SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
--------------------------- -------------------------------
(State of Incorporation) (I.R.S. Employer Identification
No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
---------------------------- -------------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 44,188,132 shares as of July 31, 1995
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
June 30, 1995 December 31,
Assets (unaudited) 1994
- ------ ------------- ------------
Current assets:
Cash and cash equivalents $ 57,799 $ 43,241
Accounts receivable, net 52,239 55,456
Finance lease receivables, current - 8,051
Inventories 21,188 18,167
Notes receivable, current, net 965 6,014
Prepaid expenses and other 4,246 4,474
------- -------
Total current assets 136,437 135,403
------- -------
Net property, plant and equipment 57,916 51,357
Finance lease receivables, net of current - 7,242
Notes receivable, net of current and
allowance 3,187 3,187
Goodwill, net 14,648 15,476
Other assets, net 16,729 15,989
Deferred income tax benefit, net 1,363 4,077
------- -------
$230,280 $232,731
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Note payable $ - $ 1,878
Current installments of long-term
obligations - 3,410
Accounts payable 4,987 4,079
Accrued expenses 25,776 27,280
Income taxes payable 2,441 8,025
------- -------
Total current liabilities 33,204 44,672
------- -------
Long-term obligations, excluding current
installments - 2,636
------- -------
Total liabilities 33,204 47,308
------- -------
Shareholders' equity:
Common stock; issued and outstanding
44,192 in 1995 and 43,921 in 1994 44 44
Additional paid-in capital 11,316 10,053
Retained earnings 183,982 175,480
Cumulative foreign currency translation
adjustment 1,734 (154)
------- -------
Total shareholders' equity 197,076 185,423
------- -------
$230,280 $232,731
======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
-------- ------ ------- --------
Revenue:
Rental and service $50,432 $57,413 $ 98,854 $119,161
Sales and other 9,358 10,338 17,963 20,675
------ ------ ------- -------
Total revenue 59,790 67,751 116,817 139,836
------ ------ ------- -------
Rental expenses 34,525 41,569 67,952 86,005
Cost of goods sold 4,313 5,260 8,229 10,392
------ ------ ------ -------
38,838 46,829 76,181 96,397
------ ------ ------- -------
Gross profit 20,952 20,922 40,636 43,439
Selling, general and
administrative expenses 12,235 12,887 22,342 26,243
------ ------ ------- -------
Operating earnings 8,717 8,035 18,294 17,196
Net interest expense (income) (557) 1,647 (1,090) 3,501
------ ------ ------- -------
Earnings before income taxes,
minority interest and
cumulative effect of
change in accounting
principle 9,274 6,388 19,384 13,695
Income taxes 3,558 3,215 7,570 7,040
------ ------ ------- -------
Earnings before minority
interest and cumulative
effect of change in
accounting principle 5,716 3,173 11,814 6,655
Minority interest in subsidiary
loss - - - 40
Cumulative effect of change in
accounting principle - - - 742
------ ------ ------- -------
Net earnings $ 5,716 $ 3,173 $ 11,814 $ 7,437
====== ====== ======= =======
Earnings per common and
common equivalent share:
Earnings before cumulative
effect of change in
accounting principle $ 0.13 $ 0.07 $ 0.26 $ 0.15
Cumulative effect of
change in accounting
principle - - - 0.02
------ ------ ------- -------
Earnings per share $ 0.13 $ 0.07 $ 0.26 $ 0.17
====== ====== ======= =======
Shares used in earnings
per share computations 45,242 43,980 45,183 43,983
====== ====== ======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
------------------
1995 1994
------- -------
Cash flows from operating activities:
Net earnings $11,814 $ 7,437
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 11,442 23,022
Provision for uncollectible accounts receivable 165 1,960
Loss on Financial Services disposition 2,933 -
Change in assets and liabilities:
Decrease in accounts receivable 3,104 340
Decrease in notes receivable 5,049 3,712
Increase in inventories (3,188) (606)
Increase in prepaid and other assets (950) (680)
Increase (decrease) in accounts payable 1,623 (2,017)
Decrease in accrued expenses (1,059) (251)
Decrease in income taxes payable (5,584) (2,361)
