. We remain keenly
aware that the patient in a hospital or in an extended or home care
setting could be our mother, our grandfather, our brother or a close
friend. That realization guides our commitment, reinforces our
dedication and enhances our deep sense of responsibility.
Individually and as an organization, we are committed to providing
therapeutic healing systems that improve patient outcomes, treat the
complications of immobility -- pulmonary, skin and circulatory problems
- - -- as well as problems related to bariatric care and chronic wounds.
We address patient problems and deliver our therapies regardless of
care setting or level of acuity, giving each patient a level of
personal attention and service that sets KCI apart.
Keeping in step with changing demographics, KCI offers therapies
to meet the needs of an evolving patient population. As the number of
older Americans continues to rise and as patients are moved to nursing
homes and home care settings, the need for KCI therapies will expand.
This is especially true for those patients that deal with circulatory
problems or skin breakdown, both of which are highly common indications
amongst the elderly.
HOSPITALIZED WITH BILATERAL PNEUMONIA AND IN CRITICAL CONDITION, A
CALIFORNIA TEACHER WAS FIGHTING FOR HER LIFE. PLACEMENT ON A TRIADYNE
BED TO HELP CLEAR HER LUNGS RESULTED IN A 50% IMPROVEMENT IN HER X-
RAYS AND LAB RESULTS OVERNIGHT. HER RECOVERY WAS COMPLETE, AND NOW
SHE'S BACK DOING WHAT SHE LOVES -- SHARING HER LOVE OF LEARNING WITH
HER STUDENTS.
[PICTURE OF STUDENT WITH TEACHER IN CLASSROOM]
FOLLOWING A SERIOUS AUTO ACCIDENT, A RETIRED ELECTRICIAN FROM KANSAS
HAD A CHRONIC, OPEN HIP WOUND THAT WAS UNRESPONSIVE TO TRADITIONAL
THERAPIES FOR SEVERAL MONTHS. WITHIN 48 HOURS AFTER RECEIVING V.A.C.
THERAPY, HE WAS AMAZED TO SEE THE WOUND CLOSING AND FILLING IN. NOW HE
AND HIS FRIENDS ARE ENJOYING THE GREAT OUTDOORS TOGETHER AGAIN.
[PICTURE OF MAN WITH DOG SITTING ON A BENCH OUTSIDE]
[Picture of person at computer]
CLINICAL STUDIES
- - ----------------
KCI's outcome management program is part of a long-term
commitment to help our customers provide a more competitive
health care system. As the managed care market matures, all
health care providers involved will become less focused on
managing costs alone and more focused in managing outcomes.
KCI'S CLINICAL ADVANTAGE
At KCI, we are 2,000 skilled and committed team members,
diversified in function and abilities, but united in professionalism,
integrity and a commitment to the highest standard of service to our
customers and patients.
What sets KCI apart in the medical marketplace is a standard we
call The Clinical Advantage. At the foundation of KCI's Clinical
Advantage is our active sponsorship of independent clinical research.
KCI's portfolio of more than 50 active and completed studies supports
the medical benefit and cost efficiency of our products and protocols
as part of the prevention and healing process, providing the outcome
data demanded by today's health care providers. KCI's software programs
and integrated clinical data-base, consisting of the Genesis, Odyssey
and PAO2 information platforms, combined with our extensive clinical
field presence, clinically proven therapies and protocols and
supporting cost data define KCI's unique position in the marketplace --
The Clinical Advantage.
One of our greatest strengths is our flexibility in meeting the
changing requirements of today's health care provider. As both private
and government reimbursement programs move toward systems where
facilities receive a fixed payment based only upon the patient's
initial diagnosis, actuarial information becomes critical. The
collection and assessment of such information is essential to predict
patient outcomes and develop appropriate pricing structures. That's
where The Clinical Advantage can help.
From an emergency placement of a trauma patient on a KCI TriaDyne,
to assistance in developing a wound-care management program for a
patient using the V.A.C., to participation in patient rounds, trained
KCI team members make more than 200,000 patient rounds annually.
These employees -- many with medical or clinical backgrounds -- assist
facility staff in collecting clinical outcome data. To facilitate the
collection and processing of this data, KCI has developed three
proprietary software programs -- Genesis, Odyssey and PAO2.
KCI staff clinicians use Genesis to assist in tracking service
responsiveness and patient outcomes. Using hand-held computers, these
clinicians make regular rounds to document the effect of KCI therapies
on a patient's overall condition. This information is then entered
into a central database and analyzed to determine the effectiveness of
specific treatment protocols.
Odyssey and PAO2 patient assessment and outcome tracking software
systems enable KCI customers to standardize the information collected
on KCI's wound management and pulmonary management protocols. As they
document and track complete wound and pulmonary management programs --
including identifying at-risk patients and determining the cost of
achieving patient outcomes -- the facilities share collected data with
KCI for inclusion in a national database. This enables the company to
compare a facility's program or patient results with similar programs
or patients on a local, regional or national basis. Each facility can
then enhance its wound and pulmonary management programs and achieve
the best possible outcome at the lowest total cost of care.
[PICTURE OF V.A.C.(R)]
THE V.A.C.(R)
- - -------------
Problem wounds need special solutions. The V.A.C. (Vacuum Assisted
Closure) closes wounds when other methods fail. It uses a pump and
special sponge to create negative pressure within the wound, drawing
the skin together. For some patients, the V.A.C. is the only answer
and only KCI has the V.A.C.
THE MOST CLINICALLY PROVEN, ADVANCED PRODUCT LINE IN THE INDUSTRY
KCI's Continuum of Care provides the broadest range of specialty
beds and mattress replacement and overlay systems in the industry,
including a multitude of clinically proven therapies which deliver
pressure relief and reduction, pulsation, Kinetic Therapy and
percussion. Health care providers have the flexibility to increase or
decrease the prescribed therapy based on individual patient acuity,
which minimizes expenditures while still achieving the desired outcome.
The cornerstone of KCI's success is the Company's focus on the
needs of each patient. This patient focus has led to the introduction
of several new specialty patient surfaces and critical medical devices
for wound care, pulmonary care and the care of bariatric patients.
As an example, the 1996 national launch of negative pressure
therapy through the V.A.C. (Vacuum Assisted Closure) is gaining
widespread acceptance as a revolutionary therapy for healing chronic
wounds. The V.A.C. uses a portable pump and a special "sponge"
dressing to create negative pressure within a wound. The process
reduces edema, draws fresh blood cells to the wound site and draws the
skin together, producing dramatic healing results in patients with
difficult wounds that had been resistant to healing. This dramatic
improvement also results in cost savings to the hospital. In fact,
Bowman Gray Hospital's 1996 Annual Report indicates that use of the
V.A.C. has resulted in a savings to the hospital of over $170,000 in
wound-care costs.
KCI's KinAir III and TheraPulse specialty beds and the First Step
(R) family of overlays are the foundation of our wound-care product
continuum. TheraPulse is the most aggressive specialty bed available
for wound healing, with clinical studies documenting a 30 percent
reduction in overall healing time. In extended care, where Medicare
has a 100-day limit on reimbursement, TheraPulse is quickly becoming
the product of choice.
In 1996, the introduction of Impression, an affordable, self-
contained, powered, pressure-relieving mattress replacement system and
TheraRest MRS, a static, pressure-reducing system, expanded KCI's
continuum to health care providers interested in purchasing some of
their wound-care support surfaces. (The Company normally rents its
specialty surfaces on an as needed basis.) Also, the First Step (R)
TriCell TM was introduced to expand the pressure-relieving therapy of
the First Step (R) family of overlays into the rapidly growing home
care market.
In bariatric care, the KCI BariKare addresses the special needs of
the large patient. Introduced in 1995, the BariKare serves as a bed,
chair and x-ray table for patients weighing up to 850 pounds. Features
such as built-in scales let nurses care for these patients in a safe
and dignified manner. In 1996, the introduction of the First Step (R)
Select Heavy Duty TM incorporated proven pressure-relieving therapy
into a design which fits directly on the BariKare. These products,
combined with important accessories like wheelchairs, walkers and
commodes, have established KCI as a leader in providing for this
underserved patient segment.
