SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
- ---------------------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 (210) 524-9000
- ---------------------------------- -----------------------------------
(Address of principal executive (Registrant's phone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common Stock: 43,189,860 shares as of October 31, 1996
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
September 30, December 31,
1996 1995
-------------- -------------
(unaudited)
Assets:
-------
Current assets:
Cash and cash equivalents................. $ 66,981 $ 52,399
Accounts receivable, net.................. 56,939 56,032
Inventories............................... 21,100 18,854
Note receivable from principal shareholder -- 10,291
Prepaid expenses and other assets......... 9,562 4,865
------- -------
Total current assets................... 154,582 142,441
------- -------
Net property, plant and equipment......... 65,388 62,276
Other notes receivable, net............... 3,187 3,187
Goodwill, net............................. 13,844 13,968
Other assets, net......................... 21,428 21,854
------- -------
$258,429 $243,726
======= =======
Liabilities and Shareholders' Equity:
-------------------------------------
Current liabilities:
Accounts payable.......................... $ 3,898 $ 2,512
Accrued expenses.......................... 29,058 26,490
Income taxes payable...................... 4,591 4,026
------- -------
Total current liabilities.............. 37,547 33,028
Capital lease obligations................... 543 --
Deferred income taxes, net.................. 1,389 374
------- -------
39,479 33,402
------- -------
Shareholders' equity:
Common stock; issued and outstanding
43,823 in 1996 and 44,331 in 1995....... 44 44
Additional paid-in capital................ 218 12,123
Retained earnings......................... 218,162 197,290
Cumulative foreign currency translation
adjustment.............................. 859 1,052
Notes receivable from officers............ (333) (185)
------- -------
218,950 210,324
------- -------
$258,429 $243,726
======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenue:
Rental and service.......... $56,638 $53,284 $167,523 $152,138
Sales and other............. 11,332 8,322 32,306 26,285
------ ------ ------- -------
Total revenue............. 67,970 61,606 199,829 178,423
Rental expenses............... 36,405 34,057 109,263 102,009
Cost of goods sold............ 3,856 2,750 11,685 10,979
------ ------ ------- -------
40,261 36,807 120,948 112,988
------ ------ ------- -------
Gross profit.............. 27,709 24,799 78,881 65,435
Selling, general and
administrative expenses..... 14,080 12,065 38,791 34,407
------ ------ ------- -------
Operating earnings........ 13,629 12,734 40,090 31,028
Net interest income........... 1,063 2,406 2,937 3,496
------ ------ ------- -------
Earnings before income
taxes.................. 14,692 15,140 43,027 34,524
Income taxes.................. 5,834 6,605 17,168 14,175
------ ------ ------- -------
Net earnings.............. $ 8,858 $ 8,535 $ 25,859 $20,349
====== ====== ======= ======
Earnings per common and
common equivalent share $ 0.19 $ 0.19 $ 0.56 $ 0.45
====== ====== ======= ======
Shares used in earnings
per share computations 45,553 45,570 45,923 45,306
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended
September 30,
--------------------
1996 1995
--------- --------
Cash flows from operating activities:
Net earnings.................................... $ 25,859 $ 20,349
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............... 16,487 16,803
Provision for uncollectible accounts
receivable............................... 2,327 1,025
Loss on KCIFS disposition................... -- 2,933
Change in assets and liabilities:
Decrease (increase) in accounts receivable (3,159) 2,001
Decrease in notes receivable.............. -- 5,343
Increase in inventories................... (2,174) (4,800)
Increase in prepaid and other assets...... (4,696) (1,219)
Increase in accounts payable.............. 1,460 1,163
Increase in accrued expenses.............. 2,604 526
Increase (decrease) in income taxes payable 968 (4,442)
Increase in deferred income taxes......... 613 4,469
------ ------
Net cash provided by operating activities 40,289 44,151
------ ------
Cash flows from investing activities:
Additions to property, plant, and equipment..... (18,287) (25,190)
Decrease in inventory to be converted
into equipment for short-term rental.......... (850) (2,250)
Dispositions of property, plant, and equipment.. 1,400 516
Proceeds from KCIFS disposition................. -- 7,182
Decrease in finance lease receivables, net...... -- 339
Decrease (increase) in note receivable from
principal shareholder......................... 10,000 (10,000)
Increase in other assets........................ (961) (4,333)
------ ------
Net cash used by investing activities... (8,698) (33,736)
------ ------
Cash flows from financing activities:
Repayments of note payable and long-term
obligations................................... 488 (860)
Proceeds from the exercise of stock options..... 4,694 2,708
Purchase and retirement of treasury stock....... (16,599) (1,251)
Cash dividends paid to shareholders............. (4,988) (4,971)
Other........................................... (147) --
------ -----
Net cash used by financing activities... (16,552) (4,374)
------ -----
Effect of exchange rate changes on cash and
cash equivalents................................ (457) 571
------ -----
Net increase in cash and cash equivalents......... 14,582 6,612
Cash and cash equivalents, beginning of year...... 52,399 43,241
------ ------
Cash and cash equivalents, end of period.......... $66,981 $49,853
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the first nine months for:
Interest...................................... 112 362
Income taxes.................................. 10,544 11,577
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The financial statements presented herein include the
accounts of Kinetic Concepts, Inc. and all subsidiaries (the
"Company"). The foregoing financial information reflects
all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position
and results of operations for the interim periods presented.
