SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1997
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: 42,664,418 shares as of August 1, 1997
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
1997 1996
----------- ------------
Assets: (unaudited)
- -------
Current assets:
Cash and cash equivalents........... $ 38,388 $ 59,045
Accounts and notes receivable, net.. 74,129 58,241
Inventories......................... 21,173 20,042
Prepaid expenses and other......... 8,722 6,860
------- -------
Total current assets............. 142,412 144,188
------- -------
Net property, plant and equipment..... 72,060 65,224
Notes receivable...................... 3,250 --
Goodwill, less accumulated amortiza-
tion of $12,510 in 1997 and $12,021
in 1996............................. 23,047 13,541
Other assets, less accumulated
amortization of $2,906 in 1997 and
$2,837 in 1996...................... 30,488 30,440
------- -------
$271,257 $253,393
======= =======
Liabilities and Shareholders' Equity:
- -------------------------------------
Current liabilities:
Accounts payable.................... $ 4,740 $ 3,974
Current installments of capital lease
obligations....................... 134 118
Accrued expenses.................... 32,299 29,792
Income tax payable.................. 3,242 2,970
------- -------
Total current liabilities........ 40,415 36,854
Capital lease obligations, net of current
installments........................ 378 396
Deferred income taxes, net............ 7,528 5,065
Other................................. 218 --
------- -------
48,539 42,315
------- -------
Minority interest..................... 204 --
Shareholders' equity:
Common stock; issued and outstanding
42,305 in 1997 and 42,355 in 1996 42 42
Retained earnings................... 225,314 210,816
Cumulative foreign currency trans-
lation adjustment................. (2,602) 555
Notes receivable from officers...... (240) (335)
------- -------
222,514 211,078
------- -------
$271,257 $253,393
======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Revenue:
Rental and service..... $61,300 $54,095 $123,125 $110,885
Sales and other........ 13,731 10,177 25,087 20,974
------ ------ ------- -------
Total revenue........ 75,031 64,272 148,212 131,859
Rental expenses......... 38,904 35,611 76,616 72,857
Cost of goods sold...... 5,770 3,786 10,012 7,829
------ ------ ------- -------
44,674 39,397 86,628 80,686
------ ------ ------- -------
Gross profit........ 30,357 24,875 61,584 51,173
Selling, general and
administrative expenses 14,134 12,154 29,144 24,711
------ ------ ------- -------
Operating earnings.. 16,223 12,721 32,440 26,462
Net interest income..... 399 904 853 1,874
------ ------ ------- -------
Earnings before income
taxes and minority
interest.......... 16,622 13,625 33,293 28,336
Income taxes............ 6,649 5,438 13,317 11,335
Minority interest....... 21 -- 21 --
------ ------ ------- -------
Net earnings........ $ 9,952 $ 8,187 $ 19,955 $ 17,001
====== ====== ======= =======
Earnings per common
and common equivalent
share............. $ 0.23 $ 0.18 $ 0.46 $ 0.37
====== ====== ======= =======
Shares used in earnings
per share computa-
tions 43,806 46,459 43,737 46,015
====== ====== ======= =======
See accompanying notes to condensed consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
---------------------
1997 1996
---------- ---------
Cash flows from operating activities:
Net earnings................................ $ 19,955 $ 17,001
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization........... 10,974 11,709
Provision for uncollectible accounts
receivable............................ 1,434 1,187
Change in assets and liabilities:
Increase in accounts receivable....... (15,656) (1,736)
Increase in inventories............... (643) (1,983)
Increase in prepaid and other assets.. (1,816) (2,395)
Increase (decrease) in accounts
payable............................. (291) 597
Increase (decrease) in accrued
expenses............................ 1,065 (99)
Increase in income taxes payable...... 272 630
Increase in deferred income taxes..... 2,463 492
------- -------
Net cash provided by operating
activities........................ 17,757 25,403
------- -------
Cash flows from investing activities:
Additions to property, plant, and
equipment................................. (13,533) (12,480)
Increase in inventory to be converted
into equipment for short-term rental...... (3,645) (150)
Dispositions of property, plant, and
equipment................................. 1,096 750
Business acquired in purchase transactions,
net of cash acquired...................... (12,445) --
Decrease in note receivable from principal
shareholder............................... -- 10,000
Increase in other assets.................... (3,223) (1,340)
------ -------
Net cash used by investing activities (31,750) (3,220)
------ -------
Cash flows from financing activities:
Repayments of capital lease obligations..... (53) --
Proceeds from the exercise of stock options. 1,963 4,276
Purchase and retirement of treasury stock... (4,133) (10,363)
Cash dividends paid to shareholders......... (3,205) (3,331)
Other....................................... 217 (138)
------ ------
Net cash used by financing activities (5,211) (9,556)
------ ------
Effect of exchange rate changes on cash and
cash equivalents............................ (1,453) (160)
------ ------
Net increase in cash and cash equivalents..... (20,657) 12,467
Cash and cash equivalents, beginning of year 59,045 52,399
------ ------
Cash and cash equivalents, end of period...... $ 38,388 $ 64,866
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the first six months for:
Interest................................. 84 82
Income taxes............................. 8,783 6,160
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 condensed consolidated financial
statements appearing in this quarterly report on Form 10-Q
should be read in conjunction with the financial statements
and notes thereto included in the Company's latest
annual report. Certain information and footnote disclosures
normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted. 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, first-out) or market (net realizable value).
