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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_______________ to ________________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
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(Exact name of registrant as specified in its charter)
Texas 74-1891727
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(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, TX 78230 (210) 524-9000
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(Address of principal executive (Registrant's telephone number)
offices and zip code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
As of March 1, 1998, there were 17,713,152 shares of the Registrant's
Common Stock outstanding, 17,613,152 of which were held by affiliates.
FORM 10-K TABLE OF CONTENTS
PART I PAGE
Item 1. Business........................................... 4
Item 2. Properties......................................... 18
Item 3. Legal Proceedings.................................. 18
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 20
Item 6. Selected Financial Data............................ 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 24
Item 8. Financial Statements and Supplementary Data........ 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 78
PART III
Item 10. Directors and Executive Officers of the Registrant.. 79
Item 11. Executive Compensation.............................. 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................... 84
Item 13. Certain Relationships and Related Transactions...... 85
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 86
Signatures................................................... 90
TriaDyner, BariKarer, The V.A.C.r, PlexiPulser, PlexiPulse All-in-
1 System TM, KinAirr III, First Stepr, FirstStepr Plus,
FirstStepr Select, FirstStepr MRS, TheraPulser, BioDyner,
BioDyner II, FluidAirr Plus, FluidAirr Elite, RotoRestr, Q2
Plusr, HomeKairr DMS, DynaPulser, FirstStepr TriCell,
Impressionr, RotoRestr Delta, PediDyner, BariAirer, FirstStepr
Select Heavy Duty, TriCellr, RIKr and AirWorksr Plus, are
trademarks of the Company used in this Report. Kinetic Therapy
SM, The Clinical Advantage SM, Genesis SM and Odyssey SM are
service marks of the Company used in this Report.
CAUTINARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements.
The forward-looking statements made in "Business", "Legal
Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which reflect
management's best judgment based on market and other factors
currently known, involve risks and uncertainties. When used in
this Report, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe" and similar expressions are
intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions
made by management of the Company, which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such estimates and statements. No
assurance can be given that any of such statements or estimates
will be realized and actual results will differ from those
contemplated by such forward-looking statements.
PART I
Item 1. Business
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General
Kinetic Concepts, Inc. (the "Company" or "KCI") is a worldwide
leader in innovative therapeutic systems which prevent and treat
the complications of immobility that can result from disease,
trauma, surgery or obesity. The Company's clinically effective
therapeutic systems include specialty hospital beds, specialty
mattress overlays and non-invasive medical devices combined with
on-site patient care consultation by the Company's
clinically-trained staff. The complications of immobility include
pressure sores, pneumonia and circulatory problems which can
increase patient treatment costs by as much as $75,000 and, if left
untreated, can result in death. The Company's therapeutic systems
can significantly improve clinical outcomes while reducing the cost
of patient care by preventing these complications or accelerating
the healing process, as well as by providing labor savings. The
Company has also been successful in applying its therapeutic
expertise to bring to market innovative medical devices that treat
chronic wounds and help prevent blood clots.
The Company designs, manufactures, markets and services its
products, many of which are proprietary. KCI's therapeutic systems
are used to treat patients across all health care settings
including acute care hospitals, extended care facilities and
patients' homes. Health care providers generally prefer to rent
rather than purchase the Company's products in order to avoid the
ongoing service, storage and maintenance requirements and the high
initial capital outlay associated with purchasing such products, as
well as to receive the Company's high-quality clinical support.
The Company can deliver its therapeutic systems to any major
domestic trauma center within two hours of notice through its
network of service centers.
Founded by James R. Leininger, M.D., an emergency room
physician, to provide better care for his patients, the Company was
incorporated in Texas in 1976. The Company's principal offices are
located at 8023 Vantage Drive, San Antonio, Texas 78230 and its
telephone number is (210) 524-9000.
On November 5, 1997, a substantial interest in the Company was
acquired by certain affiliates of Fremont Partners L.P. ("Fremont")
and Richard C. Blum & Associates, L.P. ("RCBA") (collectively, the
"Investors") pursuant to the terms of a Transaction Agreement dated
October 2, 1997, as amended by a letter agreement dated November 5,
1997 (as so amended, the "Transaction Agreement"). Under the terms
of the Transaction Agreement, the Investors purchased approximately
7.8 million newly-issued shares of the Company's common stock. The
proceeds of the stock purchase, together with proceeds from certain
financings were used to purchase approximately 31.0 million shares
of the Company's common stock from the selling shareholders and pay
all related fees and expenses. The entities controlled by the
Investors were subsequently merged with and into the Company, with
the Company as the surviving corporation. Following the merger,
Fremont, RCBA, Dr. James Leininger and Dr. Peter Leininger own
approximately 7.0 million, 4.6 million, 5.9 million and 0.1 million
common shares, respectively, representing 39.7%, 26.2%, 33.5% and
0.6% of the total shares outstanding. There are currently no other
shareholders, however, members of management have retained, and
have been granted, additional options to purchase shares.
Therapies
The Company's therapeutic systems deliver one or a combination
of the following therapies:
Pressure Relief/Pressure Reduction. The Company's pressure
relief and pressure reduction surfaces provide effective skin care
therapy in the treatment of pressure sores, burns, skin grafts and
other skin conditions and help prevent the formation of pressure
sores which develop in certain immobile individuals. The Company's
beds and mattress overlays reduce the amount of pressure at any
point on a patient's skin by using surfaces supported by air,
silicon beads, or a viscous fluid. Some of the products further
promote healing through pulsation.
Pulmonary Care. The Company's pulmonary care systems provide
Kinetic Therapy to help prevent and treat acute respiratory
problems, such as pneumonia, by reducing the build-up of fluid in
the lungs. The United States Centers for Disease Control (the
"CDC") defines Kinetic Therapy as the lateral rotation of a patient
by at least 40 degrees to each side (a continuous 80 degree arc).
Some of the Company's products combine Kinetic Therapy with
additional therapies such as percussion and pulsation which help
loosen mucous buildup and promote circulation.
Bariatric Care. The Company offers a line of bariatric care
products which are designed to accommodate obese individuals. These
products are used generally for patients weighing from 300 to 600
pounds, but can accommodate patients weighing nearly 1,000 pounds.
These individuals are often unable to fit into standard-sized beds
and wheelchairs. The Company's most sophisticated bariatric care
product can serve as a bed, chair, scale and x-ray table, helps
patients enter and exit the bed, and contains other features which
permit patients to be treated safely and with dignity. Moreover,
treating obese patients is a significant staffing issue for many
health care facilities because moving and handling these patients
increases the risk of worker's compensation claims by such
personnel. Management believes that these products enable health
care personnel to treat these patients in a manner which is safer
to hospital personnel than traditional methods, which can help
reduce worker's compensation claims. Some of the bariatric products
also address complications of immobility and obesity such as
pressure sores.
Closure of Chronic Wounds. The Company is the provider of a
patented, non-invasive device which uses negative pressure to
promote the healing of chronic wounds. The negative pressure is
applied through a proprietary foam dressing which draws the tissue
together, stimulates blood flow, reduces swelling and decreases
bacterial growth. The device heals wounds more quickly than
traditional methods and has been effective at closing chronic
wounds which have, in some cases, been open for years.
Circulatory Improvement. The Company offers a non-invasive
device which improves blood circulation, decreases swelling in the
lower extremities and reduces the incidence of blood clots. The
therapy is accomplished by wrapping inflatable cuffs around a foot
or leg and then automatically inflating and deflating them at
prescribed intervals. The products are often used by individuals
who have had hip or knee surgeries, diabetes, or other conditions
which reduce circulation.
Corporate Organization
In 1997, the Company was organized into four operating
divisions: KCI Therapeutic Services, Inc. ("KCI Therapeutic
Services" or "KCTS"), KCI Home Care, KCI International, Inc. ("KCI
International") and KCI New Technologies, Inc. ("NuTech"). At the
beginning of 1998, the Company combined the operations of KCTS and
KCI Home Care into a single business unit.
KCI Therapeutic Services
KCI Therapeutic Services provides a broad line of therapeutic
specialty support surfaces to patients in acute and sub-acute
facilities as well as extended care settings. This division
consists of approximately 1,100 personnel, many of whom have a
medical or clinical background. Sales are generated by a sales
force of approximately 350 individuals who are responsible for new
accounts in addition to the management and expansion of existing
accounts. A portion of this sales force is focused exclusively on
either the extended care market or the acute care market although
the majority of the sales force is responsible for sales across
both settings.
KCI Therapeutic Services has a national 24-hour, seven
days-a-week customer service communications system which allows it
to quickly and efficiently respond to its customers' needs. The
Company distributes its specialty patient support surfaces to acute
and extended care facilities through a network of 143 domestic
service centers. The KCTS service centers are organized as profit
centers and the general managers who supervise the service centers
are responsible for both sales and service operations. Each center
has an inventory of specialty beds and overlays which are delivered
to the individual hospitals or extended care facilities on an
as-needed basis.
The KCTS sales and support staff is comprised of approximately
250 employees with medical or clinical backgrounds. The principal
responsibility of approximately 125 of these clinicians is making
product rounds and participating in treatment protocols. These
clinicians educate the hospital or long-term facility staff on
issues related to patient treatment and assist in the establishment
of protocols. The clinical staff makes approximately 200,000
patient rounds annually. KCTS accounted for approximately 65%, 64%
and 61%, respectively, of the Company's total revenue in the years
ended December 31, 1997, 1996 and 1995.
KCI Home Care
KCI has developed a continuum of products that address the
unique demands of the home health care market. In January 1995, KCI
Home Care started a transition from a combined direct/dealer
distribution system to distributing its products through home
medical equipment ("HME") dealers. The Company believes that
selling products through the home care provider network gives it
access to a larger patient population and improves the overall
contribution from this business segment despite a reduction in per
patient revenue. Subsequent to 1997, the Company has combined the
operations of KCTS and KCI Home Care into a single business unit.
KCI International
KCI International offers the Company's therapies and services
in 12 foreign countries including Germany, Austria, the
United Kingdom, Canada, France, the Netherlands, Switzerland,
Australia, Italy, Denmark, Sweden and Ireland. The Denmark
office has recently been expanded to service all of Scandinavia. In
addition, relationships with 75 independent distributors in Latin
America, the Middle East, Asia and Eastern Europe allow KCI
International to service the demands of a growing global market.
KCI International accounted for approximately 23%, 25% and 25%,
respectively, of the Company's total revenue in the years ended
December 31, 1997, 1996 and 1995. See Note 13 of Notes to
Consolidated Financial Statements for information on foreign and
domestic operations.
NuTech
NuTech manufactures and markets the PlexiPulse and PlexiPulse
All-in-l System. The products are sold through a direct sales force
and a limited number of independent distributors and rented through
an alliance with MEDIQ/PRN, a national medical device rental
company with a strong portfolio of national accounts. NuTech
accounted for approximately 6% of the Company's total revenue in
1997.
Products
The Company's "Continuum of Care" is focused on treating wound
care patients, pulmonary patients, large or obese patients and
patients with circulatory problems by providing innovative, outcome
driven therapies across multiple care settings. The Company's
therapies include Pressure Relief/Pressure Reduction, Pulmonary
Care, Bariatric Care, Closure of Chronic Wounds and Circulatory
Improvement.
Pressure Relief/Pressure Reduction
The Company's pressure relief products include a variety of
framed beds and overlays such as the KinAir III, TheraPulse,
FluidAir Elite, HomeKair, First Step TriCell, DynaPulse, First Step
Plus, First Step Select, AirWorks Plus, Impression, RIK mattress,
and RIK overlay. The KinAir III has been shown to provide effective
skin care therapy in the treatment of pressure sores, burns and
post operative skin grafts and flaps, and to help prevent the
formation of pressure sores and certain other complications of
immobility. The TheraPulse provides a more aggressive form of
treatment through continuous pulsating action which gently massages
the skin to help promote capillary and lymphatic circulation in
patients suffering from severe pressure sores, burns, skin grafts
or flaps, swelling or circulation problems. The FluidAir Elite
supports the patient on a low-pressure surface of air-fluidized
silicon beads providing pressure relief for skin grafts or flaps,
burns and pressure sores and also has built in scales. The HomeKair
bed and TriCell overlay are low-cost pressure relief products
designed to be easily transportable directly to a patient's home.
The DynaPulse is a pulsating mattress replacement system that helps
prevent pressure ulcers in patients at high risk for skin breakdown
and can also be used to treat existing pressure ulcers. The First
Step family of overlays is designed to provide pressure relief and
help prevent pressure sores. AirWorks Plus is a low-cost overlay
which has air chambers which assist in redistributing pressure for
better skin care. Impression is a self-contained for-sale product
for the prevention of pressure sores which is intended to replace
standard hospital mattresses. The RIK mattress and the RIK overlay
are non-powered products that provide pressure relief utilizing a
patented viscous fluid and an anti-shear layer.
Pulmonary Care
The CDC defines Kinetic Therapy as lateral rotation of a
patient by at least 40 degrees on each side (a continuous 80 degree
arc). The Company believes Kinetic Therapy is essential to the
prevention or effective treatment of pneumonia and other pulmonary
complications in immobile patients. The Company's Kinetic Therapy
products include the TriaDyne, RotoRest, RotoRest Delta, PediDyne,
BioDyne II and Q2 Plus. The TriaDyne, introduced in mid-1995,
provides patients in acute care settings with three distinct
therapies on an air suspension surface. The TriaDyne applies
Kinetic Therapy by rotating the patient up to 40 degrees to each
side and provides an industry-first feature of simultaneously
turning the patient's torso and lower body in opposite directions
while keeping the patient positioned in the middle of the bed. The
TriaDyne can also provide percussion therapy to the patient's chest
to loosen mucous buildup in the lungs and pulsating therapy to
promote capillary circulation. The TriaDyne is built on Stryker
Corporation's critical care frame, which is well suited to an ICU
environment. The TriaDyne offers several other novel features not
available on other products. The RotoRest Delta is a specialty bed
which can rotate a patient up to a 62 degree angle on each side for
the treatment of pulmonary complications and prevention of
pneumonia. The RotoRest has been shown to improve the care of
patients suffering from multiple trauma, spinal cord injury, severe
pulmonary complications, respiratory failure and deep vein
thrombosis. The PediDyne, introduced in 1997, provides many of the
benefits found in the TriaDyne to pediatric patients. The BioDyne
II combines many of the therapeutic benefits of the KinAir III and
the RotoRest and is used by patients suffering from pneumonia,
coma, stroke and chronic neurological disorders.
Bariatric Care
The Company markets a line of therapeutic support surfaces and
aids for patients suffering from obesity, a market that had
previously been underserved. These products not only provide the
proper support needed by obese patients, but also enable nurses to
care for these patients in a dignified manner. Moreover, treating
obese patients is a significant staffing issue for many health care
facilities because moving and handling these patients increases the
risk of worker's compensation claims by nurses. The use of the
Company's bariatric products enables hospital staff to treat and
move obese patients in a manner which is safer to hospital
personnel while utilizing fewer hospital personnel. The most
advanced product in this line is the BariKare, which can serve as a
bed, chair, scale and x-ray table. This product is used generally
for patients weighing from 300 to 600 pounds but can be used for
patients who weigh up to nearly 1,000 pounds. The Company believes
that the BariKare is the most advanced product of its type
available today. In 1996, the Company also introduced the FirstStep
Select Heavy Duty overlay which incorporates pressure-relieving
therapy in a design that supports patients weighing up to 650
pounds. The Company recently introduced a new therapy-driven
bariatric product, the BariAire. The BariAire provides pressure
relief, patient turn assistance and step-down features designed for
both patient comfort and nurse assistance.
Closure of Chronic Wounds
The Company manufactures and markets the Vacuum Assisted
Closure device (the "V.A.C."), a non-invasive, active wound closure
therapy that utilizes negative pressure. The V.A.C. promotes
healing in wounds, pressure ulcers and grafts that frequently do
not respond to traditional methods of treatment. Treatment prot-
ocols with the V.A.C. call for a proprietary foam material to be
fitted and placed in or on top of a wound and covered with an
airtight, occlusive dressing. The foam is attached to a separate
vacuum pump. When activated, the vacuum pump creates a negative
pressure in the wound that draws the tissue together. This vacuum
action also stimulates blood flow on the surface of the wound,
reduces edema and decreases bacterial colonization, all of which
stimulate healing. The dressing material is replaced every 48 hours
and fitted to accommodate the decreasing size of the wound over
time. This is a significant improvement over the traditional method
for treating wounds which requires the nursing staff to clean and
dress a serious wound every 8 to 12 hours.
Circulatory Improvement
The PlexiPulse and PlexiPulse All-in-1 System are non-invasive
vascular assistance devices that aid venous return by pumping blood
from the lower extremities to help prevent deep vein thrombosis
("DVT") and re-establish microcirculation. The pumping action is
created by compressing specific parts of the foot or calf with
specially designed inflatable cuffs that are connected to a
separate pump unit. The cuffs are wrapped around the foot and/or
calf and are inflated in timed increments by the pump. The
intermittent inflation compresses a group of veins in the lower
limbs and boosts the velocity of blood flowing back toward the
heart. This increased velocity has been proven to significantly
decrease formation of DVT in non-ambulatory post-surgical and
post-trauma patients. The PlexiPulse is effective in preventing
DVT, reducing edema and improving lower limb blood circulation.
Competition
The Company believes that the principal competitive factors
within its markets are product efficacy, clinical outcomes, service
and cost of care. Furthermore, the Company believes that a national
presence with full distribution capabilities is important to serve
large, sophisticated national and regional health care group
purchasing organizations ("GPOs") and providers.
The Company contracts with both proprietary hospital groups
and voluntary GPOs. Proprietary groups own all of the hospitals
which they represent and, as a result, can ensure compliance with a
national agreement. Voluntary GPOs negotiate contracts on behalf of
member hospital organizations but cannot ensure that their members
will comply with the terms of a national agreement. Approximately
47% of the Company's total revenue during 1997 was generated under
national agreements with proprietary groups and voluntary GPOs in
the acute and extended care settings.
The Company competes on a national level with Hill-Rom,
Kendall and Invacare and on a regional and local level with
numerous other companies. The Company competes principally with
Invacare in the home care segment. NuTech competes primarily with
Kendall International in the foot and leg compression market. In
the U.S. specialty surface market and certain international
markets, the Company competes principally with Hill-Rom.
Market Outlook
The Company believes that it is well positioned to address the
following factors affecting the market for health care products and
services:
Uncertainty of Health Care Reform
There are widespread efforts to control health care costs in
the United States and abroad. As an example, the Balanced Budget
Act of 1997 (the "BBA") significantly reduces federal spending on
Medicare and Medicaid over the next five years by reducing annual
payment updates to acute care hospitals, changing payment systems
for both skilled nursing facilities and home health care services
from cost-based to prospective payment systems, eliminating annual
payment updates for durable medical equipment("DME"), and allowing
states greater flexibility in controlling Medicaid costs at the state
level. Until the Health Care Financing Administration ("HCFA") issues
regulations implementing this legislation in 1998, the Company
cannot reliably predict the timing of or the exact effect which these
initiatives could have on the pricing and profitability of, or
demand for, the Company's products. However, certain of the pro-
visions of the BBA, such as the changes in the manner Medicare
Part A reimburses skilled nursing facilities, may change the manner
in which the Company's customers make renting and purchasing
decisions and could have a material adverse effect on the Company.
The Company also believes it is likely that efforts by governmental
and private payors to contain costs through managed care and other
efforts and to reform health systems will continue in the future.
Consolidation of Purchasing Entities
One of the most tangible results of the health care reform
debate in the United States has been to cause health care providers
to examine their cost structures and reassess the manner in which
they provide health care services. This review, in turn, has led
many health care providers to merge or consolidate with other
members of their industry in an effort to reduce costs or achieve
operating synergies. A substantial number of the Company's
customers, including proprietary hospital groups, group purchasing
organizations, hospitals, national nursing home companies and
national home health care agencies, have been affected by this
consolidation. An extensive service distribution network and broad
product line is key to servicing the needs of these larger provider
networks. In addition, the consolidation of health care providers
often results in the renegotiation of contracts and in the granting
of price concessions. Finally, as group purchasing organizations
and integrated health care systems increase in size, each contract
represents a greater concentration of market share and the adverse
consequences of losing a particular contract increases
considerably.