Increase (decrease) in deferred income taxes 2,714 (2,725)
------ ------
Net cash provided by operating activities 28,063 27,831
------ ------
Cash flows from investing activities:
Additions to property, plant, and equipment (16,522) (8,108)
Increase in inventory to be converted into
equipment for short-term rental (2,750) (1,000)
Dispositions of property, plant, and equipment 425 1,329
Proceeds from Financial Services disposition 7,182 -
Decrease in finance lease receivables 339 734
Increase in other assets - (605)
------ ------
Net cash used by investing activities (11,326) (7,650)
------ ------
Cash flows from financing activities:
Repayments of note payable and long-term
obligations (853) (10,468)
Proceeds from the exercise of stock options 1,180 5
Purchase of treasury stock - (232)
Cash dividends paid to shareholders (3,309) (3,296)
Other - (768)
------ ------
Net cash used by financing activities (2,982) (14,759)
------ ------
Effect of exchange rate changes on cash and cash
equivalents 803 (7)
------ ------
Net increase in cash and cash equivalents 14,558 5,415
Cash and cash equivalents beginning of year 43,241 10,280
------ ------
Cash and cash equivalents end of period $57,799 $15,695
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 254 2,998
Income taxes 8,492 7,925
See accompanying notes to condensed consolidated financial statements
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The financial statements presented herein include the accounts of
Kinetic Concepts, Inc. and all subsidiaries (the "Company"). The
foregoing financial information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and results of operations for the interim
periods presented. Interim period operating results are not
necessarily indicative of the results to be expected for the full
fiscal year. The financial information presented for the interim
periods is unaudited and subject to year-end audit and adjustments.
(2) INVENTORY COMPONENTS
Inventories are stated at the lower of cost (first-in, first-out)
or market (net realizable value). Inventories are comprised of the
following (in thousands):
June 30, December 31,
1995 1994
---------- -----------
Finished goods $ 3,878 $ 3,086
Work in process 3,654 1,642
Raw materials, supplies and parts 20,656 17,689
------ ------
28,188 22,417
Less amounts expected to be
converted into equipment for
short-term rental 7,000 4,250
------ ------
$21,188 $18,167
====== ======
(3) ACQUISITIONS AND DISPOSITIONS
On June 15, 1995, the Company sold KCI Financial Services, Inc.
("Financial Services") to Cura Capital Corporation ("Cura") for
cash under a Stock Purchase Agreement. Upon consummation of this
transaction, Cura acquired all of the outstanding common shares of
Financial Services. 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 for the current quarter. In addition, KCI and its
affiliates agreed not to engage in certain types of long-term
financing of medical equipment for a period of three years.
Financial Services served as the leasing agent for the Medical
Services Division of KCI Therapeutic Services, Inc. (the "Medical
Services Division") which was sold in September 1994. The
operating results of Financial Services for the first half of 1994
and 1995 were not material as compared to the overall results of
the Company.
(4) CREDIT AGREEMENT
On May 8, 1995, the Company entered into an unsecured revolving
credit agreement (the "Credit Agreement") with a bank as an agent
for itself and certain other financial institutions. The Credit
Agreement provides for a $50 million one-year revolving credit
facility (the "Revolver") with a two-year renewal option. Any
advances under the Revolver are due at the end of the period
covered by the Credit Agreement.
The interest rate payable on borrowings under the Credit Agreement
is at the election of the Company: (i) the Bank's reference rate,
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 certain
specified ratios and meet certain financial targets. The Credit
Agreement also contains certain events of default, includes certain
provisions, and establishes various fees. At June 30, 1995, the
entire amount of the Revolver was available and the Company was in
compliance with all covenants under the Credit Agreement.