Inventories are comprised of the following (in thousands):
June 30, December 31,
1997 1996
-------- -----------
Finished goods...................... $ 4,006 $ 5,586
Work in process..................... 3,143 1,893
Raw materials, supplies and parts... 22,219 17,113
------ ------
29,368 24,592
Less amounts expected to be converted
into equipment for short-term rental 8,195 4,550
------ ------
Total inventories $21,173 $20,042
====== ======
(3) NOTES RECEIVABLE
-----------------
Notes receivable included a $3.0 million note received
from James R. Leininger, M.D., the principal shareholder and
chairman of the Company's Board of Directors, the proceeds of
which were used to finance a construction project for Home
Dome, L.L.C., a third party affiliated with Dr. Leininger.
The note carries a variable interest rate which will
fluctuate between 6.25% and 10.25% per annum, and requires
quarterly interest payments beginning May 3, 1997. Monthly
principal payments commence March 3, 1998 based on a
20-year note amortization. The note has a final maturity date
of February 3, 2002, at which time the entire amount of unpaid
principal and interest shall be due. The note is secured by
300,000 shares of the Company's Common Stock and a mortgage on
the property under construction.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) ACQUISITIONS/DISPOSITIONS
-------------------------
On April 18, 1997, the Company acquired 80% of
the outstanding capital stock of Ethos Medical Group, Ltd.
located in Athlone, Ireland, for approximately $2.3 million in
cash plus other consideration. Ethos manufactures the Keene
Roto Rest r trauma bed and other medical devices and rents
specialty support surfaces to caregivers throughout
Ireland. Ethos Medical's operating results are not expected
to have a material impact on the Company's results of
operations for 1997.
On February 1, 1997, the Company acquired the assets
of H.F. Systems, Inc. of Los Angeles. H.F. Systems
offers a complete line of therapeutic specialty
support surfaces primarily to the California extended
care marketplace. The Company acquired the assets of H.F.
Systems in a single transaction for approximately $8.0 million
in cash plus other consideration. H.F. Systems will be integrated
into Kinetic Concepts' extensive distribution system and, as
a result, the Company expects to benefit from the
elimination of certain redundant expenses. H.F. Systems recorded
revenue of approximately $7.0 million for 1996 and is
not expected to have a material impact on the Company's
results of operations for 1997.
On January 3, 1997 the Company purchased from Trac
Medical, Inc., a North Carolina corporation, all assets and
technology rights to the "Access" patient care device, an
environmental control system arm which is mountable on
hospital beds. The Company purchase price of the Access
device was approximately $2.0 million in cash plus other
consideration.
(5) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
--------------------------------------
The weighted average number of common and common
equivalent shares used in the computation of earnings per
share is as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- ------- -------
Average outstanding
common shares........ 42,317 44,307 42,322 44,332
Average common equiva-
lent share-dilutive
effect of option
shares.............. 1,489 2,152 1,415 1,683
------ ------ ------ ------
Shares used in earnings
per share
computations......... 43,806 46,459 43,737 46,015
====== ====== ====== ======
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.