IN RESPIRATORY FAILURE AFTER CONTRACTING A RARE VIRUS ON A CAMPING
TRIP, A 30-YEAR-OLD COMPUTER EXECUTIVE FROM BOSTON WAS BARELY CLINGING
TO LIFE WHEN SHE WAS PLACED ON THE ROTOREST. WITHIN MINUTES AFTER THE
MAXIMUM DEGREE OF ROTATION WAS APPLIED, HER PULMONARY FUNCTION BEGAN TO
IMPROVE. THE ICU NURSES WHERE SPEECHLESS AT THE SPEED OF HER RECOVERY.
THIS BRUSH WITH DEATH HAS GIVEN HER LIFE NEW MEANING.
[PICTURE OF GIRL]
AFTER FALLING INTO A COMMUNITY POOL AND NEARLY DROWNING, AN ATLANTA TWO-
YEAR OLD REQUIRED ADVANCED TECHNOLOGY TO REROUTE AND OXYGENATE HIS
BLOOD. AMID A TANGLE OF CATHETERS AND TUBES, HE WAS CAREFULLY PLACED
ON A PEDIKAIR, WHICH USING ITS PULSATION FEATURE, KEPT HIS LUNG
SECRETIONS MOBILIZED PREVENTING PNEUMONIA. NOW FULLY RECOVERED, HE
JUST WANTS TO GO SWIMMING AGAIN AND HIS FATHER IS HAPPY TO TAKE HIM.
[PICTURE OF TWO YEAR OLD BOY WITH DAD]
In addressing the needs of the pulmonary patient, KCI's most
advanced healing system, the TriaDyne TM, continues to be the only
product available able to deliver pulsation, percussion and true
Kinetic Therapy, which has been defined by the U.S. Centers for Disease
Control as lateral rotation of at least 40 degrees on each side.
Kinetic Therapy has been demonstrated to effectively prevent and treat
pulmonary complications. Effective use of Kinetic Therapy through
KCI's TriaDyne TM, RotoRest (R) Delta and BioDyne (R), along with
patient tracking through PAO2, provides an excellent pulmonary
management program for today's health care provider.
The immobile patient may also experience circulatory problems.
The PlexiPulse and PlexiPulse All-in-1 System are non-invasive vascular
assistance devices that aid venous return by pumping blood from the
lower extremities to help prevent clotting and reestablish
microcirculation. The PlexiPulse has been proven to be highly
effective in preventing DVT (Deep Vein Thrombosis), reducing edema and
improving lower limb blood flow.
[PICTURE OF PLEXIPULSE(R)]
PLEXIPULSE (R)
- - --------------
Nature has an answer for everything, but sometimes it needs some help.
The PlexiPulse All-in-1 System re-establishes normal circulation 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.
BUILDING ON A FOUNDATION OF PERFORMANCE
Last year we set out to realize three primary financial goals. We
achieved or surpassed all of them in 1996. We committed to growing our
top-line, or revenue, at a double-digit rate, to growing our margins at
a faster rate than our top-line and to achieving a sustained gross
margin of 40 percent and operating margin of 20 percent.
KCI's 1996 revenue increased by 11 percent, reflecting the high
market growth rates of the extended care segment, which grew by 32
percent from 1995, as well as market share gains in both the acute care
segment in the United States and in the international segment. Based
on 1996 net earnings of $39 million, a 37 percent increase over 1995
figures, we succeeded in achieving bottom-line growth in excess of our
top-line growth. With a gross profit margin of 40 percent and gross
profit surpassing the $100 million mark -- a 33 percent increase from
1993 -- we also surpassed our goal of 20 percent operating profit
margins, illustrating our ability to add revenue and leverage our
infrastructure with a relatively small increase in expenses.
Another highlight of 1996 was an 8 million share secondary
offering which increased the liquidity of KCI stock substantially. In
addition, we repurchased and retired approximately 2.5 million shares
of Kinetic Concepts common stock. We also took the opportunity to
favorably negotiate the prepayment of all the remaining notes received
from the 1994 disposition of our Medical Services Division. The bottom
line of all these actions was an increase in earnings per share from
$0.63 in 1995 to $0.86 in 1996 -- an increase of 37 percent.
As important as our dedication to enhancing shareholder value is,
we never lose sight of KCI's other "bottom line" -- our commitment to
the patients our therapeutic systems and medical devices help and our
pledge to improving patient outcomes. This overriding sense of
responsibility shapes our vision and guides our actions.
[FOUR GRAPHS (IN MILLIONS)]
REVENUE GROSS PROFIT
- - ---------------------------- -----------------------------
1993 1994 1995 1996 1993 1994 1995 1996
208,601 222,084 243,443 269,881 59,199 74,289 92,294 107,361
OPERATING PROFIT NET PROFIT
- - ------------------------------ -------------------------------
1993 1994 1995 1996 1993 1994 1995 1996
19,575 38,636 43,792 55,354 11,032 25,105 28,441 38,987
Note: Prior years exclude unusual items
OUR PRODUCT CONTINUUM
KCI'S WOUND CARE
- - ----------------------------------------------------------------------
KinAir (R) III TheraPulse (R) FluidAir Elite First Step(R)
A framed air- A framed, TM Plus
flota- pulsating A framed air sur- Adjustable, un-
tion, low air- air support face which uses framed mattress
loss surface fluidized overlay with
support surface to enhance capi- silicon three
to prevent and llary and microspheres to individually
treat skin lymphatic provide high air- controlled
breakdown and circulation and loss therapy. sections to meet
minimize pain. help improve individual
healing. needs.
- - ----------------------------------------------------------------------
First Step(R) DynaPulse (R) Impression TM Frist Step(R)
Select A pulsating mat- An all-in-one TriCell TM
An unframed, low tress powered mattress A pressure
air-loss, replacement system used to reliev-ing, low
pressure-relief system help treat and air-loss
mattress with (unframed) to reduce the therapeutic
independent help prevent and incidence of mattress support
support channels treat pressure pressure ulcers. system designed
to maximize ulcers. to help prevent
comfort. and treat
pressure ulcers.
- - ----------------------------------------------------------------------
KCI'S PULMONARY CARE
- - ----------------------------------------------------------------------
KCI's TriaDyne Roto Rest(R) BioDyne(R) II Q2 Plus TM
TM Delta
KCI's most The most Kinetic Therapy An unframed, low
advanced framed, aggressive form combined with air-loss
therapeutic of Kinetic pressure-relief mattress to
patient support Therapy, to maintain skin provide a
surface, generally used integrity and customized
providing to prevent prevent turning schedule
Kinetic Therapy pneumonia in pneumonia. with adjustable
SM, pulsation trauma patients. firmness.
and per-cussion
in addition to
low air-loss
pressure relief.
- - ---------------------------------------------------------------------
KCI'S BARIATRIC CARE
- - ---------------------------------------------------------------------
BariKare (R) Bari-800i TM First Step(R) Burke Bariatric
Flexible patient A complete care Select Heavy Bundle
positioning, com- system for large Duty TM Designed to meet
fortable surface or obese An unframed, low the special
and accurate patients up to air-loss needs of the
weight readings 800 lbs., mattress morbidly obese
for patients up designed for use designed to patient.
to 850 lbs. in acute care provide pressure
settings. relief for the
bariatric
patient.