(5) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
The weighted average number of common and common equivalent shares
used in the computation of earnings per share is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
------- ------- ------ -----
Average outstanding common
shares 44,206 43,930 44,102 43,938
Average common equivalent
shares-dilutive effect
of option shares 1,036 50 1,081 45
------ ------ ------ ------
Shares used in earnings
per share computations 45,242 43,980 45,183 43,983
====== ====== ====== ======
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.
(6) COMMITMENTS AND CONTINGENCIES
The Company is party to several lawsuits generally incidental to
its business and is contesting certain adjustments proposed by the
Internal Revenue Service to prior years' tax returns. Provisions
have been made in the accompanying financial statements for
estimated exposures related to these lawsuits and adjustments. In
the opinion of management, the disposition of these items will not
have a material effect on the Company's financial statements.
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic
Concepts, Inc. and subsidiaries as of June 30, 1995, and the related
condensed consolidated statements of earnings for the three and six
month periods ended June 30, 1995 and 1994 and the condensed
consolidated statements of cash flows for the six month periods ended
June 30, 1995 and 1994. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Kinetic Concepts,
Inc. and subsidiaries as of December 31, 1994, and the related
consolidated statements of earnings, capital accounts, and cash flows
for the year then ended (not presented herein); and in our report dated
February 14, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of
December 31, 1994, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
KPMG Peat Marwick LLP
San Antonio, Texas
July 18, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
RESULTS OF OPERATIONS
SECOND QUARTER OF 1995 COMPARED TO SECOND QUARTER OF 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 second quarter of the prior
year ($ in thousands):
Three Months Ended June 30,
-----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1995 1994 $ Pct
------ ------- --------- ------
Revenue:
Rental and service 84% 85% $(6,981) (12%)
Sales and other 16% 15% (980) (9%)
--- --- ------ ----
100% 100% (7,961) (12%)
Rental expenses 58% 61% (7,044) (17%)
Cost of goods sold 7% 8% (947) (18%)
--- --- ------ ---
Gross profit 35% 31% 30 -
Selling, general and
administrative expenses 20% 19% (652) (5%)
--- --- ------ ---
Operating earnings 15% 12% 682 8%
Net interest (income) expense (1%) 2% (2,204) (134%)
--- --- ------ ---
Earnings before income
taxes 16% 10% 2,886 45%
Income taxes 6% 5% 343 11%
--- --- ------ ---
Net earnings 10% 5% $ 2,543 80%
=== === ====== ===
The comparability of the Company's financial results in the second
quarters of 1994 and 1995 was significantly impacted by the disposition
of the Company's Medical Services Division. On September 30, 1994, KCI
Therapeutic Services, Inc. ("KCTS"), a wholly-owned subsidiary of the
Company, sold certain assets used exclusively by the Medical Services
Division to Mediq/PRN Life Support Services-I, Inc. under an Asset
Purchase Agreement. Revenue, gross profit and operating results related
to the Medical Services Division for the second quarter of 1994 were as
follows (in thousands):
Revenue $14,194
Gross Profit 4,279
Operating Earnings (Loss) (158)
Additionally, in June of 1995, the Company sold KCI Financial
Services, Inc. ("Financial Services") to Cura Capital Corporation under
a Stock Purchase Agreement (see Note 3 to the Company's Condensed
Consolidated Financial Statements). The operating results of Financial
Services for the period were not material as compared to the overall
results of the Company. However, earnings for the current quarter
include a pre-tax $2.9 million loss on the sale.
Excluding the results of the Medical Services and Financial
Services divisions, total revenue in the second quarter of 1995
increased by 12.4% to $59.2 million from $52.7 million in the second
quarter of 1994. Revenue from the Company's specialty patient surface
business was $39.0 million, up 3.8% from the second quarter of 1994.
