Kinetic Concepts develops and markets innovative therapeutic
healing systems that address skin breakdown, circulatory
problems, and pulmonary complications. Our healing systems
consist of specialty beds, mattress replacement systems, and
related medical devices. We serve multiple care settings, both
in the United States and abroad.
Table of contents
Letter to Shareholders 2-3
Change and KCI 4-11
Financial Summary 12-13
Management's Discussion and 14-20
Analysis
Financial Statements and Notes 21-31
Report of Independent Public 32
Accountants
Investor Information Inside back cover
FINANCIAL HIGHLIGHTS
(in millions, except per 1995 1 1994 2 1993 1992 1991
share data)
- ---------------------------------------------------------------
Revenue $243.4 $269.6 $268.9 $278.5 $248.7
Operating earnings 43.8 124.1 20.5 55.1 48.8
Net Earnings 28.4 64.4 8.1 28.5 24.8
Earnings per share 0.63 1.46 0.18 0.63 0.49
Cash flow provided by
operations 56.8 96.5 56.5 58.0 60.2
1 Results were negatively affected
by $927,000 or $0.02 per share in
non-recurring items.
2 Results include $43.1 million or
$0.98 per share from several
non-recurring gains.
The health care industry is changing and that's good for Kinetic
Concepts. There are more sick people than ever before, and they
need solutions to their problems. That's good for Kinetic
Concepts because our therapies have been proven effective in the
lab and with the patient. Health care providers have to squeeze
a dollar farther than ever before, and they need therapies that
are cost effective. That's good for Kinetic Concepts because we
not only save lives, we save money that can save more lives. And
that's good for everyone.
Dear Fellow Shareholders,
Change continues to shape the health care industry. Driven by
efforts to control health care spending at all levels, stemming
the rise in medical costs has become a national priority. As a
result, health care providers are consolidating at an
unprecedented rate in order to gain operating synergies and
purchasing leverage. The changing health care landscape has also
affected the patient as care providers are increasingly turning
the home into a place of healing.
Many of these changes can be good for both Kinetic Concepts and
our industry. The growing emphasis on improved patient outcomes
at a lower cost is really what Kinetic Concepts is all about.
What's exciting about this change is that the marketplace is
discovering what we've known all along -- prevention of serious
medical complications is far more effective and less expensive
than treating an illness once it develops.
Our annual report to you highlights four key changes in the
health care industry and describes how these changes can benefit
KCI. These changes are:
1. The increased pressure on health care providers to
reduce costs,
2. The migration of patients away from acute care
facilities into new care settings,
3. The consolidation of health care providers, and
4. The global focus on improved health care.
We have positioned KCI to embrace and take advantage of the
changes in the marketplace. During the past two years we sold
several underperforming assets, radically improved core
operations and successfully settled a patent infringement lawsuit
against a major competitor, all of which have enabled the
profitability of our core business to rebound. This is best
reflected by our earnings per share, which have increased 250% in
the past two years.
One of the reasons we've improved our financial performance is
that we've sharpened our marketing focus to emphasize the
effectiveness of our products. Unlike many of our competitors,
we can demonstrate the effectiveness of our products with our
extensive collection of clinical research. These are studies
conducted by teaching hospitals and other institutions that
compare the medical efficacy of our specialty products with non-
specialized treatment protocols. These studies overwhelmingly
demonstrate that KCI's products produce patient outcomes much
superior to traditional treatments. We call this our Clinical
Advantage and it has been very successful in building awareness
of Kinetic Concept's unique therapeutic benefits, as well as in
easing the price erosion that has been common among providers of
medical products and services.
Core business growth strategies - Each of our operating segments
has a blueprint to ensure future revenue growth. Here's a look
at what we are doing:
Acute and Extended Care - To better serve the needs of our
acute care and extended care markets, we have added KCI's
TriaDyne critical care specialty bed and our BariKare bed
for large patients to our continuum of surfaces. Strong
demand for these premium products and our full product line
have resulted in increased patient therapy days and higher
average rental rates.
Home Care - Since the start of 1995, we have served the
growing home care market through top-quality partners such
as Apria, American HomePatient and others. Shifting to a
dealer network has let us build on each other's strengths as
we participate in the growing home health care market with
only minimal increases in our infrastructure.
International - In late 1995 we opened sales offices in
Italy and Sweden, bringing the number of international
markets we serve to 10. Revenue growth from our
international operations continues to outpace our domestic
business, and we have strong global growth opportunities.
Medical Devices -- During 1995, we introduced the PlexiPulse
All-in-1 System to our product line. The PlexiPulse All-in-
1 System is not only highly effective at preventing lower
limb blood clotting, but it has the added benefit of
lowering inventory and operating costs for facilities that
offer this treatment. Late last year we also introduced our
revolutionary wound closure device, The V.A.C., in the
United States after its successful introduction in Europe 18
months ago.
One of the most exciting changes you'll see in 1996 is the
introduction of vastly improved information systems. We have
upgraded our financial information systems so that we now have
real-time visibility into the operations of all of our service
centers, each of our products and every one of our more than
6,000 customer accounts. In addition, our team members in the
field are all connected to our Genesis system, which they use to
collect patient data, track our assets and manage accounts. As
we combine the information gathered through Genesis with our
existing Odyssey wound management software program, we provide
our customers with insights into their treatment protocols and
likely patient outcomes that simply weren't available before.
In January 1996 we completed a successful secondary offering of
nearly 8.8 million shares of our stock. The shares were held by
the Leininger family and various charitable trusts, and their
sale has greatly improved the liquidity of our company's stock.
We welcome our new shareholders and hope that they share our
enthusiasm for the future.
Another change we hope to see in 1996 is a sharpened focus by
everyone at Kinetic Concepts on further improving our operating
profit margins through revenue growth and cost controls. One
thing, however, that will not change in 1996 is our emphasis on
recruiting, developing, training and motivating skilled and
competent KCI team members. Our successes reflect the
involvement of every single individual in this company. We both
believe that our future successes will rest on the quality,
integrity and competence of our dedicated team members. We'd
like to finish this letter by once again thanking and commending
our team members who share our mission, beliefs and core values.
/s/ JAMES R. LEININGER, M.D. /s/ RAYMOND R. HANNIGAN
____________________________ _____________________________
Chairman of the Board of Directors President and Chief Executive
Officer
#1 -- Increased pressure on costs and patient outcomes.
Cost containment efforts have spread across all aspects of
the health care industry. Both private and government
reimbursement programs are moving toward systems where facilities
receive a fixed payment, based on each patient's diagnosis, to
cover all medical expenses. Expenses that exceed the fixed
amount are paid by the facility, not the patient. This type of
system puts tremendous pressure on facilities to eliminate
additional treatment costs due to secondary patient complications
such as pneumonia or pressure ulcers.
Kinetic Concepts has a full line of products that prevent
and treat the medical complications that patients often encounter
in a hospital or nursing home. The cost of using these products
is far less than the alternate cost of treating a complication
once it develops. For example, the company's Kinetic Therapy
products rotate the patient laterally at least 40 degrees to each
side. This therapy has been demonstrated to dramatically reduce
the incidence of hospital-acquired pneumonia as well as reduce
the length of time spent in a hospital or intensive care unit,
all at a cost of less than $200 per day. In contrast, a case of
pneumonia can easily add $18,000 to the cost of a patient's stay
in a hospital.
We prove the effectiveness of our therapies to our customers
with an extensive collection of clinical studies published in
respected peer reviewed medical journals. These studies support
the cost effectiveness of our products and provide the necessary
outcome data demanded by health care providers.
Being able to provide cost savings is important in light of
efforts to control the federal government's expenditures on
health care. Even through we usually receive payment for our
products from a facility, approximately 35% of our total revenue
ultimately comes from Medicare or Medicaid. Our ability to meet
the demands of government reimbursement programs for cost
effectiveness is more important than ever.
KINETIC THERAPY'S COST ADVANTAGE
Treatment Outlook for a With Kinetic Without Kinetic
Critically Ill Blunt Therapy Therapy
Trauma Victim
- ------------------------------------------------------------
Days on a ventilator 4 7
Days in intensive care 5 8
Total days in hospital 20 45
Total cost of hospital
stay $33,500 $51,500
____________________________________________________________
Kinetic Therapy Cost $18,000
Savings
- ------------------------------------------------------------
Kinetic Therapy can greatly reduce a patient's cost of care
by reducing the total time spent in a hospital as well as the
costly intensive care unit.
We have the most extensive collection of clinical research
studies in our industry. Care providers look to these studies to
be sure that when they prescribe a Kinetic Concepts therapy, they
can be certain that it will deliver the desired outcome.
(Photo of TriaDyne specialty bed) Critical care patients take a
turn for the better on the KCI TriaDyne. It's Kinetic Therapy
rotates the patient to keep lungs clear of fluids and keep
pneumonia at bay while its percussion and pressure relief
features speed recovery, increase comfort and ease the workload
for nurses.
# 2 -- Migration of patients away from acute care facilities
Prompted by cost reduction pressures from government
reimbursement programs, private insurers and managed care
organizations, health care is now readily available in a wide
variety of settings. The role of traditional hospitals has been
somewhat reduced to more specific functions such as emergency and
specialty units. Most rehabilitation now occurs in extended care
settings as well as in the home.
We are able to provide therapies to patients in these non-
acute care settings through our national distribution network and
a broad product line that provides our Continuum of Care. Our
products range from specialty beds such as the TriaDyne, which is
designed for severely injured patients, to inflatable mattress
overlays designed for use in the home. We also have 250 full-
time clinicians on our team who make regular patient rounds and
who offer insights into the appropriate surfaces for a patient
entering a new care setting. Our broad product line and clinical
data give us the tools to access patients across all care
settings. With an increasing number of patients covered by
managed care systems, the ability to provide a seamless
transition for a patient's movement from hospital to
rehabilitation center to home is essential.
The home is gaining importance as a care setting. Changes
in federal reimbursement programs as well as commercial payor
sources have made our therapies more widely accessible in the
home market. We are capitalizing on the growth of home health
care by accessing these patients through independent medical
equipment dealers. We currently have more than 700 dealer
distribution points, and we plan to double that number during
1996 to take advantage of this growing market.
Changes in Care Settings for Acute Extended Home
a Typical Patient on
Mechanical Ventilation
1985 20 Days 20 Days 8 Days
1995 4 Days 14 Days 30 Days
Care providers are moving patients to the least expensive care
setting as soon as possible. Shown to the right are just a few
of the more than two patient support dozen products KCI offers to
speed healing.
Nature has an answer for everything, but sometimes it needs some
help. The PlexiPulse All-in-1 System duplicates the natural
blood-pumping action of walking for patients who are confined to
a bed. Keeping the blood moving prevents dangerous clots from
forming, so patients can get back on their feet.
#3 -- Consolidation of health care providers and national group
purchasing organizations
Consolidation of health care providers and national group
purchasing organizations (GPOs) within the health care industry
has greatly increased the number of patients whose care is
covered by a national organization. This increased patient base
in turn gives the providers and GPOs increased purchasing
leverage. These organizations not only want favorable pricing,
they want to deal with as few vendors as possible to minimize
their operating costs.
This trend towards consolidation is a plus for Kinetic
Concepts because our national distribution system and broad
product line are key differentiators that set us apart from our
competitors. Our broad range of products meets the changing
support surface needs of a patient across all care settings, and
we have tailored our distribution network to meet the unique
needs of our customers.
Acute and extended care: We maintain a network of 143 service
centers across the United States that are on call 24 hours a day.
When a trauma patient enters an intensive care unit, the need for
a specialty bed is immediate. We respond to that need with a
nationwide service team that can have our products delivered to
major trauma centers in the United States within two hours. The
patient surface needs of an extended care patient can also change
rapidly and the same service team that serves acute care
facilities also supports the needs of extended care facilities.
