-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VqmXQJ4y71NcAiVcOnmb/4F9orL7/AJDzye+PhIXgUyNwZCWrqks4/0Xil4HQFSz Sn8uywjOjYjPAOkIP6foPw== 0000831967-96-000012.txt : 19960814 0000831967-96-000012.hdr.sgml : 19960814 ACCESSION NUMBER: 0000831967-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINETIC CONCEPTS INC /TX/ CENTRAL INDEX KEY: 0000831967 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 741891727 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09913 FILM NUMBER: 96609877 BUSINESS ADDRESS: STREET 1: 8023 VANTAGE DR CITY: SAN ANTONIO STATE: TX ZIP: 78230 BUSINESS PHONE: 2103083993 MAIL ADDRESS: STREET 1: P. 0. B0X 659508 CITY: SAN ANTONIO STATE: TX ZIP: 78230 10-Q 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, 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: 43,950,082 shares as of July 31, 1996 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) June 30, December 31, 1996 1995 ---------- ----------- Assets: (unaudited) ------- Current assets: Cash and cash equivalents........... $ 64,866 $ 52,399 Accounts receivable, net............ 56,308 56,032 Inventories......................... 20,647 18,854 Note receivable from principal shareholder....................... -- 10,291 Prepaid and other assets............ 7,826 4,865 -------- ------- Total current assets............. 149,647 142,441 -------- -------- Net property, plant and equipment..... 63,042 62,276 Other notes receivable, net........... 3,187 3,187 Goodwill, net......................... 14,192 13,968 Other assets, net..................... 21,883 21,854 -------- -------- $251,951 $243,726 ======== ======== Liabilities and Shareholders' Equity: ------------------------------------- Current liabilities: Accounts payable.................... $ 2,636 $ 2,512 Accrued expenses.................... 26,542 26,490 Income taxes payable................ 4,253 4,026 -------- -------- Total current liabilities........ 33,431 33,028 Capital lease obligations............. 574 -- Deferred income taxes, net............ 1,269 374 -------- -------- 35,274 33,402 -------- -------- Shareholders' equity: Common stock; issued and outstanding 44,192 in 1996 and 44,331 in 1995. 44 44 Additional paid-in capital.......... 6,036 12,123 Retained earnings................... 210,961 197,290 Cumulative foreign currency translation adjustment........................ (41) 1,052 Notes receivable from officers...... (323) (185) -------- -------- 216,677 210,324 -------- -------- $251,951 $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 Six months ended June 30, June 30, ------------------ ----------------- 1996 1995 1996 1995 ------- ------- ------- -------- Revenue: Rental and service...... $54,095 $50,432 $110,885 $ 98,854 Sales and other......... 10,177 9,358 20,974 17,963 ------- ------- -------- -------- Total revenue......... 64,272 59,790 131,859 116,817 Rental expenses........... 35,611 34,525 72,857 67,952 Cost of goods sold........ 3,786 4,313 7,829 8,229 ------- ------- -------- -------- 39,397 38,838 80,686 76,181 ------- ------- -------- -------- Gross profit.......... 24,875 20,952 51,173 40,636 Selling, general and administrative expenses. 12,154 12,235 24,711 22,342 ------- ------- -------- -------- Operating earnings.... 12,721 8,717 26,462 18,294 Net interest income....... 904 557 1,874 1,090 ------- ------- -------- -------- Earnings before income taxes............. 13,625 9,274 28,336 19,384 Income taxes.............. 5,438 3,558 11,335 7,570 ------- ------- -------- -------- Net earnings.......... $ 8,187 $ 5,716 $ 17,001 $ 11,814 ======= ======= ======== ======== Earnings per common and common equivalent share............. $ 0.18 $ 0.13 $ 0.37 $ 0.26 ======= ======= ======== ======== Shares used in earnings per share computations...... 46,459 45,242 46,015 45,183 ======= ======= ======== ======= 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, --------------------- 1996 1995 --------- --------- Cash flows from operating activities: Net earnings................................ $ 17,001 $ 11,814 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........... 11,709 11,442 Provision for uncollectible accounts receivable............................ 1,187 165 Loss on KCIFS disposition............... -- 2,933 Change in assets and liabilities: Decrease (increase) in accounts receivable.......................... (1,736) 3,104 Decrease in notes receivable.......... -- 5,049 Increase in inventories............... (1,983) (3,188) Increase in prepaid and other assets.. (2,395) (950) Increase in accounts payable.......... 