Reimbursement of Health Care Costs
The Company's products are rented and sold principally to
hospitals, skilled nursing facilities and DME suppliers who receive
reimbursement for the products and services they provide from
various public and private third party payors, including Medicare,
Medicaid and private insurance programs. The Company also acts as a
Durable Medical Equipment Supplier under 42 U.S.C. 1395 et seq. and
as such furnishes its products directly to customers and bills
payors. As a result, the demand for the Company's products in any
specific care setting is dependent in part on the reimbursement
policies of the various payors in that setting. In order to be
reimbursed, the products generally must be found to be reasonable
and necessary for the treatment of medical conditions and must
otherwise fall within the payor's list of covered services. For
example, the Company is seeking to establish coverage and payment by
Medicare Part A and Medicare Part B for the V.A.C., its chronic
wound treatment product. Although clinical acceptance of this
product has continued to increase, it has not been officially
classified as a covered item by either Part A or Part B. In light
of increased controls on Medicare spending, there can be no assur-
ance on the outcome of future coverage or payment decisions for any
of the Company's products by governmental or private payors. If
providers, suppliers and other users of the Company's products
and services are unable to obtain sufficient reimbursement for the
provision of KCI products, a material adverse impact on the Company's
business, financial condition or operations could result.
Fraud and Abuse Laws
The Company is subject to various federal and state laws
pertaining to health care fraud and abuse including prohibitions on
the submission of false claims and the payment or acceptance of
kickbacks or other remuneration in return for the purchase or lease
of Company products. The United States Department of Justice and
the Office of the Inspector General of the United States Department
of Health and Human Services launched an enforcement initiative
which specifically targets the long term care, home health and DME
industries. Sanctions for violating these laws include criminal
penalties and civil sanctions, including fines and penalties, and
possible exclusion from the Medicare, Medicaid and other federal
health care programs. Although the Company believes its business
arrangements comply with federal and state fraud and abuse laws,
there can be no assurance that the Company's practices will not be
challenged under these laws in the future or that such a challenge
would not have a material adverse effect on the Company's business,
financial condition or results of operations.
Patient demographics
U.S. Census Bureau statistics indicate that the 65-and over
age group is the fastest growing population segment and is expected
to exceed 75 million by the year 2010. Management of wounds and
circulatory problems is crucial for elderly patients. These
patients frequently suffer from deteriorating physical conditions
and their wound problems are often exacerbated by incontinence and
poor nutrition.
Obesity is increasingly being recognized as a serious medical
complication. In 1994, approximately 650,000 patients in U.S.
hospitals had a principal or secondary diagnosis of obesity. Obese
patients tend to have limited mobility and thus are at risk for
circulatory problems and skin breakdown. Treating obese patients
is also a significant staffing issue for many health care
facilities and a cause of worker's compensation claims among
nurses.
Research and Development
The focus of the Company's research and development program
has been to develop new products and make technological
improvements to existing products. Since January 1994, the Company
has introduced a number of new products including: the TriaDyne,
the BariKare, the TriCell, the First Step Select Heavy
Duty, the FluidAir Elite, the PlexiPulse All-in-1 System, the
BariAire, the PediDyne and The V.A.C., a product developed from
technology licensed to the Company. Expenditures for research and
development represented approximately 2% of the Company's total
expenditures in 1997. The Company intends to continue its research
and development efforts.
Manufacturing
The Company's manufacturing processes for its specialty beds,
mattress overlays, and medical devices include the manufacture of
certain components, the purchase of certain other components from
suppliers and the assembly of these components into a completed
product. Mechanical components such as blower units, electrical
displays and air flow controls consist of a variety of customized
subassemblies which are purchased from suppliers and assembled by
the Company. The Company believes it has an adequate source of
supply for each of the components used to manufacture its products.
Patents and Trademarks
The Company seeks patent protection in the United States and
abroad. As of December 31, 1997, the Company had 59 issued U.S.
patents relating to its specialized beds, mattresses and related
products. The Company also has 32 pending U.S. Patent applications.
Many of the Company's specialized beds, products and services are
offered under trademarks and service marks. The Company has 28
registered trademarks and service marks in the United States Patent
and Trademark Office.
Employees
As of December 31, 1997, the Company had approximately 2,100
employees. The Company's employees are not represented by labor
unions and the Company considers its employee relations to be good.
Government Regulation
United States. The Company's products are subject to
regulation by numerous governmental authorities, principally the
United States Food and Drug Administration ("FDA") and
corresponding state and foreign regulatory agencies. Pursuant to
the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or
approvals, and criminal prosecution. The FDA also has the authority
to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company that violates statutory
or regulatory requirements.
In the United States, medical devices are classified into one
of three classes (Class I, II or III) on the basis of the controls
deemed necessary by the FDA to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls
(e.g., labeling, premarket notification, and adherence to Quality
System Regulations) although many Class I devices are exempt from
certain FDA requirements. Class II devices are subject to
general and special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are high risk devices that receive
greater FDA scrutiny to ensure their safety and effectiveness
(e.g., life-sustaining, life-supporting and implantable devices, or
new devices which have been found not to be substantially
equivalent to legally marketed devices). Before a new medical
device can be introduced in the market, the manufacturer must
generally obtain FDA clearance ("510(k) Clearance") or Premarket
Approval ("PMA"). All of the Company's current products have been
classified as Class I or Class II devices, which typically are
legally marketed based upon 510(k) Clearance. The FDA has announced
plans to evaluate its classification system and reclassify or
exempt many devices that are currently classified as Class I
devices. 510(k) Clearance will generally be granted if the
submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed medical device.
The FDA recently has been requiring a more rigorous demonstration
of substantial equivalence than in the past.
All devices manufactured or distributed by the Company are
subject to pervasive and continuing regulation by the FDA and
certain state agencies, including record keeping requirements and
mandatory reporting of certain adverse experiences resulting from
use of the devices. Labeling and promotional activities are
subject to regulation by the FDA and, in certain circumstances, by
the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved
uses and the FDA scrutinizes the advertising of medical devices to
ensure that unapproved uses of medical devices are not promoted.
Manufacturers of medical devices for marketing in the United
States are required to adhere to applicable regulations setting
forth detailed Quality System Regulation ("QSR") (formerly Good
Manufacturing Practices) requirements, which include design,
testing, control and documentation requirements. Manufacturers must
also comply with MDR requirements that a company report certain
device-related incidents to the FDA. The Company is subject to
routine inspection by the FDA and certain state agencies for
compliance with QSR requirements, MDR requirements and other
applicable regulations. The Company is also subject to numerous
federal, state and local laws relating to such matters as safe
working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Changes in existing requirements
or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, and results
of operations. There can be no assurance that the Company will not
incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material
adverse effect upon the Company's business, financial condition or
results of operations.
Fraud and Abuse Laws. The Company is subject to federal and
state laws pertaining to health care fraud and abuse. In
particular, certain federal and state laws prohibit manufacturers,
suppliers, and providers from offering or giving or receiving
kickbacks or other remuneration in connection with the ordering or
recommending purchase or rental, of health care items and
services. The federal anti-kickback statute provides both civil and
criminal penalties for, among other things, offering or paying any
remuneration to induce someone to refer patients to, or to
purchase, lease, or order (or arrange for or recommend the
purchase, lease, or order of), any item or service for which
payment may be made by Medicare or certain federally-funded
state health care programs (e.g., Medicaid). This statute also
prohibits soliciting or receiving any remuneration in exchange
for engaging in any of these activities. The prohibition
applies whether the remuneration is provided directly or indirectly,
overtly or covertly, in cash or in kind. Violations of the law can
result in numerous sanctions, including criminal fines, imprison-
ment, and exclusion from participation in the Medicare and Medicaid
programs.
These provisions have been broadly interpreted to apply to
certain relationships between manufacturers and suppliers, such as
the Company, and hospitals, skilled nursing facilities ("SNFs"),
and other potential purchasers or sources of referral. Under
current law, courts and the Office of Inspector General ("OIG") of
the United States Department of Health and Human Services ("HHS")
have stated, among other things, that the law is violated where
even one purpose (as opposed to a primary or sole purpose) of a
particular arrangement is to induce purchases or patient referrals.
The OIG has taken certain actions which suggest that
arrangements between manufacturers/suppliers of durable medical
equipment or medical supplies and SNFs (or other providers) may be
under continued scrutiny. An OIG enforcement initiative, Operation
Restore Trust ("ORT"), has targeted an investigation of fraud and
abuse in a number of states (i.e., California, Florida, Illinois,
New York, and Texas), focusing specifically on the long-term care,
home health, and DME industries. ORT's funding has officially ended
and the Inspector General has announced plans to implement an
"ORT-Plus" program in other states in conjunction with other
federal law enforcement bodies. Furthermore, in August 1995, the
OIG issued a Special Fraud Alert describing certain relationships
between SNFs and suppliers that the OIG viewed as abusive under the
statute. These initiatives create an environment in the industry in
which the Company operates in which there will continue to be
significant scrutiny for compliance with federal and state fraud
and abuse laws.
Several states also have referral, fee splitting and other
similar laws that may restrict the payment or receipt of
remuneration in connection with the purchase or rental of medical
equipment and supplies. State laws vary in scope and have been
infrequently interpreted by courts and regulatory agencies, but may
apply to all health care items or services, regardless of whether
Medicaid or Medicaid funds are involved.
The Company is also subject to federal and state laws
prohibiting the presentation (or the causing to be presented) of
claims for payment (by Medicare, Medicaid, or other third party
payors) that are determined to be false, fraudulent, or for an item
or service that was not provided as claimed. In one case, a major
DME manufacturer paid more than $4 million to settle allegations
that it had "caused to be presented" false Medicare claims through
advice that its sales force allegedly gave to customers concerning
the appropriate reimbursement coding for its products.
ISO Certification. Due to the harmonization efforts of a
variety of regulatory bodies worldwide, certification of compliance
with the ISO 9000 series of International Standards ("ISO
Certification") has become particularly
advantageous and, in certain circumstances necessary for many
companies in recent years. Beginning in June of 1998, ISO
Certification is expected to be required for all manufacturers
selling and distributing products within the European Economic
Community. The Company received ISO Certification in the fourth
quarter of 1997.
Other Laws. The Company owns and leases property that is
subject to environmental laws and regulations. The Company also is
subject to numerous federal, state and local laws and regulations
relating to such matters as safe working conditions, manufacturing
practices, fire hazard control and the handling and disposal of
hazardous or potentially hazardous substances.
International Sales of medical devices outside of the United
States are subject to regulatory requirements that vary widely from
country to country. Premarket clearance or approval of medical
devices is required by certain countries. The time required to
obtain clearance or approval for sale in a foreign country may be
longer or shorter than that required for clearance or approval by
the FDA and the requirements may vary. Failure to comply with
applicable regulatory requirements can result in loss of previously
received approvals and other sanctions and could have a material
adverse effect on the Company's business, financial condition or
results of operations.
Reimbursement
The Company's products are rented and sold principally to
hospitals, extended care facilities and HME providers who receive
reimbursement for the products and services they provide from
various public and private third-party payors, including the
Medicare and Medicaid programs and private insurance plans. The
Company also directly bills third party payors, including Medicare
and Medicaid, and receives reimbursement from these payors. In such
cases, Medicare beneficiaries are billed twenty percent for
coinsurance. As a result, demand and payment for the Company's
products is dependent in part on the reimbursement policies of
these payors. The manner in which reimbursement is sought and
obtained for any of the Company's products varies based upon the
type of payor involved and the setting in which the product is
furnished and utilized by patients.
Medicare. Medicare is a federally-funded program that
reimburses the costs of health care furnished primarily to the
elderly and disabled. Medicare is composed of two parts: Part A and
Part B. The Medicare program has established guidelines for the
coverage and reimbursement of certain equipment, supplies and
support services. In general, in order to be reimbursed by
Medicare, a health care item or service furnished to a Medicare
beneficiary must be reasonable and necessary for the diagnosis or
treatment of an illness or injury or to improve the functioning of
a malformed body part. This has been interpreted to mean that the
item or service must be safe and effective, not experimental or
investigational (except under certain limited circumstances
involving devices furnished pursuant to an FDA-approved clinical
trial), and appropriate. Specific Medicare guidelines have not
currently been established addressing under what circumstances, if
any, Medicare coverage would be provided for the use of the
PlexiPulse or the V.A C.
The methodology for determining the amount of Medicare
reimbursement of the Company's products varies based upon, among
other things, the setting in which a Medicare beneficiary receives
health care items and services. The recently enacted BBA will
significantly impact the manner in which Medicare reimbursement is
funded over the next five years. Most of the Company's products are
furnished in a hospital, skilled nursing facility or the
beneficiary's home.
Hospital Setting. With the establishment of the prospective
payment system in 1983, acute care hospitals are now generally
reimbursed by Medicare for inpatient operating costs based upon
prospectively determined rates. Under the prospective payment
system ("PPS"), acute care hospitals receive a predetermined
payment rate based upon the Diagnosis-Related Group ("DRG") into
which each Medicare beneficiary is assigned, regardless of the
actual cost of the services provided. Certain additional or
"outlier" payments may be made to a hospital for cases involving
unusually long lengths of stay or high costs. However, outlier
payments based upon length of stay are gradually being phased out
and will be eliminated effective with fiscal year 1998.
Furthermore, pursuant to regulations issued in 1991, and subject to
a ten-year transition period, the capital costs of acute care
hospitals (such as the cost of purchasing or renting the Company's
specialty beds) are also reimbursed by Medicare pursuant to an
add-on to the DRG-based payment amount. Accordingly, acute care
hospitals generally do not receive direct Medicare reimbursement
under PPS for the distinct costs incurred in purchasing or renting
the Company's products. Rather, reimbursement for these costs is
deemed to be included within the DRG-based payments made to
hospitals for the treatment of Medicare-eligible inpatients who
utilize the products. Since PPS rates are predetermined, and
generally paid irrespective of a hospital's actual costs in
furnishing care, acute care hospitals have incentives to lower
their inpatient operating costs by utilizing equipment and supplies
that will reduce the length of inpatient stays, decrease labor, or
otherwise lower their costs.
The principal manner in which the BBA impacts Medicare Part A
in the acute care setting is that it has reduced the annual DRG
payment updates to be paid over the next five years by more than
$40.0 billion. In addition, the BBA authorizes HCFA to enact
regulations which are designed to restrain certain hospital
reimbursement activities which are perceived to be abusive or
fraudulent.
Certain specialty hospitals (e.g., long-term care,
rehabilitation and children hospitals) also use the Company's
products. Such specialty hospitals currently are exempt from the
PPS and, subject to certain cost ceilings, are reimbursed by
Medicare on a reasonable cost basis for inpatient operating and
capital costs incurred in treating Medicare beneficiaries.
Consequently, long-term care hospitals may receive separate
Medicare reimbursement for reasonable costs incurred in purchasing
or renting the Company's products; however, Medicare reimbursement
for such hospitals is expected to be reduced by $3.5 billion over
the next five years. There can be no assurance that a prospective
payment system will not be instituted for such hospitals in future
legislation.
Skilled Nursing Facility Setting. Skilled Nursing Facilities
("SNFs") which purchase or rent the Company's products may be
reimbursed directly under Medicare Part A for some portion of their
incurred costs. Generally speaking, only the costs of treatment
during the first 100 days of a qualifying spell of illness are
subject to Medicare reimbursement. The costs incurred by SNFs in
furnishing care to Medicare beneficiaries are categorized as either
routine costs or ancillary costs. Routine costs are those costs
which are incurred for items and services routinely furnished to
all patients (e.g., general nursing services, items stocked in
gross supply). Ancillary costs are considered those costs which are
incurred for items or services ordered to treat a condition of a
specific patient and which are not generally furnished to most
patients. Ancillary costs are not subject to the routine
cost limits. Given the current routine cost limits, SNFs may be more
inclined to purchase or rent products which are reimbursed by
Medicare as ancillary items or services than if these products were
reimbursed as routine items or services. At present, the Company's
specialty beds are classified under Medicare Part A as ancillary
items. HCFA currently interprets the definition of ancillary items
to include certain support surfaces such as low air loss mattress
replacements, bed overlay systems and air fluidized therapy. Neither
The V.A.C. nor the PlexiPulse have yet been classified as ancillary
items when furnished in a SNF setting.
On July 1, 1998, the manner in which SNFs are reimbursed under
Medicare Part A will change dramatically. On that date,
reimbursement for SNFs under Medicare Part A will change from a
cost-based system to a prospective payment system. The new payment
system will be based on resource utilization groups ("RUGs"). Under
the RUGs system, a SNF Medicare patient will be assigned to a RUGs
category upon admission to the SNF. The RUGs category to which the
patient will be assigned will depend upon the level of care and
resources the patient requires. The SNF will receive a fixed per
diem payment based upon the RUGs category assigned to each Medicare
patient. The per diem payments made to the SNFs will be based upon
a blend of their actual costs and a national average cost (which is
subject to local wage-based adjustments). Initially, 75% of a SNF's
per diem will be based on its costs and 25% of the per diem will be
based on national average cost. At the end of a four-year phase-in
period, all per diem payments will be based on the national average
cost. Because the RUG's system provides SNFs with fixed cost
reimbursement, SNFs may be less inclined than they have in the past
to use products which had previously been reimbursed as ancillary
costs. Because the Company believes its products are both cost
effective and efficacious, the Company believes that it will be
able to rent and sell its products effectively under the RUGs
system.
Home Setting. The Company's products are also provided to
Medicare beneficiaries in home care settings. Medicare reimburses
beneficiaries, or suppliers accepting assignment, for the purchase
or rental of DME for use in the beneficiary's home or a home for
the aged (as opposed to use in a hospital or skilled nursing
facility setting). So long as the Medicare Part B coverage criteria
are met, certain of the Company's products, including air fluidized
beds, air-powered floatation beds and alternating air mattresses,
are reimbursed in the home setting under the DME category known as
"Capped Rental Items." Pursuant to the fee schedule payment
methodology for this category, Medicare pays a monthly rental fee
(for a period not to exceed fifteen months) equal to 80% of the
established allowable charge for the item. Guidelines concerning
under what circumstances, if any, The V.A.C. or the PlexiPulse will
be covered and reimbursed by DME have not been established. Under
the BBA, there will be a five-year freeze on consumer price index
updates for Medicare Part B Services in the home care setting.
Medicaid. The Medicaid program is a cooperative federal/state
program that provides medical assistance benefits to qualifying low
income and medically-needy persons. State participation in Medicaid
is optional and each state is given discretion in developing and
administering its own Medicaid program, subject to certain federal
requirements pertaining to payment levels, eligibility criteria and
minimum categories of services. The Medicaid program finances
approximately 50% of all care provided in skilled nursing
facilities nationwide. The Company sells or rents its products to
SNFs for use in furnishing care to Medicaid recipients. SNFs, or
the Company, may seek and receive Medicaid reimbursement directly
from states for the incurred costs. However, the method and level
of reimbursement, which generally reflects regionalized average
cost structures and other factors, varies from state to state.
Private Payors. Many private payors, including indemnity
insurers, employer group health insurance programs and managed care
plans, presently provide coverage for the purchase and rental of
the Company's products. The scope of coverage and payment policies
varies among private payors. Furthermore, many such payors are
investigating or implementing methods for reducing health care
costs, such as the establishment of capitated or prospective
payment systems.
The Company believes that government and private efforts to
contain or reduce health care costs are likely to continue. These
trends may lead third-party payors to deny or limit reimbursement
for the Company's products, which could negatively impact the
pricing and profitability of, or demand for, the Company's
products.
Item 2. Properties
- ------ ----------
The Company's corporate headquarters are currently located in
a 170,000 square foot building in San Antonio, Texas which was
purchased by the Company in January 1992. The Company utilizes
89,000 square feet of the building with the remaining space being
leased to unrelated entities.
The Company conducts its manufacturing, shipping, receiving
and storage activities in a 153,000 square foot facility in San
Antonio, Texas, which was purchased by the Company in January 1988.
In 1989, the Company completed the construction of a 17,000 square
foot addition to the facility which is utilized as office space.
The Company also owns a 37,000 square foot building in San Antonio,
Texas which houses the Company's engineering center and currently
serves as the NuTech division headquarters. In 1992, the Company
purchased a 35,000 square foot facility in San Antonio, Texas which
is used for storage. The Company maintains additional storage at
two leased facilities in San Antonio, Texas. In 1994, the Company
purchased a facility in San Antonio, Texas which has been provided
to a charitable organization to provide housing for families of
cancer patients. The facility is built on 6.7 acres and consists of
a 15,000 square foot building and a 2,500 square foot house. In
June 1997, the Company acquired a 2.8 acre tract of land adjacent
to its corporate headquarters. There are three buildings on the
land which contain an aggregate of 40,000 square feet.
The Company leases approximately 143 domestic distribution
centers, including each of its seven regional headquarters, which
range in size from 1,500 to 18,000 square feet.
Item 3. 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 reliably predict the outcome of this litigation
or the damages which could be awarded, the Company believes that
its defenses to these claims are meritorious and that the litigation
will not have a material adverse effect on the Company's business,
financial condition or results of operations.