Home care: This growing market is served through more than 700
independent dealer outlets with that number growing rapidly as we
partner with more durable medical equipment providers serving the
home market. Much of the growth in home health care is
attributable to the increasing elderly population in the United
States. The vast majority of pressure ulcers are found on
patients over the age of 65, and that segment is also the fastest
growing portion of the U.S. population.
Percentage of U.S. Population Covered
by 25 Largest Health Care Providers
1985 1990 1995
3.6% 5.1% 6.9%
Emergence of Disease State Niche Markets
The industry trend toward consolidation has yielded additional
leverage to national care providers to demand packages of
products and services that offer total solutions to specific
diseases. We are currently developing the skin wound management
portion of a total patient care package that would be offered in
conjunction with several leading manufacturers of health care
products.
Patient information is a vital ingredient in any providers' plans
to provide cost effective medical care. Through our proprietary
Genesis and Odyssey software management programs, we and our
customers can track statistical patient data, refine treatment
protocols and quantify the clinical outcomes of our therapies.
These programs give us an advantage in establishing long-term
relationships with national managed care organizations.
(Photo of BariKare bed) The special needs of large patients are
largely unaddressed in today's hospitals. The BariKare serves as
a bed, chair and x-ray table for patients weighing up to 850
pounds. It also lets nurses care for these special patients in a
safe and dignified manner.
#4 -- Global focus on improved health care
Health care systems in established economies are increasingly
seeking methods to provide improved care at a reduced cost. Many
of these systems, particularly in western Europe, are government-
supported and are experiencing the same cost control pressures
that began to affect our own Medicare/Medicaid system several
years ago.
In addition, emerging nations are beginning to seek ways to
provide improved levels of health care, although they may lack
the financial resources of more established economies. As a
result, health care systems across the world are becoming aware
of the cost effective benefits that therapeutic patient support
surfaces can provide. These products are particularly effective
when protocols dictate their usage in a preventative mode.
Kinetic Concepts is well positioned for global growth
opportunities. We have direct operations in 10 international
markets within western Europe, as well as in Canada and
Australia. We use independent dealers in other selected markets
such as Latin and South America, and we are actively exploring
both direct and joint venture operations in Asia.
Health Care Dynamics for KCI's
International Markets
1994 1993 % of GNP
Population Health Care Spent on
(millions) Spending Health
(billions) Care
----------- ----------- ----------
U.S.A. 258 $831 14.1%
Germany 81 155 8.6
U.K. 58 71 7.1
Austria 8 19 9.3
Switzerland 7 26 8.9
France 57 118 9.8
Canada 28 61 10.2
Australia 18 25 8.5
Italy 57 95 8.6
Sweden 9 10 7.5
Netherlands 15 22 9.3
Overseas Success Story -- KCI's revolutionary The V.A.C. medical
device was introduced in Europe in mid-1994. Its clinical
success overseas proved to KCI that this extraordinary device was
indeed a world-class therapy.
International distribution network -- 45 service centers, 200
service technicians, rental fleet of 5,800+ patient surfaces and
medical devices
(Photo of The V.A.C.) Problem wounds need special solutions. The
V.A.C. (Vacuum Assisted Closure) closes wounds when other methods
fail. It uses a pump and a special sponge to create suction
within a wound, drawing the skin together. For some patients,
The V.A.C. is the only answer and only KCI has The V.A.C.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
1995 1994 1993 1992 1991
Consolidated Statements of
Earnings Data:
Revenue:
Rental and service $206,653 $228,832 $232,250 $244,905 $223,192
Sales and other 36,790 40,814 36,622 33,586 25,529
Total revenue 243,443 269,646 268,872 278,491 248,721
Rental expenses 137,420 159,235 169,687 156,682 146,112
Cost of goods sold 13,729 19,388 18,666 18,987 14,238
Gross profit 92,294 91,023 80,519 102,822 88,371
Selling, general and
administrative expenses 48,502 51,813 53,279 47,710 39,538
Unusual items(1) -- (84,868) 6,705 -- --
Operating earnings 43,792 124,078 20,535 55,112 48,833
Interest expense (income),
net (4,554) 4,528 5,908 7,195 6,736
Earnings before income
taxes, minority interest,
extraordinary item and
cumulative effect of
changes in accounting
principle 48,346 119,550 14,627 47,917 42,097
Income taxes 19,905 55,949 7,175 19,405 17,260
Earnings before minority
interest, extraordinary
item and cumulative
effect of changes in
accounting principle 28,441 63,601 7,452 28,512 24,837
Minority interest in
subsidiary loss -- 40 560 -- --
Extraordinary item -- debt
extinguishment, net -- -- (400) -- --
Cumulative effect of change
in accounting for inventory
(2) -- 742 -- -- --
Cumulative effect of change
in accounting for income
taxes (3) -- -- 450 -- --
Net earnings $28,441 $64,383 $ 8,062 $28,512 $24,837
Earnings per share $ 0.63 $ 1.46 $ 0.18 $ 0.63 $ 0.49
Shares used in earnings per
share computations 45,457 44,143 44,627 45,060 50,469
Cash flow provided by
operations $56,782 $96,451 $56,538 $58,007 $60,241
Cash dividends paid to common
shareholders $ 6,631 $ 6,588 $ 6,638 $ 6,277 $ 6,047
Cash dividends per share paid
to common shareholders $ .15 $ .15 $ .15 $ .14 $ .12
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
As of December 31,
1995 1994 1993 1992 1991
Consolidated Balance Sheet
Data:
Working capital $109,413 $ 90,791 $ 60,907 $ 55,473 $ 32,206
Total assets $243,726 $232,731 $284,573 $286,915 $277,820
Long-term obligations --
noncurrent (4) $ -- $ 2,636 $101,889 $102,237 $101,781
Minority interest $ -- $ -- $ 40 $ 990 $ --
Redeemable convertible
preferred stock $ -- $ -- $ -- $ 3,307 $ 3,034
Other capital accounts $210,324 $185,423 $125,707 $123,813 $ 99,182
(1) See Note 11 of Notes to Consolidated Financial Statements for
information on unusual items.
(2) See Note 1 of Notes to Consolidated Financial Statements for
information on cumulative effect of change in method of accounting
for inventory.
(3) See Note 8 of Notes to Consolidated Financial Statements for
information on cumulative effect of change in method of accounting
for income taxes.
(4) See Notes 6 and 7 of Notes to Consolidated Financial Statements for
information concerning the Company's borrowing arrangements and
lease obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The health care industry is facing various challenges, including
increased pressure on health care providers to control costs, the
accelerating migration of patients from acute care facilities into
extended care (e.g. skilled nursing facilities and rehabilitation
centers) and home care settings, the consolidation of health care
providers and national and regional group purchasing organizations and
the growing demand for clinically proven and cost effective therapies.
The pressure to control health care costs intensified during 1993 as a
result of the health care reform debate and has continued through 1995
as Congress attempts to slow the rate of growth of federal health care
expenditures as part of its effort to balance the federal budget.
While the exact amount and nature of the federal health care budget
cuts are not final, the Company believes that health care providers
will continue to experience increased cost control pressures. The
expected reductions in future hospital payment rates will increase the
cost pressures on hospitals but the Company does not believe that the
manner in which hospitals are currently reimbursed will change
materially in the foreseeable future. However, current Congressional
proposals would change the method of reimbursement in the extended and
home care settings from retrospective cost-based systems to prospective
payment systems similar to the system adopted for hospitals in 1983.
In a prospective payment system, reimbursement is based on national
averages of costs for the care of a patient with a specific diagnosis
instead of on costs actually incurred and decisions on selecting the
products and services used in patient care are based on clinical and
cost effectiveness.
Industry trends including pricing pressures, the consolidation of
health care providers and national and regional group purchasing
organizations and a shift in market demand toward lower-priced products
such as mattress overlays have had the impact of reducing the Company's
average daily rental rates on its products. These industry trends,
together with the increasing migration of patients from acute care to
extended and home care settings have had the effect of reducing the
Company's historical revenue from acute care facilities. The Company
expects these industry trends to continue. The Company is addressing
these trends by increasing its marketing efforts beyond its existing
base of more than 1000 acute care hospitals to market to an additional
2000 medium to large hospitals in which the Company has a relatively
small presence. The Company further believes that the introduction of
the TriaDyne and BariKare beds will enable it to further penetrate this
market.
Beginning in 1993, the Company restructured its management and
operations to meet the needs of the changing health care environment.
The Company began assembling a new management team that has
concentrated on the Company's core lines of business, divested three
underperforming businesses and implemented various programs to reduce
the Company's operating costs and to improve its information systems.
On September 30, 1994, the Company sold certain assets of its Medical
Services Division ("Medical Services") which rented movable critical
care and life support equipment. On March 27, 1995, the Company sold
the assets of Medical Retro Design, Inc. ("MRD"), a subsidiary that
refurbished standard hospital beds and furniture. On June 15, 1995,
the Company sold all of the stock of KCI Financial Services, Inc.
("KCIFS"), a medical equipment leasing company.
Generally, the Company's customers prefer to rent rather than
purchase patient support surfaces, due to such considerations as high
initial capital outlays and extensive maintenance requirements. As a
result, rental revenues are a high percentage of the overall revenues
of the Company. More recently, sales have increased as a portion of
the Company's revenue. The Company believes this trend will continue
because certain U.S. health care providers are purchasing products that
are less expensive and easier to maintain such as medical devices,
mattress overlays and mattress replacement systems. In addition,
international health care providers tend to purchase products more
often than U.S. health care providers, and the Company's revenue from
international operations represents an increasing portion of the
Company's total revenues. Because of the cost pressures within the
health care industry, patients are leaving the acute care setting
sooner, thereby increasing the demand for the Company's products in the
extended and home care settings. This demand increases the utilization
of certain of the Company's products which were originally developed
for acute care settings and provides an additional market for sales of
low-cost products such as mattress overlays and mattress replacement
systems.
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the prior year ($ in
thousands):
Year Ended December 31,
Revenue Increase
Relationship (Decrease)
1995 1994 $ Pct
Revenue:
Rental and service 85% 85% $(22,179) (10%)
Sales and other 15 15 (4,024) (10)
---- ---- ---------
100% 100% (26,203) (10)
Rental expenses 56 59 (21,815) (14)
Cost of goods sold 6 7 (5,659) (29)
---- ---- ---------
Gross profit 38 34 1,271 1
Selling, general and
administrative expenses 20 19 (3,311) (6)
Unusual items -- (31) 84,868
---- ---- ---------
Operating earnings 18 46 (80,286) (65)
Interest (income) expense, net (2) 1 (9,082) (201)
---- ---- ---------
Earnings before income
taxes,minority interest,
and cumulative effect of
change in accounting
principle 20 45 (71,204) (60)
Income taxes 8 21 (36,044) (64)
---- ---- ---------
Earnings before minority
interest and cumulative
effect of change in
accounting principle 12 24 (35,160) (55)
Minority interest in subsidiary
loss -- -- (40) --
Cumulative effect of change in
accounting principle -- -- (742) --
---- ---- ------- ----
Net earnings 12% 24% $(35,942) (56%)
The Company's revenue is derived from five primary markets. The
following table sets forth, for the periods indicated, the amount of
revenues derived from each of these markets ($ in millions):
Year Ended December31,
1995 1994
Acute $111.0 $109.1
Extended 37.5 34.5
Home 14.7 14.1
International 60.7 46.4
Medical devices 16.9 13.9
Other(1) 2.6 51.6
------ ------
$243.4 $269.6
====== ======
(1) Consists of revenue of Medical Services, KCIFS, MRD and
other sales.