This increase was due to new product introductions, as well as gains in
the nursing home and rehabilitation (extended care) market. Revenue
from the Company's international operations was $15.8 million, up 38.0%
from the second quarter of 1994. Better utilization of the existing
rental fleet and increased sales contributed towards the higher
revenue. Revenue from medical device operations increased 41.1% to $4.3
million in the second quarter of 1995 related primarily to greater
market penetration as this division expanded into new states.
Excluding the results of Medical Services and Financial Services,
rental expenses were 58.4% of total revenue in the second quarter of
1995 compared to 64.4% in the second quarter of 1994. This decrease is
primarily attributable to reduced depreciation on the rental fleet, as
well as an overall effort to control costs.
Gross profit excluding the Medical Services and Financial Services
divisions increased 29.3% to $20.3 million in the second quarter of 1995
from $15.7 million in the second quarter of 1994 due to the increase in
revenue from ongoing operations as well as the decrease in rental
expenses.
Selling, general and administrative expenses for the second quarter
of 1995 included a $2.9 million loss on the sale of Financial Services.
Excluding the Medical Services and Financial Services divisions,
selling, general and administrative expenses increased $0.9 million, or
12.3%, to $8.9 million in the second quarter of 1995 from $8.0 million
in the second quarter of 1994. As a percentage of total revenue,
selling, general and administrative expenses remained flat at 15.1% in
the second quarter of 1995 as compared with the second quarter of 1994.
Excluding the Medical Services and Financial Services divisions,
operating earnings for the period increased 46.3% to $11.4 million
compared to $7.8 million in the prior-year quarter resulting largely
from broad-based revenue growth.
Net interest income for the three months ended June 30, 1995 was
$0.6 million compared to net interest expense of $1.6 million in the
prior year. This change was due to a combination of the prior year pay-
down of long term obligations, interest earned on cash reserves and
interest earned on notes receivable.
The Company's effective income tax rate in the second quarter of
1995 was 38.4%, compared to 50.3% in the second quarter of 1994. The
effective tax rate for the second quarter of 1995 was lower than the
effective tax rate for the second quarter of 1994 primarily as a result
of the recognition of certain foreign tax credits, the recognition of
the net operating losses of Medical Retro Design in the last quarter of
1994 and the disposition of the goodwill associated with the Medical
Services assets which were sold in September of 1994.
Net earnings increased $2.5 million, or 80.1%, to $5.7 million in
the second quarter of 1995 from $3.2 million in the second quarter of
1994. Excluding the Medical Services and Financial Services divisions,
net earnings from ongoing operations more than doubled to $7.3 million
in the second quarter of 1995 from $3.1 million in the second quarter of
1994. This increase was due to a decrease in rental expenses, selling,
general and administrative expenses, net interest income, and the change
in revenue as discussed above.
FIRST SIX MONTHS OF 1995 COMPARED TO FIRST SIX MONTHS OF 1994
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the first six months of the
prior year ($ in thousands):
Six Months Ended June 30,
-----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- -------------------
1995 1994 $ Pct
------- -------- -------- --------
Revenue:
Rental and service 85% 85% $ (20,307) (17%)
Sales and other 15% 15% (2,712) (13%)
--- --- -------- ---
100% 100% (23,019) (16%)
Rental expenses 58% 62% (18,053) (21%)
Cost of goods sold 7% 7% (2,163) (21%)
--- --- -------- ---
Gross profit 35% 31% (2,803) (6%)
Selling, general and
administrative expenses 19% 19% (3,901) (15%)
--- --- ------- ---
Operating earnings 16% 12% 1,098 6%
Net interest (income) expense (1%) 2% (4,591) (131%)
--- --- ------- ---
Earnings before income
taxes, minority interest
and cumulative effect of
change in accounting
principle 17% 10% 5,689 42%
Income taxes 7% 5% 530 8%
--- --- ------ ---
Earnings before minority
interest and cumulative
effect of change in
accounting principle 10% 5% 5,159 78%
Minority interest in subsidiary
loss - - (40) -
Cumulative effect of change in