On August 16, 1995, the Company filed a civil antitrust
lawsuit against Hillenbrand Industries, Inc. and one of its
subsidiaries, Hill-Rom. The suit was filed in the United States
District Court for the Western District of Texas. The suit alleges
that Hill-Rom used its monopoly power in the standard hospital bed
business to gain an unfair advantage in the specialty hospital bed
business. Specifically, the allegations set forth in the suit
include a claim that Hill-Rom required hospitals and purchasing
groups to agree to exclusively rent specialty beds in order to
receive substantial discounts on products over which they have
monopoly power - hospital beds and head wall units. The suit
further alleges that Hill-Rom engaged in activities which
constitute predatory pricing and refusals to deal. Hill-Rom has
filed an answer denying the allegations in the suit. Although
discovery has not been completed and it is not possible to reliably
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 specialty therapeutic
surface market. Although it is not possible to reliably predict the
outcome of this litigation, the Company believes that the
counterclaim is without merit.
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.
This suit was filed in the United States District Court for the
District of South Carolina. Based upon its preliminary
investigation, the Company does not believe that the TriaDyne bed
infringes any valid claims of the Hill-Rom patent or that this
lawsuit will have a material adverse impact on the Company's
business.
The Company is a party to several lawsuits arising in the
ordinary course of its business, including three other lawsuits
alleging patent infringement by the Company, and the Company is
contesting adjustments proposed by the Internal Revenue Service to
prior years' tax returns in Tax Court. Provisions 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 management believes that the Company currently maintains
adequate liability insurance coverage.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
A special meeting of the shareholders of the Company was held
on January 5, 1998 for the purpose of approving the Transaction
Agreement. A total of 19,518,595 shares of the Company's Common
Stock were entitled to vote at the meeting; 14,897,892 shares of
common stock were voted in favor of approval of the Transaction
Agreement and no shares of common stock were voted against
approval.
PART II
Item 5. Market for Registrant's Common Equity and Related
- ------- -------------------------------------------------
Stockholder Matters
-------------------
The Company's common stock ("Common Stock") traded on The
Nasdaq Stock Market under the symbol: KNCI until November 19, 1997,
which was the date on which the Company delisted its common stock.
The range of the high and low bid prices of the Common Stock for
each of the quarters during the 1997 and 1996 fiscal years is
presented below, through the last date that the Company's common
stock was traded on a national exchange.
MARKET PRICES OF COMMON STOCK
1997 1996
---------------------- -----------------------
High Low High Low
First Quarter $15.750 $11.375 $13.875 $10.438
Second Quarter 18.375 13.500 17.375 13.125
Third Quarter 19.938 16.875 16.063 13.500
Fourth Quarter 19.500 18.125 15.000 11.875
The Company's Board of Directors declared quarterly cash
dividends on the Common Stock in 1997 and 1996. The cash dividends
totaled $0.1125 and $0.15 per common share in each of 1997 and
1996, respectively. The Company's credit agreements contain
certain covenants which currently restrict the Company's ability to
declare and pay cash dividends.
As of March 1, 1998, there were 4 holders of record of the
Company's Common Stock. There is currently no established public
trading market for the Company's Common Stock.
Item 6. Selected Financial Data
- ------- -----------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
1997 1996 1995 1994 1993
-------- -------- ------- -------- -------
Consolidated Statements of
Earnings Data:
Revenue:
Rental and service...... $247,890 $225,450 $206,653 $228,832 $232,250
Sales and other......... 59,026 44,431 36,790 40,814 36,622
------- ------- ------- ------- -------
Total revenue......... 306,916 269,881 243,443 269,646 268,872
------- ------- ------- ------- -------
Rental expenses........... 156,179 146,205 137,420 159,235 169,687
Cost of goods sold........ 23,673 16,315 13,729 19,388 18,666
------- ------- ------- ------- -------
Gross profit.......... 127,064 107,361 92,294 91,023 80,519
Selling, general and
administrative expenses. 62,654 52,007 48,502 51,813 53,279
Unusual items (1)......... -- -- -- (84,868) 6,705
Recapitalization expense (2) 34,361 -- -- -- --
------- ------- ------- ------- -------
Operating earnings.... 30,049 55,354 43,792 124,078 20,535
Interest income........... 2,263 9,332 5,063 1,318 2,911
Interest expense.......... (10,173) (245) (509) (5,846) (8,819)
Foreign currency loss..... (1,106) -- -- -- --
------ ------ ------ ------- ------
Earnings before income
taxes, minority
interest, extraord-
inary item and
cumulative effect of
changes in account-
ing principles...... 21,033 64,441 48,346 119,550 14,627
Income taxes.............. 8,403 25,454 19,905 55,949 7,175
------ ------ ------ ------- ------
Earnings before minority
interest, extraordinary
item and cumulative
effects of changes in
accounting principles 12,630 38,987 28,441 63,601 7,452
Minority interest in
subsidiary loss (gain).. (25) -- -- 40 560
Extraordinary item - debt
extinguishment, net..... -- -- -- -- (400)
Cumulative effect of change
in accounting for
inventory (3)........... -- -- -- 742 --
Cumulative effect of change
in accounting for income
taxes (4)............... -- -- -- -- 450
------- ------- ------- ------ ------
Net earnings.......... $ 12,605 $ 38,987 $ 28,441 $ 64,383 $ 8,062
======= ======= ======= ======= ======
Earnings per common
share (5)........... $ 0.33 $ 0.89 $ 0.64 $ 1.47 $ 0.18
======= ======= ======= ======= ======
Earnings per common
share -- assuming
dilution (5)........ $ 0.32 $ 0.86 $ 0.63 $ 1.46 $ 0.18
======= ======= ======= ======= ======
Average common shares:
Basic (weighted average
common shares)........ 38,591 43,958 44,163 43,913 44,249
======= ======= ======= ======= ======
Diluted (weighted average
out-standing shares).. 39,910 45,489 45,457 44,143 44,627
======= ======= ======= ======= ======
Cash flow provided by
operations.............. $ 9,336 $ 62,167 $ 56,782 $ 96,451 $56,538
======= ======= ======= ======= ======
Cash dividends paid to
common shareholders..... $ 6,388 $ 6,607 $ 6,631 $ 6,588 $ 6,638
======= ======= ======= ======= ======
Cash dividends per share
paid to common share-
holders................. $ .11 $ .15 $ .15 $ .15 $ .15
======= ======= ======= ======= ======
Consolidated Balance Sheet
Data:
Working capital......... $ 96,365 $107,334 $109,413 $ 90,731 $ 60,907
Total assets............ $351,151 $253,393 $243,726 $232,731 $284,573
Long-term obligations --
noncurrent (6)........ $530,213 $ -- $ -- $ 2,755 $101,889
Minority interest....... $ -- $ -- $ -- $ -- $ 40
Other shareholders'
equity (2)............ $(275,698) $211,078 $210,324 $185,423 $125,707
(1) Includes $81.6 million gain, net of legal expense, from the
settlement of a patent infringement lawsuit. In addition, a $10.1
million pre-tax gain from the sale of the Company's Medical
Services Division was recognized. The Company also recorded
certain other unusual items related to planned dispositions of
under-utilized rental assets and over-stocked inventories of $6.8
million.
(2) See Note 2 of Notes to Consolidated Financial Statements for
information on the Company's recapitalization .
(3) On January 1, 1994, the Company changed its method of applying
overhead to inventory. Historically, a single labor overhead
rate and a single materials overhead rate were used in valuing
ending inventory. Labor overhead was applied as labor was
incurred while materials overhead was applied at the time of
shipping. This change resulted in a cumulative earnings effect
of $742,000.
(4) The Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" as of January 1,
1993 resulting in a cumulative earnings effect of $450,000.
(5) See Note 11 of Notes to Consolidated Financial Statements for
information concerning the Company's reconciliation from basic to
diluted average common shares and the calculations of net income
per common share.
(6) See Notes 5 and 6 of Notes to Consolidated Financial
Statements for information concerning the Company's borrowing
arrangements and lease obligations.
Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------
General
The ongoing health care debate continues to create pressure on
health care providers to control costs, provide cost effective
therapies and improve patient outcomes. Industry trends resulting
from these pressures include the accelerating migration of patients
from acute care facilities into extended care (e.g., skilled
nursing facilities and rehabilitation centers) and home care
settings, and the consolidation of health care providers and
national and regional group purchasing organizations. In August
1997, in an effort to reduce the federal deficit and lower overall
federal healthcare expenditures, Congress passed the Balanced
Budget Act, (the "BBA"). The BBA contains a number of provisions
which will impact the federal reimbursement of health care costs
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 reduction in future consumer price index increases); (ii) a
change, beginning July 1, 1998, in the manner in which skilled
nursing facilities ("SNFs") are reimbursed from a cost based system
to a prospective payment system whereby 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 revenues are 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. The Company does not
believe that the changes introduced by the BBA will have a
substantial impact on its hospital customers or the dealers who
distribute the Company's products in the home health care market.
However, changes introduced by the BBA may have an impact on the
manner in which the Company's extended care customers make
purchasing and rental decisions. Under a fixed payment system,
decisions on selecting the products and services used in patient
care are generally based on clinical and cost-effectiveness.
Industry trends including pricing pressures, the consolidation
of health care providers and national and regional group purchasing
organizations and a shift in market demand toward lower-priced
products such as mattress overlays have had the impact of reducing
the Company's overall average daily rental rates on its individual
products. These industry trends, together with the increasing
migration of patients from acute care to extended and home care
settings, have had the effect of reducing overall acute care market
growth.
Expansion of the Company's national distribution network has
allowed KCI to leverage a relatively fixed field cost structure
across a broad range of patients and care settings which has
resulted in improved operating margins. In addition, increasing
demand for the Company's products in the extended and home care
settings has increased utilization of certain of the Company's
products which were originally developed for acute care settings.
Because of cost pressures within the health care industry, patients
are leaving the acute care setting sooner, thereby increasing the
demand for the Company's products in the extended and home care
settings.
Generally, the Company's customers prefer to rent rather than
purchase the Company's products in order to avoid the ongoing
service, storage and maintenance requirements and the high initial
capital outlays associated with purchasing such products, as well
as to receive the Company's high-quality clinical support. As a
result, rental revenues are a high percentage of the Company's
overall revenues. More recently, sales have increased as a portion
of the Company's revenues. 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 therapeutic surfaces more often than U.S. health care
providers.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 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 prior year ($ in
thousands):
Year Ended December 31,
---------------------------
Revenue Increase
Relationship (Decrease)
------------- -----------
1997 1996 $ Pct
---- ---- ---- ----
Revenue:
Rental and service......... 81% 84% $ 22,440 10%
Sales and other............ 19 16 14,595 33
--- --- -------
100% 100% 37,035 14
Rental expenses.............. 51 54 9,974 7
Cost of goods sold........... 8 6 7,358 45
--- --- -------
Gross profit............. 41 40 19,703 18
Selling, general and
administrative expenses...... 20 19 10,647 20
Recapitalization costs....... 11 -- 34,361 N/A
--- --- -------
Operating earnings....... 10 21 (25,305) (46)
Interest income.............. -- 3 (7,069) (76)
Interest expense............. (3) -- (9,928) N/A
Foreign currency loss........ -- -- (1,106) N/A
--- --- -------
Earnings before income
taxes and minority
interest............... 7 24 (43,408) (67)
Income taxes................. 3 10 17,051 67
Minority interest............ -- -- (25) N/A
--- --- -------
Net earnings............. 4% 14% $(26,382) (68)%
=== === =======
The Company's revenue is derived from three primary markets.
The following table sets forth, for the periods indicated, the
amount of revenue derived from each of these markets ($ in
millions):
Year Ended December 31,
-----------------------
1997 1996
-------- --------
Domestic specialty surfaces.... $198.7 $181.3
International surfaces......... 66.7 67.6
Medical devices................ 39.2 20.4
Other.......................... 2.3 0.6
----- ------
Total revenue $306.9 $269.9
===== =====
Total Revenue: Total revenue in 1997 was $306.9 million, an
increase of $37.0 million, or 13.7%, from $269.9 million in 1996.
This increase was primarily attributable to growth in both the
Company's domestic specialty surface and medical devices
businesses. Domestic specialty surface revenue includes revenue
from acute and extended care facilities as well as revenue from the
home care setting. Revenue from the Company's domestic specialty
surface business was $198.7 million, up $17.4 million, or 9.6%,
from $181.3 million in the prior year due to therapy day growth in
each of the wound care, pulmonary and bariatric markets combined
with an overall increase in the average daily rental price of its
products. Revenue from the Company's international surface business
was $66.7 million compared to $67.6 million in the prior year,
despite adverse foreign currency exchange fluctuations of
approximately $6.4 million. Revenue from the Company's medical
devices business of $39.2 million increased $18.8 million, or
92.2%, up from $20.4 million in the prior year, due substantially
to growth in V.A.C. rentals in the United States.
Rental Expenses: Rental expenses consist largely of field
personnel costs, depreciation of the Company's rental equipment
and related facility costs. Rental expenses for 1997 totaled
$156.2 million, an increase of $10.0 million, or 6.8%, from $146.2
million in the prior year. The addition of extended care sales
representatives, new marketing programs and product costs
associated with new and acquired therapies and technologies
accounted for the majority of this increase. As a percentage of
total revenue, 1997 rental expenses were 50.9%, down from 54.2% in
the prior period. This decrease is primarily attributable to the
increase in rental revenue, as the majority of the Company's
rental or field expenses are relatively fixed.
Gross Profit: Gross profit in 1997 was $127.1 million, an
increase of $19.7 million, or 18.4%, from $107.4 million in the
year-ago period due substantially to higher revenue, combined with
relatively fixed field expenses and improved sales volumes. Gross
profit margin for 1997, as a percentage of total revenue, was
41.4%, up from 39.8% for the prior year. Rental margins improved
to 37.0%, up 1.9 percentage points from 1996, while sales margins
declined to 59.9%, from 63.3%, as the product mix shifted toward
lower-margin overlays, particularly in the international home care
setting.
Selling, General and Administrative Expenses: Selling, general and
administrative (SG&A) expenses for 1997 were $62.7 million, an
increase of $10.6 million, or 20.5%, from 1996. Key investments
in marketing programs and information systems as well as higher
legal and professional fees and provisions for uncollectible accounts
receivable made up the majority of this increase. As a percentage
of total revenue, SG&A expenses in 1997 were 20.4%, up slightly
from 19.3% in the year-ago period.
Recapitalization: During 1997, the Company recognized $34.4
million in fees and expenses resulting from the transactions
associated with the Transaction Agreement (the
"Recapitalization"). Recapitalization expenses consisted of
compensation expense associated with employee stock option
exercises and other incentives, commitment fees on unused credit
facilities, legal and professional fees and other miscellaneous
costs and expenses.
Operating Earnings: Operating earnings for 1997 were $30.0
million, a decrease of $25.3 million, or 45.7%, from 1996, due
substantially to Recapitalization expenses of $34.4 million in
1997. Excluding the Recapitalization expenses, operating earnings
for 1997 were $64.4 million, an increase of $9.1 million, or
16.4%, from $55.4 million in 1996. As a percentage of total
revenue, the Company's operating margin, excluding the
recapitalization expenses, improved to 21.0%, up from 20.5% in
1996.
Interest Income: Interest income earned during 1997 was $2.3
million, a $7.1 million decrease from 1996. The prior year
interest income included $5.2 million of non-recurring interest
income from the early repayment of all remaining notes receivables
from the 1994 disposition of the Medical Services Division. The
remainder of the variance is due to lower invested cash balances
in 1997 as the Company funded five acquisitions during the year
from existing cash reserves.
Interest Expense: Interest expense for the year was $10.2
million, an increase of $9.9 million from 1996. The majority of
this increase was due to interest accrued on approximately $535.0
million of debt outstanding after completion of the
Recapitalization.
Income Taxes: The Company's effective income tax rate for 1997
was 40.0% compared to 39.5% in 1996.
Net Earnings: Net earnings for 1997 were $12.6 million, or $0.32
per share, compared to 1996 net earnings of $39.0 million, or
$0.86 per share. Excluding non-recurring items, net earnings for
1997 would have been $39.2 million, or $0.98 per share, compared
to 1996 net earnings of $35.9 million, an increase of $3.3
million, or 9.2%. Higher revenue combined with controlled
spending accounted for the earnings improvement.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------
The following table sets forth, for the periods indicated,
the percentage relationship of each item to total revenue as well
as the change in each line item as compared to the prior year ($
in thousands):
Year Ended December 31,
---------------------------
Revenue Increase
Relationship (Decrease)
------------- -----------
1996 1995 $ Pct
------ ------ ----- -----
Revenue:
Rental and service........... 84% 85% $18,797 9%
Sales and other.............. 16 15 7,641 21
100% 100% 26,438 11
Rental expenses................ 54 56 8,785 6
Cost of goods sold............. 6 6 2,586 19
--- --- ------
Gross profit............... 40 38 15,067 16
Selling, general and
administrative expenses...... 19 20 3,505 7
--- --- ------
Operating earnings......... 21 18 11,562 26
Interest income................ 3 2 4,269 84
Interest expense............... -- -- 264 52
--- --- ------
Earnings before income
taxes.................... 24 20 16,095 33
Income taxes................... 10 8 5,549 28
--- --- ------
Net earnings............... 14% 12% $10,546 37%
=== === ======
The Company's revenue is derived from three primary markets.
The following table sets forth, for the periods indicated, the
amount of revenue derived from each of these markets ($ in
millions):
Year Ended December 31,
-----------------------
1996 1995
------- -------
Domestic specialty surfaces.... $181.3 $163.0
International surfaces......... 67.6 60.7
Medical devices................ 20.4 17.1
Other.......................... 0.6 2.6
----- -----
Total revenue.... $269.9 $243.4
===== =====
Total Revenue: Total revenue in 1996 was $269.9 million, an
increase of $26.4 million or 10.9% from 1995. This increase was
primarily attributable to growth in the Company's domestic
specialty support surface business combined with international
expansion and penetration. Domestic support surface revenue
includes revenue from acute and extended care facilities as well as
revenue from the home care segment. Revenue from domestic surfaces
increased $18.3 million to $181.3 million in 1996, an increase of
11.2% compared to the prior year. The domestic revenue increase
was due in large part to the continued success of KCI's TriaDyne
TM, the Company's leading Kinetic Therapy product, combined with
growth in extended care patient days and the addition of various
new national accounts. Revenue from the Company's international
specialty surface business increased $6.9 million, or 11.4%, to
$67.6 million in 1996, despite adverse foreign currency exchange
fluctuations of approximately $2 million. Strong sales in mattress
overlay products accounted for more than half of this increase.
Revenue growth in the German home care market and further
penetration in various emerging markets, e.g., Switzerland and
Australia, also contributed to international revenue growth.Revenue
from the Company's two primary medical devices, PlexiPulse TM and
The V.A.C. TM, was $20.4 million, an increase of $3.3 million, or
19.3%, from 1995. This increase was substantially due to the intro-
duction of The V.A.C. TM in the United States as well as growth
in V.A.C. revenue overseas.
In November 1996, the Company announced that it had been
advised by Premier Purchasing Partners, L.P., that its bid to be
the primary supplier for the newly combined group had been awarded
to another vendor. Premier is a new voluntary group purchasing
organization which was formed as a result of the merger of three
separate group purchasing organizations. Revenue from hospitals
within Premier for 1996 accounted for approximately 10% of the
Company's total revenue. Because facilities within Premier are not
committed to do business with the group's primary vendor, it is
difficult to predict the ultimate effect of the new agreement on
revenue and operating profits. For 1997, a substantial portion of
the revenue from the Premier group was retained.
Rental Expenses: Rental expenses consist largely of field
personnel costs, depreciation of the Company's rental equipment
and related facility costs. Rental expenses for 1996 totaled
$146.2 million, an increase of $8.8 million, or 6.4%, from the
prior year. The addition of extended care sales representatives
and international market expansion accounted for a majority of the
increase. As a percentage of total revenue, 1996 rental expenses
were 54.2%, down from 56.4% in the prior period. This decrease is
due primarily to the 1996 revenue increase because most of the
Company's rental or field expenses are relatively fixed in nature.
Gross Profit: Gross profit in 1996 was $107.4 million, an
increase of $15.1 million, or 16.3%, from the year-ago period due
substantially to higher revenue, as discussed previously, combined
with relatively fixed field expenses. Gross profit margin for
1996, as a percentage of total revenue, was 39.8%, up from 37.9%
for the prior year. Rental margins improved to 35.1%, up 1.6
percentage points from 1995, while sales margins improved slightly
to 63.3%, from 62.7%, as the product mix continued to shift toward
higher margin overlays and disposable products.