- - ----------------------------------------------------------------------
FINANCIAL TABLE OF CONTENTS
Selected Consolidated Financial Data 14
Management's Discussion and
Analysis of Financial Condition and
Results of Operations 15
Consolidated Balance Sheets.......... 22
Consolidated Statements of Earnings.. 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Share-
holders' Equity 25
Notes to Consolidated Financial
Statements 26
Independent Auditors' Report 39
Board of Directors 40
<TABLE>
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Earnings Data:
Revenue:
Rental and service $225,450 $206,653 $228,832 $232,250 $244,905
Sales and other 44,431 36,790 40,814 36,622 33,586
------- ------- ------- ------- -------
Total revenue 269,881 243,443 269,646 268,872 278,491
------- ------- ------- ------- -------
Rental expenses 146,205 137,420 159,235 169,687 156,682
Cost of goods sold 16,315 13,729 19,388 18,666 18,987
------- ------- ------- ------- -------
Gross profit 107,361 92,294 91,023 80,519 102,822
Selling, general and
administrative expenses 52,007 48,502 51,813 53,279 47,710
Unusual items(1) - - (84,868) 6,705 -
------- ------ ------- ------ ------
Operating earnings 55,354 43,792 124,078 20,535 55,112
Interest income (expense),
net..................... 9,087 4,554 (4,528) (5,908) (7,195)
------- ------ ------- ------ ------
Earnings before income
taxes, minority
interest,extraordinary
item and cumulative
effect of changes
in accounting
principles.......... 64,441 48,346 119,550 14,627 47,917
Income taxes 25,454 19,905 55,949 7,175 19,405
------- ------ ------- ------ ------
Earnings before minority
interest, extraordinary
item and cumulative
effects of changes
in accounting
principles........... 38,987 28,441 63,601 7,452 28,512
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 accountinf for income
taxes (3) .............. - - - 450 -
------ ------ ------ ------ ------
Net earnings.......... $38,987 $28,441 $64,383 $8,062 $28,512
====== ====== ====== ===== ======
Earnings per share.... $ 0.86 $ 0.63 $ 1.46 $ 0.18 $ 0.63
====== ====== ====== ===== ======
Shares used in earnings per
share computations...... 45,489 45,457 44,143 44,627 45,060
====== ====== ====== ====== ======
Cash flow provided by
operations............. $62,167 $56,782 $96,451 $56,538 $58,007
====== ====== ====== ====== ======
Cash dividends paid to
common shareholders.... $ 6,607 $ 6,631 $ 6,588 $ 6,638 $ 6,277
====== ====== ====== ====== ======
Cash dividends per share
paid to common
shareholders........... $ .15 $ .15 $ .15 $ .15 $ .14
====== ====== ====== ====== ======
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994 1993 1992
------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Working capital $107,334 $109,413 $ 90,731 $ 60,907 $ 55,473
Total assets $253,393 $243,726 $232,731 $284,573 $286,915
Long-term obligations-
noncurrent (4)...... $ - $ - $ 2,636 $101,889 $102,237
Minority interest..... $ - $ - $ - $ 40 $ 990
Redeemable convertible
preferred stock..... $ - $ - $ - $ - $ 3,307
Other shareholders'
equity.............. $211,078 $210,324 $185,423 $125,707 $123,813
</TABLE>
(1) See Note 12 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 7 of Notes to Consolidated Financial Statements for
information on cumulative effect of change in method of accounting
for income taxes.
(4) See Notes 5 and 6 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 ongoing health care debate continued during 1996 headed by
many now familiar 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 national health
care costs intensified during 1993 as a result of the health care
reform debate and has continued through 1996 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 yet to be determined,
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 cost pressures on
hospitals but the Company does not believe that the manner in which
hospitals are currently reimbursed will change materially in the near
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 a fixed payment 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.
This "fixed reimbursement" scenario heightens the need for
clinically effective therapies. The Company believes it is addressing
this need through its Clinical Advantage programs. The Company also
believes it has the most clinically proven product line in the
industry, including a pulmonary line to prevent and heal pulmonary
problems; a skin and wound-care line that prevents and heals skin
breakdown and heals wounds, and a bariatric line that provides cost-
effective care for the obese patient. Each of these therapies is
supported by clinical studies and these studies match actual experience
with economic information to support the efficacy of these therapies.
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
overall 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 overall acute care market growth. While the Company expects
these industry trends to continue, it has successfully addressed these
trends over the last two years by (i)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 had previously a relatively small presence and (ii) the
introduction of new high-end therapies and products including the
TriaDyne TM, BariKare(R) beds, the V.A.C.TM and the PlexiPulse All-in-1
system. Additionally, through its nationwide distribution network the
Company has expanded its presence in both the extended and home care
settings.
Generally, the Company's customers prefer to rent rather than
purchase patient support surfaces, due to such considerations as high
initial capital outlays and technologically complex maintenance
requirements. As a result, rental revenues are a high percentage of
the Company's overall revenue. 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
therapeutic surfaces 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.
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, 1996 Compared to Year Ended December 31, 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 prior year ($ in
thousands):
<TABLE>
<CAPTION> Year Ended December 31,
Revenue Increase
Relationship (Decrease)
-------------- ------------
1996 1995 $ Pct
----- ----- ---- -----
<S> <C> <C> <C> <C>
Revenue:
Rental and service 84% 85% $ 18,797 9%
Sales and other 16 15 7,641 21
---- ---- -------
100% 100% 26,438 11
Rental expenses 54 56 8,785 6
Cost of goods sold 6 6 2,586 19
---- ---- -------
Gross profit 40 38 15,067 16
Selling, general and
administrative expenses 19 20 3,505 7
---- ---- -------
Operating earnings 21 18 11,562 26
Interest income, net 3 2 4,533 100
---- ---- -------
Earnings before income taxes 24 20 16,095 33
Income taxes 10 8 5,549 28
---- ---- -------
Net earnings 14% 12% $ 10,546 37%
==== ==== =======
</TABLE>
The Company's revenue is derived from three primary markets. The
following table sets forth, for the periods indicated, the amount of
revenue derived from each of these markets ($ in millions):
Year Ended December 31,
-----------------------
1996 1995
------- ------
Domestic Services $181.3 $163.0
International 68.8 60.7
Medical devices 19.2 17.1
Other 0.6 2.6
------ -----
Total revenue $269.9 $243.4
===== =====
Total Revenue: Total revenue in 1996 was $269.9 million, an increase
of $26.4 million or 10.9% from 1995. This increase was primarily
attributable to growth in the Company's domestic specialty support
surface business combined with international expansion and penetration.
Domestic support surface revenue includes revenue from acute and
extended care facilities as well as revenue from the home care segment.
Revenue from acute care facilities was up $8.1 million, or 7.3%, from
the prior year, due in large part to the continued success of KCI's
TriaDyne TM, the Company's leading Kinetic Therapy product. Rental
revenue from Kinetic Therapy products grew 31% in 1996. Revenue from
extended care settings in 1996 increased 32%, or $12.0 million,
primarily due to increased patient days and the addition of various new
national accounts. Revenue in the home care segment, which accounts
for 5% of total Company revenue, decreased $1.8 million, or 12.2%, from
1995 primarily due to a change in Medicare reimbursement policy which
had the effect of reducing the number of reimbursable patient days in
the period. Revenue from the Company's international operations
increased $8.1 million, or 13.3%, to $68.8 million in 1996, despite
adverse foreign currency exchange fluctuations of approximately $2
million. Strong sales in mattress overlay products accounted for more
than half of this increase. Revenue growth in the German home care
market and further penetration in various emerging markets, e.g.,
Switzerland and Australia, also contributed to international revenue
growth. Revenue from the Company's two primary medical devices,
PlexiPulse TM and The V.A.C. TM, was $19.2 million, an increase of $2.1
million, or 12.3%, from 1995. This increase was substantially due to
the introduction of the V.A.C. TM in the United States.
In November 1996, the Company announced that it had been advised
by Premier Purchasing Partners, L.P., that its bid to be the primary
supplier for the newly combined group had been awarded to another
vendor. Premier is a new voluntary group purchasing organization which
was formed as a result of the merger of three separate group purchasing
organizations. Revenue from hospitals within Premier for 1996
accounted for approximately 10% of the Company's total revenue.
Because facilities within Premier are not committed to do business with
the group's primary vendor, it is difficult to predict the ultimate
effect of the new agreement on revenue and operating profits.
Management expects that a portion of the revenue will be retained.
Rental Expenses: Rental expenses consist largely of field personnel
costs, depreciation of the Company's rental equipment and related
facility costs. Rental expenses for 1996 totaled $146.2 million, an
increase of $8.8 million, or 6.4%, from the prior year. The addition
of extended care sales representatives, new information systems and
international market expansion accounted for a majority of the
increase. As a percentage of total revenue, 1996 rental expenses were
54.2%, down from 56.4% in the prior period. This decrease is due
primarily to the 1996 revenue increase because most of the Company's
rental or field expenses are relatively fixed in nature.