Interim period operating results are not necessarily
indicative of the results to be expected for the full
fiscal year.
(2) INVENTORY COMPONENTS
--------------------
Inventories are stated at the lower of cost (first-in,
firstout) or market (net realizable value).
Inventories are comprised of the following (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Finished goods.................... $ 3,594 $ 2,890
Work in progress.................. 2,607 1,040
Raw materials, supplies and parts 20,999 20,174
------- ------
27,200 24,104
Less amounts expected to be
converted into equipment for
short-term rental................. 6,100 5,250
------ ------
Total inventories............ $21,100 $18,854
====== ======
(3) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
------------------------------------
The weighted average number of common and common
equivalent shares used in the computation of earnings per
share is as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
--------- -------- -------- --------
Average outstanding
common shares............ 43,966 44,238 44,209 44,144
Average common equivalent
shares-dilutive effect of
option shares............ 1,587 1,332 1,714 1,162
------ ------ ------ ------
Shares used in earnings
per share computations... 45,553 45,570 45,923 45,306
====== ====== ====== ======
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Earnings per common and common equivalent share are computed
by dividing net earnings by the weighted average number of
common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares
consist of stock options (using the treasury stock method).
Earnings per share computed on a fully diluted basis is not
presented as it is not significantly different from earnings
per share computed on a primary basis.
(4) 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' federal 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.
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
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.
(5) NEW PRONOUNCEMENTS
------------------
Effective with the first quarter of 1996, the Company
has adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for
LongLived Assets to be Disposed of." Statement 121 requires
that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Adoption
of this new pronouncement had no effect on the financial
statements for the period.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation," effective
for fiscal years beginning after December 15, 1995. The
new statement allows companies to continue accounting
for stock-based compensation under the provisions of APB
Opinion 25 "Accounting for Stock Issued to Employees";
however, companies are encouraged to adopt a new accounting
method based on the estimated fair value of employee stock options.
Companies that do not follow the new fair value based method
will be required to provide expanded disclosures in
footnotes to the financial statements. The Company has
elected to continue to account for its employee stock
compensation plans as prescribed under APB Opinion 25 and
will make the pro forma footnote disclosure of net
income and earnings per share required by Statement
123 beginning with its financial statements for the year
ended December 31, 1996.
(6) SUBSEQUENT EVENT
----------------
Subsequent to September 30, 1996, the Company negotiated
the prepayment of all remaining notes received from the
1994 disposition of the Medical Services Division. The notes
had an aggregate face value of $10 million and had been
discounted to a carrying value of $3.2 million. The notes
were retired during October 1996 for $8.75 million plus
accrued interest through closing.
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of September 30, 1996,
and the related condensed consolidated statements of earnings for
the three and nine month periods ended September 30, 1996 and
1995 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 1996 and 1995.