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is party to several lawsuits generally
incidental to its business and is contesting certain
adjustments proposed by the Internal Revenue Service to
prior years' tax returns. Provisions have been made
in the accompanying financial statements for estimated
exposures related to these lawsuits and adjustments. In
the opinion of management, the disposition of these items
will not have a material effect on the Company's financial
statements.
(7) NEW PRONOUNCEMENTS
------------------
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which is
required to be adopted on December 31, 1997. At that time,
the Company will be required to change the method currently
used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary
("basic") earnings per share, the dilutive effect of stock
options will be excluded. The impact is expected to result
in an increase in basic earnings per share for the six
month period ended June 30, 1997 and June 30, 1996 of
$0.01 and $0.01 per share, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings
per share for these periods is not expected to be
material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
Results of Operations
Second Quarter of 1997 Compared to Second Quarter of 1996
- ---------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the second
quarter of the prior year ($ in thousands):
Three Months Ended June 30,
-----------------------------
Revenue Increase
Relationship (Decrease)
------------ --------------
1997 1996 $ Pct
----- ---- ------- ---
Revenue:
Rental and service.......... 82% 84% $ 7,205 13%
Sales and other............. 18% 16% 3,554 35%
--- --- ------- --
Total Revenue............. 100% 100% 10,759 17%
Rental expenses............... 52% 55% 3,293 9%
Cost of goods sold............ 7% 6% 1,984 52%
--- --- ------ --
Gross profit.............. 41% 39% 5,482 22%
Selling, general and
administrative expenses..... 19% 19% 1,980 16%
--- --- ------ --
Operating earnings........ 22% 20% 3,502 28%
Interest income, net.......... -% 1% (505) (56%)
--- --- ------ --
Earnings before income taxes
and minority interest... 22% 21% 2,997 22%
Income taxes.................. 9% 8% 1,211 22%
Minority interest............. -% -% 21 -%
--- --- ------ --
Net earnings.............. 13% 13% $ 1,765 22%
=== === ====== ==
The Company's revenue is derived from three
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
June 30,
-------------------
1997 1996
------- -------
Domestic Specialty Surfaces $48.8 $43.0
International............... 17.2 16.9
Medical Devices............. 8.7 4.2
Other....................... .3 .2
---- ----
$75.0 $64.3
==== ====
Total revenue in the second quarter of 1997 increased 16.7% to
$75.0 million, from $64.3 million in the second quarter of 1996.
Revenue from the Company's domestic specialty surface business was
$48.8 million, up $5.8 million, or 13.6% from the second quarter of
1996. The increased revenue was derived from core business
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
growth in all care settings, due primarily to higher patient
therapy days, and the addition of H.F. Systems, which the Company
acquired in February 1997. H.F. Systems contributed revenue of
approximately $2.1 million to the second quarter of 1997.
Revenue from the Company's international operations was
$17.2 million, up $300,000 or 1.7%, from the second quarter of
1996. The international revenue increase reflects higher therapy
days in virtually all mid and lower-tier markets, e.g., the
Netherlands, Canada and Switzerland, which were largely offset
by softness in Germany and the United Kingdom and by unfavorable
currency exchange fluctuations of $1.5 million. Revenue from
Ethos Medical Group operations, which the Company acquired in
April 1997, was not material during the period.
Revenue from medical device operations increased $4.5
million, or 107.1%, to $8.7 million in the second quarter of 1997
due to the continued success of The V.A.C. wound closure device
and increased rental revenue for the PlexiPulse foot/calf pump
resulting from the distribution agreement signed with Mediq/PRN at
the beginning of this year.
Rental, or field, expenses were 63.5% of total rental revenue
in the second quarter of 1997 compared to 65.8% in the second
quarter of 1996. This decrease is primarily attributable to the
increase in rental revenue, as the majority of rental expenses are
relatively fixed, e.g. facility and service costs.
Gross profit increased $5.5 million, or 22.0%, to $30.4
million in the second quarter of 1997 from $24.9 million in
the second quarter of 1996 due to increased rental revenue as
well as increased sales volumes of disposable products associated
with medical devices.