Unusual Items. In September 1994, the Company settled a patent
infringement suit against its principal competitor, Support Systems
International, Inc. ("SSI"), a predecessor in interest to Hill-Rom,
Inc., for $84.8 million. In connection with the settlement, SSI agreed
to withdraw its high-end specialty bed from the market. The
comparability of the Company's financial results for the years ended
December 31, 1995 and 1994 was significantly impacted by this
settlement and the pre-tax gain of $10.1 million from the sale of
certain assets of Medical Services. Partially offsetting these items
were certain miscellaneous unusual items, primarily dispositions of
overstocked inventory and underutilized rental assets and a write-down
of the carrying value of the assets of MRD which had a negative impact
of $6.8 million. The following is a summary of the unusual items
recorded in the prior year (in thousands):
SSI patent litigation settlement $ 84,750
Legal fees related to SSI patent litigation
settlement (3,154)
Pre-tax gain on sale of Medical Services 10,121
Miscellaneous (6,849)
Unusual items in operating earnings $ 84,868
Each following reference to "on a pro forma basis" shall mean
that the results for the period have been adjusted to reflect the
sales of Medical Services and KCIFS as if such sales had occurred on
January 1, 1994.
Total Revenue. Total revenue in 1995 was $243.4 million, a
decrease of $26.2 million or 9.7% from 1994. This decrease was
directly attributable the sale of Medical Services in September 1994.
Medical Services generated $43.8 million in revenue during 1994. On a
pro forma basis, total revenue for 1995 would have increased by $19.9
million or 9.0% to $242.0 million from $222.1 million in 1994
primarily as a result of growth in the Company's international
operations combined with smaller increases in each of the Company's
other primary markets. Revenue from acute care facilities was $111.0
million in 1995, an increase of $1.9 million or 1.7% from 1994
primarily as a result of increased therapy days in the acute care
setting, due partly to the successful introduction of new products,
including the BariKare and the TriaDyne, offset by a continuing shift
in product mix toward lower-cost overlays. Revenue from extended care
settings in 1995 was $37.5 million, an increase of $3.0 million or
8.7% from 1994, primarily due to increased patient days as patients
migrated from high-cost, acute care settings to lower-cost, extended
care settings. Revenue from home care settings was $14.7 million, an
increase of $0.6 million or 4.3% from 1994 which reflects the
Company's decision to shift to an independent dealer network at the
beginning of the year. This network provides easier access to a
larger patient population; however, revenue received from dealers is
less than that which the Company would receive from direct sales
because revenue from dealers is net of dealer service expense.
Revenue from the Company's international operations was $60.7 million
in 1995, up $14.3 million or 30.8% from 1994. Increased market
penetration and increased product sales contributed to this higher
international revenue. In addition, international operations
benefited from favorable currency exchange rate fluctuations which
accounted for $6.6 million of the revenue increase. Revenue from
medical device operations was $16.9 million in 1995, an increase of
$3.0 million or 21.6% from 1994, primarily as a result of greater
market penetration of the PlexiPulse.
Rental Expenses. Rental expenses consist largely of personnel
costs, depreciation of the Company's rental equipment and related
facility costs. Rental expenses for 1995 were $137.4 million, a
decrease of $21.8 million or 13.7% from 1994. This decrease was a
result of the sale of Medical Services in September 1994. On a pro
forma basis, rental expenses for 1995 would have been $137.4 million,
an increase of $2.2 million or 1.6% over 1994. On a pro forma basis,
as a percentage of total revenue, rental expenses would have been
56.8% in 1995 compared to 60.9% in 1994. This decrease is primarily
attributable to the pro forma increase in revenue, as the majority of
these costs are relatively fixed, combined with a reduction in field
headcount and depreciation expense.
Gross Profit. Gross profit in 1995 was $92.3 million, an
increase of $1.3 million or 1.4% over 1994. On a pro forma basis,
gross profit in 1995 would have been $90.8 million, an increase of
$16.5 million or 22.2% from 1994. On a pro forma basis, as a
percentage of revenue, gross profit margin would have increased to
37.5% in 1995 from 33.5% in 1994 as a result of the increase in pro
forma revenue, the relatively fixed nature of the rental expenses, and
the reduction in headcount and depreciation expense as discussed
above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses for 1995 were $48.5 million, a decrease of
$3.3 million or 6.4% from 1994 as a result of the sale of Medical
Services in September 1994. On a pro forma basis, selling, general
and administrative expenses would have been $44.7 million, an increase
of $9.0 million or 25.3% in 1995 from 1994. On a pro forma basis, as
a percentage of revenue, selling, general and administrative expenses
would have been 18.5% in 1995 compared to 16.1% in 1994. These
increases related primarily to common overhead costs, previously
allocated to Medical Services, which have been absorbed by the
Company, and costs associated with certain key investments, e.g.
improved information systems. The Company maintains an investment in a
Limited Partnership which invests in securities, primarily in small to
mid-sized companies which have or may have the potential to provide
quality products or services to healthcare organizations and
providers. The Company's total investment as of December 31, 1995 was
$150,000, however, the Company is committed to invest a maximum of
$1.5 million with the Partnership. The committed balance is callable
by the General Partner, as needed by the Partnership, on 30 days prior
written notice.
Operating Earnings. Operating earnings for 1995 were $43.8
million, a decrease of $80.3 million or 64.7% from 1994, primarily as
a result of the one-time benefit of the patent litigation settlement
and the sale of Medical Services in 1994. On a pro forma basis, and
excluding the patent litigation settlement and the other unusual
items, operating profit margin would have been $46.1 million, an
increase of $7.5 million or 19.4% from 1994. On a pro forma basis and
excluding the patent litigation settlement and the other unusual
items, as a percentage of revenue, operating earnings would have
increased to 19.1% for 1995 from 17.4% in 1994 substantially due to
the improved gross profit discussed above.
Net Interest Income. Net interest income for 1995 was $4.6
million as compared to net interest expense of $4.5 million in 1994.
This change was a result of the repayment of the Company's outstanding
long-term debt at the end of the third quarter of 1994. On a pro
forma basis, net interest income for 1995 would have been $4.9 million
compared to net interest income of $1.2 million in 1994. This
difference was primarily due to the fact that the 1995 results include
interest income and a reduction in interest expense resulting from the
additional cash provided by the patent litigation settlement. In
addition, interest income for 1995 included $1.7 million representing
the principal received in excess of the discounted value of the
Mediq/PRN notes.
Income Taxes. The Company's effective income tax rate for 1995
was 41.2% compared to 46.8% in 1994. This decrease was primarily a
result of the recognition in 1995 of certain foreign tax credits and
the write-off of the goodwill associated with Medical Services in
September 1994.
Net Earnings. Net earnings for 1995 were $28.4 million, or $0.63
per share, a decrease of $36.0 million from $64.4 million, or $1.46
per share, in 1994. This decrease was primarily due to the benefit
from the patent litigation settlement in 1994 and the net loss from
the sale of KCIFS in 1995, and offset in part by the net loss from the
sale of Medical Services and other unusual items in 1994. On a pro
forma basis and excluding the effect of the patent litigation
settlement and other unusual items, net earnings would have increased
by 38.6% to $29.4 million or $0.65 per share in 1995 from $21.2
million, or $0.48 per share, in 1994. On a pro forma basis and
excluding the effect of the patent litigation settlement and other
unusual items, as a percentage of revenue, net margin would have
increased to 12.1% in 1995 from 9.5% in 1994, primarily as a result of
the improvement in gross profit discussed above.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
- ---------------------------------------------------------------------
The following table sets forth, for the periods indicated, the
percentage relationship of each item to total revenue as well as the
change in each line item as compared to the prior year ($ in
thousands):
Year Ended December 31,
Revenue Increase
Relationship (Decrease)
1994 1993 $ Pct
Revenue:
Rental and service 85% 86% $(3,418) (1%)
Sales and other 15 14 4,192 11
---- ---- -------- ----
100% 100% 774 -
Rental expenses 59 63 (10,452) (6)
Cost of goods sold 7 7 722 4
---- ---- -------- ----
Gross profit 34 30 10,504 13
Selling, general and
administrative expenses 19 20 (1,466) (3)
Unusual items (31) 2 (91,573)
---- ---- ---------
Operating earnings 46 8 103,543 504
Interest (income) expense, net 1 2 (1,380) (23)
---- ---- ---------
Earnings before income
taxes,minority interest,
extraordinary item and
cumulative effect of
change in accounting
principle 45 6 104,923
Income taxes 21 3 48,774 680
Earnings before minority
interest, extraordinary
item and cumulative
effect in accounting
principle 24 3 56,149 753
Minority interest in subsidiary
loss -- -- (520) --
Extraordinary item-debt
extinguishment -- -- 400 --
Cumulative effect of change in
method of accounting for
inventory -- -- 742 --
Cumulative effect of change in
method of accounting for
income taxes -- -- (450) --
---- ---- -------- -----
Net earnings 24% 3% $ 56,321 699%
===== ==== ======== =====
The Company's revenue is derived from five primary markets. The
following table sets forth, for the periods indicated, the amount of
revenues derived from each of these markets ($ in millions):
Year Ended December 31
----------------------
1994 1993
-------- ---------
Acute $109.1 $120.7
Extended 34.5 29.1
Home 14.1 8.9
International 46.4 39.6
Medical devices 13.9 7.3
Other(1) 51.6 63.3
-------- --------
$269.6 $268.9
======== ========
(1) Consists of revenue of Medical Services, KCIFS, MRD and
other sales.
Unusual Items. The Company's financial results for the year ended
December 31, 1994 were significantly impacted by (i) the patent
litigation settlement in September 1994 with SSI for $84.8 million and
(ii) the disposition of certain assets of Medical Services on September
30, 1994 for a pre-tax gain of $8.1 million. During the fourth quarter
of 1994, the Company recognized a $2.0 million pre-tax gain as a result
of the collection of Medical Services' accounts receivable which had
not been included in the sale. These receivables had been reserved at
the time of the sale. Partially offsetting these gains were certain
other unusual items, primarily dispositions of overstocked inventories
and underutilized rental assets, a write-down of the carrying value of
the assets of MRD and an addition to the Company's reserve account for
product liability claims. Collectively, these items had a negative pre-
tax earnings impact of $6.8 million. A portion of the proceeds from
the patent litigation settlement and the sale of Medical Services was
used to pay down outstanding debt as well as to pay associated income
taxes.
Total Revenue. Total revenue in 1994, including revenue from
Medical Services and KCIFS, increased by less than 1% to $269.6 million
from $268.9 million in 1993 due to the increased revenue from several
of the Company's markets being offset by a decrease in acute care
revenue. Revenue from acute care facilities was $109.1 million, a
decrease of $11.6 million or 9.6% from 1993. This decrease was a
result of the Company's receiving lower average rental prices for its
products due to industry pricing pressures and an increase in the
proportion of rentals of lower-priced products as a percentage of total
product mix. Revenue from extended care settings was $34.5 million, an
increase of $5.4 million or 18.7% from 1993 due to a shift in patient
therapy days to extended care settings from acute care settings.
Revenue from home care settings was $14.1 million, an increase of $5.2
million or 59.2% from 1993 caused by the increased migration of
patients to home care settings. Revenue from international operations
increased $6.9 million or 17.4% to $46.4 million in 1994 primarily due
to increased market penetration in Germany and Austria. Revenue from
medical devices increased by $6.6 million or 90.8% to $13.9 million in
1994 primarily as a result of the introduction of the PlexiPulse into
new geographic markets within the United States.
Rental Expenses. Rental expenses for 1994 were $159.2 million, a
decrease of $10.5 million or 6.2% from 1993. As a percentage of
revenue, rental expenses were 59.1% in 1994 compared to 63.1% in 1993.
This decrease was a result of the sale of Medical Services in September
1994, lower depreciation expense and an overall effort to control
costs.
Gross Profit. Gross profit increased by 13.0% to $91.0 million in
1994 from $80.5 million in 1993. As a percentage of revenue, gross
profit margin increased to 33.7% in 1994 from 29.9% in 1993, primarily
due to the reduced depreciation expense and cost control efforts
discussed above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses decreased $1.5 million, or 2.8%, to $51.8
million in 1994 from $53.3 million in 1993. As a percentage of
revenue, selling, general and administrative expenses were 19.2% in
1994 compared to 19.8% in 1993. These decreases primarily relate to
lower expenses in the corporate office and field organizations
(primarily from headcount reductions) caused by the sale of Medical
Services in September 1994 and a reduction in bad debt expenses.
