1
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, 1994
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 telephone 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: 43,899,570 shares as of June 30, 1994
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
June 30, 1994 December 31,
(unaudited) 1993
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 15,695 $ 10,280
Accounts receivable, net 61,862 63,872
Refundable income taxes - 3,712
Finance lease receivables, current 7,517 6,659
Inventories 21,635 20,902
Prepaid expenses 4,381 4,709
-------- --------
Total current assets 111,090 110,134
-------- --------
Net property, plant and equipment 100,480 113,602
Finance lease receivables, net of current 5,481 7,073
Goodwill, net 43,859 44,859
Other assets, net 10,348 8,905
-------- --------
$271,258 $284,573
======== ========
Liabilities and Capital Accounts
Current liabilities:
Note payable $ 2,937 $ 2,144
Current installments of long-term obligations 13,175 8,872
Current installments of capital lease obligations 2,590 2,955
Current installments of ESOP loan - 359
Accounts payable 5,670 7,751
Accrued expenses 24,140 24,499
Income taxes payable 256 2,647
-------- --------
Total current liabilities 48,768 49,227
-------- --------
Long-term obligations, excluding current installments 85,583 99,533
Capital lease obligations,
excluding current installments 811 2,060
ESOP loan, excluding current installments - 296
Deferred income taxes 4,985 7,710
-------- --------
140,147 158,826
-------- --------
Minority interest - 40
Common stock; issued, at par, 43,960 in 1994 and
45,501 in 1993 44 46
Additional paid-in capital 10,303 18,803
Retained earnings 121,826 117,685
Cumulative foreign currency translation adjustment (782) (1,602)
Treasury stock; common, at cost, 61 shares in
1994 and 1,542 shares in 1993 (232) (8,510)
Loan to ESOP - (655)
Notes receivable from officers (48) (60)
-------- --------
$271,258 $284,573
======== ========
See accompanying notes to condensed consolidated financial statements
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
Revenue:
Service and rental $ 57,413 $ 55,302 $119,161 $116,304
Sales and other 10,338 8,292 20,675 17,253
-------- -------- -------- --------
Total revenue 67,751 63,594 139,836 133,557
-------- -------- -------- --------
Rental expenses 41,569 41,368 86,005 84,017
Cost of goods sold 5,260 3,964 10,392 8,408
-------- -------- -------- --------
46,829 45,332 96,397 92,425
-------- -------- -------- --------
Gross profit 20,922 18,262 43,439 41,132
Selling, general and
administrative expenses 12,887 13,591 26,243 25,116
-------- -------- -------- --------
Operating income 8,035 4,671 17,196 16,016
Interest expense 1,647 1,633 3,501 3,326
-------- -------- -------- --------
Earnings before income taxes,
minority interest and
cumulative effect of changes
in accounting principle 6,388 3,038 13,695 12,690
Income taxes 3,215 1,590 7,040 5,500
-------- -------- -------- --------
Earnings before minority
interest and cumulative
effect of changes in
accounting principle 3,173 1,448 6,655 7,190
Minority interest in subsidiary loss - 55 40 55
Cumulative effect of changes in
method of accounting (Note 2) - - 742 450
-------- -------- -------- --------
Net earnings $ 3,173 $ 1,503 $ 7,437 $ 7,695
======== ======== ======== ========
Earnings per common and
common equivalent share:
Earnings before cumulative
effect of change in
accounting principle $ 0.07 $ 0.03 $ 0.15 $ 0.16
Cumulative effect of changes
in method of accounting
(Note 2) - - 0.02 0.01
-------- -------- -------- --------
Earnings per share $ 0.07 $ 0.03 $ 0.17 $ 0.17
======== ======== ======== ========
Shares used in earnings
per share computations 43,980 44,574 43,983 44,848
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Six months ended
June 30,
----------------------
Cash flows from operating activities: 1994 1993
-------- --------
Net earnings $ 7,437 $ 7,695
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 21,111 21,095
Other amortization, net 1,911 2,155
Provision for uncollectible accounts receivable 1,960 3,256
Change in assets and liabilities net of effect
from acquisitions:
Decrease in accounts receivable 340 1,474
Decrease in refundable income taxes 3,712 -
Increase in inventories (606) (1,633)
Decrease (increase) in prepaid expenses 329 (99)
Increase in other assets (1,009) (725)
Decrease in accounts payable (2,017) (1,114)
Increase (decrease) in accrued expenses (251) 307
Decrease in income taxes payable (2,361) (3,021)
Decrease in deferred income taxes (2,725) (1,097)
-------- --------
Net cash provided by operating activities 27,831 28,293
-------- --------
Cash flows from investing activities:
Additions to property, plant, and equipment (8,108) (20,895)