Selling, general and administrative expenses increased
$2.0 million, or 16.3%, to $14.1 million in the second quarter
of 1997 from $12.2 million in the second quarter of 1996. The
increase is due in part to costs associated with certain key
investments (e.g. improved marketing and information systems) as
well as increased legal and professional fees. As a
percentage of total revenue, selling, general and
administrative expenses were at 18.8% in the second quarter of
1997 as compared with 18.9% in the second quarter of 1996.
Operating earnings for the period increased $3.5 million,
or 27.5%, to $16.2 million compared to $12.7 million in the prior-
year quarter resulting largely from the revenue growth discussed
above.
Net interest income for the three months ended June 30, 1997
was approximately $400,000 compared to approximately $900,000
in the prior year. The decrease in interest income resulted from
the early payment in October 1996 of all remaining notes
receivable from Mediq/PRN and lower invested cash balances
due to acquisition activities in the first six months of 1997.
The Company's effective income tax rate in the second quarter
of 1997 was 40%, consistent with the second quarter of 1996.
Net earnings increased $1.8 million, or 21.6%, to $10.0
million in the second quarter of 1997. This increase was due to
the increase in revenue as discussed above combined with
controlled spending levels.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
First Six Months of 1997 Compared to First Six Months of 1996
- -------------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the first six
months of the prior year ($ in thousands):
Six Months Ended June 30,
---------------------------
Revenue Increase
Relationship (Decrease)
------------ -------------
1997 1996 $ PCT
---- ---- ------- ----
Revenue:
Rental and service........... 83% 84% $ 12,240 11%
Sales and other.............. 17% 16% 4,113 20%
--- --- ------ --
Total Revenue.............. 100% 100% 16,353 12%
Rental expenses................ 51% 55% 3,759 5%
Cost of goods sold............. 7% 6% 2,183 28%
--- --- ------ --
Gross profit............... 42% 39% 10,411 20%
Selling, general and
administrative expenses...... 20% 19% 4,433 18%
--- --- ------ --
Operating earnings......... 22% 20% 5,978 23%
Interest income, net........... -% 1% (1,021) (54%)
--- --- ------ --
Earnings before income taxes
and minority interest.... 22% 21% 4,957 17%
Income taxes................... 9% 8% 1,982 17%
Minority interest.............. -% -% 21 -%
--- --- ------ --
Net earnings............... 13% 13% $ 2,954 17%
=== === ====== ==
The Company's revenue is derived from three primary
markets. The following table sets forth the amount of revenue
derived from each of these markets for the periods indicated ($ in
millions):
Six months ended
June 30,
-------------------
1997 1996
------- --------
Domestic Specialty Surfaces $ 97.9 $ 88.5
International.............. 33.8 34.2
Medical Devices............ 16.0 9.0
Other...................... .5 .2
------ -----
$148.2 $131.9
===== =====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Total revenue for the first six months of 1997 increased
by $16.3 million, or 12.4%, to $148.2 million. Revenue from
the Company's domestic specialty surface business was $97.9
million, up $9.4 million, or 11.0%, from the six months ended
June 30, 1996 as all major product lines showed growth. Revenue
from the Company's international operations of $33.8 million
remained flat compared to the six months ended June 30, 1996
despite unfavorable currency exchange rate fluctuations of
approximately $2.6 million for the period. Revenue from
medical device operations in the first six months of 1997 was
$16.0 million, up $7.0 million, or 77.0%, primarily due to
increased rental revenue from both the V.A.C. wound closure device
and the PlexiPulse foot/calf pump.
Rental expenses were 62.2% of total rental revenue in the
six months ended June 30, 1997 compared to 65.7% in the six
months of 1996. This decrease is primarily attributable to the
increase in rental revenue, as the majority of rental
expenses are fixed, combined with certain operating
efficiencies associated with implementation of the Genesis
service delivery system and processes. Overall, rental expenses
increased $3.8 million, or 5.2% compared to the first six months
of 1996.
Gross profit increased $10.4 million, or 20.3%, to $61.6
million in the six months ended June 30, 1997 due to the increase
in revenue, controlled growth in rental expenses and improved sales
volumes.