Gross Profit: Gross profit in 1996 was $107.4 million, an increase of
$15.1 million, or 16.3%, from the year-ago period due substantially to
higher revenue, as discussed previously, combined with relatively
fixed field expenses. Gross profit margin for 1996, as a percentage
of total revenue, was 39.8%, up from 37.9% for the prior year. Rental
margins improved to 35.1%, up 1.6 percentage points from 1995, while
sales margins improved slightly to 63.3%, from 62.7%, as the product
mix continued to shift toward higher margin overlays and disposable
products.
Selling, General and Administrative Expenses: Selling, general and
administrative (SG&A) expenses for 1996 were $52.0 million, an
increase of $3.5 million, or 7.2%, from 1995. Total SG&A expenses for
the prior year also included a $2.9 million non-recurring loss from
the sale of the Financial Services Division in June 1995. Costs
associated with international market expansion, improved information
systems and marketing, legal and professional activities accounted for
a substantial part of this increase. As a percentage of total
revenue, SG&A expenses in 1996 were 19.3%, down slightly from 19.9% in
the year-ago period.
Operating Earnings: Operating earnings for 1996 were $55.4 million,
an increase of $11.6 million, or 26.4%, from 1995. The increase was
due primarily to the growth in revenue combined with the
implementation of various initiatives undertaken to improve
efficiencies, e.g., new information systems. As a percentage of total
revenue, the Company's operating margin improved to 20.5%, up more
than two percent from 1995.
Net Interest Income: Net interest income for the year was $9.1
million, which included $5.2 million from the early repayment of all
remaining notes receivable from the 1994 disposition of the Medical
Services Division. The notes had an aggregate face value of $10
million and had been discounted to a carrying value of $3.2 million,
excluding accrued interest. The notes were retired for approximately
$9 million.
Income Taxes: The Company's effective income tax rate for 1996 was
39.5% compared to 41.2% in 1995. This decrease was primarily the
result of implementing various tax planning initiatives both
domestically and overseas.
Net Earnings: Net earnings for 1996 were $39.0 million, or $0.86 per
share,
compared to 1995 net earnings of $28.4 million, or $0.63 per share.
Higher revenue and controlled spending, combined with the one-time
increase in interest income and a lower overall tax rate accounted
for the 37% earnings improvement. Average common and common
equivalent shares outstanding were substantially unchanged year-to-
year.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the prior year ($ 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 expense 20 19 (3,311) (6)
Unusual items - (31) 84,868 NM
---- ---- ------
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% $(35,942) (56%)
==== ==== ======= ====
</TABLE>
The Company's revenue is derived from three primary markets. The
following table sets forth, for the periods indicated, the amount of
revenue derived from each of these markets ($ in millions):
Year Ended December 31,
-----------------------
1995 1994
-------- - ------
Domestic Surfaces $163.0 $157.7
International 60.7 46.4
Medical devices 17.1 13.9
Other(1) 2.6 51.6
----- -----
Total revenue $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 (1) this
settlement and (2) 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 to 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 increased
$1.7 million, or 1.6%, 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 (R) and the
TriaDyne TM, 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 increased $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 $17.1 million in
1995, an increase of $3.2 million, or 23.0%, from 1994, primarily as a
result of greater market penetration of the PlexiPulse.
Rental Expenses: 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.
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 earnings for 1995 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
September 1994 write-off of the goodwill associated with Medical
Services.
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
in 1994. 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 Principle: 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 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 1994 benefit
from the patent litigation settlement 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.
Financial Condition
Inventories at December 31, 1996 increased $1.2 million, or 6.3%,
from the end of 1995, due primarily to increased mattress overlay
levels in the foreign subsidiaries, including inventories acquired as
part of the Astec Medical acquisition. In addition, the introduction
of the V.A.C. in the United States has resulted in a slight increase to
the overall inventory balance.
The note receivable from principal shareholder at December 31,
1995 related to a loan made to James R. Leininger, M.D., the principal
shareholder and chairman of the Company's Board of Directors. In
January 1996, the note receivable, including accrued interest, was
collected in full.
Other notes receivable at December 31, 1995 consisted of three
notes receivable from Mediq/PRN, with an aggregate face value of $10.0
million, received as partial consideration in the 1994 sale of the
Medical Services Division. In October 1996, the Company negotiated the
early repayment of all the remaining notes and recognized a non-
recurring gain of approximately $5.2 million before taxes.
Other assets at December 31, 1996 increased $8.6 million, or
39.3%, to $30.4 million compared to $21.9 million in 1995, due
primarily to an investment in an asset subject to a leveraged lease.
See Note 10 to the Company's consolidated financial statements for
further discussion of this item.
Deferred income taxes at December 31, 1996 were $5.1 million, an
increase of $4.7 million from year-end 1995. The increase from the
prior year is primarily due to accelerated tax depreciation on the
TriaDyne fleet, as well as depreciation on assets subject to leveraged
leases.
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 the difference 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 1996 the net impact of these timing issues resulted
in a net deferred tax liability comprised of deferred tax liabilities
totaling $13.3 million offset by deferred tax assets totaling $8.2
million.
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. Initial 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 Company, Inc. (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.
On October 31, 1996 the Company received a counterclaim which had
been filed by Hillenbrand Industries, Inc. in the antitrust lawsuit
which the Company filed in 1995. The counterclaim alleges that the
Company's antitrust lawsuit and other actions were designed to enable
Kinetic Concepts to monopolize the bed market. Although it is not
possible to predict the outcome of this litigation, the Company
believes that the counterclaim is without merit.
On December 26, 1996, Hill-Rom filed a lawsuit against the Company
alleging that the Company's TriaDyne TM bed infringes a patent issued
to Hill-Rom December of 1996. This suit was filed in the United States
District Court for the District of South Carolina. Substantive
discovery in the case has not begun. Based upon its initial
investigation, the Company does not believe that the TriaDyne bed
infringes the Hill-Rom patent or that this lawsuit will materially
impact on the marketing of the TriaDyne bed.
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 "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, 1996, the Company had current assets of $144.2
million and current liabilities of $36.9 million resulting in a working
capital surplus of $107.3 million, compared to a surplus of $109.4
million at December 31, 1995.
In 1996, the Company made net capital expenditures of $21.7
million. The 1996 capital expenditures primarily relate to the
Company's TriaDyne TM, TriCell and FluidAir TM products, various
mattress overlay products and the design and development of new
information systems. Other than a commitment for new product inventory
for $706,000, 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, 1996, 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, 1996, the Company was in compliance with
all covenants.
During 1996, the Company generated $62.2 million in cash from
operating activities compared to $56.8 million in the prior year. The
primary reason for this difference was an improvement in operating
results partially offset by increased receivable and inventory levels.
Investment activities for 1996 used $17.6 million, including net
capital expenditures of $21.7 million and a $7.2 million investment in
an asset subject to a leveraged lease agreement, partly offset by the
early repayment of notes receivable from Mediq/PRN. Financing
activities for 1996 used $37.3 million consisting primarily of the
purchase and retirement of treasury stock and dividends paid to
shareholders. In 1996, the Company repurchased and retired nearly 2.5
million shares of common stock under a program which authorizes the
Company to purchase up to 3 million shares. Subsequent to 1996, the
Company's Board of Directors approved a program which authorizes the
Company to purchase up to an additional 3 million shares.