Increase in inventory to be converted into equipment
for short-term rental (1,000) (600)
Dispositions of property, plant, and equipment 1,329 1,210
Businesses acquired in purchase transactions, net of cash acquired - (4,127)
Decrease in finance lease receivables 734 415
Increase in other assets (605) (3,586)
-------- --------
Net cash used by investing activities (7,650) (27,583)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) of note payable and long-term obligations (8,854) 11,534
Repayments of capital lease obligations (1,614) (1,633)
Proceeds from the exercise of stock options 5 621
Minority interest in subsidiary loss, net (40) -
Purchase of treasury stock (232) (1,668)
Payments for retirement of preferred stock - (3,442)
Cash dividends paid to shareholders (3,296) (3,357)
Other (728) 492
-------- --------
Net cash provided (used) by financing activities (14,759) 2,547
-------- --------
Effect of exchange rate changes on cash and cash equivalents (7) 72
-------- --------
Net increase in cash and cash equivalents 5,415 3,329
Cash and cash equivalents beginning of year 10,280 6,963
-------- --------
Cash and cash equivalents end of period $ 15,695 $ 10,292
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the first six months for:
Interest $ 2,998 $ 3,237
Income taxes 7,925 6,085
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The foregoing financial information reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and results of operations for the interim periods presented. Interim
period operating results are not necessarily indicative of the results to
be expected for the full fiscal year. The financial information presented
for the interim periods is unaudited and subject to year-end audit and
adjustments. As a result of divisionalization, certain reclassifications
of rental and selling, general and administrative expenses related to 1993
have been made to conform with the current period's presentation.
(2) ACCOUNTING CHANGES
On January 1, 1994, the Company changed its method of applying overhead to
inventory. Historically, a single labor overhead rate and materials
overhead rate was 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 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), which reflects the cumulative effect of this change for the
periods prior to January 1, 1994. The proforma effects of the retroactive
application of the change in accounting principle have not been disclosed
as the effects cannot be reasonably estimated. The effect of the change
for the quarter ended June 30, 1994 on the results of operations before
the cumulative effect of the change is not material.
During the first quarter of 1993, the Company recorded the cumulative
effect of a change in accounting principle related to the adoption of FAS
109 "Accounting for Income Taxes" which resulted in a one-time after-tax
increase of $450,000, or $0.01 per share.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
(3) 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,
1994 1993
-------- ------------
Finished goods $ 5,995 $ 5,902
Work in process 1,416 1,546
Raw materials, supplies and parts 23,724 21,954
------- -------
31,135 29,402
Less amounts expected to be
converted into equipment for
short-term rental (9,500) (8,500)
------- -------
$21,635 $20,902
======= =======
(4) 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,
----------------- ---------------
1994 1993 1994 1993
------ ------ ------ ------
Average outstanding common shares 43,930 44,167 43,938 44,217
Average common equivalent shares-
dilutive effect of option shares 50 407 45 631
------ ------ ------ ------
Shares used in earnings
per share computations 43,980 44,574 43,983 44,848
====== ====== ====== ======
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.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic Concepts,
Inc. and subsidiaries as of June 30, 1994, and the related condensed
consolidated statements of earnings for the three and six month periods ended
June 30, 1994 and 1993 and the condensed consolidated statements of cash flows
for the six month periods ended June 30, 1994 and 1993. These consolidated
condensed 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, 1993, and the related consolidated statements
of earnings, capital accounts, and cash flows for the year then ended (not
presented herein); and in our report dated February 14, 1994, 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, 1993, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
KPMG PEAT MARWICK
San Antonio, Texas
July 22, 1994
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Second Quarter of 1994 Compared to Second Quarter of 1993