Selling, General and Administrative Expenses: SG&A expenses for
1996 were $52.0 million, an increase of $3.5 million, or 7.2%,
from 1995. Total SG&A expenses for the prior year also included a
$2.9 million non-recurring loss from the sale of the Financial
Services Division in June 1995. Costs associated with
international market expansion, improved information systems and
marketing, legal and professional activities accounted for a
substantial part of this increase. As a percentage of total
revenue, SG&A expenses in 1996 were 19.3%, down slightly from
19.9% in the year-ago period.
Operating Earnings: Operating earnings for 1996 were $55.4
million, an increase of $11.6 million, or 26.4%, from 1995. The
increase was due primarily to the growth in revenue combined with
the implementation of various initiatives undertaken to improve
efficiencies, e.g., new information systems. As a percentage of
total revenue, the Company's operating margin improved to 20.5%,
up more than two percent from 1995.
Net Interest Income: Net interest income for 1996 was $9.1
million, which included $5.2 million from the early repayment of
all remaining notes receivable from the 1994 disposition of the
Medical Services Division. The notes had an aggregate face value
of $10 million and had been discounted to a carrying value of $3.2
million, excluding accrued interest. The notes were retired for
approximately $9 million.
Income Taxes: The Company's effective income tax rate for 1996
was 39.5% compared to 41.2% in 1995. This decrease was primarily
the result of implementing various tax planning initiatives both
domestically and overseas.
Net Earnings: Net earnings for 1996 were $39.0 million, or $0.86
per share, compared to 1995 net earnings of $28.4 million, or
$0.63 per share. Higher revenue and controlled spending, combined
with the one-time increase in interest income and a lower overall
tax rate accounted for the 37% earnings improvement. Average
common and common equivalent shares outstanding were substantially
unchanged year-to-year.
Financial Condition
Accounts receivable at December 31, 1997 were $81.2 million,
an increase of $23.0 million, or 39.5%, from the prior year end.
Approximately $5.4 million of this increase was due to receivables
associated with purchase transactions during the year. In
addition, VAC rentals and sales which will be paid through the
Medicare and other third party programs increased receivables by
$3.8 million as the Company continued its work towards
establishment of a Medicare VAC Reimbursement Code. The remainder
of this increase was due primarily to (i) revenue growth in
extended care and home care markets which tend to have customers
and payors who historically have paid over a longer cycle than
acute care customers and (ii) growth in international receivables.
Inventories at December 31, 1997 increased $1.5 million, or
7.5%, to $21.6 million from the end of 1996, due primarily to the
Ethos Medical Group, Ltd. and the RIK Medical L.L.C. acquisitions.
Prepaid expenses and other current assets at December 31,
1997 were $18.4 million, an increase of $11.6 million, or 169%,
compared to the prior year. The majority of this increase was due
to: (i) a current tax receivable of $6.2 million related to the
refund of all 1997 Federal tax payments made and (ii) $3.0 million
of assets to be sold to Dr. James Leininger in 1998.
Net property plant and equipment at December 31, 1997 was
$75.4 million, an increase of $10.2 million, or 15.7%, from the
prior year due, in part, to business acquisitions made during the
year. Net capital expenditures in 1997 were $27.9 million and
related primarily to new product additions to the Company's fleet
of rental frames and surfaces.
Goodwill associated with the excess purchase price of
acquisitions over net tangible and intangible assets acquired
increased $32.4 million, or 239%, from December 31, 1996 due to
the five acquisitions completed during 1997. The goodwill
associated with these acquisitions is being amortized over periods
ranging from 15 to 25 years. See Note 3 of Notes to Consolidated
Financial Statements for further discussion of the Company's
acquisition activities.
During 1997, KCI recorded loan issuance costs of $17.7
million associated with the Company's recapitalization. See Note
2 of Notes to Consolidated Financial Statements for further
discussion of this item.
Accounts payable and accrued expenses were $40.4 million and
$41.3 million, respectively, at December 31, 1997 compared to $4.0
million and $29.8 million, respectively, at the end of 1996. The
increased liabilities relate primarily to payments to be made for
shares of common stock not previously tendered as well as unpaid
costs and expenses associated with the Recapitalization.
Deferred income taxes at December 31, 1997 were $10.0
million, an increase of $4.9 million from year-end 1996. The
increase from the prior year is primarily due to accelerated tax
depreciation on the TriaDyne TM fleet, as well as depreciation on
assets subject to leveraged leases.
Income Taxes
The provision for deferred income taxes is based on the asset
and liability method and represents the change in the deferred
income tax accounts during the year. Under the asset and liability
method of FAS 109, deferred income taxes are recognized for the
future tax consequences attributable to the difference between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
At the end of 1997, the net impact of these timing issues
resulted in a net deferred tax liability comprised of deferred tax
liabilities totaling $23.6 million offset by deferred tax assets
totaling $13.5 million.
Legal Proceedings
A description of the Company's legal proceedings is set forth
under the caption "Item 3. Legal Proceedings".
Liquidity and Capital Resources
At December 31, 1997, the Company had current assets of $183.0
million and current liabilities of $86.6 million resulting in a
working capital surplus of $96.4 million, compared to a surplus of
$107.3 million at December 31, 1996.
In 1997, the Company made net capital expenditures of $27.9
million. The 1997 capital expenditures primarily relate to the
Company's TriaDyne TM, TriCell TM and FluidAir TM products, various
mattress overlay products and the design and development of new
information systems. The Company's current budget for capital
expenditures for 1998, other than acquisition expenditures, is
$30.5 million and consists primarily of rental product additions.
Other than commitments for new product inventory, including
disposable "for sale" products, of $11.4 million, the Company has
no material long-term capital commitments and can adjust the level
of capital expenditures as circumstances dictate.
The Company's principal sources of liquidity are expected to
be cash flow from operating activities and borrowings under the
Senior Credit Facilities. It is anticipated that the Company's
principal uses of liquidity will be to fund capital expenditures
related to the Company's rental products, provide needed working
capital, meet debt service requirements and finance the Company's
strategic plans.
The Senior Credit Facilities total $400.0 million and consist
of (i) a $50.0 million six-year Revolving Credit Facility, (ii) a
$50.0 million six-year Acquisition Facility, (iii) a $120.0 million
six-year amortizing Term Loan A, (iv) a $90.0 million seven-year
amortizing Term Loan B and (v) a $90.0 million eight-year
amortizing Term Loan C, (collectively, "the Term Loans"). The Term
Loans were fully drawn to finance a portion of the Tender Offer.
The Acquisition Facility was partially drawn to, in effect, finance
the RIK Medical acquisition. The Acquisition Facility provides the
Company with financing to pursue strategic acquisition
opportunities. The Acquisition Facility will remain available to
the Company for a period of three years at which time will begin to
amortize over the remaining three years of the facility. The
Company has utilized and will utilize borrowings under the
Revolving Facility to help effect the Tender Offer, pay related
fees and expenses, fund capital expenditures and meet working
capital needs.
The Term Loans are payable in equal quarterly installments (1)
subject to an amortization schedule as follows:
Year Amount
---- ------------
1998............................ $ 4,800,000
1999............................ $ 8,800,000
2000............................ $16,800,000
2001............................ $31,800,000
2002............................ $31,800,000
2003............................ $36,800,000
2004............................ $85,500,000
2005............................ $83,700,000
(1) The first three quarterly principal installments for 2004
shall be $450,000 with the final installment for that year
equal to $84,150,000. For 2005, the first three installments
shall be equal to $225,000 and the final installment shall be
equal to $83,025,000.
The Term Loans and the Notes are subject to customary terms,
covenants and conditions which partially restrict the uses of
future cash flows by the Company. The Company does not expect that
these covenants and conditions will have a material adverse impact
on its operations. At December 31, 1997, the Revolving Credit
Facility and Acquisition Facility had balances of $24.5 million and
$10 million, respectively. Correspondingly, the aggregate
availability under these two facilities was $65.5 million.
Indebtedness under the Senior Credit Facilities, including the
Revolving Credit Facility (other than certain loans under the
Revolving Credit Facility designated in foreign currency), the Term
Loans and the Acquisition Facility initially bear interest at a
rate based upon (i) the Base Rate (defined as the higher
of (x) the rate of interest publicly announced by Bank of
America as its "reference rate" and (y) the federal funds effective
rate from time to time plus 0.50%), plus 1.25% in respect of the
Tranche A Term Loans, the loans under the Revolving Credit Facility
(the "Revolving Loans") and the loans under the Acquisition
Facility (the "Acquisition Loans"), 1.50% in respect of the Tranche
B Term Loans and 1.75% in respect of the Tranche C Term Loans, or
at the Company's option, (ii) the Eurodollar Rate (as defined in
the Senior Credit Facility Agreement) for one, two, three or six
months, in each case plus 2.25% in respect of Tranche A Term Loans,
Revolving Loans and Acquisition Loans, 2.50% in respect of Tranche
B Term Loans and 2.75% in respect of the Tranche C Term Loans.
Certain Revolving Loans designated in foreign currency will
initially bear interest at a rate based upon the cost of funds for
such loans, plus 2.25% or 2.50%, depending on the type of foreign
currency. Performance-based reductions of the interest rates under
the Term Loans, the Revolving Loans and the Acquisition Loans are
available. Subsequent to December 31, 1997, the Company entered
into a swap transaction whereby the interest rate on $150,000,000
of the term loans is fixed at 5.7575% through January 8, 2001.
Indebtedness of the Company under the Senior Credit Agreement
is guaranteed by certain of the subsidiaries of the Company and is
secured by (i) a first priority security interest in all, subject
to certain customary exceptions, of the tangible and intangible
assets of the Company and its domestic subsidiaries, including,
without limitation, intellectual property and real estate owned by
the Company and its subsidiaries, (ii) a first priority perfected
pledge of all capital stock of the Company's domestic subsidiaries
and (iii) a first priority perfected pledge of up to 65% of the
capital stock of foreign subsidiaries owned directly by the Company
or its domestic subsidiaries.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage ratio
and capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and
advances, capital expenditures, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of
other indebtedness (including the Notes), liens and encumbrances
and other matters customarily restricted in such agreements. The
Company is in compliance with the applicable covenants at December
31, 1997.
The Senior Credit Agreement contains customary events of
default, including payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency, failures
under ERISA plans, judgment defaults, failure of any guaranty,
security document security interest or subordination provision
supporting the Bank Credit Agreement to be in full force and effect
and change of control of the Company.
As part of the Recapitalization transactions, the Company
issued $200.0 million of Senior Subordinated Notes (the "Notes")
due 2007. The Notes are unsecured obligations of the Company,
ranking subordinate in right of payment to all senior debt of the
Company and will mature on November 1, 2007. Interest on the Notes
accrues at the rate of 9 5/8% per annum and is payable
semiannually in cash on each May 1 and November 1, commencing on
May 1, 1998, to the persons who are registered Holders at the close
of business on April 15 and October 15, respectively, immediately
preceding the applicable interest payment date. Interest on the
Notes accrues from and including the most recent date to which
interest has been paid or, if no interest has been paid, from and
including the date of issuance.
The Notes are not entitled to the benefit of any mandatory
sinking fund. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and
after November 1, 2002, upon not less than 30 nor more than 60
days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the
twelve-month period commencing on November 1 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if
any, to the date of redemption.
Year Percentage
---- ----------
2000.................................. 104.813%
2001.................................. 103.208%
2002.................................. 101.604%
2005 and thereafter................... 100.000%
At any time, or from time to time, the Company may acquire a
portion of the Notes through open-market purchases. Also, on or
prior to November 1, 2000, the Company may, at its option, on one
or more occasions use all or a portion of the net cash proceeds of
one or more Equity Offerings (as defined) to redeem the Notes
issued under the Indenture at a redemption price equal to 109.625%
of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least
65% of the principal amount of Notes originally issued remains
outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 120
days after the consummation of any such Equity Offering. As used
in this paragraph, "Equity Offering" means any offering of
Qualified Capital Stock of the Company.
As of December 31, 1997 the entire $200.0 million of Senior
Subordinated Notes was issued and outstanding.
During 1997, the Company generated $10.7 million in cash from
operating activities compared to $62.2 million in the prior year, a
decrease of $51.5 million. The decrease in operating cash flows
resulted substantially from $34.4 million in fees and expenses
associated with the Recapitalization, as well as an increase in
accounts receivable as discussed previously. Excluding the effects
of the Recapitalization, operating cash flows for 1997 would have
been $37.3 million. Investment activities for 1997 used $68.1
million, including net capital expenditures of $27.9 million and
$41.2 million used to fund the five business acquisitions completed
during 1997. Financing activities for 1997 provided $61.9 million
consisting primarily of proceeds from common stock issuance and
borrowings of notes payable and long-term obligations, partially
offset by recapitalization costs to purchase treasury stock,
finance stock option exercises and pay dividends. In 1997, the
Company repurchased and retired approximately 258,000 shares of
common stock under a program which authorized the Company to pur-
chase up to 3 million shares.
At December 31, 1997, cash and cash equivalents totaling $61.81
million were available for general corporate purposes. Based upon
the current level of operations, the Company believes that cash
flow from operations and the availability under its lines of credit
will be adequate to meet its anticipated requirements for debt
repayment, working capital and capital expenditures through 1998.
Impact of Year 2000
The Year 2000 issue results from computer programs being
written using two digits rather than four digits to define the date
field. Certain of the Company's existing computer programs that
have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it
would need to modify or replace key portions of its software so
that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently
believes that through its conversion to the Oracle applications
platform and with modifications to other existing software, the
Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and
conversions are not made properly or are not completed timely, the
Year 2000 issue could have a material impact on the operations of
the Company.
The Company has initiated formal communications with all of
its significant suppliers and large customers to determine the
extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000
issues. The Company's total Year 2000 project cost, and estimates
to complete, include the estimated costs and time associated with
the impact of third party Year 2000 issues based on presently
available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will
be timely converted and would not have an adverse effect on the
Company's systems. The Company has determined
it has no exposure to contingencies related to the Year 2000 issue
for the products it has sold.
The Company will utilize both internal and external resources
to reprogram, or replace, and test the software for Year 2000
modifications. The Company anticipates completing the Year 2000
project by no later than March 31, 1999, which is prior to any
anticipated impact on its operating systems. The total cost of the
Year 2000 project is estimated at $6.5 million and is being funded
through operating cash flows. Also, $5.5 million of this total
will be used to purchase new software that will be capitalized and
the remaining $1.0 million will be expensed as incurred. To date,
the Company has incurred approximately $5.4 million ($900,000
expensed and $4.5 million capitalized for new software), related to
the assessment of the Year 2000 issue, development of a
modification plan, preliminary software modifications and purchase
of new software, where necessary.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability
of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes and similar uncertainties.
Item 8. Financial Statements and Supplementary Data
- ------- --------------------------------------------
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31,
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents............ $ 61,754 $ 59,045
Accounts receivable, net............. 81,238 58,241
Inventories.......................... 21,553 20,042
Prepaid expenses and other........... 18,446 6,860
------- -------
Total current assets......... 182,991 144,188
------- -------
Net property, plant and equipment...... 75,434 65,224
Goodwill, less accumulated amortization
of $13,989 in 1997 and $12,021 in 1996 45,899 13,541
Loan issuance cost, less accumulated
amortization of $382 in 1997......... 17,346 --
Other assets, less accumulated
amortization of $3,100 in 1997 and
$5,614 in 1996....................... 29,481 30,440
------- -------
$351,151 $253,393
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 40,353 $ 3,974
Accrued expenses..................... 41,334 29,792
Current installments of long-term
obligations........................ 4,800 --
Current installments of capital lease
obligations........................ 139 118
Income tax payable................... -- 2,970
------- -------
Total current liabilities.... 86,626 36,854
======= =======
Long-term obligations, excluding
current installments................... 529,901 --
Capital lease obligations, excluding
current installments................... 312 396
Deferred income taxes, net............. 10,010 5,065
------- -------
626,849 42,315
------- -------
Commitments and contingencies (Note 12)
Shareholders' (deficit) equity:
Common stock; issued and outstanding
17,471 in 1997 and 42,355 in 1996.... 17 42
Retained (deficit) earnings............ (273,231) 210,816
Cumulative foreign currency translation
adjustment........................... (2,484) 555
Notes receivable from officers......... -- (335)
------- -------
(275,698) 211,078
------- -------
$351,151 $253,393
======= =======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Revenue:
Rental and service................ $247,890 $225,450 $206,653
Sales and other................... 59,026 44,431 36,790
------- ------- -------
Total revenue.............. 306,916 269,881 243,443
------- ------- -------
Rental expenses..................... 156,179 146,205 137,420
Cost of goods sold.................. 23,673 16,315 13,729
------- ------- -------
179,852 162,520 151,149
------- ------- -------
Gross profit............... 127,064 107,361 92,294
Selling, general and administrative
expenses.......................... 62,654 52,007 48,502
Recapitalization expenses........... 34,361 -- --
------- ------- -------
Operating earnings......... 30,049 55,354 43,792
Interest income..................... 2,263 9,332 5,063
Interest expense.................... (10,173) (245) (509)
Foreign currency loss............... (1,106) -- --
------- ------- -------
Earnings before income
taxes and minority
interest................. 21,033 64,441 48,346
Income taxes........................ 8,403 25,454 19,905
------- ------- -------
Earnings before minority
interest................. 12,630 38,987 28,441
Minority interest in subsidiary gain (25) -- --
------- ------ ------
Net earnings............... $ 12,605 $38,987 $28,441
======= ====== ======
Earnings per common share........... $ 0.33 $ 0.89 $ 0.64
======= ====== ======
Earnings per common share - assuming
dilution.......................... $ 0.32 $ 0.86 $ 0.63
======= ====== ======
Average common shares:
Basic (weighted average
outstanding shares)........ 38,591 43,958 44,163
======= ====== ======
Diluted (weighted average
outstanding shares) 39,910 45,489 45,457
======= ====== ======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
---------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net earnings........................... $ 12,605 $ 38,987 $ 28,441
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation......................... 21,091 20,301 20,882
Amortization......................... 2,989 1,493 1,878
Provision for uncollectible accounts
receivable......................... 5,888 2,457 1,883
Loss on KCIFS and Medical Services
dispositions....................... -- -- 2,933
Gain on early repayment of notes
receivable......................... -- (5,180) --
Change in assets and liabilities net of
effects from purchase of subsidiaries
and unusual items:
Increase in accounts receivable, net (24,920) (4,626) (2,695)
Decrease in notes receivable....... -- 3,187 6,014
Increase in inventories............ (13) (1,034) (998)
Increase in prepaid expenses and
other............................ (11,199) (1,927) (593)
Increase (decrease) in accounts
payable.......................... 392 1,525 (895)
Increase (decrease) in accrued
expenses......................... 1,896 3,349 (520)
Decrease in income taxes payable... (2,970) (1,056) (3,999)
Increase in deferred income taxes,
net.............................. 4,945 4,691 4,451
------ ------ ------
Net cash provided by operating
activities................. 10,704 62,167 56,782
------ ------ ------
Cash flows from investing activities:
Additions to property, plant and
equipment.......................... (27,672) (27,783) (36,104)
Decrease (increase) in inventory to
be converted into equipment for
short-term rental.................. (2,850) 700 (1,000)
Dispositions of property, plant and
equipment.......................... 2,620 5,400 3,231
Proceeds from sale of KCIFS and
Medical services divisions......... -- -- 7,182
Excess principal repayment on
discounted notes receivable........ -- 5,180 --
Business acquired in purchase
transactions, net of cash acquired. (41,153) (1,146) --
Decrease in finance lease receivables,
net................................ -- -- 339
Note paid (received) from principal
shareholder........................ -- 10,000 (10,000)
Decrease (increase) in other assets.. 939 (9,960) (6,531)
------ ------ ------
Net cash used by investing
activities................. (68,116) (17,609) (42,883)
------ ------ ------
Cash flows from financing activities:
Borrowing (repayment) of notes payable
and long-term obligations.............. 534,701 -- (800)
Borrowing (repayment)of capital lease
obligations........................ (333) 457 (64)
Loan issuance costs.................. (17,734) -- --
Proceeds from the exercise of stock
options............................ 3,668 4,264 4,919
Purchase and retirement of treasury
stock.............................. (3,827) (35,241) (2,849)
Cash dividends paid to shareholders.. (6,388) (6,607) (6,631)
Recapitalization costs-purchase of
treasury stock..................... (631,606) -- --
Recapitalization costs-proceeds from
common stock issuance.............. 150,184 -- --
Recapitalization costs-fees and
expenses.......................... (8,626) -- --
Recapitalization costs-amounts not
yet paid........................... 41,652 -- --
Other................................ 253 (150) (185)
------- ------ ------
Net cash provided (used) by
financing activities....... 61,944 (37,277) (5,610)
------- ------ ------
Effect of exchange rate changes on cash
and cash equivalents................. (1,823) (635) 869
------- ------ ------
Net increase in cash and cash
equivalents.......................... 2,709 6,646 9,158
Cash and cash equivalents, beginning of
year................................. 59,045 52,399 43,241
------- ------ ------
Cash and cash equivalents, end of year. $ 61,754 $59,045 $52,399
======= ====== ======
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit) Equity
Three Years Ended December 31, 1997
(in thousands, except per share data)
Notes
Receivable
from
Cumulative Officers Total
Addi- Foreign for Share-
tional Retained Currency Exercise holders'
Common Paid-In Earnings Translation Treasury of Stock Equity
Stock Capital (Deficit) Adjustment Stock Options (Deficit)
----- ------- --------- ---------- -------- ------- ---------
Balances at
December 31,1994. $ 44 $10,053 $175,480 $ (154) $ -- $ -- $185,423
Net earnings...... -- -- 28,441 -- -- -- 28,441
Exercise of stock
options.......... -- 4,024 -- -- -- (185) 3,839
Tax benefit real-
ized from stock
option plan...... -- 895 -- -- -- -- 895
Treasury stock
purchased........ -- -- -- -- (2,849) -- (2,849)
Treasury stock
retired.......... -- (2,849) -- -- 2,849 -- --
Cash dividends on
common stock--
$0.15 per share.. -- -- (6,631) -- -- -- (6,631)
Foreign currency
translation
adjustment....... -- -- -- 1,206 -- -- 1,206
-------------------------------------------------------------------
Balances at
December 31, 1995 44 12,123 197,290 1,052 -- (185) 210,324
-------------------------------------------------------------------
Net earnings...... -- -- 38,987 -- -- -- 38,987
Exercise of stock
options.......... -- 2,098 -- -- -- (150) 1,948
Tax benefit
realized from
stock option
plan............. -- 2,166 -- -- -- -- 2,166
Treasury stock
purchased........ -- -- -- -- (35,241) -- (35,241)
Treasury stock
retired.......... (2) (16,387) (18,854) -- 35,241 -- (2)
Cash dividends on
common stock--
$0.15 per share.. -- -- (6,607) -- -- -- (6,607)
Foreign currency
translation
adjustment....... -- -- -- (497) -- -- (497)
Balances at --------------------------------------------------------------------
December 31, 1996 42 -- 210,816 555 -- (335) 211,078
Net earnings...... -- -- 12,605 -- -- -- 12,605
Exercise of stock
options.......... -- 2,019 -- -- -- 335 2,354
Tax benefit
realized from
stock option
plan............. -- 1,567 -- -- -- -- 1,567
Treasury stock
retired.......... -- 15,330 (19,157) -- -- -- (3,827)
Cash dividends on
common stock--
$0.11 per share.. -- -- (6,388) -- -- -- (6,388)
Foreign currency
translation
adjustment....... -- -- -- (3,039) -- -- (3,039)
Purchase of
treasury stock... (32) (18,916) (612,658) -- -- -- (631,606)
Proceeds from
common stock
issuance......... 7 -- 150,177 -- -- -- 150,184
Fees and expenses. -- -- (8,626) -- -- -- (8,626)
--------------------------------------------------------------------
Balances at
December 31, 1997 $ 17 $ -- $(273,231) $(2,484) $ -- $ -- $(275,698)
====================================================================
See accompanying notes to consolidated financial statements.