Selling, general and administrative expenses increased
$4.4 million, or 17.9%, to $29.1 million in the first six months
of 1997 from $24.7 million in the first six months of 1996. Key
investments in marketing programs and information systems as well
as higher legal and professional fees accounted for the majority of
this increase.
Operating earnings for the period increased $6.0 million,
or 22.6%, to $32.4 million compared to $26.5 million in the prior-
year resulting largely from the above-mentioned revenue growth.
Net interest income for the six months ended June 30, 1997
was $900,000 compared to $1.9 million in the prior year. The
decrease in interest income resulted from the early payment in
October 1996 of all remaining notes receivable from Mediq/PRN
and lower invested cash balances due to acquisition activities in
1997.
The Company's effective income tax rate in the first six
months ended June 30, 1997 was 40%, consistent with the first six
months of 1996.
Net earnings increased $3.0 million, or 17.4%, to $20.0
million in the first six months of 1997 from $17.0 million in the
first six months of 1996. This increase was due to the relative
decrease in rental expenses and the change in revenue as discussed
above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Financial Condition
- --------------------
The change in revenue and expenses experienced by the
Company during the six months ended June 30, 1997 and other
factors resulted in changes to the Company's balance sheet as
follows:
Cash and cash equivalents were $38.4 million at June 30, 1997,
a decrease of $20.7 million from December 1996. The cash decrease
is primarily attributable to business/asset acquisitions totaling
$12.4 million and a temporary increase in accounts receivable
resulting from a recent billing systems conversion.
Accounts receivable at June 30, 1997 were $74.1 million, a
$15.9 million or 27.3%, increase from year-end. On January 2,
1997, the Company converted to a new billing and accounts
receivable system. Implementation activities had a negative timing
impact on collections for the period. The Company expects future
receivable balances to decrease over time. Business acquisition
activities during the first half of 1997 have also increased
accounts receivable.
Inventory at June 30, 1997 increased 5.6% to $21.2 million
from $20.0 million at December 31, 1996 primarily due to
planned product introductions and the recent acquisition of
Ethos Medical Group, which had inventory of approximately
$800,000.
Net property, plant and equipment at June 30, 1997
increased 10.5% to $72.1 million from $65.2 million at December 31,
1996 due in part to asset acquisitions such as H.F.
Systems. Capital expenditures were $16.1 million during the
first six months of 1997 as the Company invested in new products
for its rental fleet and new computer systems. Depreciation and
amortization for the first six months of 1997 totaled $11.0
million, down 6.3% from the same period in 1996.
Notes receivable consisted of a $3.0 million note received
from James R. Leininger, M.D., the Company's principal
shareholder and chairman of the Board of Directors. The note is
secured by a Deed of Trust/Security Agreement, Vendor's Lien and
300,000 shares of KCI Common Stock. The note bears interest
at market rates and has a final maturity of February 3, 2002.
Goodwill increased $9.5 million during the period, to
$23.0 million, due primarily to the Company's three business
acquisitions in the period.
Accrued expenses at June 30, 1997 increased $2.5 million,
or 8.4%, to $32.3 million from $29.8 million at December 31,
1996. Accruals for payments in connection with the H.F. System
acquisition and other operating costs accounted for the
majority of this increase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Market Trends
- -------------
The health care industry continues to face 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 an effort to reduce the federal deficit and lower
overall federal health care expenditures, President Clinton
recently signed into law the Balanced Budget Act of 1997 (the
"BBA"). The BBA contains a number of provisions which will
impact the federal reimbursement of health care and reduce
projected payments under the Medicare system by $115 billion
over the next five years. The majority of the savings are
scheduled for the fourth and fifth years of this plan. The
provisions include (i) a reduction exceeding $30 billion in the
level of payments made to acute care hospitals under Medicare Part A
over the next five years (which will be funded primarily through
a freeze and/or reduction in future consumer price index
increases); (ii) a change on July 1, 1998 in the manner in
which skilled nursing facilities ("SNFs") are reimbursed from
a cost-based system to a prospective payment system under which
the SNFs will receive an all inclusive, case-mix-adjusted per
diem payment for each of their Medicare patients; and (iii)
a five-year freeze on consumer price index updates for
Medicare Part B services in the home and the implementation
of competitive bidding trials for five categories of home care
products.