The following table details the Company's Condensed Consolidated Statements
of Earnings for the quarters ended June 30, 1994 and 1993 and provides the
relationship of each item to total revenue and the increase or decrease and
percentage change of each line item as compared to the second quarter of the
prior year (in thousands):
Three Months Ended June 30,
------------------------------------------------------
1994 1993 Increase (decrease)
--------------- --------------- -------------------
Revenue:
Service and rental $ 57,413 85% $ 55,302 87% $ 2,111 4%
Sales and other 10,338 15% 8,292 13% 2,046 25%
-------- --- -------- --- -------
67,751 100% 63,594 100% 4,157 7%
Rental expenses 41,569 61% 41,368 65% 201 1%
Cost of goods sold 5,260 8% 3,964 6% 1,296 33%
-------- --- -------- --- -------
Gross profit 20,922 31% 18,262 29% 2,660 15%
Selling, general and
administrative expenses 12,887 19% 13,591 21% (704) (5%)
-------- --- -------- --- -------
Operating Income 8,035 12% 4,671 8% 3,364 72%
Interest expense 1,647 2% 1,633 3% 14 1%
-------- --- -------- --- -------
Earnings before income taxes
and minority interest 6,388 10% 3,038 5% 3,350 110%
Income taxes 3,215 5% 1,590 3% 1,625 102%
-------- --- -------- --- -------
Earnings before minority
interest 3,173 5% 1,448 2% 1,725 119%
Minority interest in subsidiary
loss - - 55 - (55) -
-------- --- -------- --- -------
Net earnings $ 3,173 5% $ 1,503 2% $ 1,670 111%
======== === ======== === =======
Earnings per share $ 0.07 $ 0.03 $ 0.04 133%
======== ======== =======
Weighted shares 43,980 44,574 (594) (1%)
======== ======== =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenue in the second quarter of 1994 increased by 6.6% to $67.8
million from $63.6 million in the second quarter of 1993. Revenue from KCI
Therapeutic Services, KCI's domestic specialty patient surface businesses
including acute care and alternate care, was $37.5 million, down less than 1%
from the second quarter of 1993. Revenue from KCI's International division was
$11.4 million, up 14% from $10.0 million in the prior year quarter. Revenue
from the Company's other operating divisions, NuTech, Medical Retro Design and
KCI Medical Services increased 18.8% to $18.8 million in the second quarter of
1994 due primarily to increased revenue from NuTech and revenue contributed by
Clinical Systems, Inc., which was acquired in June, 1993.
Rental expenses largely consist of service center facility and personnel
costs, regional sales and administrative expenses, advertising and promotion,
depreciation of the Company's rental equipment, the cost of the parts and
accessories used to maintain the equipment and other related expenses. Rental
expenses were 61.0% of total revenue in the second quarter of 1994 compared to
65.1% in the second quarter of 1993. This decrease is primarily attributable
to lower depreciation expense as a result of reduced capital expenditures and
lower parts expense. Cost of goods sold includes the manufacturing cost of the
Company's beds and other products that are sold rather than rented by the
Company.
Gross profit increased 14.6% to $20.9 million in the second quarter of 1994
from $18.3 million in the second quarter of 1993 primarily due to the increase
in revenue.
Selling, general and administrative expenses decreased 5.2% to $12.9
million in the second quarter of 1994 from $13.6 million in the second quarter
of 1993. Selling, general and administrative expenses as a percentage of total
revenue decreased to 19.0% in the second quarter of 1994 from 21.4% in the
second quarter of 1993. This decrease was due primarily to a reduction of bad
debt expense.
Operating income increased 72.0% to $8.0 million in the second quarter of
1994 from $4.7 million in the prior year quarter. This increase is due to an
increase in rental and sales revenue as well as a decrease in selling, general
and administrative expenses.
Interest expense in the second quarter of 1994 was relatively constant
at $1.6 million. The average interest rate of the Company's debt increased
but was offset by a reduction of the principal balance of that debt.
The Company's effective income tax rate in the second quarter of 1994 was
50.3%, compared to 52.3% in the second quarter of 1993. The effective tax rate
for the second quarter of 1994 was lower than the effective rate in 1993
primarily as a result of the cumulative adjustment required in the 1993 quarter
to achieve an annual effective rate of 43.3% for 1993.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1994, the cumulative losses allocated to the minority interest
holder of Medical Retro Design exceeded the balance of its investment. As a
result, the Medical Retro Design second quarter loss was absorbed entirely by
the Company.