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
----------------------------
The consolidated financial statements include the accounts of
Kinetic Concepts, Inc. ("KCI") and all subsidiaries (collectively,
the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications of amounts related to prior years have been made
to conform with the 1997 presentation.
(b) Nature of Operations and Customer Concentration
-----------------------------------------------
The Company designs, manufactures, markets and distributes
therapeutic products, primarily specialty hospital beds, mattress
overlays and medical devices that treat and prevent the
complications of immobility. The principal markets for the
Company's products are domestic and international health care
providers, predominantly hospitals and extended care facilities
throughout the U.S. and Western Europe. Receivables from these
customers are unsecured.
The Company contracts with both proprietary hospital groups
and voluntary group purchasing organizations ("GPOs"). Proprietary
hospital groups own all of the hospitals which they represent and,
as a result, can ensure complete compliance with an executed
national agreement. Voluntary GPOs negotiate contracts on behalf
of member hospital organizations but cannot ensure that their
members will comply with the terms of an executed national
agreement. Approximately 47% of the Company's revenue during 1997
was generated under national agreements with GPOs.
The Company operates directly in 12 foreign countries
including Germany, Austria, the United Kingdom, Canada, France, the
Netherlands, Switzerland, Australia, Sweden, Italy, Denmark and
Ireland (see Note 13).
(c) Revenue Recognition
-------------------
Service and rental revenue are recognized as services are
rendered. Sales and other revenue are recognized when products are
shipped. Through June 15, 1995, the Company leased certain medical
equipment under long-term lease agreements which were accounted for
as direct financing leases. Unearned interest was amortized to
income over the term of the lease using the interest method (See
Note 3).
(d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an
original maturity of ninety days or less to be cash equivalents.
(e) Fair Value of Financial Instruments
-----------------------------------
The carrying amount reported in the balance sheet for cash,
accounts receivable, long-term securities, accounts payable, and
long-term obligations approximates its fair value. The company
estimates the fair value of long-term obligations by discounting
the future cash flows of the respective instrument, using the
Company's incremental rate of borrowing for a similar instrument.
(f) Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-
out) or market (net realizable value). Costs include material,
labor and manufacturing overhead costs. Inventory expected to be
converted into equipment for short-term rental has been
reclassified to property, plant and equipment.
(g) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Betterments
which extend the useful life of the equipment are capitalized.
(h) Depreciation
------------
Depreciation on property, plant and equipment is calculated on
the straight-line method over the estimated useful lives (thirty to
forty years for the buildings and between three and ten years for
most of the Company's other property and equipment) of the assets.
(i) Goodwill
--------
Goodwill represents the excess purchase price over the fair
value of net assets acquired and is amortized over five to thirty-
five years from the date of acquisition using the straight-line
method.
The carrying value of goodwill is based on management's
current assessment of recoverability. Management evaluates
recoverability using both objective and subjective factors.
Objective factors include management's best estimates of projected
future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis,
technological advantage or disadvantage, and the Company's
strategic focus.
(j) Other Assets
------------
Other assets consist principally of patents, trademarks, long-
term investments, cash and investments restricted for use by the
Company's captive insurance company and the estimated residual
value of assets subject to leveraged leases. Patents and trademarks
are amortized over the estimated useful life of the respective
asset using the straight-line method.
(k) Income Taxes
------------
The Company recognizes certain transactions in different time
periods for financial reporting and income tax purposes. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. The provision for deferred income taxes
represents the change in deferred income tax accounts during the
year.
(l) Earnings Per Share
------------------
In 1997, the Financial Accounting Standard Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earning per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
(m) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(n) Insurance Programs
------------------
The Company established the KCI Employee Benefits Trust (the
"Trust") as a self-insurer for certain risks related to the
Company's U.S. employee health plan and certain other benefits. The
Company funds the Trust based on the value of expected future
payments, including claims incurred but not reported. The Company
has purchased insurance which limits the Trust's liability under
the benefit plans.
The Company's wholly-owned captive insurance company, KCI
Insurance Company, Ltd. (the "Captive"), reinsures the primary
layer of commercial general liability, workers' compensation and
auto liability insurance for certain operating subsidiaries.
Provisions for losses expected under these programs are recorded
based upon estimates of the aggregate liability for claims incurred
based on actuarial reviews. The Company has obtained insurance
coverage for catastrophic exposures as well as those risks required
to be insured by law or contract.
(o) Foreign Currency Translation
----------------------------
The functional currency for the majority of the Company's
foreign operations is the applicable local currency. The
translation of the applicable foreign currencies into U.S. dollars
is performed for balance sheet accounts using the exchange rates in
effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period.
(p) Stock Options
-------------
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation." The 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 are required to provide expanded disclosures in footnotes
to the financial statements. The Company has elected to continue
accounting for stock-based compensation under the provisions of APB
Opinion 25 and has provided the required disclosures (See Note 9).
(q) Research and Development
------------------------
The focus of the Company's research and development program
has been to develop new products and make technological
improvements to existing products. Expenditures for research and
development are expensed as incurred and represented approximately
2% of the Company's total expenditures in each of the years ended
December 31, 1997, 1996 and 1995.
NOTE 2. Recapitalization
----------------
On November 5, 1997, a substantial interest in the Company was
acquired by Fremont Partners L.P. ("Fremont") and Richard C. Blum &
Associates, L.P. ("RCBA") (collectively, the "Investors"). The
Company and the Investors entered into a Transaction Agreement
dated as of October 2, 1997, as amended by a letter agreement dated
November 5, 1997 (as so amended, the "Transaction Agreement")
pursuant to which the Investors purchased 7,802,180 shares of newly-
issued shares of the Company's common stock, $0.001 par value per
share, at a price equal to $19.25 per share. The proceeds of the
stock purchase, together with approximately $534.0 million of
aggregate proceeds from certain financings, (see Note 5), were used
to purchase approximately 31.0 million shares of the Company's
common stock from the selling shareholders at a price of $19.25 per
share, net to seller and pay all related fees and expenses.
Also pursuant to the Transaction Agreement, the Investors were
subsequently merged with and into the Company, with the Company as
the surviving corporation of the Merger. Following the Merger,
Fremont, RCBA, Dr. James Leininger and Dr. Peter Leininger own
7,029,922, 4,644,010, 5,939,220 and 100,000 shares, respectively,
representing 39.7%, 26.2%, 33.5% and 0.6% of the total shares
outstanding. There are currently no other shareholders but certain
members of management have retained, and/or have been granted,
additional options to purchase shares. The transactions have been
accounted for as a recapitalization and as such, a step-up of
assets to fair market value was not required. The difference
between the payment amount and the net book value of assets
acquired and liabilities assumed was recorded as retained earnings
as a cash distribution to the selling shareholders.
During 1997, non-recurring costs in connection with the
Recapitalization of approximately $34.4 million were incurred and
expensed. Additionally, financing costs of approximately $17.7
million have been deferred and will be amortized over the lives of
the new debt facilities.
NOTE 3. Acquisitions and Dispositions
-----------------------------
On June 15, 1995, the Company sold KCI Financial Services
("KCIFS") to Cura Capital Corporation ("Cura") for cash under a
Stock Purchase Agreement. Upon consummation of this transaction,
Cura acquired all of the outstanding capital stock of KCIFS. Total
proceeds from the sale were $7.2 million. This transaction re-
sulted in a pre-tax loss of $2.9 million which is reflected in
selling, general and administrative expenses in 1995. In addition,
the Company and its affiliates agreed not to provide lease
financing for medical equipment manufactured by third parties for
a period of three years. KCIFS served as the leasing agent for
Medical Services, certain assets of which were sold in September
1994. The operating results of KCIFS for 1995 were not material
as compared to the overall results of the Company.
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 has
been integrated into Kinetic Concepts' extensive distribution
system and, as a result, the Company has benefited from the
elimination of certain redundant expenses. H.F. Systems
recorded revenue of approximately $7.0 million for 1996 and did not
have a material impact on the Company's results of operations for
1997.
During 1997, the Company acquired 90% of the outstanding
capital stock of Ethos Medical Group, Ltd. located in Athlone,
Ireland, for approximately $2.8 million in cash plus other
consideration. Ethos manufactures the Keene Roto Rest trauma bed
and other medical devices and rents specialty support surfaces to
caregivers throughout Ireland. Ethos Medical's operating results
did not have a material impact on the Company's results of
operations for 1997.
On July 31, 1997, the Company acquired the outstanding capital
stock of Equi-Tron Mfg., Inc. located in Ontario, Canada, for
approximately $3.2 million in cash plus other consideration. Equi-
Tron Mfg., Inc. manufactures a line of products for bariatric
patients used primarily in the home care market. The operating
results of Equi-Tron Mfg., Inc. did not have a material impact on
the Company's results of operations for 1997.
On October 1, 1997, the Company acquired substantially all of
the assets of RIK Medical, L.L.C. ("RIK"), a Delaware limited
liability company. The Company paid approximately $23.3 million in
cash for the acquisition plus an earn-out of up to $2.0 million.
RIK is a manufacturer of non-powered therapeutic support surfaces
based in Boulder, Colorado. The RIK products incorporate several
unique and patented components and features. The operating results
of RIK Medical did not have a material impact on the Company's
results of operations for 1997.
The 1997 acquisitions have been accounted for by the purchase
method of accounting, and accordingly, the approximate purchase
prices, shown above, have been allocated to the assets acquired and
the liabilities assumed based on the estimated fair values at the
dates of acquisition, with the excess of purchase prices over
assigned asset values recorded as goodwill which the Company is
amortizing over periods of 15-25 years. The results of operations
of the acquisitions have been included in the Company's
consolidated financial statements since the acquisition dates.
Because the 1997 acquisitions are not material to the Company's
financial position or results of operations, pro forma results of
operations are not presented.
NOTE 4. Supplemental Balance Sheet Data
-------------------------------
Accounts receivable consist of the following (in thousands):
December 31,
------------------
1997 1996
-------- --------
Trade accounts receivable.......... $88,509 $63,613
Employee and other receivables..... 3,933 2,160
------ ------
92,442 65,773
Less allowance for doubtful
receivables...................... 11,204 7,532
------ ------
$81,238 $58,241
====== ======
Inventories consist of the following (in thousands):
December 31,
-----------------
1997 1996
-------- --------
Finished goods..................... $ 7,162 $ 5,586
Work in process.................... 2,743 1,893
Raw materials, supplies and parts.. 19,048 17,113
------ ------
28,953 24,592
Less amounts expected to be
converted into equipment for
short-term rental................ 7,400 4,550
------ ------
$21,553 $20,042
====== ======
Net property, plant and equipment consist of the following
(in thousands):
December 31,
---------------------
1997 1996
---------- ---------
Land.............................. $ 649 $ 1,007
Buildings......................... 16,693 14,254
Equipment for short-term rental... 131,534 133,896
Machinery, equipment and furniture 40,551 36,821
Leasehold improvements............ 1,560 1,388
Inventory to be converted into
equipment....................... 7,400 4,550
------- -------
198,387 191,916
Less accumulated depreciation..... 122,953 126,692
------- -------
$ 75,434 $ 65,224
======= =======
Accrued expenses consist of the following (in thousands):
December
----------------------
1997 1996
---------- ----------
Payroll, commissions and related taxes $15,454 $13,232
Insurance accruals.................... 3,238 2,887
Other accrued expenses................ 22,642 13,673
------ ------
$41,334 $29,792
====== ======
NOTE 5. Long-Term Obligations
---------------------
Long-term obligations at December 31, 1997 consists of the following
(in thousands):
Senior Credit Facilities:
Revolving bank credit facility......... $ 24,500
Acquisition credit facility............ 10,000
Term loans:
Tranche A due 2003.................. 120,000
Tranche B due 2004.................. 90,000
Tranche C due 2005.................. 90,000
-------
334,500
9 5/8% Senior Subordinated Notes Due 2007. 200,000
-------
534,500
Less: Current installments................ 4,800
-------
529,700
Other..................................... 201
-------
$529,901
=======
Senior Credit Facilities
Indebtedness under the Senior Credit Facilities, including the
Revolving Credit Facility (other than certain loans under the
Revolving Credit Facility designated in foreign currency), the Term
Loans and the Acquisition Facility initially bear interest at a
rate based upon (i) the Base Rate (defined as the higher of (x) the
rate of interest publicly announced by Bank of America as its
"reference rate" and (y) the federal funds effective rate from time
to time plus 0.50%), plus 1.25% in respect of the Tranche A Term
Loans, the loans under the Revolving Credit Facility (the
"Revolving Loans") and the loans under the Acquisition Facility
(the "Acquisition Loans"), 1.50% in respect of the Tranche B Term
Loans and 1.75% in respect of the Tranche C Term Loans, or at the
Company's option, (ii) the Eurodollar Rate (as defined in the Sr.
Credit Facility Agreement) for one, two, three or six months, in
each case plus 2.25% in respect of Tranche A Term Loans, Revolving
Loans and Acquisition Loans, 2.50% in respect of Tranche B Term
Loans and 2.75% in respect of the Tranche C Term Loans. Certain
Revolving Loans designated in foreign currency will initially bear
interest at a rate based upon the cost of funds for such loans,
plus 2.25% or 2.50%, depending on the type of foreign currency.
Performance-based reductions of the interest rates under the Term
Loans, the Revolving Loans and the Acquisition Loans are available.
Subsequent to December 31, 1997, the Company entered into a swap
transaction whereby the interest rate on $150,000,000 of the term
loans is fixed at 5.7575% through January 8, 2001.
The Revolving Loans may be repaid and reborrowed. The Company
is required to pay to the Banks under the Bank Credit Agreement a
commitment fee initially equal to 0.50% per annum, payable in
arrears on a quarterly basis, on the average daily unused portion
of the Revolving Credit Facility and Acquisition Facility during
such quarter. The Company is also required to pay to the Banks
participating in the Revolving Credit Facility letter of credit
fees equal to the applicable margin then in effect with respect to
Eurodollar loans under the Revolving Credit Facility on the
face amount of each letter of credit outstanding and to the
Bank issuing a letter of credit a fronting fee of 0.25%
on the average daily stated amount of each outstanding letter of
credit issued by such Bank, in each case payable in arrears on a
quarterly basis. Bank of America and Bankers Trust will receive
and continue to receive such other fees as have been separately
agreed upon. At December 31, 1997, the aggregate availability
under the Revolving Credit and Acquisition Facilities was $65.5
million.
The Term Loans are subject to quarterly amortization payments
commencing on March 31, 1998. Commitments under the Acquisition
Facility will expire three years from the closing of the Bank
Credit Agreement and the Acquisition Facility loans outstanding
shall be repayable in equal quarterly amortization payments
commencing March 31, 2001. In addition, the Bank Credit Agreement
provides for mandatory repayments, subject to certain exceptions,
of the Term Loans, the Acquisition Facility and/or the Revolving
Credit Facility based on certain net asset sales outside the
ordinary course of business of the Company and its subsidiaries,
the net proceeds of certain debt and equity issuances and excess
cash flows.
Indebtedness of the Company under the Senior Credit Agreement
is guaranteed by certain of the subsidiaries of the Company and is
secured by (i) a first priority security interest in all, subject
to certain customary exceptions, of the tangible and intangible
assets of the Company and its domestic subsidiaries, including,
without limitation, intellectual property and real estate owned by
the Company and its subsidiaries, (ii) a first priority perfected
pledge of all capital stock of the Company's domestic subsidiaries
and (iii) a first priority perfected pledge of up to 65% of the
capital stock of foreign subsidiaries owned directly by the Company
or its domestic subsidiaries.
The Senior Credit Agreement requires the Company to meet
certain financial tests, including minimum levels of EBITDA (as
defined therein), minimum interest coverage, maximum leverage ratio
and capital expenditures. The Bank Credit Agreement also contains
covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, loans and
advances, capital expenditures, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of
other indebtedness (including the Notes), liens and encumbrances
and other matters customarily restricted in such agreements. The
Company is in compliance with the applicable covenants at December
31, 1997.
The Senior Credit Agreement contains customary events of
default, including payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency, failures
under ERISA plans, judgment defaults, failure of any guaranty,
security document security interest or subordination provision
supporting the Bank Credit Agreement to be in full force and effect
and change of control of the Company.
9 5/8% Senior Subordinated Notes Due 2007
The 9 5/8% Senior Subordinated Notes Due 2007 (the "Notes")
are unsecured obligations of the Company, ranking subordinate in
right of payment to all senior debt of the Company and will mature
on November 1, 2007. Interest on the Notes accrues at the rate of
9 5/8% per annum and is payable semiannually in cash on each May 1
and November 1, commencing on May 1, 1998, to the persons who
are registered Holders at the close of business on April 15 and
October 15, respectively, immediately preceding the applicable
interest payment date. Interest on the Notes accrues from and
including the most recent date to which interest has been paid or,
if no interest has been paid, from and including the date of
issuance.
The Notes are not entitled to the benefit of any mandatory
sinking fund. In addition, at any time, or from time to time, the
Company may acquire a portion of the Notes through open-market
purchases.
Redemption
Optional Redemption. The Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to
time, on and after November 1, 2002, upon not less than 30 nor more
than 60 days' notice, at the following redemption prices (expressed
as percentages of the principal amount thereof) if redeemed during
the twelve-month period commencing on November 1 of the year set
forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption.