Less than 10% of the Company's revenue is received directly
from the Medicare system. However, many of the health care
providers who pay the Company for its products are reimbursed,
either directly or indirectly, by the Federal government under the
Medicare system for the use of those products. We do not believe
that the changes introduced by the BBA will have a material impact
on our hospital customers or the dealers we partner with in home
health care. However, the changes to the Medicare system introduced
by the BBA may have an impact on the manner in which the Company's
extended care customers make purchasing decisions. Because the Company
has focused on providing clinically efficacious and cost effective
products, it believes it is well positioned for the changes in extended
care reimbursement introduced by the BBA. Although these changes may
impact revenue in the short term as the Company's extended care
customers begin to understand the impact of the changes on their
respective businesses, the Company does not believe that any of the
changes in the Medicare system introduced by the BBA will have a material
adverse impact on its business.
The Company's market continues to increase based
upon demographic trends as most of the Company's patients are
over 50 years old. Further, its broad product line and national
distribution system enable it to compete effectively in the
changing healthcare environment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------
Market Trends (continued)
- -------------------------
More recently, sales have increased as a portion of the
Company's revenue. The Company believes this trend will
continue because certain U.S. health care providers are purchasing
products that are less expensive and easier to maintain such
as medial devices, mattress overlays and mattress replacement
systems. In addition, international health care providers
tend to purchase products more often than U.S. health care
providers.
Legal Proceedings
- -----------------
On February 21, 1992, Novamedix Limited ("Novamedix") filed
a lawsuit against the Company in the United States District Court
for the Western District of Texas. Novamedix manufactures the
principal product which directly competes with the PlexiPulse. The
suit alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship
with Novamedix and a variety of ancillary claims. Novamedix seeks
injunctive relief and monetary damages. Initial discovery in
this case has been substantially completed. Although it is not
possible to predict the outcome of this litigation or the damages
which could be awarded, the Company believes that its defenses to
these claims are meritorious and that the litigation will not
have a material adverse effect on the Company's business, financial
condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust
lawsuit against Hillenbrand Industries, Inc. and one of its
subsidiaries, Hill-Rom. The suit was filed in the United States
District Court for the Western District of Texas. The suit
alleges that Hill-Rom used its monopoly power in the standard
hospital bed business to gain an unfair advantage in the specialty
hospital bed business. Specifically, the allegations set forth
in the suit include a claim that Hill-Rom required hospitals and
purchasing groups to agree to exclusively rent specialty beds
in order to receive substantial discounts on products over which
they have monopoly power -- hospital beds and head wall units. The
suit further alleges that HillRom 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 has not been completed and it is not possible
to predict the outcome of this litigation or the damages which
might be awarded, the Company believes that its claims are
meritorious.
On October 31, 1996 the Company received a counterclaim
which had been filed by Hillenbrand Industries, Inc. in the
antitrust lawsuit which the Company filed in 1995. The
counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable KCI to monopolize the bed
market. Although it is not possible to predict the outcome
of this litigation, the Company believes that the counterclaim is
without merit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------
Legal Proceedings (continued)
- -----------------------------
On December 26, 1996, Hill-Rom, a subsidiary of
Hillenbrand Industries, Inc., filed a lawsuit against the Company
alleging that the Company's TriaDyne bed infringes a patent
issued to Hill-Rom December 24, 1996. This suit was filed in the
United States District Court for the District of South Carolina.
Substantive discovery in the case has not begun. Based upon its
preliminary investigation, the Company believes that its defenses
to the lawsuit are meritorious and that this lawsuit will not have a
material adverse impact on the marketing of the TriaDyne bed.
The Company is a party to several lawsuits arising in
the ordinary course of its business and is contesting
adjustments proposed by the Internal Revenue Service to prior
years' tax returns. To the extent management believes reserves
are justified, reserves, have been made in the Company's
financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the
disposition of these matters will not have a material
adverse effect on the Company's business, financial
condition or results of operations.
The manufacturing and marketing of medical products
necessarily entails an inherent risk of product liability claims.