597 1,623 Decrease in accrued expenses.......... (99) (1,059) Increase (decrease) in income taxes payable............................. 630 (5,584) Increase in deferred income taxes..... 492 2,714 ------ ------ Net cash provided by operating activities........................ 25,403 28,063 ------ ------ Cash flows from investing activities: Additions to property, plant, and equipment................................. (12,480) (16,522) Increase in inventory to be converted into equipment for short-term rental...... (150) (2,750) Dispositions of property, plant, and equipment................................. 750 425 Proceeds from KCIFS disposition............. -- 7,182 Decrease in finance lease receivables, net.. -- 339 Decrease in note receivable from principal shareholder............................... 10,000 -- Increase in other assets.................... (1,340) -- ------ ------ Net cash used by investing activities (3,220) (11,326) ------ ------ Cash flows from financing activities: Repayments of note payable and long-term obligations................................ -- (853) Proceeds from the exercise of stock options.. 4,276 1,180 Purchase and retirement of treasury stock.... (10,363) -- Cash dividends paid to shareholders.......... (3,331) (3,309) Other........................................ (138) -- ------- ------- Net cash used by financing activites. (9,556) (2,982) ------- ------- Effect of exchange rate changes on cash and cash equivalents............................. (160) 803 ------- ------- Net increase in cash and cash equivalents...... 12,467 14,558 Cash and cash equivalents, beginning of year... 52,399 43,241 ------- ------- Cash and cash equivalents, end of period....... $ 64,866 $ 57,799 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the first six months for: Interest................................... 82 254 Income taxes............................... 6,160 8,492 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, first- out) or market (net realizable value). Inventories are comprised of the following (in thousands): June 30, December 31, 1996 1995 ---------- ------------ Finished goods.......... $ 3,892 $ 2,890 Work in process......... 2,763 1,040 Raw materials, supplies and parts............. 19,392 20,174 ------- ------- 26,047 24,104 Less amounts expected to be converted into equipment for short-term rental... 5,400 5,250 ------- ------- Total inventories.. $20,647 $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 Six months ended June 30, June 30, ------------------ ----------------- 1996 1995 1996 1995 -------- -------- -------- ------- Average outstanding common shares...... 44,307 44,206 44,332 44,102 Average common equivalent shares-dilutive effect of option shares.... 2,152 1,036 1,683 1,081 ------ ------ ------ ------ Shares used in earnings per share computations 46,459 45,242 46,015 45,183 ====== ====== ====== ====== 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' 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 Long- Lived 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) 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. 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, 1996, and the related condensed consolidated statements of earnings for the three and six month periods ended June 30, 1996 and 1995 and the condensed consolidated statements of cash flows for the six month periods ended June 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 July 16, 1996 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Results of Operations Second Quarter of 1996 Compared to Second 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 second quarter of the prior year ($ in thousands): Three Months Ended June 30, _______________________________________ Variance Revenue Relationship Increase (Decrease) -------------------- ------------------ 1996 1995 $ Pct --------- -------- -------- ------ Revenue: Rental and service.... 84% 84% $ 3,663 7% Sales and other....... 16% 16% 819 9% ---- ---- ------ 100% 100% 4,482 7% Rental expenses......... 55% 58% 1,086 3% Cost of goods sold...... 6% 7% (527) (12%) ---- ---- ----- Gross profit.......... 39% 35% 3,923 19% Selling, general and administrative expenses 19% 20% (81) (1%) ---- ---- ----- Operating earnings...... 20% 15% 4,004 46% Net interest income....... 1% 1% 347 62% ---- ---- ----- Earnings before income taxes. .............. 21% 16% 4,351 47% Income taxes............... 8% 6% 1,880 53% ---- ---- ----- Net earnings............ 