At December 31, 1996, cash and cash equivalents totaling $59.0
million were available for general corporate purposes. Subsequent to
December 31, 1996, the Company has completed two separate asset
acquisitions for a combined purchase price of approximately $10 million
in cash plus other considerations. 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 1997.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION> December 31,
1996 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,045 $ 52,399
Accounts receivable, net 58,241 56,032
Inventories 20,042 18,854
Note receivable from principal
shareholder -- 10,291
Prepaid expenses and other 6,860 4,865
------- -------
Total current assets 144,188 142,441
Net property, plant and equipment 65,224 62,276
Other notes receivable, net -- 3,187
Goodwill, less accumulated amortization
of $12,021 in 1996 and $10,625 in 1995 13,541 13,968
Other assets, less accumulated
amortization of $5,614 in 1996
and $5,638 in 1995.................. 30,440 21,854
------- -------
$253,393 $243,726
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,974 $ 2,512
Current installments of capital lease
obligations 118 --
Accrued expenses 29,792 26,490
Income tax payable 2,970 4,026
------ ------
Total current liabilities 36,854 33,028
------ ------
Capital lease obligations, excluding
current installments............. 396 --
Deferred income taxes, net 5,065 374
------ ------
42,315 33,402
------ ------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock; issued and outstanding
42,355 in 1996 and 44,331 in 1995 42 44
Additional paid-in capital -- 12,123
Retained earnings 210,816 197,290
Cumulative foreign currency translation
adjustment............................ 555 1,052
Notes receivable from officers.......... (335) (185)
------ -------
211,078 210,324
------- -------
$253,393 $243,726
======= =======
</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,
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Revenue:
Rental and service $225,450 $206,653 $228,832
Sales and other 44,431 36,790 40,814
------- ------- -------
Total revenue 269,881 243,443 269,646
------- ------- -------
Rental expenses 146,205 137,420 159,235
Cost of goods sold 16,315 13,729 19,388
------- ------- -------
162,520 151,149 178,623
------- ------- -------
Gross profit 107,361 92,294 91,023
Selling, general and administrative
expenses........................ 52,007 48,502 51,813
Unusual items -- -- (84,868)
------- ------- -------
Operating earnings 55,354 43,792 124,078
Interest income (expense), net 9,087 4,554 (4,528)
------- ------- -------
Earnings before income taxes,
minority interest and
cumulative effect of
change in accounting
principle 64,441 48,346 119,550
Income taxes 25,454 19,905 55,949
------- ------- -------
Earnings before minority
interest and cumulative effect
of change in accounting
principle..................... 38,987 28,441 63,601
Minority interest in subsidiary loss -- -- 40
Cumulative effect of change in
accounting for inventory -- -- 742
------- ------- -------
Net earnings $ 38,987 $ 28,441 $ 64,383
======= ======= =======
Earnings per common and common
equivalent share:
Earnings before cumulative effect of
change in accounting principle $ 0.86 $ 0.63 $ 1.44
Cumulative effect of change in
accounting for inventory -- -- 0.02
------- ------- -------
Earnings per share $ 0.86 $ 0.63 $ 1.46
Shares used in earnings per share
computations 45,489 45,457 44,143
======= ======= =======
</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,
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $38,987 $28,441 $ 64,383
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 21,794 22,760 38,795
Provision for uncollectible accounts
receivable 2,457 1,883 1,100
Noncash portion of unusual items - - 4,797
Loss (gain) on KCIFS and Medical Services
dispositions - 2,933 (10,121)
Gain on early repayment of notes
receivable...... (5,180) - -
Change in assets and liabilities net of
effects from purchase of subsidiaries
and unusual items:
Decrease (increase) in accounts
receivable, net....... (4,626) (2,695) 7,316
Decrease (increase) in notes
receivable......... 3,187 6,014 (9,201)
Decrease (increase) in
inventory............. (1,034) (998) 2,735
Decrease (increase) in prepaid and
other assets....... (1,927) (593) 3,947
Increase (decrease) in accounts
payable............ 1,525 (895) (3,672)
Increase (decrease) in accrued
expenses........... 3,349 (520) 2,781
Increase (decrease) in income taxes
payable............ (1,056) (3,999) 5,378
Increase (decrease) in deferred income
taxes............ 4,691 4,451 (11,787)
------- ------- ------
Net cash provided by operating
activities................. 62,167 56,782 96,451
------- ------- ------
Cash flows from investing activities:
Additions to property, plant and
equipment..................... (27,783) (36,104) (13,814)
Decrease (increase) in inventory to be
converted into equipment for short-term
rental............................. 700 (1,000) 4,250
Dispositions of property, plant and
equipment....................... 5,400 3,231 2,869
Proceeds from sale of KCIFS and Medical
Services divisions............... - 7,182 65,300
Excess principal repayment on discounted
notes receivable.................... 5,180 - -
Business acquired in purchase
transactions, net of cash acquired.. (1,146) - -
Decrease (increase) in finance lease
receivables, net ................... - 339 (1,561)
Note received from principal shareholder 10,000 (10,000) -
Increase in other assets............ (9,960) (6,531) (9,230)
------ ------ -----
Net cash provided (used) by
investing activities...... (17,609) (42,883) 47,814
------- ------ ------
Cash flows from financing activities:
Repayments of notes payable and long-term
obligations.................. - (800) (102,625)
Borrowing (repayments)of capital lease
obligations.................. 457 (64) (2,382)
Proceeds from the exercise of stock
options................ 4,264 4,919 915
Purchase and retirement of treasury stock (35,241) (2,849) (1,157)
Cash dividends paid to shareholders (6,607) (6,631) (6,588)
Other (150) (185) (791)
------ ------ ------
Net cash used by financing
activities......... (37,277) (5,610) (112,628)
------ ------ -------
Effect of exchange rate changes on cash and
cash equivalents........ (635) 869 1,324
------ ------ -------
Net increase in cash and cash equivalents 6,646 9,158 32,961
Cash and cash equivalents, beginning of
year..................... 52,399 43,241 10,280
------ ------ ------
Cash and cash equivalents, end of year $59,045 $52,399 $ 43,241
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Three Years Ended December 31, 1996
(in thousands, except per share data)
<CAPTION>
Notes
Receivable
Cumulative from Cumulative
Foreign Officers
Currency for Total
Additional Trans- Excerise Share-
Common Paid-In Retained lation Treasury Loan to of Stock holders' holders'
Stock Capital Earnings Adjusment Stock ESOP Options Equity
_______ _______ ________ _________ _______ ______ _______ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December
31, 1993 .. $ 46 $18,803 $117,685 $ (1,602) $(8,510) $(655) $ (60) $125,707
Net earnings .. -- -- 64,383 -- -- -- -- 64,383
Exercise of
stock options .. -- 803 -- -- -- -- -- 803
Forgiveness of
officer receivable -- -- -- -- -- -- 60 60
Tax benefit
realized from
stock option plan -- 112 -- -- -- -- -- 112
Treasury stock
purchased .. -- -- -- -- (1,157) -- -- (1,157)
Treasury stock
retired......... (2) (9,665) -- -- 9,667 -- -- --
Cash dividends
on common and
preferred
preferred stock --
$0.15 per share -- -- (6,588) -- -- -- -- (6,588)
Payments on loan
to ESOP .. -- -- -- -- -- 655 -- 655
Foreign currency
translation
adjustment -- -- -- 1,448 -- -- -- 1,448
- - ----------------------------------------------------------------------------------------------
Balances at
December
31, 1994 .. 44 10,053 175,480 (154) -- -- -- 185,423
Net earnings.. -- -- 28,441 -- -- -- -- 28,441
Exercise of
stock options.. -- 4,024 -- -- -- -- (185) 3,839
Tax benefit
realized from
stock option plan -- 895 -- -- -- -- -- 895
Treasury stock
purchased .. -- -- -- -- (2,849) -- -- (2,849)
Treasury stock
retired .. -- (2,849) -- -- 2,849 -- -- --
Cash dividends
on common stock--
$0.15 per share -- -- (6,631) -- -- -- -- (6,631)
Foreign currency
translation
adjustment -- -- -- 1,206 -- -- -- 1,206
- - ----------------------------------------------------------------------------------------------
Balances at
December 31, 1995 44 12,123 197,290 1,052 -- -- (185) 210,324
- - ----------------------------------------------------------------------------------------------
Net earnings -- -- 38,987 -- -- -- -- 38,987
Exercise of
stock options.. -- 2,098 -- -- -- -- (150) 1,948
Tax benefit
realized from
stock option plan -- 2,166 -- -- -- -- -- 2,166
Treasury stock
purchased .. -- -- -- -- (35,241) -- -- (35,241)
Treasury stock
retired .. (2) (16,387) (18,854) -- 35,241 -- -- (2)
Cash dividends
on common stock--
$0.15 per share -- -- (6,607) -- -- -- -- (6,607)
Foreign currency
translation
adjustment -- -- -- (497) -- -- -- (497)
- - -------------------------------------------------------------------------------------------------
Balances at
December
31, 1996 $ 42 $ -- $210,816 $ 555 $ -- $ -- $(335) $211,078
=================================================================================
</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 1996 presentation.