The Company currently has certain product liability claims
pending for which provision has been made in the Company's
financial statements. Management believes that resolution of these
claims will not have a material adverse effect on the Company's business,
financial condition or results of operations. The Company has not
experienced any significant losses due to product liability claims
and currently maintains adequate liability insurance coverage.
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1997, the Company
generated net cash provided by operating activities of $17.8
million compared to $25.4 million in the prior year period. The
majority of this decrease was attributable to the temporary
increase in accounts receivable, which increased $15.9 million
from year-end 1996. The Company made three business
acquisitions during the period for an aggregate purchase price of
approximately $12.4 million in cash. At June 30, 1997, cash and
cash equivalents totaling $38.4 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 June 30, 1997, the entire
amount of the Credit Agreement was unused. 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.
At June 30, 1997, the Company was committed to
purchase approximately $3.4 million of inventory associated with
new products over the remainder of this year. The Company did
not have any other material purchase commitments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1996 Annual Meeting of the Shareholders of Kinetic Concepts,
Inc. was held at 9:00 a.m. on May 13, 1997. The following
matters were acted upon by the shareholders at the annual meeting:
1. Sam A. Brooks, Frank A. Ehmann, Raymond R. Hannigan,
Wendy L. Gramm, P.h.D., James R. Leininger, M.D.,
Peter A. Leininger, M.D., and Bernhard T. Mittemeyer,
M.D. were each elected to serve as Directors of the
Company until the 1998 Annual Meeting of Shareholders
and until their successors were duly elected and
qualified. With respect to the election of Mr.
Brooks, Mr. Ehmann, Mr. Hannigan, Dr. Gramm,
Dr. James Leininger, Dr. Peter Leininger, and Dr.
Mittemeyer, each nominee as a director received
40,096,897 or more votes. No shareholders abstained
in the election of the directors and there were no
broker non-votes.
2. The Kinetic Concepts, Inc. Senior Executive
Stock Option Plan was approved. There were 38,836,714
votes for approval and 998,102 votes against approval.
3. The 1997 Kinetic Concepts, Inc. Employee Stock
Purchase Plan was approved. There were 39,778,810
votes for approval and 206,901 votes against approval.
4. The appointment of Ernst & Young LLP as the Company's
auditors for 1997 was approved. There were
40,104,213 votes for approval and 20,964 votes against
approval
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 Description
------- -----------
3.1 Restatement of Articles of Incorporation
(filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
3.2 Restated By-Laws of the Company (filed as
Exhibit 3.3 to the Company's Registration
Statement on Form S-1, as amended
(Registration No. 33-21353), and
incorporated herein by reference).
4.1 Specimen Common Stock Certificate of the
Company (filed as Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein
by reference).
10.1 Agreement dated September 29, 1987, by and
between the Company and Hill-Rom Company,
Inc. (filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-
1, as amended (Registration No. 33-21353),
and incorporated herein by reference).
10.2 Employment and Non-Competition Agreement
dated December 26, 1986, by and between the
Company and James R. Leininger, M.D. (filed
as Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as
amended (Registration No. 33-21353), and
incorporated herein by reference).
10.3 Contract dated September 30, 1985, by and
between Ryder Truck Rental, Inc. and the
Company regarding the rental of delivery
trucks (filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1, as amended
(Registration No. 33-21353), and incorporated
herein by reference).
10.4 1988 Kinetic Concepts, Inc. Directors Stock
Option Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1,
as amended (Registration No. 33-21353), and
incorporated herein by reference).
10.5 Kinetic Concepts, Inc. Employee Stock
Ownership Plan and Trust dated January 1, 1989
(filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein by
reference).
EXHIBITS (continued)
--------------------
10.6 1987 Key Contributor Stock Option Plan, as
amended, dated October 27, 1989 (filed as
Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989,
and incorporated herein by reference).
10.7 Amendment No. 1 to Asset Purchase Agreement
dated September 30, 1994 by and among Kinetic
Concepts, Inc., a Texas corporation, KCI
Therapeutic Services, Inc., a Delaware
corporation, MEDIQ Incorporated, a Delaware
corporation, PRN Holdings, Inc., a Delaware
corporation and MEDIQ/PRN Life Support
Services-I, Inc., a Delaware corporation
(filed as Exhibit 2.2 to the Company's Form
8K dated October 17, 1994, and incorporated
herein by reference).