Operating Earnings. Operating earnings increased $103.6 million
to $124.1 million in 1994 from $20.5 million in 1993. This increase
was directly attributable to the patent litigation settlement and the
pre-tax gain on the sale of Medical Services. Excluding the patent
litigation settlement and the other unusual items, operating earnings
would have increased by $12.0 million or 43.9% to $39.2 million in 1994
from $27.2 million in 1993. Excluding the patent litigation settlement
and other unusual items, as a percentage of revenue, operating margin
would have increased to 14.5% in 1994 from 10.1% in 1993, primarily as
a result of the decreased rental expense discussed above and, to a
lesser extent, lower selling, general and administrative expenses.
Net Interest Expense. Net interest expense in 1994 was $4.5
million compared to $5.9 million in 1993 as a result of the reduction
of the Company's long-term debt at the end of the third quarter of 1994
as well as the interest earned on the Mediq/PRN notes.
Income Taxes. The Company's effective income tax rate in 1994 was
46.8% compared to 49.1% in 1993. This decrease is primarily
attributable to the fact that the nondeductibility of goodwill written
off in connection with the sale of Medical Services was offset by the
impact of the patent litigation settlement. The patent litigation
settlement contributed approximately 68% of the Company's pre-tax
earnings and was taxed at the full statutory rate.
Other. During 1994, the cumulative losses allocated to the
minority interest holder of MRD exceeded the balance of such holder's
investment. As a result, the Company recognized $3.8 million of
losses. These losses and the diminished opportunities within the
refurbishment business contributed towards the Company's decision to
liquidate the assets and discontinue the operations of MRD.
Concurrently, the Company wrote off unamortized goodwill of $1.5
million and wrote down inventories to net realizable value.
Change in Accounting Principles. During the first quarter of
1994, the Company recorded the cumulative effect of a change in its
inventory accounting method which resulted in a one-time after-tax
earnings increase of $742,000, or $0.02 per share.
Net Earnings. Net earnings in 1994 were $64.4 million, or $1.46
per share, an increase of $56.3 million from $8.1 million, or $0.18 per
share, in 1993, primarily as a result of the patent litigation
settlement. Excluding the effect of the patent litigation settlement
and the other unusual items only, net earnings would have increased by
80.5% to $22.0 million, or $0.50 per share, in 1994 from $12.2 million,
or $0.27 per share, in 1993. Excluding the effect of the patent
litigation settlement and the other unusual items, as a percentage of
revenue, net earnings would have increased to 8.1% in 1994 from 4.5% in
1993, primarily as a result of reductions in depreciation expense,
selling, general and administrative expenses and interest expense.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
- ---------------------------------------------------------------------
Total Revenue. Total revenue in 1993 decreased by 3.5% to $268.9
million from $278.5 million in 1992 primarily as a result of a decline
in revenue from acute care facilities. Revenue from acute care
facilities was $120.7 million, a decrease of $18.6 million or 13.3%
from 1992. This decrease was caused by the uncertainty created by the
health care reform debate, which led to increased cost control
pressures. In addition, the shift in the Company's product mix toward
lower-priced products such as mattress overlays, the increased
migration of patients from acute care settings to extended and home
care settings and the Company's loss of market share in the acute care
setting contributed to this decrease. Revenue from extended care
settings was $29.1 million, an increase of $2.8 million or 10.8% from
1992 as a result of the patient migration discussed above. Revenue
from home care settings was $8.9 million, a decrease of $1.3 million
or 13.2% from 1992, due to a significant reduction in reimbursement
rates for the HomeKair bed which was partially offset by increased
rentals of this product. Revenue from international operations in 1993
was $39.6 million, a decrease of $0.4 million or 1.1% from 1992.
Revenue from medical devices increased $5.6 million from $1.7 million
in 1992 to $7.3 million in 1993 due to increased market acceptance of
the PlexiPulse.
Rental Expenses. Rental expenses for 1993 were $169.7 million, an
increase of $13.0 million or 8.3% from $156.7 million in 1992. As a
percentage of revenue, rental expense was 63.1% in 1993 compared to
56.3% in 1992. The increase was primarily a result of additional costs
incurred related to the formation of operating divisions by the
Company which resulted in additional sales and service management
functions.
Gross Profit. Gross profit decreased by $22.3 million or 21.7% to
$80.5 million in 1993 from $102.8 million in 1992. As a percentage of
revenue, gross profit decreased to 29.9% in 1993 from 36.9% in 1992,
primarily due to the decline in revenue and the additional costs
incurred resulting from the formation of operating divisions by the
Company discussed above.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $5.6 million or 11.7% to $53.3
million in 1993 from $47.7 million in 1992. As a percentage of
revenue, selling, general and administration expenses were 19.8% in
1993 compared to 17.1% in 1992. These increases were primarily
attributable to the write-off of accounts receivable and start-up
expenses related to the Company's two newest lines of business, NuTech
and MRD.
Unusual Items. During the fourth quarter of 1993, the Company
recorded unusual items of $6.7 million which reduced net earnings by
approximately $4.1 million (net of tax benefit of $2.6 million), or
$0.09 per share. The Company recognized charges included in unusual
items totaling $4.8 million, primarily related to dispositions of
overstated inventories and underutilized rental assets. Unusual items
also included a provision for anticipated losses of $1.0 million
related to product liability claims resulting from one of the
Company's insurance carriers being placed into receivership, and a
provision of $0.9 million relating to severance costs and costs
anticipated for the relocation of certain operations.
Operating Earnings. Operating earnings decreased by 62.7% to
$20.5 million in 1993 from $55.1 million in 1992. Excluding the effect
of the unusual items referred to above, operating earnings would have
decreased by 50.6% to $27.2 million in 1993 from $55.1 million in
1992. Excluding the effect of the unusual items, as a percentage of
revenue, operating earnings would have decreased to 10.1% in 1993 from
19.8% in 1992, primarily as a result of the decline in revenue, the
costs incurred related to the formation of operating divisions by the
Company and the increase in rental and selling, general and
administrative expenses discussed above.
Net Interest Expense. Net interest expense in 1993 was $5.9
million compared to $7.2 million in 1992 primarily due to a reversal
of interest accrued in prior years related to a contingent liability
that was never realized. The effect of this reversal was partially
offset by an increase in the Company's borrowings under its credit
facilities and accrued interest related to prior year tax liabilities.
Income Taxes. The Company's effective tax rate in 1993 was 49.1%,
compared to 40.5% in 1992. The increase in the effective tax rate was
attributable to (i) an increase in the marginal statutory federal
income tax rate from 34% to 35%, (ii) an increase in international
taxable earnings (which are subject to a tax rate higher than the
marginal U.S. statutory rate) as a percentage of taxable income, (iii)
an increase in non-deductible expenses (primarily goodwill
amortization) as a percentage of taxable income and (iv) losses of MRD
which were non-deductible for federal and state tax purposes. The
increases were partially offset by tax benefits related to the
recapitalization of the Company's Canadian and French subsidiaries.
Other. In the fourth quarter of 1993, the Company refinanced its
existing debt facility which resulted in an extraordinary charge of
$0.4 million, net of a $0.3 million tax benefit, or $0.01 per share.
Change in Accounting Principles. During 1993, the Company also
recorded the cumulative effect of a change in accounting principles
related to the adoption of Statement of Financial Accounting Standards
No. 109 (FAS 109) "Accounting for Income Taxes" which resulted in a
one-time earnings increase of $450,000 or $0.01 per share.
Net Earnings. Net earnings decreased by 71.7% to $8.1 million, or
$0.18 per share, in 1993 from $28.5 million, or $0.63 per share, in
1992, as a result of the decline in revenue and increase in rental and
selling, general and administrative expenses discussed above.
Excluding the unusual items, net earnings during 1993 would have been
$12.2 million, down 57.2% or $16.3 million, compared with 1992. This
decrease is primarily due to the decline in revenue and the increase
in rental expenses and selling, general and administrative expenses
discussed above.
Financial Condition
The change in revenue and expenses experienced by the Company
during 1995, as well as the impact of the KCIFS sale, resulted in
changes to the Company's balance sheet as follows:
Total finance lease receivables decreased $15.3 million and note
payable and total long-term obligations decreased $7.9 million from
December 31, 1994 due to the sale of KCIFS in the second quarter of
1995.
Note receivable from principal shareholder at December 31, 1995 of
$10.3 million relates to a $10.0 million loan (plus accrued interest)
made to James R. Leininger, M.D., the principal shareholder and
chairman of the Company's Board of Directors in August 1995. In
January 1996, the note receivable was collected in full.
Other notes receivable at December 31, 1995 decreased $6.0
million, or 65.4% to $3.2 million from $9.2 million at December 31,
1994 due to payments received during 1995.
Income taxes payable decreased $4.0 million to $4.0 million at
December 31, 1995 from $8.0 million at December 31, 1994 due to the
increase in 1994 taxable income related to the settlement of the SSI
lawsuit and the sale of the Medical Services division. Total tax
payments for 1995 were $15.1 million compared to payments of $57.3
million for 1994.
Deferred income taxes at December 31, 1995 were $0.4 million
compared to a deferred tax benefit of $4.1 million at December 31,
1994. The change from the prior year is primarily due to depreciation
on an asset subject to a leveraged lease which was acquired by the
Company in December of 1994.
Income Taxes
The provision for deferred income taxes is based on the asset and
liability method and represents the change in the deferred income tax
accounts during the year. Under the asset and liability method of FAS
109, deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled.
At the end of 1995 the net impact of these timing issues resulted
in a net deferred tax liability comprised of deferred tax liabilities
totalling $6.4 million offset by deferred tax assets totaling $6.0
million. During 1994, the net impact of these timing issues resulted in
a net deferred tax asset versus the net deferred tax liability
recognized in 1995. Primary components of these future tax benefits
include reserves for uncollectible accounts receivable and reserves for
inventory.
Legal Proceedings
On February 21, 1992, Novamedix Limited ("Novamedix") filed a
lawsuit against the Company in the United States District Court for the
Western District of Texas. Novamedix holds the patent rights to the
principal product which directly competes with the PlexiPulse. The
suit alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship with
Novamedix and a variety of subsidiary claims. Novamedix seeks
injunctive relief and monetary damages. Discovery in this case has been
substantially completed. Although it is not possible to predict the
outcome of this litigation or the damages which could be awarded, the
Company believes that its defenses to these claims are meritorious and
that the litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust lawsuit
against Hillenbrand Industries, Inc. and one of its subsidiaries, Hill-
Rom. The suit was filed in the United States District Court for the
Western District of Texas. The suit alleges that Hill-Rom used its
monopoly power in the standard hospital bed business to gain an unfair
advantage in the specialty hospital bed business. Specifically, the
allegations set forth in the suit include a claim that Hill-Rom
required hospitals and purchasing groups to agree to exclusively rent
specialty beds in order to receive substantial discounts on products
over which they have monopoly power -- hospital beds and head wall
units. The suit further alleges that Hill-Rom engaged in activities
which constitute predatory pricing and refusals to deal. Hill-Rom has
filed an answer denying the allegations in the suit. Although
discovery is just beginning and it is not possible to predict the
outcome of this litigation or the damages which might be awarded, the
Company believes that its claims are meritorious.
The Company is party to several lawsuits arising in the ordinary
course if its business and is contesting adjustments proposed by the
Internal Revenue Service to prior years' tax returns. Provisions have
been made in the Company's financial statements for estimated exposures
related to these lawsuits and adjustments. See "Consolidated Financial
Statements". In the opinion of management, the disposition of these
items will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain liability claims pending for which provision has
been made in the Company's financial statements. Management believes
that resolution of these claims will not have a material adverse effect
on the Company's business, financial condition or results of
operations. The Company has not experienced any significant losses due
to product liability claims and currently maintains umbrella liability
insurance coverage.