Net earnings increased 111.1% to $3.2 million in the second quarter of 1994
from $1.5 million in the second quarter of 1993. Earnings per share increased
133.3% to $0.07 per share from $0.03 per share in the prior year quarter. These
increases are primarily due to the increased revenues and more closely
controlled expenses as described above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Six Months of 1994 Compared to First Six Months of 1993
The following table details the Company's Condensed Consolidated Statements
of Earnings for the six months ended June 30, 1994 and 1993 and provides the
relationship of each item to total revenue and the increase or decrease and
percentage change of each line item as compared to the first six months of the
prior year (in thousands):
Six Months Ended June 30,
------------------------------------------------------
1994 1993 Increase (decrease)
--------------- --------------- ------------------
Revenue:
Service and rental $119,161 85% $116,304 87% $ 2,857 3%
Sales and other 20,675 15% 17,253 13% 3,422 20%
-------- --- -------- --- --------
139,836 100% 133,557 100% 6,279 5%
Rental expenses 86,005 62% 84,017 63% 1,988 2%
Cost of goods sold 10,392 7% 8,408 6% 1,984 24%
-------- --- -------- --- --------
Gross profit 43,439 31% 41,132 31% 2,307 6%
Selling, general and
administrative expenses 26,243 19% 25,116 19% 1,127 5%
-------- --- -------- --- --------
Operating Income 17,196 12% 16,016 12% 1,180 7%
Interest expense 3,501 2% 3,326 2% 175 5%
-------- --- -------- --- --------
Earnings before income
taxes, minority interest
and cumulative effect of
changes in accounting
principle 13,695 10% 12,690 10% 1,005 8%
Income taxes 7,040 5% 5,500 4% 1,540 28%
-------- --- -------- --- --------
Earnings before minority
interest and cumulative
effect of changes in
accounting principle 6,655 5% 7,190 6% (535) (7%)
Minority interest 40 - 55 - (15) -
Cumulative effect of changes
in method of accounting
(Note 2) 742 - 450 - 292 -
-------- --- -------- --- --------
Net earnings $ 7,437 5% $ 7,695 6% $ (258) (3%)
======== === ======== === ========
Earnings per share before
cumulative effect $ 0.15 $ 0.16 $ (0.01) -
Cumulative effect 0.02 0.01 0.01 -
-------- -------- --------
Net earnings per share $ 0.17 $ 0.17 $ 0.00 -
======== ======== ========
Weighted shares 43,983 44,848 (865) (2%)
======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenue in the first six months of 1994 increased by 4.7% to
$139.8 million from $133.6 million in the first six months of 1993. Revenue
from KCI Therapeutic Services, KCI's domestic specialty patient surface
businesses including acute care and alternate care, was $78.4 million, down
2.1% from $80.2 million for the first six months of 1993. Revenue from KCI's
International division was $21.4 million, up 6.1% from $20.2 million in the
same period of the prior year. Revenue from the Company's other operating
divisions, NuTech, Medical Retro Design and KCI Medical Services, was up 20.2%
to $40.0 million for this year from $33.3 million primarily due to increased
revenue from NuTech and revenue contributed by Clinical Systems, Inc., which
was acquired in June, 1993.
Rental expenses were 61.5% of total revenue in the first six months of
1994 compared to 62.9% in the first six months of 1993, due primarily to lower
personnel costs and parts expense. Cost of goods sold includes the
manufacturing cost of the Company's beds and other products that are sold
rather than rented by the Company.
Gross profit increased 5.6% to $43.4 million in the first six months of
1994 from $41.1 million in the first six months of 1993 primarily due to the
increase in revenue as discussed above.
Selling, general and administrative expenses increased 4.5% to $26.2
million in the first six months of 1994 from $25.1 million in the first six
months of 1993. Selling, general and administrative expenses as a percentage
of total revenue remained steady at 18.8% in the first six months of 1994.
Operating income increased 7.4% to $17.2 million in the first six
months of 1994 from $16.0 million in the same period of the prior year. This
increase is due to the increase in revenue and the control in the aggregate of
rental expenses, cost of goods sold and selling, general and administrative
expenses as a percentage of revenue as discussed above.