(b) Nature of Operations and Customer Concentration
The Company designs, manufactures, markets and distributes
therapeutic products, primarily specialty hospital beds, mattress
overlays and medical devices 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 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
47% of the Company's revenue during 1996 was generated under
national agreements with GPOs.
The Company operates directly in ten foreign countries
including Germany, Austria, the United Kingdom, Canada, France,
the Netherlands, Switzerland, Australia, Sweden and Italy(see
Note 13).
(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.
(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 assets subject to leveraged
leases. 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 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
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.
The Company's wholly-owned captive insurance company, KCI
Insurance Company, Ltd. (the "Captive"), reinsures the primary
layer of commercial general liability, workers' compensation and
auto liability insurance for certain operating subsidiaries.
Provisions for losses expected under these programs are recorded
based upon 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) Stock Options
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 has elected to continue accounting for stock-based
compensation under the provisions of APB Opinion 25 and has
provided the required by disclosures (See Note 9).
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, pre-
tax 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 pre-tax gain amount due to the
nondeductibility of $25.8 million in unamortized goodwill.
During the second quarter of 1996, the Company acquired
Astec Medical, a small overlay company in the United Kingdom.
This firm produces a well-received product which will enable the
Company to further penetrate the community hospital market
throughout Europe.
Subsequent to December 31, 1996, the Company acquired H.F.
Systems, Inc. of Los Angeles. H.F. Systems offers a complete
line of therapeutic specialty support surfaces primarily to the
West Coast extended care marketplace. The purchase price was
approximately $8 million in cash and other considerations.
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 included notes received from
Mediq/PRN as part of the proceeds on the sale of Medical Services
effective September 30, 1994. 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. In October of 1996, the Company negotiated the early
repayment of all remaining notes for $8.5 million, plus interest
accrued through closing. As a result of this transaction, the
Company recognized a one-time gain of $5.2 million before income
taxes which has been included as interest income as of December
31, 1996. The values of the various notes receivable at December
31, 1995 for accounting purposes are described below (in
thousands):
Year Ended December 31,
---------------------
Principal Balance
1996 1995
-------- --------
Note from PRN Holding, Inc. with
10% interest due quarterly in
arrears beginning March 1996
and principal due September 1999 $ -- $10,000
Less discount and valuation
allowance................. -- (6,813)
------
Notes receivable, noncurrent $ -- $ 3,187
===== ======
NOTE 4. Supplemental Balance Sheet Data
Accounts receivable consist of the following (in thousands):
December 31,
1996 1995
------- --------
Trade accounts receivable $63,613 $60,149
Employee and other receivables 2,160 2,060
------ -------
65,773 62,209
Less allowance for doubtful
receivables 7,532 6,177
------ -------
$58,241 $56,032
====== ======
Inventories consist of the following (in thousands):
December 31,
1996 1995
------ -------
Finished goods $ 5,586 $ 2,890
Work in process 1,893 1,040
Raw materials, supplies and parts 17,113 20,174
------- ------
24,592 24,104
Less amounts expected to be converted
into equipment for short-term rental 4,550 5,250
------- -------
$20,042 $18,854
======= =======
Net property, plant and equipment consist of the following
(in thousands):
December 31,
1996 1995
----- ------
Land $ 1,007 $ 742
Buildings 14,254 13,418
Equipment for short-term rental 133,896 110,858
Machinery, equipment and furniture 36,821 27,610
Leasehold improvements............... 1,388 1,042
Inventory to be converted into
equipment............................ 4,550 5,250
------- -------
191,916 158,920
Less accumulated depreciation and
amortization..................... 126,692 96,644
------- -------
$65,224 $62,276
======= =======
Accrued expenses consist of the following (in thousands):
December
1996 1995
-------- -------
Payroll, commissions and related
taxes......................... $13,162 $12,589
Insurance accruals.............. 2,887 3,470
Other accrued expenses.......... 13,743 10,431
------ -------
$29,792 $26,490
====== ======
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. Note Payable and Long-Term Obligations
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 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, 1996, 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 control of the Company, and
establishes various fees to be paid by the Company. At December
31, 1996, the Company was in compliance with all covenants.
Interest paid on debt during 1996, 1995 and 1994 amounted to $0.2
million, $0.4 million and $5.4 million, respectively.
NOTE 6. Leasing Obligations
The Company is obligated for equipment under various capital
leases which expire at various dates during the next four years.
At December 31, 1996 the gross amount of equipment under capital
leases totaled $619,000 and related accumulated depreciation
totaled $175,000.
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 $13.5 million, $12.0 million and $10.9
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of December 31, 1996 are as follows:
Capital Operating
Leases Leases
------- --------
1997.................................. $208 $10,498
1998.................................. 160 7,947
1999.................................. 160 5,221
2000.................................. 93 3,771
2001 ................................. - 1,073
Later years........................... - -
----- --------
Total minimum lease payments......... $621 $28,510
====== =======
Less amount representing interest 107
Present value of net minimum capital
lease payments..................... 514
Less current portion............... 118
Obligations under capital leases
excluding current installments..... 396
NOTE 7. Income Taxes
Earnings before income taxes consists of the following (in
thousands):
Year Ended December 31,
1996 1995 1994
------- ------- -------
Domestic $51,771 $37,542 $110,287
Foreign 12,670 10,804 9,263
------ ------ --------
$64,441 $48,346 $119,550
====== ====== =======
Income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Year Ended December 31, 1996
-------------------------------
Current Deferred Total
---------- -------- --------
Federal $14,363 $ 4,464 $18,827
State 2,569 552 3,121
International 3,831 (325) 3,506
------- ------- -------
$20,763 $ 4,691 $25,454
======= ======= =======
Year Ended December 31, 1995
------------------------------
Current Deferred Total
--------- --------- --------
Federal $ 8,148 $ 4,174 $12,322
State 2,140 277 2,417
International 5,166 -- 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
====== ====== ======
Income tax expense attributable to income from continuing
operations differed from the amounts computed by applying the
statutory tax rate of 35 percent to pre-tax income from
continuing operations as a result of the following:
<TABLE>
<CAPTION> Year Ended December 31,
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Computed "expected" tax expense $22,554 $16,921 $41,843
Goodwill 442 533 9,307
State income taxes, net of Federal
benefit ........................ 2,028 1,571 4,846
Tax-exempt interest from municipal
bonds .......................... (445) -- --
Foreign income taxed at other than
U.S. rates.................... 1,145 1,836 350
Utilization of foreign net operating
loss carryforwards............. (123) (231) (814)
Nonconsolidated foreign net
operating loss .............. 67 492 566
Foreign, other............... (441) (1,450) 271
Effect of change in inventory
accounting method.......... -- -- 455
Other, net................. 227 233 (420)
------ ------ ------
$25,454 $19,905 $56,404
====== ====== ======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and December 31, 1995 are
presented below:
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts $4,458 $3,591
Intangible assets, deducted for book
purposes but capitalized and
amortized for tax purposes 1 323
Net operating loss carryforwards 67 492
Inventories, principally due to additional
costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986 664 702
Notes receivable, basis difference -- 397
Legal fees, capitalized and amortized for
tax purposes 670 402
Accrued liabilities..................... 1,015 519
Deferred foreign tax asset.............. 325 --
Other................................... 1,089 41
----- -----
Total gross deferred tax assets 8,289 6,467
Less valuation allowance (67) (492)
----- -----
Net deferred tax assets 8,222 5,975
Deferred Tax Liabilities:
Plant and equipment, principally due to
differences in depreciation and basis (11,722) (5,686)
Deferred state tax liability (973) (421)
Investments, principally due to
differences in tax treatment
of certain components (506) --
Other.......................... (86) (242)
-------- -------
Total gross deferred tax liabilities (13,287) (6,349)
-------- --------
Net deferred tax liability $ (5,065) $ (374)
======== =======
</TABLE>
At December 31, 1996, the Company had $1.1 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
$712,000 can be used indefinitely and the remainder expire from
1997 through 2001.