Year Percentage
---- ----------
2000.................................. 104.813%
2001.................................. 103.208%
2002.................................. 101.604%
2005 and thereafter................... 100.000%
Optional Redemption upon Equity Offerings. At any time, or
from time to time, on or prior to November 1, 2000, the Company
may, at its option, on one or more occasions use all or a portion
of the net cash proceeds of one or more Equity Offerings (as
defined below) to redeem the Notes issued under the Indenture at a
redemption price equal to 109.625% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided that at least 65% of the principal amount of
Notes originally issued remains outstanding immediately after any
such redemption. In order to effect the foregoing redemption with
the proceeds of any Equity Offering, the Company shall make such
redemption not more than 120 days after the consummation of any
such Equity Offering.
Interest paid during 1997, 1996 and 1995 was approximately
$5.1 million, $200,000 and $400,000, respectively.
As used in the preceding paragraph, "Equity Offering", means
any offering of Qualified Capital Stock of the Company.
Future maturities of long-term debt at December 31, 1997 are
as follows (in thousands):
Year Amount
---- --------
1998.................................. $ 4,800
1999.................................. $ 8,800
2000.................................. $ 16,800
2001.................................. $ 35,133
2002.................................. $ 35,133
Thereafter............................ $433,834
NOTE 6. Leasing Obligations
-------------------
The Company is obligated for equipment under various capital
leases which expire at various dates during the next four years.
At December 31, 1997, the gross amount of equipment under capital
leases totaled $619,000 and related accumulated depreciation
totaled $299,000.
The Company leases computer and telecommunications equipment,
service vehicles, office space, various storage spaces and
manufacturing facilities under noncancelable operating leases which
expire at various dates over the next six years. Total rental
expense for operating leases, net of sublease payments received,
was $13.2 million, $13.5 million and $12.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments under capital and noncancelable
operating leases (with initial or remaining lease terms in excess
of one year) as of December 31, 1997 are as follows (in thousands):
Capital Operating
Leases Leases
--------------------
1998....................................... $216 $13,696
1999....................................... 173 7,500
2000....................................... 107 5,528
2001....................................... 1 3,966
2002....................................... -- 3,125
Later years................................ -- --
--- ------
Total minimum lease payments............... $497 $33,815
======
Less amount representing interest.......... 46
---
Present value of net minimum capital lease
payments................................. 451
Less current portion....................... 139
---
Obligations under capital leases excluding
current installments..................... $312
---
NOTE 7. Income Taxes
------------
Earnings before income taxes and minority interest consists of
the following (in thousands):
Year Ended December 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
Domestic......................... $12,493 $51,771 $37,542
Foreign.......................... 8,540 12,670 10,804
------ ------ ------
$21,033 $64,441 $48,346
====== ====== ======
Income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Year Ended December 31, 1997
----------------------------------
Current Deferred Total
---------- ---------- ---------
Federal........................ $ 145 $ 3,380 $ 3,525
State.......................... 19 1,105 1,124
International.................. 3,549 205 3,754
------ ------ ------
$ 3,713 $ 4,690 $ 8,403
====== ====== ======
Year Ended December 31, 1996
----------------------------------
Current Deferred Total
---------- --------- --------
Federal........................ $14,363 $ 4,464 $18,827
State.......................... 2,569 552 3,121
International.................. 3,831 (325) 3,506
------ ------ ------
$20,763 $ 4,691 $25,454
====== ====== ======
Year Ended December 31, 1995
--------------------------------
Current Deferred Total
--------- --------- --------
Federal........................ $ 8,148 $ 4,174 $12,322
State.......................... 2,140 277 2,417
International.................. 5,166 -- 5,166
------ ------ ------
$15,454 $ 4,451 $19,905
====== ====== ======
Income tax expense attributable to income from continuing
operations differed from the amounts computed by applying the
statutory tax rate of 35 percent to pre-tax income from continuing
operations as a result of the following (in thousands):
Year Ended December 31,
---------------------------
1997 1996 1995
-------- -------- --------
Computed "expected" tax expense... $7,353 $22,554 $16,921
Goodwill.......................... 317 442 533
State income taxes, net of Federal
benefit......................... 731 2,028 1,571
Tax-exempt interest from municipal
bonds........................... (160) (445) --
Foreign income taxed at other than
U.S. rates...................... 417 1,145 1,836
Utilization of foreign net operating
loss carryforwards.............. (46) (123) (231)
Nonconsolidated foreign net
operating loss.................. 402 67 492
Foreign, other.................... (268) (441) (1,450)
Other, net........................ (343) 227 233
----- ------ ------
$8,403 $25,454 $19,905
===== ====== ======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and December 31, 1996 are
presented below (in thousands):
1997 1996
--------- ---------
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts........ $ 3,311 $ 4,458
Intangible assets, deducted for book
purposes but capitalized and amortized
for tax purposes ...................... 617 1
Foreign net operating loss carryforwards. 402 67
Net operating loss carryforwards......... 1,566 --
Inventories, principally due to additional
costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986. 895 664
Legal fees, capitalized and amortized for
tax purposes........................... 533 670
Accrued liabilities...................... 1,381 1,015
Foreign tax credits, available for
carryback.............................. 3,321 --
Deferred foreign tax asset............... 120 325
Other.................................... 1,804 1,089
------ ------
Total gross deferred tax assets........ 13,950 8,289
Less valuation allowance............... (402) (67)
------ ------
Net deferred tax assets................ 13,548 8,222
Deferred Tax Liabilities:
Plant and equipment, principally due to
differences in depreciation and basis.. (20,591) (11,722)
Deferred state tax liability............. (2,077) (973)
Investments, principally due to differences
in tax treatment of certain components (804) (506)
Other.................................... (86) (86)
------ ------
Total gross deferred tax liabilities... (23,558) (13,287)
------ ------
Net deferred tax liability............. $(10,010) $ (5,065)
====== ======
At December 31, 1997, the Company had $1.3 million of
operating loss carryforwards available to reduce future taxable
income of certain international subsidiaries. These loss
carryforwards must be utilized within the applicable carryforward
periods. A valuation allowance has been provided for the deferred
tax assets related to loss carryforwards. Carryforwards of $630,000
can be used indefinitely and the remainder expire from 1998 through
2002. Additionally, the Company had a foreign tax credit of
$3,097,000 which will be carried back to 1995 and 1996.
The Company anticipates that the reversal of existing taxable
temporary differences and future income will provide sufficient
taxable income to realize the tax benefit of the remaining deferred
tax assets.
Income taxes paid during 1997, 1996 and 1995 were $12.1
million, $15.4 million and $15.1 million, respectively.
NOTE 8. Shareholders' Equity and Employee Benefit Plans
-----------------------------------------------
Common Stock:
The Company is authorized to issue 100 million shares of
Common Stock, $0.001 par value (the "Common Stock"). On November
5, 1997, a substantial interest in the Company was acquired by
Fremont Partners L.P. ("Fremont") and Richard C. Blum & Associates,
L.P. ("RCBA") (collectively, the "Investors"). The Company and the
Investors entered into a Transaction Agreement dated as of October
2, 1997, as amended by a letter agreement dated November 5, 1997
(as so amended, the "Transaction Agreement") pursuant to which the
Investors purchased 7,802,180 shares of newly-issued shares of the
Company's common stock, $0.001 par value per share, at a price
equal to $19.25 per share. The proceeds of the stock purchase,
together with approximately $534.0 million of aggregate proceeds
from certain financings, (see Note 5), were used to purchase
approximately 31.0 million shares of the Company's common stock
from the selling shareholders at a price of $19.25 per share, net
to seller and pay all related fees and expenses. The number of
shares of Common Stock issued and outstanding at the end of 1997
and 1996 was 17,486,000 and 42,355,000, respectively.
Treasury Stock:
In July, 1995, the Company's Board of Directors approved a
program to repurchase up to 3,000,000 shares of its Common Stock.
The Company repurchased approximately 258,000 shares during 1997
and 2,563,000 shares during 1996. In 1994, the Company's Board
of Directors adopted a resolution to return all repurchased shares
to the status of authorized but unissued shares. In accordance
with this resolution, the Company retired 2,563,000 and 77,000
treasury shares in 1996 and 1995, respectively. In February 1997,
the Company's Board of Directors approved a program which authorized
the Company to purchase up to an additional 3 million shares. The
Company repurchased no shares during 1997 under this program. Both
programs were terminated in 1997 in connection with the November
1997 recapitalization transactions.
Preferred Stock:
The Company is authorized to issue up to 20.0 million shares
of Redeemable Preferred Stock, par value $0.001 per share, in one
or more series. As of December 31, 1997 and December 31, 1996, none
were issued.
Employee Stock Ownership Plan:
The Company established an Employee Stock Ownership Plan (the
"ESOP") covering employees of the Company who meet minimum age and
length of service requirements. The ESOP enabled eligible employees
to acquire a proprietary interest in the Company.
As of November 6, 1997, the ESOP was terminated and all shares
of stock owned by the ESOP were tendered in connection with the
November 1997 recapitalization transactions. Based on the number
of shares allocated for the year, ESOP expense recorded during
1997, 1996 and 1995 amounted to $0, $0 and $263,000, respectively.
Investment Plan:
The Company has an Investment Plan intended to qualify as a
deferred compensation plan under Section 401(k) of the Internal
Revenue Code of 1986. The Investment Plan is available to all
domestic employees and the Company matches employee contributions
up to a specified limit. In 1997, 1996 and 1995, the Company made
matching contributions and charged to expense $950,000, $498,000
and $265,000, respectively.
NOTE 9. Stock Option Plans
------------------
In October 1995, the Financial Accounting Standards Board
(FASB) issued Statement No. 123, "Accounting and Disclosure of
Stock-Based Compensation." While the accounting standard
encourages the adoption of a new fair-value method for expense
recognition, Statement 123 allows companies to continue accounting
for stock options and other stock-based awards as provided in Account-
ing Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company has elected to follow the
provisions of APB 25 and related interpretations in accounting
for its stock options plans because, as discussed below, the
alternative fair-value method prescribed by FASB Statement No. 123
requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options
generally equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In December 1997, the Company's Board of Directors approved
the 1997 Management Equity Plan. The maximum aggregate number of
shares of no-par Common Stock that may be issued in connection with
grants under the Management Equity Plan is approximately 1.2
million shares, subject to adjustment as provided for in the plan.
The Management Equity Plan shall be administered, and grants
determined, by a committee of the Board of Directors. The exercise
price and term of options granted under the Management Equity Plan
shall be determined by the committee, however, in no event shall
the term of any option granted under the Management Equity Plan
exceed seven (7) years. The Management Equity Plan supersedes all
other stock option plans. As of December 31, 1997, all outstanding
options granted under the superseded plans were 100% vested.
The 1997 Kinetic Concepts, Inc. Stock Incentive Plan (the
"Stock Incentive Plan") was approved by the Company's Board of
Directors on May 13, 1997 and covered an aggregate of 2.5 million
shares of the Company's Common Stock. Under the Stock Incentive
Plan, options were granted to employees (including officers), non-
employee directors and consultants of the Company. The exercise
price of the options was determined by a committee of the Board of
Directors of the Company. The Stock Incentive Plan permitted the
Board of Directors to declare the terms for payment when such
options are exercised. Options under the Stock Incentive Plan were
granted with a term not exceeding ten years. The Stock Incentive
Plan was superseded by the 1997 Management Equity Plan.
The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option
Plan (the "Key Contributor Stock Option Plan") covered up to an
aggregate of 5.75 million shares of the Company's Common Stock.
Options were granted under the Key Contributor Stock Option Plan
to employees (including officers), non-employee directors and con-
sultants of the Company. The exercise price of the options was
determined by a committee of the Board of Directors of the Company.
The Key Contributor Stock Option Plan permitted the Board of
Directors to declare the terms for payment when such options are
exercised. Options under the Key Contributor Stock Option
Plan were granted with a term not exceeding ten years. The
Key Contributor Stock Option Plan expired April 13, 1997 and was
succeeded by the 1997 Stock Incentive Plan.
The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan
(the "Directors Stock Option Plan") covered an aggregate of 300,000
shares of the Company's Common Stock and were granted to non-
employee directors of the Company. The exercise price of options
granted under the Directors Stock Option Plan was determined as the
fair market value of the shares of the Company's Common Stock on
the date that such option was granted. The Directors Stock Option
Plan was succeeded by the 1997 Stock Incentive Plan.
The 1995 Kinetic Concepts, Inc. Senior Executive Management
Stock Option Plan (the "Senior Executive Stock Option Plan")
covered a total of 1.4 million shares of the Company's Common Stock
and may be granted to certain senior executives of the Company at
the recommendation of the Chief Executive Officer and discretion of
the Company's Board of Directors. The exercise price for each
share of common stock covered by an option was established by the
Board of Directors but was not in any case less than the fair
market value of the shares of common stock of the Company on the
date of grant. Vesting of options granted was subject to certain
terms and conditions. The Senior Executive Stock Option Plan was
superseded by the 1997 Management Equity Plan .
Pro forma information regarding net income and earnings per
share is required by Statement 123, and has been determined as if
the Company had accounted for its employee stock options under the
fair-value method of that statement. The fair value for options
granted during the three fiscal years ended December 31, 1997,
1996 and 1995, respectively, was estimated using a Black-Scholes
option pricing model with the following weighted average
assumptions: risk-free interest rates of 5.6%, 6.1% and 6.0%
dividend yields of 1.1%, 0.9% and 2.1%, volatility factors of the
expected market price of the Company's common stock of .30, .32 and
.33, and a weighted-average expected option life of 5 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the underlying assumptions can materially affect the
fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in
thousands except for earnings per share information):
1997 1996 1995
--------- --------- --------
Net Earnings as Reported...... $12,605 $38,987 $28,441
Pro Forma Net Earnings........ $11,319 $37,996 $28,238
Earnings Per Share as Reported
Earnings per common share... $ 0.33 $ 0.89 $ 0.64
Earnings per common share--
assuming dilution......... $ 0.32 $ 0.86 $ 0.63
Pro Forma Earnings Per Share
Earnings per common share... $ 0.29 $ 0.86 $ 0.64
Earnings per common share--
assuming dilution......... $ 0.28 $ 0.84 $ 0.62
The Company is not required to apply the method of accounting
prescribed by Statement 123 to stock options granted prior to
January 1, 1995. As a result, the pro forma compensation cost
reflected above may not be representative of future results.
The following table summarizes information about stock options
outstanding at December 31, 1997 (options in thousands):
Weighted
Average
Options Remaining Weighted Options Weighted
Range of Outstanding Contract Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/97 (yrs) Price 12/31/97 Price
- ------------ ----------- -------- -------- ---------- --------
$ 3.50 to $ 4.63 346 6.3 $ 4.17 346 $ 4.17
$ 5.00 to $ 9.50 182 6.6 $ 6.78 182 $ 6.78
$11.13 to $19.25 1,808 7.7 $16.86 852 $14.17
----- --- ----- ----- -----
2,336 7.4 $14.20 1,380 $10.69
A summary of the Company's stock option activity, and related
information, for years ended December 31, 1997, 1996 and 1995
follows (options in thousands):
1997 1996 1995
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------- ---------------- ----------------
Options Oustanding-
Beginning of Year 3,339 $ 8.68 2,833 $ 5.21 3,029 $ 4.50
Granted........... 1,708 $ 17.44 1,317 $14.47 873 $ 6.89
----- ----- ----- -----
Exercised......... (2,609) $ 9.40 (628) $ 5.05 (792) $ 4.56
----- ----- ----- -----
Forfeited......... (102) $ 10.63 (183) $ 9.34 (277) $ 4.57
----- ----- ----- ----- -----
Options Outstanding-
End of Year..... 2,336 $ 14.20 3,339 $ 8.68 2,833 $ 5.21
----- ----- ----- ----- -----
Exercisable at End
of Year......... 1,380 $ 10.69 1,321 $ 7.07
----- ------ ----- -----
Weighted-Average
Fair Value of
Options Granted
During the Year. $ 6.39 $ 5.80 $ 2.19
Exercise prices for options outstanding as of December 31,
1997 ranged from $3.50 to $19.25. The weighted average remaining
contractual life of those options is 7.4 years. The weighted
average fair value of options granted during 1997 approximated the
weighted average exercise price at the grant date.
Note 10. Other Assets
------------
A summary of other long-term assets follows (in thousands):
1997 1996
-------- --------
Investment in assets subject
to leveraged leases............. $16,069 $14,766
Information systems development
projects........................ -- 3,124
Investment in long-term securities 782 2,979
Intangible assets................. 4,096 3,710
Deposits and other................ 11,634 11,475
------ ------
$32,581 $36,054
(Less) accumulated amortization... (3,100) (5,614)
------ ------
$29,481 $30,440
====== ======
The Company acquired beneficial ownership of two Grantor
Trusts in December 1996 and December 1994. Each Trust asset
consists of a McDonnell Douglas DC-10 aircraft and three engines.
In connection with the acquisition, KCI paid cash equity of $7.2
million and $7.6 million, respectively, and assumed non-recourse
debt of $47.0 million and $51.8 million, respectively. The DC-10
aircrafts are on lease to the Federal Express Corporation through
June 2012 and January 2012, respectively. Federal Express pays
monthly rent to a third party who, in turn, pays this entire amount
to the holders of the non-recourse certificated indebtedness, which
is secured by the aircraft. Recourse to the certificate holders is
limited to the Trust assets only.
Long-term securities consist primarily of government backed
securities held by the Company's wholly owned captive insurance
company.
Note 11. Earnings Per Share
------------------
The following table sets forth the reconciliation from basic
to diluted average common shares and the calculations of net income
per common share. Net income for basic and diluted calculations do
not differ (in thousands, except per share).
1997 1996 1995
----------- ---------- ---------
Net Income..................... $12,605 $38,987 $28,441
====== ====== ======
Average Common Shares:
Basic(weighted-average
outstanding shares).......... 38,591 43,958 44,163
Dilutive potential common
shares from stock
options.................. 1,319 1,531 1,294
------ ------ ------
Diluted (weighted-average
outstanding shares)...... 39,910 45,489 45,457
====== ====== ======
Earnings per common share...... $ 0.33 $ 0.89 $ 0.64
====== ====== ======
Earning per common share -
assuming dilut............... $ 0.32 0.86 0.63
====== ====== ======
NOTE 12. 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. A small amount of
discovery remains. 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.
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. 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 Kinetic Concepts 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.
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 in
December 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 initial investigation, the
Company does not believe that the TriaDyne bed infringes the Hill-
Rom patent or that this lawsuit will materially impact the
marketing of the TriaDyne bed. 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 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.
Other than commitments for new product inventory, including
disposable "for sale" products, of $11.4 million, the Company has
no material long-term capital commitments and can adjust the level
of capital expenditures as circumstances dictate.
See discussion of the Company's self-insurance program at Note
1 and leases at Note 6.
NOTE 13. Segment and Geographic Information
----------------------------------
The Company operates primarily in one industry segment: the
distribution of specialty therapeutic beds and medical devices to
select health care providers.
A summary of financial information by geographic area is as
follows (in thousands):
Year Ended December 31, 1997
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated customers $236,642 $70,274 $ -- $306,916
Intercompany transfers 5,838 -- (5,838) --
------- ------ -------- -------
Total......... $242,480 $70,274 $ (5,838) $306,916
======= ====== ======= =======
Operating earnings...... $ 18,365 $12,184 $ (500) $ 30,049
======= ====== ======= =======
Total assets:
Identifiable assets... $244,374 $55,846 $(10,823) $289,397
======= ====== =======
Corporate assets...... 61,754
-------
Total assets.. $351,151
=======
Year Ended December 31, 1996
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated customers $201,116 $68,765 $ -- $269,881
Intercompany transfers 7,272 -- (7,272) --
------- ------ ------ -------
Total......... $208,388 $68,765 $(7,272) $269,881
======= ====== ====== =======
Operating earnings...... $ 40,810 $15,197 $ (653) $ 55,354
======= ====== ====== =======
Total assets:
Identifiable assets... $155,049 $49,622 $(10,323) $194,348
======= ====== ======
Corporate assets...... 59,045
-------
Total assets.. $253,393
=======
Year Ended December 31, 1995
----------------------------
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Total revenue:
Unaffiliated customers $182,754 $60,689 $ - $243,443
Intercompany transfers 6,991 -- (6,991) --
------- ------ ------ -------
Total......... $189,745 $60,689 $ (6,991) $243,443
======= ====== ====== =======
Operating earnings...... $ 33,779 $10,845 $ (832) $ 43,792
======= ====== ====== =======
Total assets:
Identifiable assets... $157,603 $43,787 $(10,063) $191,327
======= ====== =======
Corporate assets...... 52,399
-------
Total assets.. $243,726
=======
Domestic intercompany transfers primarily represent shipments
of equipment and parts to international subsidiaries. These
intercompany shipments are made at transfer prices which
approximate prices charged to unaffiliated customers and have been
eliminated from consolidated net revenues. Corporate assets consist
of cash and cash equivalents.