Interest expense in the first six months of 1994 increased 5.3% to
$3.5 million from $3.3 million in the first six months of 1993 primarily due
to an increase in the average interest rate.
The effective rate of income taxes in the first six months of 1994 was
51.4%, compared to 43.3% in the first six months of 1993. This increase is
primarily attributable to higher effective rates for state income and
international trade taxes.
Minority interest in the first six months of 1993 represents losses of
Medical Retro Design, Inc. allocated to the minority interest holder. During
1994, the cumulative losses allocated to Medical Retro Design, Inc. exceeded
the balance of its investment. As a result, a portion of the losses incurred
was absorbed by the Company.
During the first quarter of 1994, the Company recorded the cumulative
effect of a change in accounting principle related to its inventory costing
method which resulted in an increase of $742,000, or $0.02 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of 1993, the Company recorded the cumulative
effect of a change in accounting principle related to the adoption of FAS 109
"Accounting for Income Taxes" which resulted in a one-time after-tax increase
of $450,000, or $0.01 per share.
Net earnings decreased 3.3% to $7.4 million in the first six months of
1994 from $7.7 million in the first six months of 1993. Earnings per share
remained steady at $0.17 per share in the first six months of 1994.
Financial Condition
The change in revenue and expenses experienced by the Company during the
second quarter of 1994 and other factors resulted in changes to the Company's
balance sheet as follows:
Inventory at June 30, 1994 increased $0.7 million, or 3.5%, to $21.6
million from $20.9 million at December 31, 1993 primarily due to the change in
accounting principle as previously discussed.
Net property, plant and equipment at June 30, 1994 decreased $13.1
million, or 11.6%, to $100.5 million from $113.6 million at December 31, 1993
due to depreciation expense related to dispositions of rental equipment which
exceeded the cost of additions to rental equipment.
Other assets at June 30, 1994 increased $1.4 million, or 16.2%, to $10.3
million from $8.9 million at December 31, 1993. The growth in other assets is
primarily due to the increase in restricted cash related to the Company's
captive insurance company and deferred patent costs.
Current installments of long-term obligations increased $4.3 million to
$13.2 million at June 30, 1994 from $8.9 million at December 31, 1993
primarily due to the reclassification of certain long-term obligations to
current.
Long-term obligations decreased $14.0 million to $85.6 million at June 30,
1994 from $99.5 million at December 31, 1993 due to repayments made on the
Company's credit facility using net cash provided by operating activities and
to the reclassification of certain long-term obligations to current.
ESOP loan, including current installments, at June 30, 1994 decreased $0.7
million from December 31, 1993 due to the repayment of that loan during the
first quarter of 1994.
During 1994, the Company retired 1,541,876 shares of common stock held as
treasury shares with par value of $0.001 per share which resulted in a $8.5
million decline in additional paid-in capital and treasury stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Market Trends
During 1993, the introduction of the American Health Security Act and a
variety of competing legislative proposals created a national debate about
health care reform. However, attempts to reduce our nation's health care
costs did not begin in 1993. For the past decade, the health care industry
has experienced increased pressure from a variety of sources to control costs
and improve patient outcomes. Prior to 1983, health care providers lived in a
"cost plus" environment which did not require that cost effectiveness or
patient outcomes be accurately measured. In 1983, Congress created the "DRG"
system under which Medicare reimbursement was based upon an individual
patient's diagnosis rather than the actual cost incurred by a hospital to
treat the patient. In addition, the manner in which health care providers
were reimbursed for their capital costs, including the cost of buying or
renting the Company's products, has been significantly limited over the past
ten years. In general, the focus of these regulations has been to increase
health care providers' awareness of the importance of cost effectiveness,
managing patient outcomes and treating patients in the lowest cost environment
which is appropriate. Further regulatory changes which will impact the health
care industry loom on the horizon. Although specific legislative proposals
are being debated in both the United States House of Representatives and
Senate, it is uncertain which of the health care reform proposals, if any,
will be enacted. In any event, however, it is apparent that the health care
industry in the 1990's will be required to become more cost effective than it
is today and further improve patient outcomes. The reimbursement which the
Company receives for its products may be affected as a result of health care
reform.