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 1996, as the Company intends to reinvest these earnings
permanently in the foreign operations or to repatriate such
earnings only when it is advantageous for the Company to do so.
The amount of the unrecognized tax liability for these
undistributed earnings was not material at the end of 1996 due to
the availability of foreign tax credits.
Income taxes paid during 1996, 1995 and 1994 were $15.4
million, $15.1 million and $57.3 million, respectively.
NOTE 8. 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 1996 and
1995 was 42,355,000 and 44,331,000, respectively.
Treasury Stock:
In July, 1995, the Company's Board of Directors approved a
program to repurchase up to 3,000,000 shares of its Common Stock.
The Company repurchased 2,563,000 shares during 1996 and 77,000
shares during 1995. As of December 31, 1996, there were 360,000
remaining shares to be repurchased in the program. 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
2,563,000 and 77,000 treasury shares in 1996 and 1995,
respectively. Subsequent to 1996, the Company's Board of
Directors approved a program which authorizes the Company to
purchase up to an additional 3 million shares.
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, 1996 and December 31, 1995, none
were issued.
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, 1996, all shares of stock owned by the ESOP
have been allocated to employees. Based on the number of shares
planned to be allocated for the year, ESOP expense recorded
during 1996, 1995 and 1994 amounted to $0, $263,000 and $476,000,
respectively.
Investment Plan:
The Company has an Investment Plan intended to qualify as a
deferred compensation plan under Section 401(k) of the Internal
Revenue Code of 1986. The Investment Plan is available to all
domestic employees and the Company matches employee contributions
up to a specified limit. In 1996, 1995 and 1994, the Company made
matching contributions an charged to expense $498,000, $265,000
and $314,000, respectively.
NOTE 9. Stock Option Plans
In October 1995, the Financial Accounting Standards Board
(FASB) issued Statement No. 123, "Accounting for Stock-Based
Compensation." While the new accounting standard encourages the
adoption of a new fair-value method for expense recognition,
Statement 123 allows companies to continue accounting for stock
options and other stock-based awards as provided in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company has elected to follow the
provisions of APB 25 and related interpretations in accounting
for its stock options plans because, as discussed below, the
alternative fair-value method prescribed by FASB Statement No.
123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee stock
options generally equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
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 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 1995 Kinetic Concepts, Inc. Senior Executive Management
Stock Option Plan (the "Senior Executive Stock Option Plan")
covers a total of 1,400,000 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.
Pro forma information regarding net income and earnings per
share is required by Statement 123, and has been determined as if
the Company had accounted for its employee stock options under
the fair-value method of that statement. The fair value for
options granted during the two fiscal years ended December 31,
1996 and 1995, respectively, was estimated using a Black-Scholes
option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.1% and 6.0% dividend
yields of 0.9% and 2.1%, volatility factors of the expected
market price of the Company's common stock of .32 and .33, and a
weighted-average expected option life of 5 years.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the underlying assumptions can materially affect the
fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in
thousands except for earnings per share information):
1996 1995
--------- -------
Net Earnings as Reported $38,987 $28,441
Pro Forma Net Earnings $37,996 $28,238
Earnings Per Shareas
Reported $ 0.86 $ 0.63
Pro Forma Earnings Per
Share $ 0.84 $ 0.62
The Company is not required to apply the method of
accounting prescribed by Statement 123 to stock options granted
prior to January 1, 1995. As such, the pro forma compensation
cost reflected above may not be representative of future results.
The following table summaries information about stock
options outstanding at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Range of Outstanding Contract Excerise Excercisable Excercise
Excerise Prices at 12/31/96 Life(yrs) Price at 12/31/96 Price
- - ---------------- --------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
$ 3.00 to $4.63 1,166 6.9 $ 4.22 594 $ 4.23
$ 5.00 to $9.50 1,272 7.5 $ 6.26 435 $ 6.14
$11.13 to $17.00 901 9.2 $15.61 292 $14.23
------- ------ ----- ------ --------
3,339 8.0 $ 8.68 1,321 $ 7.07
</TABLE>
A summary of the Company's stock option activity, and
related information, for years ended December 31, 1996, 1995 and
1994 follows (options in thousands):
<TABLE>
<CAPTION> 1996 1995 1994
----------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Options
Outstanding -
Beginning of
Year............ 2,833 $ 5.21 3,029 $ 4.50 2,668 $5.35
----- ------ ----- ------ ----- -----
Granted......... 1,317 $14.47 873 $ 6.89 2,124 $4.15
----- ------ ----- ----- ----- ----
Exercised....... (628) $ 5.05 (792) $ 4.56 (199) $4.07
----- ------ ------ ------ ------ ------
Forfeited........ (183) $ 9.34 (277) $ 4.57 (1,564) $5.53
----- ------ ----- ------ ----- ------
Options
Outstanding End
of Year....... 3,339 $ 8.68 2,833 $ 5.21 3,029 $4.50
------ ------ ----- ------ ------ -------
Exercisable at
End of Year..... 1,321 $ 7.07
----- ------ ------ ------ ------- --------
Weighted-Average
Fair Value of
Options Granted
During th Year $ 5.80 $ 2.19
</TABLE>
Exercise prices for options outstanding as of December 31,
1996 ranged from $3.00 to $17.00. The weighted average remaining
contractual life of those options is 8.0 years.
The following table summarizes the activity in the Company's
1987 Key Contributor Stock Option Plan (in thousands, except per
share data):
Shares Option Price Per Share
-------- ----------------------
Outstanding, January 1, 1994 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
------------------------------------
Granted...................... 806 $11.75 to $17.00
Canceled..................... (183) $3.625 to $16.50
Exercised.................... (618) $3.50 to $16.50
------------------------------------
Outstanding, December 31,1996 2,800 $3.00 to $17.00
The following table summarizes the activity in the Company's
1988 Eligible Directors Stock Option Plan (in thousands, except
per share data):
Shares Option Price Per Share
------ -----------------------
Outstanding, January 1, 1994 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
-----------------------------------
Granted 31 $14.625 to $16.125
Exercised (10) $4.375 to $9.375
Lapsed -- $--
-----------------------------------
Outstanding, December 31, 1996 59 $3.75 to $16.125
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, 1996, 20,000
options are exercisable and expire ten years from the grant 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. At December 31, 1996, 340,000
options are exercisable and expire three years from the grant
date.
Note 10. Other Assets
A summary of other long-term assets follows (in thousands):
1996 1995
-------- ------
Investment in assets subject
to leveraged leases......... $14,766 $ 7,566
Information systems
development projects........ 3,124 5,601
Investment in long-term
securities ................ 4,989 4,872
Intangible assets.......... 3,660 3,475
Deposits and other......... 8,529 5,978
-------- -------
$35,068 $27,492
(Less) accumulated
amortization.............. (4,628) (5,638)
-------- --------
$30,440 $21,854
======= =======
Long-term securities consist primarily of government backed
securities held by the Company's wholly owned captive insurance
company and are carried at market value, which is not
significantly different than cost. The carrying value of the
long-term securities approximates fair value.
On December 30, 1996, the Company acquired beneficial
ownership of a Grantor Trust. The Trust assets consist of a
McDonnell Douglas DC-10 aircraft and three engines. In
connection with the acquisition, KCI paid cash equity of $7.2
million and assumed non-recourse debt of $47.0 million. The DC-
10 aircraft is on lease to the Federal Express Corporation
through June 2012. Federal Express pays monthly rent to a third
party who, in turn, pays this entire amount to the holders of the
non-recourse certificated indebtedness, which is secured by the
aircraft. Recourse to the certificate holders is limited to the
Trust assets only.
NOTE 11. 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. Initial 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.
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. 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.
On October 31, 1996 the Company received a counterclaim
which had been filed by Hillenbrand Industries, Inc. in the
antitrust lawsuit which the Company filed in 1995. The
counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable Kinetic Concepts to
monopolize the bed market. Although it is not possible to
predict the outcome of this litigation, the Company believes that
the counterclaim is without merit.