13% 10% $2,471 43% ==== ==== ===== -------------------------------------------------------------------- The Company's revenue is derived from four primary markets. The following table sets forth the amount of revenue derived from each of these markets for the periods indicated ($ in millions): Three months ended June 30, ------------------------ 1996 1995 -------- -------- Acute/Extended......... $41.1 $35.9 HomeCare............... 2.6 3.1 International.......... 16.9 15.8 Medical Devices........ 3.5 4.3 Other.................. .2 .7 ---- ---- $64.3 $59.8 ==== ==== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Total revenue in the second quarter of 1996 increased by $4.5 million, or 7%, to $64.3 million from $59.8 million in the second quarter of 1995. Revenue from the Company's specialty patient surface business was $43.7 million, up $4.7 million, or 12%, from the second quarter of 1995. This increase was due to the success of the TriaDyne specialty bed and the addition of various national accounts which are contributing to market share gains. In addition, the company experienced strong growth in patient days in the extended care (nursing and rehabilitation) segment. Revenue in the Home Care segment was down slightly from the prior-year period although patient days were up from the second quarter of 1995. This decrease resulted, in part, from the Company's shift to an independent dealer network beginning in 1995. Revenue received from dealers is less than that which the Company would receive from direct sales because revenue from dealers is net of dealer service expenses, however, the dealer network provides access to a larger patient population. In addition, the Company believes sales in this segment slowed in anticipation of the introduction of a new product, the TriCell, a high-end, multi-featured overlay product specifically designed for the home care market. Revenue from the Company's international operations was $16.9 million, up 7% from the second quarter of 1995, despite unfavorable currency rate fluctuations. Excluding the effect of currency fluctuations, revenue increased by 19% compared to the 1995 quarter. Increased market penetration and increased sales contributed towards the higher revenue. Revenue from medical device operations decreased 19% to $3.5 million in the second quarter of 1996 due primarily to a shift in market demand from rentals to sales. During this transition, product "trials" are underway which should begin to produce higher revenue in the second half of the year. Rental expenses were 66% of rental revenue in the second quarter of 1996 compared to 68% in the second quarter of 1995. This decrease is primarily attributable to the increase in rental revenue, as the majority of rental expenses are relatively fixed, combined with operational efficiencies attributable, in part, to the new Genesis operations management system. Gross profit increased $3.9 million, or 19%, to $24.9 million in the second quarter of 1996 from $21.0 million in the second quarter of 1995 due to the increase in revenue, controlled growth in rental expenses and improved sales margins. Selling, general and administrative expenses of $12.2 million approximated the 1995 quarter. As a percentage of total revenue, selling, general and administrative expenses were at 19% in the second quarter of 1996 as compared with 20% in the second quarter of 1995. The 1995 quarter included a $2.9 million charge for the loss on the sale of the Financial Services division in June 1995. On a comparable basis, the increased spending in 1996 was due primarily to certain investments, e.g. new marketing programs and information systems. Operating earnings for the period increased $4.0 million, or 46%, to $12.7 million compared to $8.7 million in the prior-year quarter resulting largely from revenue growth. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Net interest income for the three months ended June 30, 1996 was $900,000 compared to $560,000 in the prior year. This increase was due to interest recognized on a note receivable obtained in a sale of assets. Interest on this note is paid quarterly, in arrears, beginning in the second quarter of 1996. The Company's effective income tax rate in the second quarter of 1996 was 40%, up slightly from the prior year due primarily to an increase in the state income tax rate. Net earnings increased $2.5 million, or 43%, to $8.2 million in the second quarter of 1996 from $5.7 million in the second quarter of 1995. This increase was due to the relative decrease in rental expenses, increased net interest income and the change in revenue as discussed above. First Six Months of 1996 Compared to First Six Months of 1995 - ------------------------------------------------------------- The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the first six months of the prior year ($ in thousands): Six Months Ended June 30, __________________________________________ Variance Revenue Relationship Increase(Decrease) -------------------- ------------------ 1996 1995 $ Pct --------- --------- --------- -------- Revenue: Rental and service.. 