accounting principle - - (742) -
--- --- -------- ---
Net earnings 10% 5% $ 4,377 59%
=== === ======== ===
The comparability of the Company's financial results in the first
six months of 1994 and 1995 was significantly impacted by the
disposition of the Medical Services Division. Revenue, gross profit and
operating results related to Medical Services for the first six months
of 1994 were as follows (in thousands):
Revenue $30,542
Gross Profit 9,986
Operating Earnings 1,050
Excluding the results of the Medical Services and Financial
Services divisions, total revenue in the first six months of 1995
increased by 7.4% to $115.3 million from $107.4 million in the first six
months of 1994. Revenue from the Company's specialty patient surface
business was $77.0 million, down less than 2% from the first six months
of 1994. This decrease was due substantially to sluggish industry and
seasonal conditions during the first quarter of 1995 which reduced
revenue from acute care facilities, partially offset by continuing gains
in extended and home care settings. Revenue from the Company's
international operations was $29.5 million, up 37.6% from the first six
months of 1994. Continued market penetration and increased sales have
contributed towards higher revenue. Revenue from medical device
operations increased 27.8% to $8.0 million in the first six months of
1995 related primarily to greater market penetration.
Excluding Medical Services and Financial Services, rental expenses
were 58.9% of total revenue in the first six months of 1995 compared to
65.1% in the first six months of 1994. This decrease is primarily
attributable to reduced depreciation expense as well as an overall
effort to control costs.
Gross profit excluding Medical Services and Financial Services
increased 24.1% to $39.2 million in the first six months of 1995 from
$31.5 million in the first six months of 1994 due to the increase in
revenue from international and medical device operations, as well as the
decrease in rental expenses.
Selling, general and administrative expenses for the first six
months of 1995 included a $2.9 million loss on the sale of Financial
Services. Excluding the Medical Services and Financial Services
divisions, selling, general and administrative expenses increased $2.2
million or 13.8% to $18.5 million in the first six months of 1995 from
$16.3 million in the first six months of 1994. The majority of this
increase relates to common overhead costs, previously allocated to the
Medical Services Division, which have been fully absorbed by the
Company.
Excluding the Medical Services and Financial Services divisions,
operating earnings for the period increased 35.1% to $20.6 million
compared to $15.3 million in the prior year due substantially to
increased revenue.
Net interest income for the six months ended June 30, 1995 was $1.1
million, compared to net interest expense of $3.5 million in the prior
year period. This change was due to a combination of the prior year pay-
down of long term obligations, interest earned on cash reserves and
interest earned on notes receivable.
The Company's effective income tax rate in the first six months of
1995 was 39.1%, compared to 51.4% in the first six months of 1994. The
effective tax rate for the first six months of 1995 was lower than the
effective tax rate for the first six months of 1994 primarily as a
result of the recognition of certain foreign tax credits, the
recognition of the net operating losses of Medical Retro Design in the
last quarter of 1994 and the disposition of the goodwill associated with
the Medical Services assets which were sold in September of 1994.
During the first three months of 1994, the cumulative losses
allocated to the minority interest holder of Medical Retro Design
exceeded the balance of its investment. As a result, losses of $3.8
million were absorbed entirely by the Company in 1994. These continuing
losses and the diminished opportunities within the refurbishment
business led to the decision to liquidate this unit in December of 1994
and the eventual sale of MRD assets in March 1995. Operations of the
MRD unit during the first quarter of 1995 were immaterial to the overall
results of the Company.
During the first three months of 1994, the Company also recorded
the cumulative effect of a change in accounting principle related to its
inventory costing method. This resulted in a one-time after-tax
earnings increase of $742,000, or $0.02 per share.