10.17 Credit Agreement dated as of May 8, 1995 by
and among the Company and Bank of America
National Trust and Savings Association, as
Agent (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein
by reference).
10.18 Purchasing Agreement, dated February 1, 1994,
between the Company, KCI Therapeutic Services,
Inc. and Voluntary Hospitals of America,
Inc.(filed as Exhibit 10.18 to the Company's
Amended Annual Report on Form 10K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P. (filed as Exhibit 10.19 to the Company's
Amended Annual Report on Form 10-K/A, dated
January 23, 1996, for the year ended December
31, 1994, and incorporated herein by
reference).
10.20 KCI Management 1994 Incentive Program (filed
as Exhibit 10.20 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
10.21 KCI Employee Benefits Trust Agreement (filed
as Exhibit 10.21 to the Company's Amended
Annual Report on Form 10-K/A, dated January
23, 1996, for the year ended December 31,
1994, and incorporated herein by reference).
EXHIBITS (continued)
--------------------
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment (filed as Exhibit
10.22 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining the
terms of his employment (filed as Exhibit
10.23 to the Company's Amended Annual Report
on Form 10-K/A, dated January 23, 1996, for
the year ended December 31, 1994, and
incorporated herein by reference).
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan (filed as
Exhibit 10.24 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23, 1996,
for the year ended December 31, 1994, and
incorporated herein by reference).
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes (filed as
Exhibit 10.25 to the Company's Amended Annual
Report on Form 10-K/A, dated January 23, 1996,
for the year ended December 31, 1994, and
incorporated herein by reference).
10.26 Stock Purchase Agreement dated June 15, 1995
among KCI Financial Services, Inc., Kinetic
Concepts, Inc., Cura Capital Corporation, MG
Acquisition Corporation and the Principal
Shareholders of Cura Capital Corporation
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.27 Promissory Note dated August 21, 1995 in the
principal amount of $10,000,000 payable to
James R. Leininger, M.D. to the order of
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
10.28 Stock Pledge Agreement dated August 21, 1995
by and between James R. Leininger, M.D. and
Kinetic Concepts, Inc., a Texas corporation
(filed as Exhibit 2.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated
herein by reference).
EXHIBITS (continued)
---------------------
10.29 Executive Committee Stock Ownership Plan
(filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein
by reference).
10.30 Deferred Compensation Plan (filed as Exhibit
99.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
10.31 Kinetic Concepts, Inc. Senior Executive Stock
Option Plan (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).
10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan (filed as
Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.33 Asset Purchase Agreement dated January 3,
1997 by and among Trac Medical, Inc., a North
Carolina corporation, Terry Williams, David
Mattis, George Parrish and KCI Therapeutic
Services, Inc., a Delaware corporation(filed
as Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by
reference).
10.34 Asset Purchase Agreement dated January 27,
1997 by and among Hydrothermic Floatation
Systems, Inc., a California corporation, Y.
Jeremy Levy and KCI Therapeutic Services,
Inc., a Delaware corporation (filed as Exhibit
10.34 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference).
*10.35 Agreement for the sale and purchase of 80% of
the issued share capital of Ethos Medical
Group Limited by KCI International, Inc. dated
April 18, 1997.
11.1 Earnings Per Share Computation (filed as
Exhibit 11.1 to the Company's Annual Report on
Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
13.1 Kinetic Concepts, Inc. 1996 Annual Report to
Shareholders (furnished for the information of
the Commission and not deemed to be "filed,"
except for those portions expressly
incorporated herein by reference)(filed as
Exhibit 13.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
EXHIBITS (continued)
--------------------
16.1 Letter from KPMG Peat Marwick LLP to the
Securities and Exchange Commission regarding
agreement with statements made by Registrant
under Item 9 of its Form 10-K dated March 28,
1997 (filed as Exhibit 16.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
22.1 List of Subsidiaries (filed as Exhibit 22.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and
incorporated herein by reference).
*27.1 Financial Data Schedule.
Note: (*) Exhibits filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the 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.
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/ MARTIN J. LANDON
--------------------
Martin J. Landon
Vice President, Accounting and
Corporate Controller
Date: August 13, 1997