84% 85% $ 12,031 12% Sales and other..... 16% 15% 3,011 17% ---- ---- ------- 100% 100% 15,042 13% Rental expenses....... 55% 58% 4,905 7% Cost of goods sold.... 6% 7% (400) ( 5%) ---- ---- ------ Gross profit..... 39% 35% 10,537 26% Selling, general and administrative expenses 19% 19% 2,369 11% ---- ---- ------ Operating earnings 20% 16% 8,168 45% Net interest income... 1% 1% 784 72% ---- ---- ------ Earnings before income taxes... 21% 17% 8,952 46% Income taxes.......... 8% 7% 3,765 50% ---- ---- ------ Net earnings..... 13% 10% $ 5,187 44% ==== ==== ======= --------------------------------------------------------------------- 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): Six months ended June 30, ----------------- 1996 1995 -------- ------- Acute/Extended........ $ 83.3 $ 70.2 HomeCare.............. 6.3 6.8 International......... 34.2 29.5 Medical Devices....... 7.9 8.0 Other (1)............. .2 2.3 ----- ----- $131.9 $116.8 ===== ===== (1) Consists of revenue of KCIFS, MRD and other sales. Total revenue for the first six months of 1996 increased by $15.0 million or 13% to $131.9 million. Revenue from the Company's specialty patient surface business was $89.6 million, up $12.6 million, or 16%, from the six months end June 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 slightly from the prior- year period, however, patient days were up from the first six months of 1995. Revenue from the Company's international operations was $34.2 million, up 16% from the six months ended June 30, 1995. On a local currency basis, excluding exchange rate fluctuations, revenue from the international segment increased nearly 23%. Increased market penetration and increased sales contributed towards the higher revenue. Revenue from medical device operations in the first six months of 1996 was comparable to the prior year. Rental expenses were 66% of total rental revenue in the six months ended June 30, 1996 compared to 69% in the six 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 $10.5 million, or 26%, to $51.2 million in the six months ended June 30, 1996 due to the increase in revenue, controlled growth in rental expenses and improved sales margins. Selling, general and administrative expenses increased $2.4 million, or 11%, to $24.7 million in the first six months of 1996 from $22.3 million in the first six months of 1995. As a percentage of total revenue, selling, general and administrative expenses were at 19% in the six months ended June 30, 1996 as compared with 19% in the six months of 1995. Operating earnings for the period increased $8.2 million, or 45%, to $26.5 million compared to $18.3 million in the prior-year resulting largely from the above-mentioned revenue growth. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Net interest income for the six months ended June 30, 1996 was $1.9 million compared to $1.1 million in the prior year. This increase was due to interest recognized on a note receivable obtained in a sale of assets. Interest on this note is paid quarterly, in arrears , beginning in 1996. The Company's effective income tax rate in the first six months ended June 30, 1996 was 40% as compared to 39% in the first six months of 1995. Net earnings increased $5.2 million, or 44%, to $17.0 million in the first six months of 1996 from $11.8 million in the first six months of 1995. 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 has 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 six months ended June 30, 1996 and other factors resulted in changes to the Company's balance sheet as follows: Inventory at June 30, 1996 increased $1.7 million, or 10%, to $20.6 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 Sweden while inventory levels in Germany increased to support strong sales demand of TheraCare and First Step 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 June 30, 1996 increased $700,000, or 1%, to $63.0 million from $62.3 million at December 31, 1995 due to additions to rental equipment and computer systems in excess of depreciation and dispositions. Capital expenditures were $11.9 million during the first six months of 1996 as the Company invested in new products for its rental fleet and new computer systems. Additional paid-in capital decreased $6.1 million, or 50%, during the first half of 1996 due primarily to