On December 26, 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc. filed a lawsuit against the Company alleging
that the Company's TriaDyne bed infringes a patent issued to Hill-
Rom in December 1996. This suit was filed in the United States
District Court for the District of South Carolina. Substantive
discovery in the case has not begun. Based upon its initial
investigation, the Company does not believe that the TriaDyne bed
infringes the Hill-Rom patent or that this lawsuit will
materially impact the marketing of the TriaDyne bed.
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 6.
NOTE 12. 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 pre-tax income
to the 1994 results. In addition, a $10.1 million pre-tax 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. These items together total $84
million and are included in Unusual Items on the 1994 Statement
of Earnings.
NOTE 13. Segment and Geographic Information
The Company operates primarily in one industry segment: the
distribution of specialty therapeutic beds and medical devices to
select health care providers.
A summary of financial information by geographic area is as
follows:
Year Ended December 31, 1996
Domestic Foreign Elimination Consolidated
-------- ------ ----------- ------------
Total revenue:
Unaffiliated
customers $201,116 $68,765 $ - $269,881
Intercompany
transfers 7,272 - (7,272) -
-------- ------- ------- ---------
Total $208,388 $68,765 $(7,272) $269,881
======= ======= ======== =======
Operating earnings $ 40,810 $15,197 $ (653) $ 55,354
======= ====== ======= ========
Total assets:
Identifiable assets $156,273 $49,622 $(11,547) $194,348
======== ======= ======== ========
Corporate assets 59,045
--------
Total assets $253,393
========
Year Ended December 31, 1995
--------------------------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
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
=======
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 14. Quarterly Financial Data (Unaudited)
The unaudited consolidated results of operations by quarter
are summarized below:
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $67,587 $64,272 $67,970 $70,052
Operating earnings $13,741 $12,721 $13,629 $15,263
Net earnings $ 8,814 $ 8,187 $ 8,858 $13,128
Earnings per common and
common equivalent share $0.19 $0.18 $0.19 $0.30
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
Earnings per share for the full year may differ from the
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, 1996
and 1995, and the related consolidated statements of earnings,
cash flows and shareholders' equity for each of the years in the
three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements,
the Company changed its method of applying overhead to inventory
in 1994.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 5, 1997
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, Renal Care Group, Inc.
FRANK A. EHMANN
Retired
Former Executive Vice President and Co-Chief Operating Officer
Baxter Travenol Laboratories, Inc.
WENDY L GRAMM, PH.D.
Economist
Director of the Regulatory Analysis Program at the Center for
Study of Public Choice at George Mason University
BERNHARD T. MITTEMEYER, M.D.
Professor of Urological Surgery at the
Texas Tech University School of Medicine
EXECUTIVE 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 and Engineering
LARRY P. BAKER
Vice President, Corporate Services
OPERATING DIVISION EXECUTIVES
CHRISTOPHER M. FASHEK
President
KCI Therapeutic Services, Inc.
FRANK DiLAZZARO
President
KCI International, Inc.
RICHARD C. VOGEL
Vice President and General Manager
KCI New Technologies, Inc.
MICHAEL C. WELLS
Vice President and General Manager
KCI Home Care
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.
LISTING
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 13, 1997 at 9:00 a.m. (CST) at:
Omni San Antonio Hotel
Grand Ballroom
9821 Colonnade Blvd.
San Antonio, TX 78230
AUDITORS
KPMG PEAT MARWICK LLP
112 East Pecan
Suite 2400
San Antonio, Texas 78205
MARKET PRICES OF COMMON STOCK
1996 1995
-------------------- -----------------------
High Low High Low
First Qtr $13.875 $10.438 $8.250 $6.563
Second Qtr 17.375 13.125 8.125 6.625
Third Qtr 16.063 13.500 11.625 7.000
Fourth Qtr 15.000 11.875 13.000 10.000
Trademarks - TriaDyne TM, BariKare(R), PlexiPulse(R), All-in-1
System TM, The V.A.C. (R), TheraPulse(R), KinAir(R), DynaPulse (R), First
Step(R), and Home Kair(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. Certain of these products are subject to patent
and/or pending patent.
(C) Copyright 1997 Kinetic Concepts, Inc. All rights reserved.
KCI
8023 VANTAGE DRIVE - SAN ANTONIO, TX 78230 . WWW.KCI1.COM
"Commit thy way unto the Lord; trust also in Him;
and He shall bring it to pass" -- Psalms 37:5
Exhibit 16.1
March 27, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We have read Kinetic Concepts, Inc. statements included
under Item 9 of its 1996 annual report on Form 10-K for the
year ended December 31, 996, and we agree with such
statements, except that we are not in a position to agree or
disagree with Kinetic Concepts, Inc.'s statements in
paragraph one other than the date we were notified of our
termination or any of the statements in paragraph four.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
KCI Subsidiaries
(Updated March 26, 1997)
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 New Technologies, Inc., a Delaware corporation
(Tax ID #74-2615226)
3. KCI Properties Limited, a Texas limited liability company
(Tax ID #74-2621178)
4. KCI Real Property Limited, a Texas limited liability company,
d/b/a Premier Properties (Tax ID #74-2644430)
5. KCI Air, Inc., a Delaware corporation
(Tax ID #74-2765302)
6. Medical Retro Design, Inc., a Delaware corporation
(Tax ID #74-2652711)
7. KCI Clinical Systems, Inc., a Delaware corporation
(Tax ID #74-2675416)
8. KCI Holding Company, Inc., a Delaware corporation
(Tax ID #74-2804102)
9. Plexus Enterprises, Inc., a Delaware corporation
(Tax ID #74-2814710)
10. The Kinetic Concepts Foundation, a Texas non-profit corporation
(Tax ID#74-2822321)
11. KCI International, Inc., a Delaware corporation
(Tax ID #51-0307888)
(a) KCI Medical Canada, Inc., a Canadian corporation
(b) KCI Medical Ltd., a United Kingdom corporation (formerly
Mediscus International Limited), name change effective
October 31, 1995
NOTE: All assets of KCI Medical United Kingdom
Limited and Mediscus Products Limited are being
transferred to KCI Medical Limited effective
January 1, 1996.
DORMANT UK COMPANIES:
(i) KCI Medical United Kingdom Limited
(ii) Mediscus Products Limited
(iii) Home-Care Medical Products Limited (formerly KCII
Medical Limited)
NOTE: Home-Care Medical and KCII Medical swapped
names in October, 1995. KCII Medical Limited was
formerly Lingard Leasing.
(c) KCI Medical Holding GmbH (formerly KCI Handels GmbH)
(i) KCI Mediscus Produkte GmbH
(ii) KCI Therapie Gerate mbH (formerly Verwalt)
(d) Equipement Medical KCI, S.A.R.L., a French corporation
(e) KCI Medical B.V., a Netherlands corporation
(f) KCI Mediscus AG, a Swiss corporation
(g) KCI Mediscus Klinikausstattung Gesellschaft mbH with
domicile in Vienna
(h) KCI Europe Holding B.V., a Netherlands corporation
(i) KCI International-Virgin Islands, Inc., a Virgin Islands
corporation
(j) KCI Medica Espana, S.A., a Spanish corporation (partially
incorporated)
(k) KCI Medical Australia PTY, Ltd., an Australian corporation
(l) KCI Medical S.r.l., an Italian corporation
(m) KCI Medical A/S, Denmark
(n) KCI Medical AB, Sweden
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Kinetic Concepts, Inc.:
We consent to incorporation by reference in the Registration
Statements (No. 33-26673 and No. 33-26674) on Form S-8 of
Kinetic Concepts, Inc. and subsidiaries (the "Company") of
our report dated February 5, 1997, relating to the
consolidated balance sheets of the Company as of December
31, 1996 and 1995, and the related consolidated statements
of earnings, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31,
1996, which report appears in the 1996 annual report to
shareholders which is incorporated by reference in the
December 31, 1996 annual report on Form 10-K of the Company
and our report dated February 5, 1997, relating to the
related financial statement schedule as of and for each of
the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report
on Form 10-K of the Company.
Our report refers to 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 27, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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