These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally
of applying analytical review procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than
an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for them
to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
of Kinetic Concepts, Inc. and subsidiaries as of December 31,
1995, and the related consolidated statements of earnings,
capital accounts, and cash flows for the year then ended (not
presented herein); and in our report dated February 6, 1996, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of
December 31, 1995, is fairly presented, in all material respects,
in relation to the consolidated balance sheet from which it has
been derived.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
October 15, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Third Quarter of 1996 Compared to Third Quarter of 1995
- -------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the third
quarter of the prior year ($ in thousands):
Three Months Ended September 30,
----------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- ------------------
1996 1995 $ Pct
-------- -------- --------- -------
Revenue:
Rental and service.......... 83% 86% $ 3,354 6%
Sales and other............. 17% 14% 3,010 36%
---- ---- ------
100% 100% 6,364 10%
Rental expenses............... 54% 55% 2,348 7%
Cost of goods sold............ 5% 5% 1,106 40%
---- ---- -----
Gross profit............... 41% 40% 2,910 12%
Selling, general and
administrative expenses..... 21% 19% 2,015 17%
---- ---- -----
Operating earnings.......... 20% 21% 895 7%
Net interest income........... 2% 4% (1,343) (56%)
---- ---- -----
Earnings before income taxes 22% 25% (448) (3%)
Income taxes.................. 9% 11% (771) (12%)
---- ---- -----
Net earnings................ 13% 14% $ 323 4%
==== ==== =====
- --------------------------------------------------------------------------
The Company's revenue is derived from four primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Three months ended
September 30,
--------------------------
1996 1995
------------ -----------
Acute/Extended........ $ 42.8 $ 38.9
Home Care............. 3.1 3.6
International......... 17.4 15.2
Medical Devices....... 4.6 3.8
Other................. .1 .1
------ ------
$ 68.0 $ 61.6
====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue in the third quarter of 1996 increased by
$6.4 million, or 10.3%, to $68.0 million from $61.6 million in the
third quarter of 1995. Revenue from the Company's specialty
patient surface business was $45.9 million, up $3.4 million, or
8.2%, from the third quarter of 1995. This increase was due to
the success of the TriaDyne specialty bed and the addition of
various national accounts which contributed to market share
gains. In addition, the Company experienced significant growth
in the extended care (nursing and rehabilitation) segment due to
the addition of various new national accounts as well as the
continuing growth of patients in these lower cost and lower
acuity care settings. Revenue in the Home Care segment was down
from the prior-year period primarily due to a change in Medicare
reimbursement policy.
Revenue from the Company's international operations was
$17.4 million, up 14.4% from the third quarter of 1995. On a local
currency basis, excluding the effect of currency fluctuations,
revenue increased by 10% compared to the 1995 quarter. Increased
rental market penetration and increased sales contributed to
the higher revenue.
Revenue from medical device operations increased approximately
$700,000, or 18.8%, due substantially to the successful introduction
of the V.A.C. therapy to the domestic market. Revenue from the
PlexiPulse foot/calf compression device was consistent with the 1995
quarter as this product continues its transition toward a more
salesoriented market. With the shift from rentals to sales, the
Company has experienced additional pricing pressures on this product.
Rental expenses were 64.3% of rental revenue in the third
quarter of 1996 compared to 63.9% in the third quarter of 1995.
This increase is primarily attributable to increased field
marketing costs and the shift towards sales in the medical
devices segment. Field expenses in the medical devices segment
remained flat year to year.
Gross profit increased $2.9 million, or 11.7%, to $27.7
million in the third quarter of 1996 from $24.8 million in the
third quarter of 1995 due to the increase in revenue and controlled
growth in rental expenses.
Selling, general and administrative expenses of $14.1
million increased $2.0 million from the third quarter of
1995. As a percentage of total revenue, selling, general and
administrative expenses were at 21% in the third quarter of 1996
as compared with 19% in the third quarter of 1995. Items
contributing to this increase include higher sales commissions,
legal and professional fees, and marketing costs.
Operating earnings for the period increased $895,000, or 7.0%, to
$13.6 million, resulting largely from the revenue growth described above.