the purchase and retirement of approximately 680,000 shares of common stock under a program which authorizes the Company to purchase up to 3 million shares of its stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ 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 and balance the federal budget. As a result, the Company believes that health care providers will continue to experience heightened cost control pressures. Industry trends including pricing pressures, the consolidation of health care providers and national and regional group purchasing organizations and a shift in market demand toward lower-priced products such as mattress overlays have had the impact of reducing the Company's average daily rental rates on its products. These industry trends, together with the increasing migration of patients from acute care to extended and home care settings have had an effect of reducing the Company's historical revenue from acute care facilities. 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 introductions of the TriaDyne and BariKare beds have enabled it to further penetrate this market. More recently, sales have increased as a portion of the Company's revenue. The Company believes this trend will continue because certain U.S. health care providers are purchasing products that are less expensive and easier to maintain such as medical devices, mattress overlays and mattress replacement systems. In addition, international health care providers tend to purchase products more often than U.S. health care providers, and the Company's revenue from international operations represents an increasing portion of the Company's total 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - ------------------------------------------------------------ Liquidity and Capital Resources - ------------------------------- During the six months ended June 30, 1996, the Company generated net cash provided by operating activities of $25.4 million compared to $28.1 million in the prior year period. At June 30, 1996, cash and cash equivalents totaling $64.9 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, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The 1996 Annual Meeting of the Shareholders of Kinetic Concept, Inc. was held at 9:00 a.m. on May 14, 1996. The following matters were acted upon by the shareholders at the annual meeting: 1. Sam A. Brooks, Frank A. Ehmann, Raymond R. Hannigan, James R. Leininger, M.D., Peter A. Leininger, M.D., and Bernhard T. Mittemeyer, M.D. were each elected to serve as Directors of the Company until the 1997 Annual Meeting of Shareholders and until their successors were duly elected and qualified. With respect to Mr. Brooks' election, there were 42,181,455 votes for approval and 174,990 votes against approval. With respect to Mr. Ehmann's election, there were 42,171,400 votes for approval and 185,045 votes against approval. With respect to Mr. Hannigan's election, there were 42,165,555 votes for approval and 190,890 votes against approval. With respect to Dr. James Leininger's election, there were 42,163,905 votes for approval and 192,540 votes against approval, no abstentions and no broker non-votes. With respect to Dr. Peter Leininger's election, there were 42,168,555 votes for approval and 187,890 votes against approval. With respect to Dr. Mittemeyer's election there were 42,179,155 votes for approval and 177,290 votes against approval. No shareholders abstained in the election of the directors and there were no broker non-votes. 2. The appointment of KPMG Peat Marwick as the Company's auditors for 1996 was approved. There were 42,300,487 votes for approval, 20,490 votes against approval, 35,468 abstentions and no broker non-votes. 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 August 12, 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: August 12, 1996 EX-15 2 Kinetic Concepts, Inc. San Antonio, Texas Gentlemen: Re: Registration Statement Nos. 33-26673, 33-26674 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 16, 1996 related to our review of interim financial information. Pursuant to Rule 436 (c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /S/ KPMG PEAT MARWICK LLP ------------------------- KPMG Peat Marwick LLP San Antonio, Texas August 12, 1996 EX-27 3
5 3-MOS DEC-31-1995 JUN-30-1996 64,866,379 0 64,800,601 (7,927,445) 20,647,345 149,647,149 179,251,181 (116,209,906) 251,950,999 33,431,667 0 0 0 44,202 216,632,256 251,950,999 20,973,591 131,858,567 7,829,114 97,567,902 0 1,187,099 (1,873,678) 28,335,230 11,334,092 17,001,138 0 0 0 17,001,138 0.43 0.43
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