Since 1987, the Company has been positioning itself to remain competitive
in an environment which demands accountability for patient outcomes at a lower
cost. The Company's Therapeutic Service's division offers the most complete
continuum of products in the industry and controls overall patient costs by
allowing the health care provider to match the needs of a particular patient
with the appropriate product and therapy. The Company has also made
significant investments in medical studies which demonstrate the clinical
efficacy and cost effectiveness of its products. Over the past several years,
the Company has entered into a number of partnering arrangements with its
customers which allow its customers to obtain state of the art medical
technology while at the same time lowering their overall costs. The Company
believes that these types of arrangements will be necessary in order to
succeed in the health care industry in the 1990's.
The Company also maintains the largest national accounts portfolio in the
specialty bed industry and expects to benefit from further consolidation of
providers and buying groups. At the same time, as shifts in reimbursement
policy have tended to move patients into lower cost environments, the Company
has continued to focus new efforts on the extended care and home care markets.
Since 1987, U.S. health care expenditures have grown 90% to $942.5
billion. Estimated U.S. health care expenditures are expected to exceed one
trillion dollars in 1994. While future performance cannot be assured, the
Company believes that it is well positioned to compete in the dynamic health
care marketplace.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Legal Proceedings
On September 3, 1991, the Company filed a lawsuit against SSI Medical
Services, Inc. in the United States District Court for the Western District of
Texas. The defendant is the Company's principal competitor in the specialty
bed market. The suit alleges that the defendants have marketed a product
which infringes several patents held by the Company and seeks injunctive
relief as well as actual and exemplary damages. Discovery in the suit was
substantially completed in the second quarter. Trial has been set for late
August of 1994. Although it is not possible to predict the outcome of this
litigation or the damages which could be awarded, the Company believes that
the award of significant damages in the suit is likely.
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, which is marketed by KCI New Technologies, Inc.
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. The Plaintiff seeks injunctive
relief and monetary damages. 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 result in a material impact on the Company's operations or
financial condition.
Liquidity and Capital Resources
During the second quarter of 1994, the Company generated net cash provided
by operating activities of $27.8 million compared to $28.3 million in the
prior year quarter. The Company believes that net cash provided by operations
during the next twelve month period will be sufficient to provide for new
investments in equipment and reduction of the Company's debt under its credit
agreement.
At June 30, 1994, cash and cash equivalents totaling $15.7 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 permits borrowings of up to
$130.0 million, $37.0 million of which was available at June 30, 1994.
At June 30, 1994, the Company was committed to purchase approximately
$1.8 million of inventory associated with a new product over the remainder of
this year. The Company did not have any other material purchase commitments.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1994 Annual Meeting of the Shareholders of Kinetic Concepts, Inc. was held
at 9:00 a.m. on May 10, 1994. The following matters were acted upon by the
shareholders at the annual meeting:
1. Sam A. Brooks, Frank A. Ehmann, 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 1995 Annual Meeting
of Shareholders and until their successors were duly elected and
qualified. With respect to Mr. Brooks' election, there were
41,381,536 votes for approval and 116,974 votes against approval.
With respect to Mr. Ehmann's election, there were 41,173,159 votes
for approval and 115,001 votes against approval. With respect to
Dr. James Leininger's election, there were 41,170,799 votes for
approval, 327,711 votes against approval, no abstentions and no
broker nonvotes. With respect to Dr. Peter Leininger's election,
there were 41,173,309 votes for approval and 325,201 votes against
approval. With respect to Dr. Mittemeyer's election there were
41,392,007 votes for approval and 101,785 votes against approval.
No shareholders abstained in the election of the directors and
there were no broker nonvotes.
2. The appointment of KPMG Peat Marwick as the Company's auditors for
1994 was approved. There were 41,403,018 votes for approval,
40,275 votes against approval, 50,499 abstentions and no broker
nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of all exhibits filed or included as part of this quarterly
report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------ -----------
15 Filed herewith Letter from KPMG
Peat Marwick dated
August 12, 1994
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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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,
President & Chief Executive Officer
By: /s/ BIANCA A. RHODES
Bianca A. Rhodes
Senior Vice President and
Chief Financial Officer
Date: August 12, 1994
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EXHIBIT INDEX
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------ -----------
15 Filed herewith Letter from KPMG
Peat Marwick dated
August 12, 1994