Net interest income for the three months ended September
30, 1996 was $1.1 million compared to $2.4 million in the prior
year. This decrease was due to interest recognized in 1995 on
a note receivable obtained in the Medical Services sale which was
repaid in 1995. Subsequent to September 30, 1996, the Company
negotiated the prepayment of all remaining notes receivable from
the sale of Medical Services. The notes, with an aggregate face
value of $10 million, had been carried at a discounted book
value of $3.2 million. See note(6) to the condensed consolidated
financial statements for further discussion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
The Company's effective income tax rate in the third quarter
of 1996 was 39.7%, down from the prior year rate of 43.6% due
primarily to implementation of various foreign tax strategies in
the current year.
Net earnings increased $300,000, or 3.8%, to $8.9 million in
the third quarter of 1996. This increase was due primarily to the
change in revenue and income tax rates as discussed above.
First Nine Months of 1996 Compared to First Nine Months of 1995
- ---------------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the first nine
months of the prior year ($ in thousands):
Nine Months Ended September 30,
---------------------------------------
Variance
Revenue Relationship Increase (Decrease)
-------------------- ------------------
1996 1995 $ Pct
---------- -------- --------- -------
Revenue:
Rental and service......... 84% 85% $15,385 10%
Sales and other............ 16% 15% 6,021 23%
---- ---- ------
100% 100% 21,406 12%
Rental expenses.............. 55% 57% 7,254 7%
Cost of goods sold........... 6% 7% 706 6%
---- ---- ------
Gross profit............... 39% 36% 13,446 21%
Selling, general and
administrative expenses.... 19% 19% 4,384 13%
---- ---- ------
Operating earnings......... 20% 17% 9,062 29%
Net interest income.......... 2% 2% (559) (16%)
---- ---- ------
Earnings before income taxes 22% 19% 8,503 25%
Income taxes................. 9% 8% 2,993 21%
---- ---- ------
Net earnings................. 13% 11% $ 5,510 27%
==== ==== ======
- --------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
The Company's revenue is derived from four primary markets.
The following table sets forth the amount of revenue derived from
each of these markets for the periods indicated ($ in millions):
Nine months ended
September 30,
-------------------
1996 1995
------- -------
Acute/Extended..... $ 125.0 $ 108.5
Home Care.......... 9.4 10.4
International...... 51.6 44.7
Medical Devices.... 13.6 11.7
Other (1).......... .2 3.1
------ ------
$ 199.8 $ 178.4
====== ======
(1) Consists of revenue of KCIFS, MRD and other sales in 1995.
Total revenue for the first nine months of 1996 increased
by $21.4 million or 12.0%, to $199.8 million. Revenue from
the Company's specialty patient surface business was $134.4
million, up $15.5 million, or 13.0%, from the nine months ended
September 30, 1995. This increase was due to new product
introductions, primarily the TriaDyne and BariKare, combined with
increased patient days in the extended care market due, in
part, to the addition of various national accounts. Revenue in
the Home Care segment decreased $1.0 million from the prior-
year period. Revenue from the Company's international
operations was $51.6 million, up 15.4% from the nine months
ended September 30, 1995. On a local currency basis,
excluding exchange rate fluctuations, revenue from the
international segment increased nearly 19%. Increased market
penetration and increased sales contributed towards the higher
revenue. Revenue from medical device operations in the first nine
months of 1996 increased $1.9 million, or 16.2% compared to the
prior year. The Company's VAC therapy device, launched
earlier this year, accounted for substantially all of this
increase.
Rental expenses were 65.2% of total rental revenue in the
nine months ended September 30, 1996 compared to 67.1% in the nine
months of 1995. This decrease is primarily attributable to the
increase in rental revenue, as the majority of rental expenses
are relatively fixed, combined with certain operating
efficiencies.
Gross profit increased $13.4 million, or 20.6%, to $78.9
million in the nine months ended September 30, 1996 due
primarily to the increase in revenue and controlled growth in
rental expenses.
Selling, general and administrative expenses increased
$4.4 million, or 12.7%, to $38.8 million in the first nine months
of 1996 from $34.4 million in the first nine months of 1995. As a
percentage of total revenue, selling, general and administrative
expenses were at 19% in the first nine months ended September
30, 1996 which was comparable with the 19% in the first
nine months of 1995. Investments in marketing programs,
computer systems and higher legal and professional fees comprised
the majority of the spending increase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Operating earnings for the period increased $9.1 million,
or 29.2%, to $40.1 million compared to $31.0 million in the prior
year resulting largely from the above-mentioned revenue growth.