Liquidity and Capital Resources
At December 31, 1995, the Company had current assets of $142.4
million and current liabilities of $33.0 million resulting in a working
capital surplus of $109.4 million, compared to a surplus of $90.7
million at December 31, 1994.
In 1995, the Company made net capital expenditures of $33.9
million. The 1995 capital expenditures primarily relate to the
Company's new TriDyne and BariKare products and the design and
development of new information systems. Other than the committed
capital expenditure for new product inventory for $1.6 million, the
Company has no material long-term capital commitments.
The Company's Credit Agreement permits unsecured borrowings of up
to $50.0 million. At December 31, 1995, the entire borrowing base of
$50.0 million was available. The interest rate payable on borrowings
under the Credit Agreement is, at the election of the Company, the
Bank of America's reference rate or the London interbank offered rate
quoted to Bank of America for one, two, three or six month Eurodollar
deposits adjusted for appropriate reserves plus 40 basis points. The
Credit Agreement requires that the Company maintain specified ratios
and meet certain financial targets and also contains certain customary
covenants. At December 31, 1995, the Company was in compliance with
all covenants.
During 1995, the Company generated $56.8 million in cash from
operating activities compared to $96.5 million in the prior year. The
primary reason for this difference was the sale of Medical Services and
the patent litigation settlement. Investment activities for 1995 used
$42.9 million, including net capital expenditures of $33.9 million and
a $10.0 million loan to James R. Leininger, M.D., chairman of the
Company's Board of Directors. As of January 31, 1996, subsequent to
the secondary sale of common shares by Dr. Leininger and certain
related selling shareholders, the loan to Dr. Leininger was paid in
full. Financing activities for 1995 used $5.6 million consisting
primarily of dividends paid to shareholders.
At December 31, 1995, cash and cash equivalents totaling $52.4
million were available for general corporate purposes. Based upon the
current level of operations, the Company believes that cash flow from
operations and cash reserves will be adequate to meet its anticipated
requirements for working capital and capital expenditures through 1996.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 52,399 $ 43,241
Accounts receivable, net 56,032 55,456
Finance lease receivables, current -- 8,051
Inventories 18,854 18,167
Note receivable from principal shareholder 10,291 --
Notes receivable, current, net -- 6,014
Prepaid expenses and other 4,865 4,474
------- -------
Total current assets 142,441 135,403
------- -------
Net property, plant and equipment 62,276 51,357
Finance lease receivables, net of current -- 7,242
Other notes receivable, net 3,187 3,187
Goodwill, less accumulated amortization of
$10,625 in 1995 and $9,105 in 1994 13,968 15,476
Other assets, less accumulated amortization
of $5,638 in 1995 and $8,012 in 1994 21,854 15,989
Deferred income tax benefit, net -- 4,077
-------- --------
$243,726 $232,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,512 $ 4,079
Note payable -- 1,878
Current installments of long-term
obligations -- 3,410
Accrued expenses 26,490 27,280
Income tax payable 4,026 8,025
------ ------
Total current liabilities 33,028 44,672
------ ------
Long-term obligations, excluding current
installments -- 2,636
Deferred income taxes, net 374 --
------- ------
33,402 47,308
------- ------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock; issued and outstanding 44,331
in 1995 and 43,921 in 1994 44 44
Additional paid-in capital 12,123 10,053
Retained earnings 197,290 175,480
Cumulative foreign currency translation
adjustment 1,052 (154)
Notes receivable from officers (185) --
------- -------
210,324 185,423
------- -------
$243,726 $232,731
======== ========
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
Year Ended December 31,
1995 1994 1993
Revenue:
Rental and service $206,653 $228,832 $232,250
Sales and other 36,790 40,814 36,622
-------- -------- --------
Total revenue 243,443 269,646 268,872
-------- -------- --------
Rental expenses 137,420 159,235 169,687
Cost of goods sold 13,729 19,388 18,666
-------- ------- --------
151,149 178,623 188,353
-------- ------- --------
Gross profit 92,294 91,023 80,519
Selling, general and administrative
expenses 48,502 51,813 53,279
Unusual items -- (84,868) 6,705
-------- ------- -------
Operating earnings 43,792 124,078 20,535
Interest expense (income), net (4,554) 4,528 5,908
-------- ------- -------
Earnings before income
taxes, minority interest,
extraordinary item and
cumulative effect of
changes in accounting
principle 48,346 119,550 14,627
Income taxes 19,905 55,949 7,175
-------- ------- ------
Earnings before minority
interest, extraordinary
item and cumulative
effect of changes in
accounting principle 28,441 63,601 7,452
Minority interest in subsidiary loss -- 40 560
Extraordinary item -- debt
extinguishment, net -- -- (400)
Cumulative effect of change in
accounting for inventory -- 742 --
Cumulative effect of change in
accounting for income taxes -- -- 450
------ ------ -------
Net earnings $28,441 $64,383 $8,062
====== ====== =======
Earnings per common and common
equivalent share:
Earnings before extraordinary item
and cumulative effect of changes
in accounting principle $ 0.63 $ 1.44 $ 0.18
Extraordinary item -- -- (0.01)
Cumulative effect of change in
accounting for inventory -- 0.02 --
Cumulative effect of change in
accounting for income taxes -- -- 0.01
------- ------- --------
Earnings per share $ 0.63 $ 1.46 $ 0.18
======= ======== ========
Shares used in earnings per share
computations 45,457 44,143 44,627
======= ======== ========
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
1995 1994 1993
Cash flows from operating activities:
Net earnings $28,441 $ 64,383 $ 8,062
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 22,760 38,795 47,884
Provision for uncollectible accounts
receivable 1,883 1,100 5,330
Noncash portion of unusual items -- 4,797 4,832
Loss (gain) on KCIFS and Medical Services
dispositions 2,933 (10,121) --
Change in assets and liabilities net of
effects from purchase of subsidiaries and
unusual items:
Decrease (increase) in accounts
receivable, net (2,695) 7,316 (2,481)
Decrease (increase) in notes receivable 6,014 (9,201) --
Decrease (increase) in inventory (998) 2,735 (1,326)
Decrease (increase) in prepaid and other
assets (593) (3,947) (5,437)
Increase (decrease) in accounts payable (895) (3,672) 666
Increase (decrease) in accrued expenses (520) 2,781 3,930
Increase (decrease) in income taxes
payable (3,999) 5,378 (2,889)
Increase (decrease) in deferred income
taxes 4,451 (11,787) (2,033)
-------- -------- --------
Net cash provided by operating
activities 56,782 96,451 56,538
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment (36,104) (13,814) (33,402)
Decrease (increase) in inventory to be
converted into equipment for short-
term rental (1,000) 4,250 (3,865)
Dispositions of property, plant and
equipment 3,231 2,869 2,773
Businesses acquired in purchase
transactions, net of cash acquired -- -- (4,240)
Proceeds from sale of KCIFS and Medical
Services divisions 7,182 65,300 --
Decrease (increase) in finance lease
receivables, net 339 (1,561) (419)
Note received from principal shareholder (10,000) -- --
Increase in other assets (6,531) (9,230) (4,412)
-------- ------- -------
Net cash provided (used) by
investing activities (42,883) 47,814 (43,565)
-------- ------- --------
Cash flows from financing activities:
Borrowings (repayments) of notes payable
and long-term obligations (800) (102,625) 7,277
Repayments of capital lease obligations (64) (2,382) (3,526)
Proceeds from the exercise of stock options 4,919 915 632
Payments for retirement of preferred stock -- -- (3,452)
Purchase and retirement of treasury stock (2,849) (1,157) (2,951)
Cash dividends paid to shareholders (6,631) (6,588) (6,664)
Other (185) (791) (101)
-------- -------- -------
Net cash used by financing activities (5,610) (112,628) (8,785)
-------- -------- -------
Effect of exchange rate changes on cash and
cash equivalents 869 1,324 (871)
------- -------- -------
Net increase in cash and cash equivalents 9,158 32,961 3,317
Cash and cash equivalents, beginning of
year 43,241 10,280 6,963
------- ------- -------
Cash and cash equivalents, end of year $52,399 $ 43,241 $10,280
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Capital Accounts
Three Years Ended December 31, 1995
(in thousands, except per share data)
Notes
Cumulative Receivable
Foreign from Officers
Additional Currency for Exercise
Preferred Common Paid-In Retained Translation Treasury Loan to of Stock
Stock Stock Capital Earnings Adjustment Stock ESOP Options
-------- ----- -------- -------- ---------- -------- ------- ---------
Balances at
December 31, 1992 $3,307 $45 $15,024 $116,432 $(663) $(5,559) $(1,181) $(285)
Net earnings .. -- -- -- 8,062 -- -- -- --
Exercise of
stock options .. -- 1 631 -- -- -- -- --
Forgiveness of
officer receivable -- -- -- -- -- -- -- 225
Tax benefit
realized from
stock option plan -- -- 3,148 -- -- -- -- --
Accretion of
preferred stock .. 145 -- -- (145) -- -- -- --
Treasury stock
purchased .. -- -- -- -- -- (2,951 ) -- --
Cash dividends
on common and
preferred stock --
$0.15 per share -- -- -- (6,664) -- -- -- --
Payments on loan
to ESOP .. -- -- -- -- -- -- 526 --
Purchase and
retirement of
perferred stock (3,452) -- -- -- -- -- -- --
Foreign currency
translation
adjustment -- -- -- -- (939) - -- --
------ ---- ------- ------- ------- ------ ------ ------
Balances at
December 31, 1993 -- 46 18,803 117,685 (1,602) (8,510) (655) (60)
Net earnings .. -- -- -- 64,383 -- -- -- --
Exercise of
stock options .. -- -- 803 -- -- -- -- --
Forgiveness of
officer receivable -- -- -- -- -- -- -- 60
Tax benefit
realized from
stock option plan -- -- 112 -- -- -- -- --
Treasury stock
purchased .. -- -- -- -- -- (1,157) -- --
Treasury stock
retired .. -- (2) (9,665) -- -- 9,667 -- --
Cash dividends
on common stock--
$0.15 per share -- -- -- (6,588) -- -- -- --
Payments on loan
to ESOP .. -- -- -- -- -- -- 655 --
Foreign currency
translation adjustment -- -- -- -- 1,448 -- -- --
---- ----- ----- ----- ----- ----- ----- ------
Balances at
December 31, 1994 -- 44 10,053 175,480 (154) -- -- --
Net earnings .. -- -- -- 28,441 -- -- -- --
Exercise of
stock options .. -- -- 4,024 -- -- -- -- (185)
Tax benefit
realized from
stock option plan -- -- 895 -- -- -- -- --
Treasury stock
purchased -- -- -- -- -- (2,849) -- --
Treasury stock
retired -- -- (2,849) -- -- 2,849 -- --
Cash dividends
on common stock--
$0.15 per share -- -- -- (6,631) -- -- -- --
Foreign currency
translation adjustment -- -- -- -- 1,206 -- -- --
---- ----- -------- -------- ------- ------- ------ -----
Balances at
December 31, 1995 $ -- $ 44 $12,123 $197,290 $1,052 $ -- -- $ (185)
======= ===== ======== ======== ====== ======= ====== =======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Kinetic Concepts, Inc. ("KCI") and all subsidiaries
(collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain reclassifications of amounts related to prior years have
been made to conform with the 1995 presentation.
(b) Nature of Operations and Customer Concentration
-----------------------------------------------
The Company designs, manufactures, markets and distributes
therapeutic products, primarily specialty hospital beds, mattress
overlays and mattress replacement systems, that treat and prevent
the complications of immobility. The principal markets for the
Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities
throughout the U.S. and Western Europe. Receivables from these
customers are unsecured.