NOTE 14. Quarterly Financial Data (Unaudited)
------------------------------------
The unaudited consolidated results of operations by quarter
are summarized below:
Year Ended December 31, 1997
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- -------- --------
Revenue.................... $73,181 $75,031 $76,299 $ 82,405
Operating earnings (loss).. $16,217 $16,223 $16,165 $(18,556)
Net earnings (loss)........ $10,003 $ 9,952 $ 9,948 $(17,298)
Per share:
Earnings (loss) per
common share........ $ 0.24 $ 0.24 $ 0.23 $ (0.63)
Earnings (loss) per
common share -
assuming dilution... $ 0.23 $ 0.23 $ 0.23 $ (0.63)
Average common shares:
Basic (Weighted
average outstanding
shares)............. 42,401 42,317 42,447 27,248
Diluted (Weighted
average outstanding
shares) 43,763 43,806 44,091 28,213
====== ====== ====== ======
Results for the fourth quarter of 1997 include
recapitalization expenses of $34.4 million (See Note 2).
Year Ended December 31, 1996
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- --------
Revenue.................... $67,587 $64,272 $67,970 $70,052
Operating earnings......... $13,741 $12,721 $13,629 $15,263
Net earnings............... $ 8,814 $ 8,187 $ 8,858 $13,128
Per share:
Earnings per common
share............... $ 0.20 $ 0.18 $ 0.20 $ 0.30
Earnings per common
share - assuming
dilution............ $ 0.19 $ 0.18 $ 0.19 $ 0.30
Average common shares:
Basic (Weighted
average outstanding
shares).............. 44,320 44,307 43,966 43,087
Diluted (Weighted
average outstanding
shares).............. 45,967 46,459 45,553 44,474
====== ====== ====== ======
Earnings per share for the full year may differ from the
total of the quarterly earnings per share due to rounding
differences.
NOTE 15. New Accounting Pronouncements
------------------------------
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after
December 15, 1997. This new pronouncement establishes standards
for the reporting and display of comprehensive income and
its components in a full set of general purpose financial state-
ments. Under the provisions of Statement No. 130, all revenue,
expenses, gains and losses recognized during the period are included
in income, regardless of whether they are considered to be results
of operations of the period. Items required by accounting
standards to be reported as direct adjustments to paid-in-
capital, retained earnings or other non-income equity accounts
are not to be included as components of comprehensive income.The
Company plans to adopt the provisions of Statement No. 130 effective
with the fiscal year beginning January 1, 1998, and estimates that
any impact on the Company's results of operations or financial posit-
ion will not be material.
Also, effective for periods beginning after December 15, 1997,
the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes
standards for the way that public companies report information
about operating segments in annual financial statements as well as
interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. Operating segments are components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
The Company plans to adopt the provisions of Statement No. 131
effective with the fiscal year beginning January 1, 1998 and
estimates that adoption of these provisions will not have a
material adverse impact on the Company's financial position or
results of operations.
During 1997, the Securities and Exchange Commission issued
expanded disclosure requirements of accounting policies for
derivative financial instruments and the exposure to market risk.
The new rules require enhanced descriptions of specific aspects of
a registrant's accounting policies for derivatives as well as
qualitative and quantitative disclosures about each type of market
risk. The increased policy disclosures on derivatives were
effective for all public companies for periods ending after June
15, 1997. The qualitative and quantitative market risk disclosures
must be provided in all filings that include audited financial
statements for fiscal years ending after June 15, 1998. The
Company expects compliance with these requirements will not have a
material impact on the Company's consolidated results of
operations, financial position, or cash flows.
NOTE 16. Guarantor Condensed Consolidating Financial Statements
------------------------------------------------------
Kinetic Concepts, Inc. issued $200 million in subordinated
debt securities to finance a tender offer to purchase certain of
its common shares outstanding. In connection with the issuance of
these securities, certain of its subsidiaries (the guarantor
subsidiaries) will serve as guarantors. Certain other subsidiaries
(the nonguarantor subsidiaries) will not guarantee such debt.
The following tables present the condensed consolidating
balance sheets of Kinetic Concepts, Inc. as a parent company, its
guarantor subsidiaries and its nonguarantor subsidiaries as of
December 31, 1997 and 1996 and the related condensed consolidating
statements of earnings and cash flows for each year in the three-
year period ended December 31, 1997.
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
December 31, 1997
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equiv-
alents.............. $ -- $ 44,471 $ 17,316 $ (33) $ 61,754
Accounts receivable,
net................. 681 75,252 15,002 (9,697) 81,238
Inventories.......... 16,716 3,056 9,547 (7,766) 21,553
Prepaid expenses and
other.............. 5,663 11,847 1,584 (648) 18,446
------- ------- ------- ------ -------
Total current
assets......... 23,060 134,626 43,449 (18,144) 182,991
Net property, plant and
equipment............ 14,310 75,471 9,065 (23,412) 75,434
Goodwill, net.......... 2,749 37,332 5,818 -- 45,899
Loan issuance cost, net 0 17,346 -- -- 17,346
Other assets, net...... 6,055 23,298 127 1 29,481
Intercompany invest-
ments and advances... 264,135 228,016 1,017 (493,168) --
------- ------- ------- ------- -------
Total assets..... $310,309 $516,089 $ 59,476 $(534,723) $351,151
======= ======= ======= ======= =======
LIABILITIES AND CAPITAL
ACCOUNTS
Accounts payable....... $ 37,594 $ 595 $ 2,196 $ (32) $ 40,353
Accrued expenses....... 12,714 23,429 5,691 (500) 41,334
Current installments on
long-term obligations 4,800 -- -- -- 4,800
obligations
Intercompany payables.. -- 181,147 9,761 (190,908) --
Current installments of
capital lease obli-
gations.............. 139 -- -- -- 139
Income tax payable..... -- 1 648 (649) --
------- ------- ------- ------- -------
Total current
liabilities... 55,247 205,172 18,296 (192,089) 86,626
------- ------- ------- ------- -------
Long-term obligations
excluding current
installments........ 529,700 201 -- -- 529,901
Capital lease obliga-
tions, excluding
current installments 256 -- 56 -- 312
Deferred income taxes,
net................. 804 17,636 -- (8,430) 10,010
------- ------- ------- ------- -------
Total liabilities 586,007 223,009 18,352 (200,519) 626,849
Shareholders' (deficit)
equity............... (275,698) 293,080 41,124 (334,204) (275,698)
------- ------- ------- ------- -------
Total liabilities
and equity..... $310,309 $516,089 $ 59,476 $(534,723) $351,151
======= ======= ======= ======= =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Balance Sheet
December 31, 1996
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- -------- ---------
ASSETS
Current assets:
Cash and cash
equivalents....... $ -- $ 50,286 $ 14,485 $ (5,726) $ 59,045
Accounts receivable,
net............... 5,174 46,585 13,072 (6,590) 58,241
Inventories......... 13,944 334 10,605 (4,841) 20,042
Prepaid expenses and
other............. 2,677 3,214 969 -- 6,860
-------- ------- ------- -------- -------
Total current
assets........ 21,795 100,419 39,131 (17,157) 144,188
Net property, plant and
equipment........... 12,965 76,143 9,571 (33,455) 65,224
Goodwill, net......... 3,375 3,829 6,337 -- 13,541
Other assets, net..... 10,848 21,470 325 (2,203) 30,440
Intercompany invest-
ments and advances.. 279,773 200,399 -- (480,172) --
------- ------- ------- ------- -------
Total assets.... $328,756 $402,260 $ 55,364 $(532,987) $253,393
======= ======= ======= ======= =======
LIABILITIES AND CAPITAL
ACCOUNTS
Accounts payable...... $ 7,635 $ 509 $ 1,556 $ (5,726) $ 3,974
Accrued expenses...... 5,422 17,947 5,561 862 29,792
Intercompany payables. 102,044 48,272 9,894 (160,210) --
Current installments
of capital lease
obligations......... 118 -- -- -- 118
Income tax payable.... 2,111 -- 2,294 (1,435) 2,970
------- ------- ------- ------- -------
Total current
liabilities 117,330 66,728 19,305 (166,509) 36,854
------- ------- ------- ------- -------
Capital lease obliga-
tions, excluding
current installments 348 -- 48 -- 396
Deferred income taxes,
net.................. -- 12,120 -- (7,055) 5,065
------- ------- ------- ------- -------
Total liabilities 117,678 78,848 19,353 (173,564) 42,315
Shareholders' equity.. 211,078 323,412 36,011 (359,423) 211,078
------- ------- ------- ------- -------
Total liabilities
and equity.... $328,756 $402,260 $ 55,364 $(532,987) $253,393
======= ======= ======= ======= =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1997
(in thousands)
Kinetic Historical
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
REVENUE:
Rental and service.... $ -- $202,938 $ 44,952 $ -- $247,890
Sales and other....... 42,290 36,777 21,190 (41,231) 59,026
------ ------- ------- ------ -------
Total revenue 42,290 239,715 66,142 (41,231) 306,916
Rental expenses....... -- 123,346 40,946 (8,113) 156,179
Cost of goods sold.... 30,335 9,379 12,791 (28,832) 23,673
------ ------- ------ ------ -------
30,335 132,725 53,737 (36,945) 179,852
------ ------- ------ ------ -------
Gross profit...... 11,955 106,990 12,405 (4,286) 127,064
Selling, general and
administrative
expenses............ 8,796 44,090 9,768 -- 62,654
Recapitalization
expense............. -- 34,361 -- -- 34,361
------ ------- ------ ------ -------
Operating earnings 3,159 28,539 2,637 (4,286) 30,049
Interest income....... 278 1,527 458 -- 2,263
Interest expense...... (9,736) (1,176) -- 739 (10,173)
Foreign currency loss. -- -- (1,106) -- (1,106)
------ ------- ------ ------ -------
Earnings before
income taxes and
minority interest (6,299) 28,890 1,989 (3,547) 21,033
Income tax............ (2,483) 11,169 1,381 (1,664) 8,403
Minority interest..... -- -- 25 -- 25
Earnings before
equity in
earnings of
subsidiaries.... (3,816) 17,721 583 (1,883) 12,605
Equity in earnings
of subsidiaries. 16,421 583 -- (17,004) --
------ ------ ------ ------ ------
Net earnings...... $ 12,605 $ 18,304 $ 583 $(18,887) $ 12,605
======= ======= ======= ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1996
(in thousands)
Kinetic Historical
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
-------- --------- --------- -------- ----------
REVENUE:
Rental and service.... $ -- $176,135 $49,315 $ -- $225,450
Sales and other....... 54,716 10,989 18,768 (40,042) 44,431
------ ------- ------ ------- -------
Total revenue..... 54,716 187,124 68,083 (40,042) 269,881
Rental expenses....... -- 110,198 45,851 (9,844) 146,205
Cost of goods sold.... 33,774 -- 9,027 (26,486) 16,315
------ ------- ------ ------ -------
33,774 110,198 54,878 (36,330) 162,520
------ ------- ------ ------ -------
Gross profit...... 20,942 76,926 13,205 (3,712) 107,361
Selling, general and
administrative
expenses............ 22,615 38,218 3,101 (11,927) 52,007
------ ------ ------ ------ ------
Operating earnings (1,673) 38,708 10,104 8,215 55,354
Interest income....... 249 9,513 334 (764) 9,332
Interest expense...... (962) (810) -- 1,527 (245)
Earnings before
income taxes
and minority
interest........ (2,386) 47,411 10,438 8,978 64,441
Income tax............ (788) 19,059 3,862 3,321 25,454
------ ------ ------ ------ ------
Earnings before
equity in
earnings of
subsidiaries.... (1,598) 28,352 6,576 5,657 38,987
Equity in earnings
of subsidiaries. 40,585 6,576 -- (47,161) --
------ ------ ----- ------ ------
Net earnings...... $38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
====== ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Earnings
For the year ended December 31, 1995
(in thousands)
Kinetic Historical
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
-------- --------- --------- ------- ---------
REVENUE:
Rental and service.... $ -- $160,214 $46,439 $ -- $206,653
Sales and other....... 91,737 12,244 13,393 (80,584) 36,790
------ ------- ------ ------ -------
Total revenue..... 91,737 172,458 59,832 (80,584) 243,443
Rental expenses....... -- 134,137 40,453 (37,170) 137,420
Cost of goods sold.... 47,258 2,869 6,517 (42,915) 13,729
------ ------- ------ ------ -------
47,258 137,006 46,970 (80,085) 151,149
------ ------- ------ ------ -------
Gross profit...... 44,479 35,452 12,862 (499) 92,294
Selling, general and
administrative
expenses............ 11,115 12,219 3,647 21,521 48,502
------ ------ ------ ------ ------
Operating earnings 33,364 23,233 9,215 (22,020) 43,792
Interest income....... 318 4,458 287 -- 5,063
Interest expense...... (4,358) 1,737 -- 2,112 (509)
------ ------ ------ ------ ------
Earnings before
income taxes
and minority
interest........ 29,324 29,428 9,502 (19,908) 48,346
Income tax............ 11,436 11,477 4,751 (7,759) 19,905
------ ------ ------ ------ ------
Earnings before
equity in
earnings of
subsidiaries.... 17,888 17,951 4,751 (12,149) 28,441
Equity in earnings
of subsidiaries. 10,554 4,751 -- (15,305) --
------ ------ ------ ------ ------
Net earnings...... $ 28,442 $ 22,702 $ 4,751 $(27,454) $ 28,441
======= ======= ====== ====== =======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1997
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- -------- ---------
Cash flows from
operating activities:
Net earnings........... $ 12,605 $ 18,304 $ 583 $(18,887) $ 12,605
Adjustments to
reconcile net earn-
ings to net cash
provided by operat-
ing activities....... (19,424) (5,196) 2,355 20,364 (1,901)
------ ------ ------ ------ ------
Net cash provided by
operating activities (6,819) 13,108 2,938 1,477 10,704
Cash flows from
investing activities:
Additions to
property, plant
and equipment...... (1,624) (22,565) (5,698) 2,215 (27,672)
Decrease in inventory
to be converted into
equipment for short-
term rental......... (2,850) -- -- -- (2,850)
Dispositions of
property, plant
and equipment....... -- 521 2,099 -- 2,620
Businesses acquired
in purchase trans-
actions, net of
cash aquired........ -- (38,266) (2,886) (1) (41,153)
Decrease (increase)
in other assets..... 4,583 1,709 2,990 (8,343) 939
------ ------ ----- ----- ------
Net cash provided (used)
by investing activities 109 (58,601) (3,495) (6,129) (68,116)
Cash flows from
financing activities:
Borrowings (repay-
ments) of notes
payable and long-
term obligations.... 534,500 201 -- -- 534,701
Borrowings (repay-
ments) of capital
lease obligations... (71) -- 8 (270) (333)
Loan issuance cost.... (6) (17,728) -- -- (17,734)
Proceeds from the
excercise of stock
options............. 3,668 -- -- -- 3,668
Proceeds (payments)
on intercompany
investments and
advances............ (71,983) 59,803 7,521 4,659 --
Purchase and retire-
ment of treasury
stock............... (3,827) -- -- -- (3,827)
Cash dividends paid
to shareholders..... (6,388) -- -- -- (6,388)
Recapitalization
costs - purchase of
treasury stock......(631,606) -- -- -- (631,606)
Recapitalization
costs - proceeds
from C/S issuance.. 150,184 -- -- -- 150,184
Recapitalization
costs - fees and
expenses........... (8,626) -- -- -- (8,626)
Recapitalization
costs - amounts not
yet paid........... 41,652 -- -- -- 41,652
Other................ (787) (2,598) (4,141) 7,779 253
------- ------ ----- ------ ------
Net cash provided
by financing activi-
ties................. 6,710 39,678 3,388 12,168 61,944
Effect of exchange rate
changes on cash and
cash equivalents..... -- -- -- (1,823) (1,823)
------- ------ ----- ------ ------
Net increase in cash
and cash equivalents. -- (5,815) 2,831 5,693 2,709
Cash and cash equiva-
lents, beginning of
year................. -- 50,286 14,485 (5,726) 59,045
------- ------ ------ ------ ------
Cash and cash equiva-
lents, end of year... $ -- $44,471 $17,316 $ (33) $61,754
======= ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1996
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- -------- ---------
Cash flows from
operating activities:
Net earnings........... $ 38,987 $ 34,928 $ 6,576 $(41,504) $ 38,987
Adjustments to
reconcile net
earnings to net
cash provided by
operating activities (32,912) 24,267 (5,031) 36,856 23,180
------- ------- ------- ------- -------
Net cash provided by
operating activities 6,075 59,195 1,545 (4,648) 62,167
Cash flows from
investing activities:
Additions to
property, plant
and equipment....... (8,474) (13,261) (10,017) 3,969 (27,783)
Decrease in inventory
to be converted into
equipment for short-
term rental......... 700 -- -- -- 700
Dispositions of
property, plant and
plant and equipment. -- 132 5,268 -- 5,400
Businesses acquired
in purchase trans-
actions, net of
cash acquired....... -- (1,146) -- -- (1,146)
Excess principal
repayment on dis-
counted notes
receivable.......... -- 5,180 -- -- 5,180
Note repaid from
principal shareholder -- 10,000 -- -- 10,000
Decrease (increase)
in other assets..... 23 (6,796) (1,227) (1,960) (9,960)
------ ------- ------- ------ ------
Net cash provided (used)
by investing activi-
ties.................. (7,751) (5,891) (5,976) 2,009 (17,609)
Cash flows from
financing activities:
Borrowings (repay-
ments)of capital
lease obligations... 466 -- (6) (3) 457
Proceeds from the
excercise of stock
options............. 4,264 -- -- -- 4,264
Proceeds (payments)
on intercompany
investments and
advances............ 39,442 (45,135) 5,565 128 --
Purchase and retire-
ment of treasury
stock............... (35,241) -- -- -- (35,241)
Cash dividends paid
to shareholders..... (6,607) -- -- -- (6,607)
Other................. (648) 975 (480) 3 (150)
------- ------ ------ ------ ------
Net cash provided (used)
by financing activi-
ties.................. 1,676 (44,160) 5,079 128 (37,277)
Effect of exchange rate
changes on cash and
cash equivalents...... -- -- -- (635) (635)
------- ------ ------ ------ ------
Net increase in cash
and cash equivalents.. -- 9,144 648 (3,146) 6,646
Cash and cash equiva-
lents, beginning of
year.................. -- 41,142 13,837 (2,580) 52,399
------- ------ ------ ------ ------
Cash and cash equiva-
lents, end of year... $ -- $50,286 $14,485 $(5,726) $59,045
======= ====== ====== ====== ======
Condensed Consolidating Guarantor, Non-Guarantor And
Parent Company Statement of Cash Flows
For year ended December 31, 1995
(in thousands)
Kinetic
Concepts, Reclassi- Kinetic
Inc. Non- fications Concepts,
Parent Guarantor Guarantor and Inc.
Company Sub- Sub- Elimi- and Sub-
Borrower sidiaries sidiaries nations sidiaries
--------- --------- --------- --------- ---------
Cash flows from
operating activities:
Net earnings........... $ 28,442 $ 22,702 $ 4,751 $(27,454) $ 28,441
Adjustments to
reconcile net earn-
ings to net cash
provided by operat-
ing activities....... (16,632) 45,435 6,740 (7,202) 28,341
------ ------ ------ ------ ------
Net cash provided by
operating activities 11,810 68,137 11,491 (34,656) 56,782
Cash flows from
investing activities:
Additions to
property, plant
and equipment...... 225 (65,148) (7,632) 36,451 (36,104)
Increase in inventory
to be converted into
equipment for short-
term rental........ (1,000) -- -- -- (1,000)
Dispositions of
property, plant
and equipment...... 209 669 2,353 -- 3,231
Proceeds from sale of
divisions.......... -- 7,182 -- -- 7,182
Decrease in finance
lease receivable,
net................ -- -- -- 339 339
Decrease (increase)
in other assets.... (5,012) (9,002) 117 (2,634) (16,531)
------ ------ ------ ----- ------
Net cash provided (used)
by investing activities (5,578) (66,299) (5,162) 34,156 (42,883)
Cash flows from
financing activities:
Borrowings (repay-
ments) of notes
payable and long-
term obligations... (95) (7,805) (68) 7,168 (800)
Borrowings (repay-
ments) of capital
lease obligations.. -- -- 55 (119) (64)
Proceeds from the
excercise of stock
options............ 4,919 -- -- -- 4,919
Proceeds (payments)
on intercompany
investments and
advances........... (2,596) 15,433 (4,620) (8,217) --
Purchase and retire-
ment of treasury
stock.............. (2,849) -- -- -- (2,849)
Cash dividends paid
to shareholders.... (6,631) -- -- -- (6,631)
Other................ 1,020 (2,855) 1,203 447 (185)
------ ------ ------ ------ ------
Net cash provided (used)
by financing activities (6,232) 4,773 (3,430) (721) (5,610)
Effect of exchange rate
changes on cash and
cash equivalents..... -- -- -- 869 869
------ ------ ------ ------ ------
Net increase in cash
and equivalents...... -- 6,611 2,899 (352) 9,158
Cash and cash equiva-
lents, beginning of
year................. -- 34,531 10,938 (2,228) 43,241
------ ------ ------ ----- ------
Cash and cash equiva-
lents, end of year... $ -- $41,142 $13,837 $(2,580) $52,399
====== ====== ====== ====== ======
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of December 31, 1997 and
the related consolidated statements of earnings, cash flows and
shareholders' ( deficit) equity for the year then ended. Our audit
also included the financial statement schedule, as it relates to
information for the year ended December 31, 1997, listed in the
index at Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated
financial statements for Kinetic Concepts, Inc. and subsidiaries
for the years ended December 31, 1996 and 1995 were audited by
other auditors whose report dated February 5, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Kinetic Concepts, Inc. and subsidiaries as of December
31, 1997 and the results of their operations and their cash flows
for the year ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
-------------------------
Ernst & Young LLP
San Antonio, Texas
February 6, 1998
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
We have audited the accompanying consolidated balance sheet of
Kinetic Concepts, Inc. and subsidiaries as of December 31, 1996 and
the related consolidated statements of earnings, cash flows and
shareholders' equity for each of the years in the two-year period
ended December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Kinetic Concepts, Inc. and subsidiaries as of December
31, 1996, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, 1997
Independent Auditor's Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 5, 1997, we reported on the consolidated
balance sheet of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1996, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the
years in the two-year period ended December 31, 1996. In
connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial
statement schedule as listed in Item 14 (a) (2) of Form 10-K.