Net interest income for the nine months ended September 30,
1996 was $2.9 million compared to $3.5 million in the prior year.
This decrease was due to interest recognized on a note receivable
obtained in a sale of assets in the prior year which was repaid in
1995.
The Company's effective income tax rate in the first nine
months ended September 30, 1996 was 39.9% as compared to 41.1% in
the first nine months of 1995.
Net earnings increased $5.5 million, or 27.1%, to $25.9
million in the first nine months of 1996. This increase was
due to the relative decrease in rental expenses and the change
in revenue as discussed above.
Impact of Inflation
- -------------------
The Company does not believe that inflation had a
material impact on sales or expenses during the period. Increases
in labor, raw materials or other operating costs, however, could
significantly affect the Company's operations. The majority of
these costs are relatively fixed in nature and the Company has
generally been able to maintain margins despite changing prices or
reimbursement rates.
Financial Condition
- -------------------
The change in revenue and expenses experienced by the
Company during the nine months ended September 30, 1996 and
other factors resulted in changes to the Company's balance sheet
as follows:
Inventory at September 30, 1996 increased $2.2 million,
or 11.9%, to $21.1 million from $18.9 million at December 31,
1995 primarily due to new product introductions and international
market expansion. In late 1995, the Company began operations in
both Italy and Scandinavia and inventory levels in Germany
increased to support strong sales demand for the TheraCare
and FirstStep mattress overlays. In addition, during the
second quarter, the Company acquired a small mattress overlay
manufacturer in the United Kingdom, Astec Medical Ltd., which
carried inventory of approximately $400,000.
The note receivable from principal shareholder at December
31, 1995 of $10.3 million, including accrued interest, was
collected in full during the first quarter of 1996.
Net property, plant and equipment at September 30,
1996 increased $3.1, or 5.0%, to $65.4 million from $62.3
million at December 31, 1995 due to additions to rental equipment
and computer systems in excess of depreciation and
dispositions. Net capital expenditures were $17.7 million during
the first nine months of 1996 as the Company invested in new
products for its rental fleet and new computer systems.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Additional paid-in capital decreased $11.9 million, or 98.2%,
during the first nine months of 1996 due primarily to the purchase
and retirement of approximately 1.1 million shares of common stock
under a program which authorizes the Company to purchase up to 3
million shares of its stock.
Market Trends
- -------------
The health care industry is facing various challenges,
including increased pressure on health care providers to control
costs, the accelerating migration of patients from acute care
facilities into extended care (e.g. skilled nursing facilities
and rehabilitation centers) and home care settings, the
consolidation of health care providers and national and
regional group purchasing organizations and the growing demand
for clinically proven and cost effective therapies. In
addition, Congress continues to debate federal health care
expenditures in an attempt to slow the rate of growth of those
expenditures. Recently, there have been heightened indications
that the federal Medicare program will move towards a
prospective payment system for skilled nursing facilities and that
such a system may eventually be adopted for home care.
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 made the acute care market for
the Company's products increasingly competitive. The Company
expects these industry trends to continue. The Company has
addressed 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 TriaDyne and BariKare beds have enabled it to
further penetrate this market.
The Company contracts with both proprietary and voluntary
group purchasing organizations ("GPO's"). Proprietary GPO's own
all of the hospitals which they represent and, as a result, can
ensure member compliance with an executed national agreement.
Voluntary GPO's negotiate contracts on behalf of member hospital
organizations but cannot ensure that their members will comply
with the terms of an executed national agreement. The
Company has a voluntary GPO agreement with American
Healthcare Systems ("AMHS") which runs through March 31, 1998
and which accounted for approximately 7.5% of the Company's
total revenue during the first nine months of 1996. Earlier this
year, AMHS merged with Premier and the Sunhealth Alliance,
to form the largest group purchasing organization in the U.S.
As a result of the merger, the Company has been informed that
the AMHS, Premier and Sunhealth contracts, which together account
for approximately 11% of total revenue, will be terminated as of
January 1, 1997 and a contract for the new Premier organization
has been put out for bid.