The Company operates in ten foreign countries including Germany,
Austria, the United Kingdom, Canada, France, the Netherlands,
Switzerland, Australia, Sweden and Italy. (see Note 12).
The Company contracts with both proprietary and voluntary
purchasing organizations ("GPOs"). Proprietary GPOs own all of
the hospitals which they represent and, as a result, can ensure
complete compliance with an executed national agreement.
Voluntary GPOs negotiate contracts on behalf of member hospital
organizations but cannot ensure that their members will comply
with the terms of an executed national agreement. Approximately
46% of the Company's revenue during 1995 was generated under
national agreements with GPOs.
(c) Revenue Recognition
-------------------
Service and rental revenue are recognized as services are
rendered. Sales and other revenue are recognized when products
are shipped. Through June 15, 1995, the Company leased certain
medical equipment under long-term lease agreements which were
accounted for as direct financing leases. Unearned interest was
amortized to income over the term of the lease using the interest
method. (see Note 2).
(d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an
original maturity of ninety days or less to be cash equivalents.
(e) Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out)
or market (net realizable value). Costs include material, labor
and manufacturing overhead costs. Inventory expected to be
converted into equipment for short-term rental has been
reclassified to property, plant and equipment.
On January 1, 1994, the Company changed its method of applying
overhead to inventory. Historically, a single labor overhead rate
and a single materials overhead rate were used in valuing ending
inventory. Labor overhead was applied as labor was incurred while
materials overhead was applied at the time of shipping. During
1993, the Company completed a study to more precisely determine
the labor overhead which should be applied to specific products,
parts and accessories which resulted in the adoption of four
separate labor overhead pools and the application of materials
overhead upon the receipt of materials.
The Company believes that the change in the application of this
accounting principle is preferable because it more accurately
assigns overhead costs to the products, parts and accessories
which benefit from the related activities and thus improves the
matching of costs with revenues in reporting operating results.
The change in the application of this accounting principle
resulted in an increase in net earnings of $742,000 (after
reduction of income taxes of $455,000), or $0.02 per share, which
reflects the cumulative effect of this change for the periods
prior to January 1, 1994. The pro forma effects of the
retroactive application of the change in accounting principle
have not been disclosed because the effects cannot be reasonably
estimated. The effect of the change for the period ended December
31, 1994 on the results of operations before the cumulative
effect of the change is not material.
(f) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Betterments
which extend the useful life of the equipment are capitalized.
(g) Depreciation and Amortization
-----------------------------
Depreciation on property, plant and equipment is calculated on
the straight-line method over the estimated useful lives (thirty
to forty years for the buildings and between three and ten years
for most of the Company's other property and equipment) of the
assets.
(h) Goodwill
--------
Goodwill represents the excess purchase price over the fair value
of net assets acquired and is amortized over five to thirty-five
years from the date of acquisition using the straight-line
method.
The carrying value of goodwill is based on management's current
assessment of recoverability. Management evaluates recoverability
using both objective and subjective factors. Objective factors
include management's best estimates of projected future earnings
and cash flows and analysis of recent sales and earnings trends.
Subjective factors include competitive analysis, technological
advantage or disadvantage, and the Company's strategic focus.
(i) Other Assets
------------
Other assets consist principally of patents, trademarks, system
development costs, long-term investments, cash and investments
restricted for use by the Company's captive insurance company,
and the estimated residual value of an asset subject to a
leveraged lease. Patents and trademarks are amortized over the
estimated useful life of the respective asset using the straight-
line method.
(j) Income Taxes
------------
The Company recognizes certain transactions in different time
periods for financial reporting and income tax purposes. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. The provision for deferred income
taxes represents the change in deferred income tax accounts
during the year.
(k) Common Stock and Earnings Per Common and Common Equivalent
Share
----------------------------------------------------------
Earnings per common and common equivalent share are computed by
dividing net earnings (after deducting preferred stock dividends
and accretion) by the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options (using
the treasury stock method). Earnings per share computed on a
fully diluted basis is not presented as it is not significantly
different from earnings per share computed on a primary basis.
(l) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(m) Insurance Programs
------------------
In 1993, the Company established the KCI Employee Benefits Trust
(the "Trust") as a self-insurer for certain risks related to the
Company's U.S. employee health plan and certain other benefits.
The Company funds the Trust based on the value of expected future
payments, including claims incurred but not reported. The Company
has purchased insurance which limits the Trust's liability under
the benefit plans.
During 1993, the Company formed a wholly-owned captive insurance
company, KCI Insurance Company, Ltd. (the "Captive"). The Captive
reinsures the primary layer of commercial general liability,
workers' compensation and auto liability insurance for certain
operating subsidiaries of the Company. Provisions for losses
expected under these programs are recorded based upon the
Company's estimates of the aggregate liability for claims
incurred based on actuarial reviews. The Company has obtained
insurance coverage for catastrophic exposures as well as those
risks required to be insured by law or contract.
(n) Foreign Currency Translation
----------------------------
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The translation of
the applicable foreign currencies into U.S. dollars is performed
for balance sheet accounts using the exchange rates in effect at
the balance sheet date and for revenue and expense accounts using
a weighted average exchange rate during the period.
(o) New Pronouncements
------------------
Accounting for Asset Impairment
- -------------------------------
During March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." The Company is required to adopt
Statement 121 in the fiscal year beginning January 1, 1996.
Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company has not completed all of the
analysis required to estimate the impact of the new statement;
however, the adoption of Statement 121 is not expected to have a
material adverse impact on the Company's financial position or
the results of its operations at the time of adoption.
Accounting for Stock-Based Compensation
- ---------------------------------------
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation. The new Statement
allows companies to continue accounting for stock-based
compensation under the provisions of APB Opinion 25, "Accounting
for Stock Issued to Employees"; however, companies are encouraged
to adopt a new accounting method based on the estimated fair
value of employee stock options. Companies that do not follow
the new fair value based method will be required to provide
expanded disclosures in footnotes to the financial statements.
The Company is subject to the disclosure requirements of
Statement 123 in the fiscal year beginning January 1, 1996.
NOTE 2. Acquisitions and Dispositions
-----------------------------
On June 15, 1995, the Company sold KCI Financial Services
("KCIFS") to Cura Capital Corporation ("Cura") for cash under a
Stock Purchase Agreement. Upon consummation of this transaction,
Cura acquired all of the outstanding capital stock of KCIFS.
Total proceeds from the sale were $7.2 million. This transaction
resulted in a pre-tax loss of $2.9 million which is reflected in
selling, general and administrative expenses in 1995. In
addition, the Company and its affiliates agreed not to provide
lease financing for medical equipment manufactured by third
parties for a period of three years. KCIFS served as the leasing
agent for Medical Services, certain assets of which were sold in
September 1994. The operating results of KCIFS for 1995 and 1994
were not material as compared to the overall results of the
Company.
In December of 1994, the Company adopted a plan to liquidate the
assets of Medical Retro Design, Inc. ("MRD"). Pursuant to that
plan, the Company sold certain operating assets of MRD to HBR
Healthcare Co. under an Asset Purchase Agreement effective March
27, 1995. The sales price was approximately $250,000. In
conjunction with the sale, KCI and its affiliates agreed not to
refurbish certain hospital beds and related furniture for a
period of three years. Goodwill of $1.5 million associated with
MRD was written off in 1994. The write-off was treated as an
unusual item. The operating results of MRD for 1995 and 1994
were immaterial to the overall results of the Company.
On September 30, 1994, the Company sold certain assets (the
"Assets") used exclusively by Medical Services to Mediq/PRN under
an Asset Purchase Agreement. Upon consummation of this
transaction, Mediq/PRN acquired the Assets and assumed certain
liabilities of Medical Services. The sales price was
approximately $84.1 million. In conjunction with the sale, the
Company and its affiliates agreed not to rent or distribute a
portfolio of critical care and life support equipment for five
years.
Gross proceeds included a cash payment of approximately $65.3
million and promissory notes in the aggregate principal amount of
$18.8 million. The net proceeds of $72.8 million, pretax gain of
$10.1 million, and after-tax net loss of $2.5 million were
calculated, as follows (in thousands):
Cash $65,300
Notes receivable (See Note 3) 9,852
Fees and commissions (2,329)
-------
Net proceeds 72,823
Equipment and inventory sold (38,959)
Goodwill (25,778)
Accounts receivable provision (479)
Capital leases assumed 2,514
-------
Pre-tax gain on disposition 10,121
-------
Tax expense (12,601)
-------
Net loss on disposition $(2,480)
=======
Tax expense exceeded the pretax gain amount due to the
nondeductibility of $25.8 million in unamortized goodwill.
Assuming the sale had been consummated as of the beginning of
1994 and 1993 and excluding the after-tax loss on disposition,
pro forma operating results of the Company would be as follows
(in thousands):
Year Ended December 31,
-----------------------
1994 1993
---------- ---------
Revenue $225,800 $212,882
Net earnings $ 71,116 $ 8,064
Earnings per share $ 1.61 $ 0.18
Shares used 44,143 44,627
In June, 1993, the Company acquired the operating assets of
Clinical Systems, Inc. ("CSI"), a provider of intravenous
services and supplies to the home health care market, from a bank
for $4.2 million, including direct acquisition costs. The fair
value of assets acquired, including goodwill, was $5.1 million
and liabilities assumed were $0.9 million. The Company
recognized the excess cost of the assets acquired over the
estimated fair value of such assets ("goodwill") of $1.4 million
which was being amortized over 15 years. The net assets of CSI
were sold as part of the sale of Medical Services and the
unamortized goodwill was written off.
NOTE 3. Notes Receivable
----------------
In August 1995, the Company loaned $10.0 million to James R.
Leininger, M.D., the principal shareholder and chairman of the
Company's Board of Directors. The note was secured by a Stock
Pledge Agreement covering one million shares of common stock in
Kinetic Concepts, Inc. Interest was payable in annual
installments at the rate of 7.94%. In January 1996, the note
receivable was collected in full.
Other notes receivable includes notes received from Mediq/PRN as
part of the proceeds on the sale of Medical Services effective
September 30, 1994. The values of the various notes receivable at
December 31, 1995 and December 31, 1994 for accounting purposes
are described below (in thousands):
Year Ended December 31,
--------------------------
Principal Balance Stated
1995 1994 Interest
------- ------- --------
Rate
----
Note from PRN Holding, Inc. with
interest due quarterly in
arrears beginning March, 1996
and principal due
September, 1999 $10,000 $10,000 10%
Notes from Mediq/PRN due in 10
equal monthly installments
beginning December, 1994 -- 5,404 --
Note from Mediq/PRN due in 12
equal monthly installments
beginning December, 1994 -- 2,734 8%
Miscellaneous -- 4 --
------ ------
Total 10,000 18,142
Less discount and valuation
allowance (6,813) (8,941)
Less amounts classified as
current -- (6,014)
Notes receivable, noncurrent $ 3,187 $ 3,187
======= =======
At the time of the sale, the Company received an opinion from an
independent investment banker on the notes receivable which was
used to arrive at the carrying values. The Company believes that
the carrying amounts for notes receivable are reasonable
estimates of the related fair values.