Net earnings for the first six months of 1995 increased $4.4
million, or 58.9%, to $11.8 million from $7.4 million in the first six
months of 1994. On a comparable basis, net earnings from ongoing
operations more than doubled to $13.3 million in the first six months of
1995 from $6.4 million in the first six months of 1994. This increase
was primarily due to a decrease in rental expenses, interest income
earned, and the change in revenue, as discussed above.
FINANCIAL CONDITION
The change in revenue and expenses experienced by the Company
during the second quarter of 1995 and other factors resulted in changes
to the Company's balance sheet as follows:
Inventory at June 30, 1995 increased $3.0 million, or 16.6%, to
$21.2 million from $18.2 million at December 31, 1994 primarily due to
new product introductions, more specifically KCI's TriaDyne and
BariKare. KCI's TriaDyne is the most advanced specialty bed in the
industry. It provides Kinetic Therapy to intensive-care patients. The
BariKare is an advanced care system for obese patients.
Net property, plant and equipment at June 30, 1995 increased $6.5
million, or 12.8%, to $57.9 million from $51.4 million at December 31,
1994 due to additions to rental equipment in excess of depreciation and
dispositions. Capital expenditures were $16.5 million during the first
six months of 1995 as the Company invested in new products for its
rental fleet and new computer systems.
Total notes receivable at June 30, 1995 decreased $5.0 million, or
54.9%, to $4.2 million from $9.2 million at December 31, 1994 due to
payments received during the first six months of 1995.
Total finance lease receivables decreased $15.3 million and note
payable and long-term obligations decreased $5.3 million from December
31, 1994 due to the sale of Financial Services in the second quarter of
1995.
Accrued expenses at June 30, 1995 decreased $1.5 million, or 5.5%,
to $25.8 million from $27.3 million at December 31, 1994 primarily due
to settlements of accruals related to the sale of the Medical Services
Division and bonus payments made during 1995.
Deferred tax benefit at June 30, 1995 decreased $2.7 million, or
66.6%, to $1.4 million from $4.1 million at December 31, 1994 due
primarily to depreciation on an asset subject to a leveraged lease which
was acquired by the Company in December of 1994.
MARKET TRENDS
For the past decade, the U.S. health care industry has experienced
increased pressure from a variety of sources to control costs and
improve patient outcomes. This pressure intensified in 1993 as our
nation debated health care reform. Although the events of 1994 would
seem to indicate that major legislative reform of the health care system
is unlikely at this time, it is apparent that the health care industry
will seek to become more cost effective and further improve patient
outcomes.
Since 1987, the Company has been positioning itself to remain
competitive in an environment which demands accountability for patient
outcomes at a lower cost. The Company's Therapeutic Service's division
offers the most complete continuum of products in the industry and helps
reduce the overall cost of patient care by allowing the health care
provider to match the needs of a particular patient with an appropriate
product and therapy. In addition, the Company continues to search for
new therapies and technologies, making investments as deemed prudent, to
improve patient outcomes both now and into the future. Recent product
introductions include KCI's TriaDyne, BariKare and a vacuum assisted
closure device, "The VAC".
The Company also has sponsored a number of medical studies which
demonstrate the clinical efficacy and cost effectiveness of its
products. Over the past several years, the Company has entered into a
number of partnering arrangements with its customers which allow its
customers to obtain state of the art medical technology while at the
same time lowering their overall costs. The Company believes that these
types of studies and arrangements will be necessary in order to survive
and prosper in the health care industry in the 1990's.
The Company also maintains an extensive national accounts portfolio
in the specialty bed industry and expects to benefit from further
consolidation of providers and buying groups. At the same time, as
shifts in reimbursement policy have tended to move patients into lower-
cost environments, the Company has continued to focus new efforts on the
extended care and home care markets. While future performance cannot be
assured, the Company believes that it is well positioned to compete in
the dynamic health care marketplace.