The Company believes that it has 30-35% of the existing
Premier members under contract and that its principal competitor has
55-60% of the existing Premier members under contract. The entity
who is awarded the contract will, in all probability, be able to
convert a significant number of its competitor's customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
However, because Premier is a voluntary group purchasing organization,
such conversions will not happen immediately and the competing entity
should be able to maintain a number of its existing customers.
In order to do so, the competing entity may be required to offer
better pricing or terms to its existing customers. If the Company is
not awarded the Premier contract, the Company believes that it will
be able to continue to grow its domestic specialty bed revenue base.
This belief is based upon the fact that: i) the Company recently
signed a proprietary group purchasing agreement with Tenet Healthcare
Corporation, the second largest proprietary group purchasing organization
in the United States, ii) the Company has recently been awarded a
position in the VHA Opportunity Program, iii) the Company has been
successful in converting a number of competitive accounts under its Acute
2000 marketing program and in the extended care market.
During 1996, 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 revenue.
Legal Proceedings
- -----------------
The Company is party to several lawsuits arising in the
ordinary course of its business and is contesting adjustments
proposed by the Internal Revenue Service to prior years' tax
returns. Provisions have been made in the Company's financial
statements for estimated exposures related to these lawsuits and
adjustments. See "Item 1. Financial Statements". In the opinion
of management, the disposition of these items will not have a
material adverse effect on the Company's business, financial
condition or results of operations.
The manufacturing and marketing of medical products necessarily
entails an inherent risk of product liability claims. The Company
currently has certain liability claims pending for which provision
has been made in the Company's financial statements. Management
believes that resolution of these claims will not have a material
adverse effect on the Company's business, financial condition or
results of operations. The Company has not experienced any
significant losses due to product liability claims and currently
maintains umbrella liability insurance coverage.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1996, the
Company generated net cash provided by operating activities of
$40.3 million compared to $44.2 million in the prior year period.
The decrease in operating cash flow resulted primarily from
short-term swings in current assets, e.g. receivables, as net
earnings were up $5.5 million from the year-ago period. Total
net capital expenditures of $17.7 million through September 1996
were down $9.2 million, or 34.1%, from the prior year. Capital
additions in 1995 included a significant investment related to the
TriaDyne product launch.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
At September 30, 1996, cash and cash equivalents totaling
$67.0 million were available for general corporate purposes.
Additionally, the Company maintains a Credit Agreement with a bank
as an agent for itself and certain other financial institutions.
The Credit Agreement currently permits borrowings of up to $50 million.
At September 30, 1996, the entire amount of the Credit Agreement was
available. The Company believes that current cash reserves combined
with operating cash flows and available credit facilities during
the next twelve month period will be sufficient to provide
for new investments, e.g., business acquisitions, technology or
equipment, and any working capital needed during the period.
Forward-looking Statements
- --------------------------
This Report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. All statements other than statements of
historical fact included in this report regarding the Company's
financial position, business strategy, and plans and objectives of
management for future operations, are forward-looking statements that
involve risks and uncertainties. Although the Company believes that
the expectations and assumptions reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations and assumptions will prove to have been correct.
In addition to the factors discussed above, among the factors that
could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are the following: the impact
of health care reform, significant changes in health care reimbursement
(including the adoption of a prospective payment system for Medicare
patients in skilled nursing facilities and the home), the loss or gain
of a material national group purchasing account as a result of further
industry consolidation or otherwise, a material change in foreign
exchange rates and a material increase in the level of competition in
the markets we serve.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
A list of all exhibits filed or included as part of this
quarterly report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------ -----------
15 Filed herewith Letter from KPMG
Peat Marwick LLP
dated November 14, 1996
27 Filed herewith Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: /s/ JAMES R. LEININGER, M.D.
----------------------------
James R. Leininger, M.D.
Chairman of the Board
By: /s/ RAYMOND R. HANNIGAN
----------------------------
Raymond R. Hannigan
President and Chief Executive Officer
By: /s/ BIANCA A. RHODES
----------------------------
Bianca A. Rhodes
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: November 14, 1996