NOTE 4. Supplemental Balance Sheet Data
-------------------------------
A summary of accounts receivable follows (in thousands):
December 31,
--------------
1995 1994
---- ----
Trade accounts receivable $60,149 $61,722
Employee and other receivables 2,060 2,334
------- -------
62,209 64,056
Less allowance for doubtful
receivables 6,177 8,600
------- -------
$56,032 $55,456
======= =======
Inventories are comprised of the following (in thousands):
December 31,
------------
1995 1994
---- -----
Finished goods $ 2,890 $ 3,086
Work in process 1,040 1,642
Raw materials, supplies and parts 20,174 17,689
------- -------
24,104 22,417
Less amounts expected to be
converted into equipment for
short-term rental 5,250 4,250
------- -------
$18,854 $18,167
======= =======
Net property, plant and equipment consists of the following (in
thousands):
December 31,
--------------
1995 1994
---- ----
Land 742 742
Buildings 11,089 9,882
Equipment for short-term rental 110,858 117,745
Machinery, equipment and furniture 30,256 29,041
Leasehold improvements 725 633
Inventory to be converted into
equipment 5,250 4,250
------ ------
158,920 162,293
Less accumulated depreciation and
amortization 96,644 110,936
------ -------
$62,276 $51,357
Accrued expenses consist of the following (in thousands):
December 31,
-------------
1995 1994
----- ------
Payroll, commissions and related
taxes $12,589 $11,450
Insurance accruals 3,470 4,143
Accruals related to disposition of
Medical Services 178 1,524
Other accrued expenses (Note 11) 10,253 10,163
------- -------
$26,490 $27,280
======= =======
The carrying amount of financial instruments in current assets
and current liabilities approximate fair value because of the
short maturity of these instruments.
NOTE 5. Equipment Leases
-----------------
Through June 15, 1995, the Company leased medical equipment to
hospitals, nursing homes, doctors and others through KCIFS.
Equipment leases that met the criteria for direct financing
leases were carried at the gross investment in the lease less
unearned income. Any equipment which did not meet the criteria
for a direct financing lease was accounted for as an operating
lease. Operating leases are usually for one to three year
periods. The medical devices under the operating leases are
included with property, plant and equipment in the accompanying
December 31, 1994 balance sheet at a cost of $3.4 million and
accumulated depreciation of $1.2 million. The carrying amounts
of these leases approximated fair market value. At December 31,
1995, there were no remaining finance or operating lease
receivables (see Note 2).
NOTE 6. Note Payable and Long-Term Obligations
--------------------------------------
On December 17, 1993, the Company entered into a revolving credit
and term loan agreement (the "Credit Agreement") with a bank as
agent for itself and certain other financial institutions. The
Credit Agreement was subsequently amended on May 8, 1995 and
provides for a $50 million one-year revolving credit facility
with a two-year renewal option. Any advances under the Credit
Agreement are due at the end of the period covered by the Credit
Agreement. At December 31, 1995, the entire $50 million balance
was available.
The interest rate payable on borrowings under the Credit
Agreement is at the election of the Company: (i) the Bank's
reference rate, or (ii) the London inter-bank offered rate quoted
to the Bank for one, two, three, or six month Eurodollar deposits
adjusted for appropriate reserves ("LIBOR") plus 40 basis points.
The Credit Agreement requires that the Company maintain specified
ratios and meet certain financial targets. The Credit Agreement
also contains certain events of default, includes certain
provisions governing a change in contract of the Company, and
establishes various fees to be paid by the Company. At December
31, 1995, the Company was in compliance with all covenants.
In the fourth quarter of 1993, the Company recorded an
extraordinary item of $400,000, net of $267,000 tax benefit, or
$0.01 per share related to the refinancing of its then-existing
debt facility.
At December 31, 1994, KCIFS had a note payable which provided for
borrowings up to a maximum of $5.0 million with a bank. At
December 31, 1994, $1.9 million was due on demand on the note
payable. The term loan portion of this obligation is included in
long-term obligations below. Interest on the note payable was at
the bank's base lending rate plus one-half of one percent (9% at
December 31, 1994).
A summary of long-term obligations follows (in thousands):
December 31,
-------------
1995 1994
----- -----
Nonrecourse notes payable to financial
institutions, interest rates ranging
from 10.5% to 13.5%, payable
through October 1998 $ -- $ 891
Other notes -- 5,155
------- ------
-- 6,046
Less current installments -- 3,410
------- ------
Long-term obligations, excluding current
installments $ -- $2,636
======= ======
The carrying value of the Company's long-term debt obligations
approximates their face value based on current rates for similar
types of debt.
Interest paid on debt during 1995, 1994 and 1993 amounted to $0.4
million, $5.4 million and $7.0 million, respectively.
NOTE 7. Leasing Obligations
-------------------
The Company leases service vehicles, office space, various
storage spaces and manufacturing facilities under noncancelable
operating leases which expire at various dates over the next six
years. Total rental expense for operating leases, net of sublease
payments received, was $12.0 million, $10.9 million and $11.1
million for the years ended December 31, 1995, 1994 and 1993,
respectively.
Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of December 31, 1995 are as follows:
Operating
Leases
--------
1996 $8,396
1997 5,389
1998 3,296
1999 1,861
2000 1,182
Later years 302
-------
Total minimum lease payments $20,426
=======
NOTE 8. Income Taxes
------------
The Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" as of January 1, 1993. The
cumulative effect of this change in accounting for income taxes
of $450,000 was determined as of January 1, 1993, and is reported
separately in the consolidated statement of earnings for the year
ended December 31, 1993.
Earnings before income taxes consists of the following (in
thousands):
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- -----
Domestic $37,542 $110,287 $10,022
Foreign 10,804 9,263 4,605
------- ------- -------
$48,346 $119,550 $14,627
======= ======== =======
Income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Year Ended December 31, 1995
----------------------------
Current Deferred Total
------- -------- -------
Federal $ 8,148 $ 4,174 $12,322
State 2,140 277 2,417
International 5,166 0 5,166
------- ------- --------
$15,454 $ 4,451 $19,905
======= ======= =======
Year Ended December 31, 1994
----------------------------
Current Deferred Total
------- -------- -----
Federal $56,697 $(11,031) $45,666
State 8,212 (756) 7,456
International 3,282 -- 3,282
------- --------- -------
$68,191 $(11,787) $56,404
======= ======== =======
Year Ended December 31, 1993
----------------------------
Current Deferred Total
------- -------- ------
Federal $ 4,483 $(1,071) $ 3,412
State 1,565 (574) 991
International 2,710 62 2,772
------- ------- -------
$ 8,758 $(1,583) $ 7,175
======= ======= =======
Income tax expense attributable to income from continuing
operations differed from the amounts computed by applying the
statutory tax rate of 35 percent to pretax income from continuing
operations as a result of the following:
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- -----
Computed "expected" tax expense $16,921 $41,843 $5,119
Goodwill 533 9,307 824
State income taxes, net of Federal
benefit 1,571 4,846 644
Loss in majority-owned subsidiary -- -- 802
Effect of change in tax rates on
temporary differences -- -- 250
Foreign income taxed at other than
U.S. rates 1,836 350 1,159
Utilization of foreign net operating
loss carryforwards (231) (814) (1,319)
Nonconsolidated foreign net
operating loss 492 566 --
Foreign, other (1,450) 271 (135)
Effect of change in inventory
accounting method -- 455 --
Other, net 233 (420) (169)
------ ----- -------
$19,905 $56,404 $7,175
======= ======= =======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and December 31, 1994 are
presented below:
1995 1994
---- ----
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts $3,591 $3,083
Intangible assets, deducted for book
purposes but capitalized and amortized
for tax purposes 323 51
Net operating loss carryforwards 492 1,193
Inventories, principally due to additional
costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986 702 1,064
Notes receivable, basis difference 397 679
Legal fees, capitalized and amortized for
tax purposes 402 672
Other 560 139
------ ------
Total gross deferred tax assets 6,467 6,881
Less valuation allowance (492) (1,193)
------ ------
Net deferred tax assets 5,975 5,688
Deferred Tax Liabilities:
Plant and equipment, principally due to
differences in depreciation and basis (5,686) (1,032)
Accrued liabilities, not currently
deductible for tax purposes -- (256)
Deferred state tax liability (421) (144)
Other (242) (179)
------ ------
Total gross deferred tax liabilities (6,349) (1,611)
Net deferred tax asset (liability) $ (374) $4,077
====== ======
At December 31, 1995, the Company had $1.3 million of operating
loss carryforwards available to reduce future taxable income of
certain international subsidiaries. These loss carryforwards must
be utilized within the applicable carryforward periods. A
valuation allowance has been provided for the deferred tax assets
related to loss carryforwards. Carryforwards of $616,000 can be
used indefinitely and the remainder expire from 1997 through
2000.
The Company anticipates that the reversal of existing taxable
temporary differences and future taxable income will provide
sufficient taxable income to realize the tax benefit of the
remaining deferred tax assets. In accordance with the Company's
accounting policy, U.S. deferred taxes have not been provided on
undistributed earnings of foreign subsidiaries at the end of
1995, as the Company intends to reinvest these earnings
permanently in the foreign operations or to repatriate such
earnings only when advantageous for the Company to do so. The
amount of the unrecognized tax liability for these undistributed
earnings is not material at the end of 1995 due to the
availability of foreign tax credits.
Income taxes paid during 1995, 1994, and 1993 were $15.1 million,
$57.3 million and $13.3 million, respectively.
NOTE 9. Shareholders' Equity and Employee Benefit Plans
-----------------------------------------------
Common Stock
The Company is authorized to issue 100 million shares of Common
Stock, $.001 par value (the "Common Stock"). The number of shares
of Common Stock issued and outstanding at the end of 1995 and
1994 was 44,331,000 and 43,921,000, respectively.
Treasury Stock
In February, 1993, the Company's Board of Directors approved a
program to repurchase up to 3,000,000 shares of its Common Stock.
The Company repurchased 372,000 shares during 1995 and 237,000
shares during 1994. In 1994, the Company's Board of Directors
adopted a resolution to return all repurchased shares to the
status of authorized but unissued shares. In accordance with this
resolution, the Company retired 372,000 and 1,779,000 treasury
shares in 1995 and 1994, respectively.
Preferred Stock
The Company is authorized to issue up to 20 million shares of
Redeemable Preferred Stock, par value $0.001 per share, in one or
more series. As of December 31, 1995 and December 31, 1994, none
were issued.
Options
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan
(the "Key Contributor Stock Option Plan") covers up to an
aggregate of 5,750,000 shares of the Company's Common Stock.
Options may be granted under the Key Contributor Stock Option
Plan to employees (including officers), non-employee directors
and consultants of the Company. The exercise price of the options
is determined by a committee of the Board of Directors of the
Company. The Key Contributor Stock Option Plan permits the Board
of Directors to declare the terms for payment when such options
are exercised. Options may be granted with a term not exceeding
ten years.
The following table summarizes the activity in the Company's Key
Contributor Stock Option Plan (in thousands, except per share
data):
Option Price
Shares Per Share
------- ----------------
Outstanding, January 1, 1993 1,802 $3.00 to $8.625
Granted 1,212 $3.75 to $7.625
Canceled (346) $3.50 to $8.1875
Exercised (62) $3.50 to $5.75
------
Outstanding, December 31, 1993 2,606 $3.00 to $8.625
Granted 2,116 $3.375 to $6.00
Canceled (1,556) $3.50 to $8.625
Exercised (199) $3.50 to $5.75
-------
Outstanding, December 31, 1994 2,967 $3.00 to $8.625
Granted 865 $5.50 to $11.75
Canceled (277) $3.375 to $8.1875
Exercised (760) $3.375 to $6.75
-------
Outstanding, December 31, 1995 2,795 $3.00 to $11.75
=======
As of December 31, 1995 and 1994, 1.0 million and 1.1 million
options were exercisable and 834,000 and 1,423,000 shares were
available for future grants, respectively.
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the
"Directors Stock Option Plan") covers an aggregate of 300,000
shares of the Company's Common Stock and may be granted to non-
employee directors of the Company. The exercise price of options
granted under the Directors Stock Option Plan shall be the fair
market value of the shares of the Company's Common Stock on the
date that such option is granted.