LEGAL PROCEEDINGS
On February 21, 1992, Novamedix Limited filed a lawsuit against the
Company in the United States District Court for the Western District of
Texas. Novamedix holds the patent rights to the principal product which
competes directly with the PlexiPulse, which is marketed by KCI New
Technologies, Inc. The suit alleges that the PlexiPulse infringes on
several patents held by Novamedix, that the Company breached a
confidential relationship with Novamedix and a variety of other claims.
The Plaintiff seeks injunctive relief and monetary damages. Discovery
in this case has been substantially completed. Although it is not
possible to predict the outcome of this litigation or the damages which
could be awarded, the Company believes that its defenses to these claims
are meritorious and that the litigation will not have a material effect
on the Company's financial statements.
The Company is party to several lawsuits generally incidental to
its business and is contesting adjustments proposed by the Internal
Revenue Service to prior years' tax returns. Provisions have been made
in the accompanying financial statements for estimated exposures related
to these lawsuits and adjustments. In the opinion of management, the
disposition of these items will not have a material effect on the
Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1995, the Company generated net cash
provided by operating activities of $28.1 million compared to $27.8
million in the prior year period. At June 30, 1995, cash and cash
equivalents totaling $57.8 million were available for general corporate
purposes. Additionally, the Company maintains a Credit Agreement with a
bank as an agent for itself and certain other financial institutions.
The Credit Agreement currently permits borrowings of up to $50.0
million. At June 30, 1995, the entire amount of the Credit Agreement was
available. The Company believes that current cash reserves combined with
operating cash flows during the next twelve month period will be
sufficient to provide for new investments in equipment and any working
capital needed during the period.
At June 30, 1995, the Company was committed to purchase
approximately $3.5 million of inventory associated with a new product
over the remainder of this year. The Company did not have any other
material purchase commitments.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1995 Annual Meeting of the Shareholders of Kinetic Concept, Inc. was
held at 9:00 a.m. on May 9, 1995. The following matters were acted upon
by the shareholders at the annual meeting:
1. Sam A. Brooks, Frank A. Ehmann, Raymond R. Hannigan, James R.
Leininger, M.D., Peter A. Leininger, M.D., and Bernhard T.
Mittemeyer, M.D. were each elected to serve as Directors of
the Company until the 1996 Annual Meeting of Shareholders and
until their successors were duly elected and qualified. With
respect to Mr. Brooks' election, there were 41,151,463 votes
for approval and 436,063 votes against approval. With respect
to Mr. Ehmann's election, there were 40,978,098 votes for
approval and 609,428 votes against approval. With respect to
Mr. Hannigan's election, there were 41,151,998 votes for
approval and 435,528 votes against approval. With respect to
Dr. James Leininger's election, there were 41,151,063 votes
for approval and 436,463 votes against approval, no
abstentions and no broker nonvotes. With respect to Dr. Peter
Leininger's election, there were 41,151,663 votes for approval
and 435,863 votes against approval. With respect to Dr.
Mittemeyer's election there were 40,980,598 votes for approval
and 606,928 votes against approval. No shareholders abstained
in the election of the directors and there were no broker
nonvotes.
2. An amendment to the Company's 1987 Key Contributor Stock
Option Plan increasing the number of shares which can be
granted under the Plan from 4,500,000 shares to 5,750,000
shares was approved. There were 36,311,998 votes for
approval, 5,182,869 votes against approval and 29,809
abstentions.
3. The appointment of KPMG Peat Marwick as the Company's auditors
for 1995 was approved. There were 41,489,697 votes for
approval, 28,459 votes against approval, 18,766 abstentions
and no broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
2 Filed herewith 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
15 Filed herewith Letter from KPMG
Peat Marwick LLP
dated August 11, 1995
99 Filed herewith Executive Committee Stock
Ownership Policy
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: JAMES R. LEININGER, M.D.
------------------------
James R. Leininger, M.D.
Chairman of the Board
By: RAYMOND R. HANNIGAN
-------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: BIANCA A. RHODES
----------------
Bianca A. Rhodes
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: August 11, 1995