The following table summarizes the activity in the Directors
Stock Option Plan (in thousands, except per share data):
Shares Option Price Per
Share
-------- ----------------
Outstanding, January 1, 1993 119 $4.125 to $13.25
Granted 8 $4.50
Exercised (57) $7.00
Lapsed (8) $13.125 to $13.25
--------
Outstanding, December 31, 1993 62 $4.125 to $9.375
Granted 8 $3.75 to $4.50
Exercised -- $--
Lapsed (8) $5.00 to $5.25
--------
Outstanding, December 31, 1994 62 $3.75 to $9.375
Granted 8 $8.125 to $9.25
Exercised (32) $4.125 to $5.875
Lapsed -- $--
--------
Outstanding, December 31, 1995 38 $3.75 to $9.375
========
In July, 1991, the Company granted options to three non-employee
directors of the Company to acquire a total of 30,000 shares of
the Company's Common Stock at $5.00 per share (the fair market
value at date of grant). At December 31, 1995, 20,000 options are
exercisable and expire ten years from the grant date.
In addition, in April, 1993, the Company granted a warrant to
AmHS Purchasing Partners, L.P. ("AmHS") to acquire 150,000 shares
of the Company's common stock at $6.625 per share (the fair
market value at date of grant). These options are exercisable and
expire over a five-year period from such date.
During 1994, the Chairman of the Board issued options for 440,000
of his shares at fair market value of $5.74 to the newly
appointed Chief Executive Officer.
The 1995 Kinetic Concepts, Inc. Senior Executive Management Stock
Option Plan (the "Senior Executive Stock Option Plan") covers a
total of 1.4 million shares of the Company's Common Stock and may
be granted to certain senior executives of the Company at the
recommendation of the Chief Executive Officer and discretion of
the Company's Board of Directors. The exercise price for each
share of common stock covered by an option shall be established
by the Board of Directors but may not in any case be less than
the fair market value of the shares of common stock of the
company on the date of grant. Vesting of options granted is
subject to certain terms and conditions. The Senior Executive
Stock Option Plan is subject to final approval by the Company's
shareholders.
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the
"ESOP") covering employees of the Company who meet minimum age
and length of service requirements. The ESOP enables eligible
employees to acquire a proprietary interest in the Company.
As of December 31, 1995, and December 31, 1994, 566,772 and
500,000 shares, respectively, of the stock owned by the ESOP were
allocated to employees. Based on the number of shares planned to
be allocated for the year, ESOP expense recorded during 1995,
1994, and 1993 amounted to $263,000, $476,000 and $594,000,
respectively. ESOP expense in 1994 and 1993 included $5,000 and
$55,000, respectively, of interest expense related to a loan
agreement with a bank.
Investment Plan
The Company has an Investment Plan intended to qualify as a
deferred compensation plan under Section 401(k) of the Internal
Revenue Code of 1986. The Investment Plan is available to all
domestic employees and the Company matches employee contributions
up to a specified limit. In 1995, 1994 and 1993, $265,000,
$314,000 and $308,000, respectively, was charged to expense for
matching contributions.
NOTE 10. Commitments and Contingencies
-----------------------------
On February 21, 1992, Novamedix Limited filed a lawsuit against
the Company in the United States District Court for the Western
District of Texas. Novamedix holds the patent rights to the
principal product which directly competes with the PlexiPulse.
The suit alleges that the PlexiPulse infringes several patents
held by Novamedix, that the Company breached a confidential
relationship with Novamedix and a variety of subsidiary claims.
Novamedix seeks injunctive relief and monetary damages. Discovery
in this case has been substantially completed. Although it is not
possible to predict the outcome of this litigation or the damages
which could be awarded, the Company believes that its defenses to
these claims are meritorious and that the litigation will not
have a material effect on the Company's business, financial
condition or results of operations.
The Company is party to several lawsuits generally incidental to
its business, including product claims and is contesting certain
adjustments proposed by the Internal Revenue Service to prior
years' tax returns. Provisions have been made in the accompanying
financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the
disposition of these items will not have a material effect on the
Company's business, financial condition or results of operations.
See discussion of self-insurance program at Note 1 and leases at
Note 7.
NOTE 11. Unusual Items
-------------
During the third quarter of 1994, the Company recorded a gain
from the settlement of a patent infringement lawsuit brought
against SSI. The settlement was $84.75 million. Net of legal
expenses, this transaction added $81.6 million of pretax income
to the 1994 results. In addition, a $10.1 million pretax gain
from the sale of Medical Services was recognized. The Company
recorded certain other unusual items, primarily planned
dispositions of under-utilized rental assets and over-stocked
inventories of $6.8 million.
A summary of unusual items follows (in thousands):
1995 1994 1993
---- ---- -----
SSI settlement, net of legal fees $ -- $81,596 $ --
Gain from Medical Services sale (Note 2) -- 10,121 --
Equipment and inventory write-downs -- (4,045) (4,850)
Other -- (2,804) (1,855)
------ -------- --------
Unusual items in operating
earnings $ -- $84,868 $(6,705)
------ ------- --------
During the fourth quarter of 1993, the Company recorded unusual
items of $6.7 million. Adjustments to the carrying values of
assets and liabilities, primarily related to planned dispositions
of under-utilized rental assets and over-stocked inventories,
totaling $4.8 million were charged to unusual items. Unusual
items also included provisions of $900,000 relating to losses
anticipated for the relocation of certain operations as well as
certain other severance costs. A provision for anticipated losses
of $1 million related to product liability claims was also
charged to unusual items when one of the Company's former
insurance carriers was placed into receivership.
NOTE 12. Segment and Geographic Information
----------------------------------
The Company operates primarily in one industry segment: the
distribution of specialty therapeutic beds and rental medical
devices to select health care providers.
A summary of financial information by geographic area is as
follows:
Year Ended December 31, 1995
----------------------------
Domestic Foreign Eliminations Consoliadated
-------- ------- ------------ -------------
Total revenue:
Unaffiliated
customers $182,754 $60,689 $ -- $243,443
Intercompany
transfers 6,991 -- $ (6,991) --
--------- ------- --------- --------
Total $189,745 $60,689 $ (6,991) $243,443
--------- ------- --------- --------
Operating earnings $ 33,779 $10,845 $ (832) $ 43,792
========= ======= ========= ========
Total assets:
Identifiable
assets $157,615 $43,787 $(10,075) $191,327
========= ======= =========
Corporate assets 52,399
--------
Total assets $243,726
========
Year Ended December 31, 1994
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated
customers $223,202 $46,444 $ -- $269,646
Intercompany
transfers 5,489 -- (5,489) --
-------- ------- --------- --------
Total $228,691 $46,444 $ (5,489) $269,646
======== ======= ========= ========
Operating earnings $117,368 $ 7,737 $ (1,027) $124,078
======== ======= ========= ========
Total assets:
Identifiable assets $156,248 $41,756 $ (8,514) $189,490
======== ======= =========
Corporate assets 43,241
--------
Total assets $232,731
========
Year Ended December 31, 1993
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated
customers $229,301 $39,571 $ -- $268,872
Interrcompany
transfers 3,644 -- (3,644) --
-------- ------- -------- --------
Total $232,945 $39,571 $ (3,644) $268,872
======== ======= ======== ========
Operating earnings $ 14,941 $ 6,093 $ (479) $ 20,535
======== ======= ======== ========
Total assets:
Identifiable assets $244,495 $37,285 $ (7,487) $274,293
======== ======= ======== ========
Corporate assets 10,280
--------
Total assets $284,573
========
Domestic intercompany transfers primarily represent shipments of
equipment and parts to international subsidiaries. These
intercompany shipments are made at transfer prices which
approximate prices charged to unaffiliated customers and have
been eliminated from consolidated net revenues. Corporate assets
consist of cash and cash equivalents.
NOTE 13. Quarterly Financial Data (Unaudited)
------------------------------------
The unaudited consolidated results of operations by quarter are
summarized below:
Year Ended December 31, 1995
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $57,027 $59,790 $61,606 $65,020(a)
Operating earnings $ 9,577 $ 8,717 $12,734 $12,764
Net earnings $ 6,098 $ 5,716 $ 8,535 $ 8,092
Earnings per common and
common equivalent share $0.14 $0.13 $0.19 $0.18
Year Ended December 31, 1994
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $72,084 $67,751 $70,239 $59,572(a)
Operating earnings $ 9,161 $ 8,035 $93,202 $13,680(b)
Net earnings $ 4,264 $ 3,173 $48,641 $ 8,305(b)
Earnings per common and
common equivalent share $0.10 $0.07 $1.10 $0.19(b)
(a) See discussion of acquisitions/dispositions at Note 2.
(b) See discussion of unusual items at Note 11 and extraordinary
item at Note 6.
Earnings per share for the full year may differ from the sum
total of the quarterly earnings per share due to rounding
differences.
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheets of
Kinetic Concepts, Inc. and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of earnings,
cash flows and capital accounts for each of the years in the
three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 8 to the Consolidated Financial
Statements, the Company changed its method of accounting for
income taxes in 1993, and its method of applying overhead to
inventory in 1994.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 6, 1996
BOARD OF DIRECTORS
JAMES R. LEININGER, M.D.
Chairman of the Board of Directors
RAYMOND R. HANNIGAN
President and Chief Executive Officer
PETER A. LEININGER, M.D.
Executive Vice President
SAM A. BROOKS
Chairman, National Imaging Affiliates, Inc.
FRANK A. EHMANN
Retired
Former Executive Vice President and Co-Chief Operating Officer
Baxter Travenol Laboratories, Inc.
BERNHARD T. MITTEMEYER, M.D.
Executive Vice President and Provost,
Texas Tech University Health Science Center
CORPORATE OFFICERS
RAYMOND R. HANNIGAN
President and Chief Executive Officer
PETER A. LEININGER, M.D.
Executive Vice President
BIANCA A. RHODES
Senior Vice President, Finance and Chief Financial Officer
DENNIS E. NOLL
Senior Vice President, General Counsel and Secretary
MICHAEL J. BURKE
Vice President, Manufacturing
OPERATING DIVISION EXECUTIVES
CHRISTOPHER M. FASHEK
President
KCI Therapeutic Services, Inc.
FRANK DiLAZZARO
President
KCI International, Inc.
DANIEL R. PUCHEK
President
KCI New Technologies, Inc.
JOSH H. LEVINE
Vice President and General Manager
KCI Home Care Division
INVESTOR INFORMATION
BIANCA A. RHODES
Senior Vice President, Finance and Chief Financial Officer
210-524-9000
FORM 10-K
A copy of the Company's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge
from Investor Relations, Kinetic Concepts, Inc.
LISTED
NASDAQ National Market System, Ticker Symbol KNCI
TRANSFER AGENT AND REGISTRAR
FIRST NATIONAL BANK OF BOSTON
c/o BostonEquiServe
Shareholder Services Division
P.O. Box 644
Boston, MA 02102-0644
(617) 575-3400
ANNUAL MEETING
The Company's annual meeting of shareholders will be held on
Tuesday, May 14, 1996 at 9:00 a.m. (local time) at:
Embassy Suites Hotel
7750 Briaridge
San Antonio, TX 78230
AUDITORS
KPMG PEAT MARWICK LLP
112 East Pecan
Suite 2400
San Antonio, Texas 78205
MARKET PRICES OF COMMON STOCK
1995 1994
High Low High Low
------ ------ ----- -----
First Quarter 8.250 6.563 4.250 3.750
Second Quarter 8.125 6.625 4.250 3.375
Third Quarter 11.625 7.000 5.875 3.375
Fourth Quarter 13.000 10.000 6.875 5.375
TRADEMARKS - TriaDyne TM, BariKare(R), PlexiPulse(R), All-in-1
System,The V.A.C. TM, TheraPulse(R), KinAir(R), DynaPulse TM,
FirstStep(R), and HomeKair(R) are trademarks of Kinetic Concepts, Inc.
Clinical Advantage SM, Kinetic Therapy SM, Genesis SM, Odyssey SM,
and Continuum of Care SM, are service marks of Kinetic Concepts, Inc.
These products are subject to patent and/or pending patent.
(C) Copyright 1996 Kinetic Concepts, Inc.