This financial statement schedule is the responsiblity of the
Company's management. Our responsibility is to express an opinion
on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information
see forth therein.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, `997
Item 9. Changes in and Disagreements with Accountants on
------------------------------------------------
Accounting Matters and Financial Disclosure
-------------------------------------------
Ernst & Young LLP was the Company's certifying accountant for
the year ended December 31, 1997. On February 18, 1997, the Board
of Directors of the Company, upon the recommendation of the Audit
Committee, voted to engage the accounting firm of Ernst & Young LLP
as the Company's certifying accountant for the year ending
December 31, 1997. The Company's previous certifying accountant,
KPMG Peat Marwick LLP, was notified on February 21, 1997 and its
engagement was terminated effective upon the completion and filing
of the Company's 1996 Annual Report on Form 10-K. On February 24,
1997, the Company notified Ernst & Young LLP that it would be
engaged as the Company's certifying accountant for the 1997 fiscal
year.
The reports of KPMG Peat Marwick LLP on the Company's
financial statements for the two fiscal years ended December 31,
1995 and 1996 did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1995
and 1996 and in the subsequent interim period through the date of
dismissal, there were no disagreements with KPMG Peat Marwick LLP
on any matters of accounting principles, financial statement
disclosure or audit scope and procedures which, if not resolved to
the satisfaction of KPMG Peat Marwick LLP, would have caused the
firm to make reference to the matter in their report.
The change in certifying accountant came in response to a
Request for Proposal issued by the Company in 1996. The newly
engaged firm, Ernst & Young LLP, has been providing property and
income tax planning services to the Company since 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Set forth below are the names, ages and positions of the
directors and executive officers of the Company, together with
certain other key personnel.
Name Age Position
- ---- --- --------
Robert Jaunich II ........ 57 Chairman of the Board
Raymond R. Hannigan....... 58 Director, President and Chief Executive
Officer
James R. Leininger M.D.... 53 Director, Chairman Emeritus
James T. Farrell.......... 33 Director
N. Colin Lind............. 41 Director
Jeffrey W. Ubben.......... 36 Director
Dennis E. Noll............ 43 Senior Vice President, General Counsel
and Secretary
Christopher M. Fashek..... 48 President, KCI Therapeutic Services
Frank DiLazzaro........... 39 President, KCI International
Richard C. Vogel.......... 43 Vice President and General Manager,
NuTech
Michael J. Burke.......... 50 Vice President, Manufacturing
Martin J. Landon.......... 38 Vice President, Accounting and Corporate
Controller
Robert Jaunich II became a director and Chairman of the Board
after the consummation of the Tender Offer. Mr. Jaunich is a
Managing Director of Fremont Partners where he shares management
responsibility for the $605 million investment fund. He is also a
Managing Director and a member of the Board of Directors and
Executive Committee of The Fremont Group. Prior to joining the
Fremont Group in 1991, he was Executive Vice President and a member
of the Chief Executive Office of Jacobs Suchard AG, a Swiss-based
chocolate, sugar confectionery and coffee company. He currently
serves as a director of CNF Transportation, Inc. and as Chairman of
the Managing General Partner of Crown Pacific Partners, L.P.
Raymond R. Hannigan joined the Company as its President and
Chief Executive Officer in November 1994 and has served as a
director of the Company since 1994. From January 1991 to November
1994, Mr. Hannigan was the President of the International Division
of Sterling Winthrop Consumer Health Group (a pharmaceutical
company with operations in over 40 countries), a wholly-owned
subsidiary of Eastman Kodak. From May 1989 to January 1991, Mr.
Hannigan was the President of Sterling Drug International.
James R. Leininger, M.D. is the founder of the Company and
served as Chairman of the Board of Directors from 1976 until 1997.
From January 1990 to November 1994, Dr. Leininger served as
President and Chief Executive Officer of the Company. From 1975
until October 1986, Dr. James Leininger was also the Chairman of
the Emergency Department of the Baptist Hospital System in San
Antonio, Texas.
James T. Farrell became a director after the consummation of
the Tender Offer. Mr. Farrell is a Managing Director of Fremont
Partners. Before joining The Fremont Group in 1991, he was an
associate at ESL Partners, a private investment partnership. In
1985, he began his career at Copley Real Estate Advisors. Mr.
Farrell is a former director of Coldwell Banker Corporation. He
also serves as a director of the nonprofit Pacific Research
Institute.
N. Colin Lind became a director after the consummation of the
Tender Offer. Mr. Lind is a Managing Director of Richard C. Blum &
Associates, L.P. Before joining RCBA in 1986 he was a Vice
President at R. H. Chappell Co., an investment concern focused on
development stage companies, and was previously a Vice President of
Research for two regional brokerage firms, Davis Skaggs, Inc. and
Wheat First Securities. He has previously been a director of two
public companies and seven venture capital backed companies.
Jeffrey Ubben became a director after the consummation of the
Tender Offer. Mr. Ubben is a Managing Director of Richard C. Blum &
Associates, L.P. Before joining RCBA in 1995 he was manager of the
$5 billion Fidelity Value Fund and had been employed by Fidelity
for a period of nine years.
Dennis E. Noll joined the Company in February 1992 as its
Senior Corporate Counsel and was appointed Vice President, General
Counsel and Secretary in January 1993. Mr. Noll was promoted to
Senior Vice President in September 1995. Prior to joining the
Company in February 1992, Mr. Noll was a shareholder of the law
firm of Cox & Smith Incorporated.
Christopher M. Fashek joined the Company in February 1995 as
President, KCTS. Prior to joining the Company, he served as General
Manager, Sterling Winthrop, New Zealand since February 1993, and
served as Vice President Sales of Sterling Health USA from 1989
until February 1993.
Frank DiLazzaro joined the Company in 1988 as General Manager,
KCI Medical Canada. Mr. DiLazzaro served as Vice President, KCI
International, Inc. from June 1989 to December 1992. Mr. DiLazzaro
has served as President, KCI International, Inc. since January 1993
and was Vice President, Marketing from April 1993 to September
1995.
Richard C. Vogel joined the Company as its Vice President and
General Manager, NuTech on July 1, 1996. From 1989 to 1996, Mr.
Vogel served as Executive Vice President of Vestar, Inc., a
California-based biotechnology company.
Michael J. Burke joined the Company in September 1995 as Vice
President, Manufacturing. Prior to joining the Company, Mr. Burke
worked for Sterling Winthrop, Inc., a Division of Eastman Kodak
Company, for 25 years, where he served as Vice President,
Manufacturing and as General Manager, Sterling Health HK/China
since 1992.
Martin J. Landon joined the Company in May 1994 as Senior
Director of Corporate Development and was promoted to Vice
President, Accounting and Corporate Controller in October 1994.
From 1987 to May 1994, Mr. Landon worked for Intelogic Trace, Inc.,
most recently serving as Vice President and Chief Financial
Officer.
Item 11. Executive Compensation
- ------- ----------------------
SUMMARY COMPENSATION TABLE
--------------------------
LONG-TERM
COMPEN-
SATION
ANNUAL COMPENSATION AWARDS
- ---------------------------------------------------------------------------
Other Securi-
(1) ties All
Annual Under- Other
Name and Principal Com- lying Compen-
Position Year Salary Bonus pensation Options sation
- ---------------------- ---- ------ ------- --------- ------- --------
Raymond R. Hannigan 1997 $300,000 $433,100 12,000 $5,583
Chief Executive 1996 275,000 175,000 12,000 4,888
Officer,& President 1995 250,000 172,000 $39,204 12,000 1,836
Christopher M. Fashek 1997 $206,750 $362,637 8,000 $2,256
President & Chief 1996 193,000 115,800 123,000 1,647
Executive Officer, 1995 180,758 77,760 $18,378 8,000 421
KCI Therapeutic
Services, Inc.
Frank DiLazzaro 1997 $181,000 $390,323 8,000 $1,409
President, 1996 168,000 86,000 78,000 884
KCI International, Inc. 1995 156,000 85,836 8,000 1,012
Dennis E. Noll 1997 $177,688 $293,390 8,000 $1,623
Senior Vice-President, 1996 165,812 81,000 98,000 1,315
General Counsel & 1995 151,750 75,096 8,000 708
Secretary
Michael J. Burke 1997 $172,000 $295,480 46,400 $2,259
Vice President, 1996 159,333 74,400 8,000 1,427
Manufacturing 1995 45,208 23,892 $18,275
(1) The column entitled "Other Annual Compensation" includes
monies paid to Messrs. Hannigan, Fashek and Burke in 1995 for
reimbursement of relocation expenses. Except with respect to
personal benefits received by such individuals in fiscal 1995,
the personal benefits provided to each of the named executive
officers under various Company programs did not exceed 10% of
the individual's combined salary and bonus in any other year.
(2) The "All Other Compensation" column includes the Company's
contribution to the Company's Employee Stock Ownership Plan
which was credited in 1996, a Company contribution of $500 to
the Company's 401(k) plan for the named individuals and a
premium for term life insurance in an amount which varied
depending on the age of the executive officer.
Item 11. Executive Compensation (continued)
- ------- ---------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during fiscal 1997 to the named executive officers:
Individual Grants
-------------------------------------------- -------------------------
% of Potential Realizable
Number of Total Value at Assumed Annual
Securities Options Rates of Stock Price
Under- Granted to Appreciation for
lying Employees Option Term
Options in Fiscal Exercise Expiration -------------------------
Names Granted Year Price Date 5%(3) 10%(3)
- -------------------- -------- --------- -------- ---------- -------------------------
Raymond R. Hannigan.. 12,000(1) 1.54% $15.1250 05/13/07 $ 185,940 $ 391,500
192,000(2) 20.31% $19.2500 10/01/04 $1,480,320 $3,444,480
Christopher M. Fashek 8,000(1) 1.02% $15.1250 05/13/07 $ 123,960 $ 261,000
110,400(2) 11.68% $19.2500 10/01/04 $ 851,184 $1,980,576
Frank DiLazzaro...... 8,000(1) 1.02% $15.1250 05/13/07 $ 123,960 $ 261,000
80,000(2) 8.46% $19.2500 10/01/04 $ 616,800 $1,435,200
Dennis E. Noll....... 8,000(1) 1.02% $15.1250 05/13/07 $ 123,960 $ 261,000
80,000(2) 8.46% $19.2500 10/01/04 $ 616,800 $1,435,200
Michael J. Burke..... 8,000(1) 1.02% $15.1250 05/13/07 $ 123,960 $ 261,000
38,400(2) 4.06% $19.2500 10/01/04 $ 296,064 $ 688,896
(1) The referenced options are fully vested and have a term of ten (10) years.
(2) The referenced options vest and became exercisable in twenty percent (20%)
increments on November 5 of each year and have a term of seven (7) years.
(3) The information in these columns illustrates the value that might be
realized upon the exercise of the options granted during fiscal 1997
assuming the specified compound rates of appreciation of Common Stock over
the term of the options. The potential realizable value set forth in the
columns of the foregoing table do not take into account certain provisions
of the options providing for termination of an option following termination
of employment, nontransferability or vesting requirements.
Item 11. Executive Compensation (continued)
- -------- ----------------------------------
AGGREGATED OPITON EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION VALUE
The following table sets forth certain information concerning
the options exercised by each named executive officer during fiscal
1997 and the number and value of the options held by the named
executive officers at the end of the fiscal year ended December 31,
1997.
Number of Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options Options at
Acquired at FY-End FY-End
on Value(1) Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable(2)
- -------------------- -------- ----------- ------------- -----------------
Raymond R. Hannigan 736,000 $10,434,400 200,000 $2,651,500
(3) 192,000 --
Christopher M. Fashek 41,000 $ 512,750 139,800 $1,104,375
110,400 --
Frank DiLazzaro 10,000 $ 108,050 98,530 $ 800,568
80,000 --
Dennis E. Noll 123,700 $ 1,433,463 50,000 $ 331,250
80,000 --
Michael J. Burke 30,000 $ 303,750 106,000 $ 202,500
38,400 --
(1) The values are calculated by subtracting the exercise price
from the value of the underlying Common Stock as of the date
of exercise, which, in each instance, was $19.25.
(2) The Company's Common Stock is no longer publicly traded. For
purposes of this calculation, the fair market value of the Common
Stock was assumed to be $19.25 per share.
(3) Dr. James Leininger granted Mr. Hannigan an option in 1994 to
purchase 440,000 shares of Common Stock at a purchase price of
$5.74 per share. Mr. Hannigan purchased 340,000 of the shares
of Common Stock subject to that option during 1997.
Item 12. Security Ownership of Certain Beneficial Owners
- -------- -----------------------------------------------
and Management
--------------
SECURITIES HOLDINGS OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND
OFFICERS
Based upon information received upon request from the persons
concerned, each person known to be the beneficial owner of more
than five percent of the Company's outstanding common stock, each
director, nominee for director, named executive officer (as defined
on page 7 hereof) and all directors and executive officers of the
Company as a group, owned beneficially as of March 1, 1998, the
number and percentage of outstanding shares of Common Stock of the
Company indicated in the following table:
Shares of Common
Stock
Beneficially owned
as of Percent
March 1, 1998 (1) of Class
------------------- ---------
James R. Leininger, M.D.............. 5,939,220 31.1%
8023 Vantage Drive
San Antonio, TX 78230
Fremont Partners L.P................. 7,029,922 36.8%
and certain related parties
50 Fremont Street, Suite 3700
San Francisco, CA 94105
Richard C. Blum & Associates......... 4,644,010 24.3%
and certain related parties
909 Montgomery Street, Suite 400
San Francisco, CA 84133
Raymond R. Hannigan(2)............... 200,000 1.0%
James T. Farrell (3)................. --
Robert Jaunich II (3)................ --
N. Colin Lind (4).................... --
Jeffrey W. Ubben (4)................. --
Christopher M. Fashek(2)............. 139,800 *
Frank DiLazzaro(2)................... 98,530 *
Dennis E. Noll(2).................... 50,000 *
Michael J. Burke(2) ................. 106,000 *
All directors and executive officers
as a group (17 persons)(5)......... 785,438 4.1%
* Less than one (1%) percent
(1) Except as otherwise indicated in the following notes, the
persons named in the table directly own the number of shares
indicated in the table and have the sole voting power and
investment power with respect to all of such shares. Shares
beneficially owned include options exercisable prior to April
29, 1998.
(2) The shares shown from Messers. Hannigan, Fashek, DiLazzaro,
Noll and Burke include 200,000, 139,800, 98,530, 50,000 and
106,000 shares of Common Stock, respectively, which such persons
have the right to acquire under stock options granted by the Company
which are exercisable prior to April 29, 1998.
(3) Messrs. Farrell and Jaunich are managing directors of Fremont
Partners, L.P. and certain of its related parties ("Fremont").
The Shares shown do not include the Shares beneficially owned
by Fremont.
(4) Messrs. Lind and Ubben are managing directors of Richard C.Blum
& Associates, L.P. and certain of its related parties ("RCBA").
The Shares shown do not include the Shares beneficially owned
by RCBA.
(5) The shares shown include 65,800 shares of Common Stock
which the directors and executive officers have the right to
acquire under stock options granted by the Company which are
exercisable prior to April 29, 1998.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
On December 18, 1996, a company controlled by Dr. James
Leininger acquired a tract of land (the "Property") from the
Company for $395,000. The Property is comprised of approximately
2.2 acres and is adjacent to the Company's corporate headquarters.
The purchase price was based on the aggregate cost of the Property
to the Company (including acquisition expenses). The Company
believes that the acreage was transferred to Dr. James Leininger at
a price equal to its fair market value. In connection with the
purchase of the Property, the Company loaned Dr. James Leininger
$3,000,000 in February 1997 to develop the Property. The loan bore
interest at a rate equal to the prime rate of Texas Commerce Bank.
The loan was non-recourse to Dr. James Leininger but was secured by
the Property, the improvements on the Property and 300,000 shares
owned by Dr. James Leininger. Dr. Leininger repaid the loan in
full on December 31, 1997.
Pursuant to the provisions of the Executive Committee Stock
Ownership Policy, the Company loaned funds to Christopher M.
Fashek, the President of KCI Therapeutic Services, Inc. (a division
of the Company), Bianca A. Rhodes, the Company's Chief Financial
Officer at the time and Dennis E. Noll, the Company's Senior Vice
President and General Counsel. These loans were utilized by such
executive officers to acquire Shares in order to meet the standards
set forth in the Company's Executive Committee Stock Ownership
Policy. The loans bore interest at the applicable federal rate
established by the Internal Revenue Service and had a term of five
years. The initial loans made to Mr. Fashek, Ms. Rhodes and Mr.
Noll were $107,672, $170,672 and $86,310, respectively, and the
outstanding balance of principal and accrued interest on such loans
as of December 31, 1996 were $87,076, $166,003 and $81,888,
respectively. Mr. Noll repaid his loan in February 1997. Ms.
Rhodes repaid the principal amount of her loan in July 1997. Mr.
Fashek repaid his loan on November 5, 1997. The Board has amended
the Executive Committee Stock Ownership Policy to make the
ownership thresholds in the policy voluntary and, as a result, the
Company will not be making loans to executive officers under the
policy in the future.
At its December meeting, the Company's Board of Directors
agreed to sell Dr. James R. Leininger certain of the Company's non-
operating assets. The assets included the vehicle driven by Dr.
Leininger and the Company's ownership interest in the San Antonio
Spurs, Bionumerick, Inc. and a small aircraft. The vehicle was
sold to Dr. Leininger at its depreciated book value and the
ownership interests were to be sold at their cost to the Company.
The vehicle was transferred in January of 1998 and the ownership
interests will be transferred by the end of the second quarter of
1998. The Company believes that the transfers will be made at
prices equal to their fair market value.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
- -------- ----------------------------------------------------
on Form 8-K
-----------
(a) The following documents are filed as part of this report:
1. Financial Statements
---------------------
The following consolidated financial statements are filed
as a part of this report:
Consolidated Balance Sheets as of December 31, 1997
and 1996
Consolidated Statements of Earnings for the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders'(Deficit)Equity
for the three years ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedules
for each of the years in the three-year period ended
December 31, 1997 are filed as part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts -
Years ended December 31, 1997, 1996 and 1995
All other schedules have been omitted as the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or
because the information required is included in the
financial statements and notes thereto.
3. Exhibits
--------
The following exhibits are filed as a part of this Report:
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).
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 8-
K 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.
10.19 Rental/Purchasing Agreement, dated April 1,
1993 between the Company, KCI Therapeutic
Services, Inc. and AmHS Purchasing Partners,
L.P.
10.20 KCI Management 1994 Incentive Program
10.21 KCI Employee Benefits Trust Agreement
10.22 Letter, dated September 19, 1994, from the
Company to Raymond R. Hannigan outlining the
terms of his employment.
10.23 Letter, dated November 22, 1994, from the
Company to Christopher M. Fashek outlining
the terms of his employment.
10.24 Option Agreement, dated November 21, 1994,
between Dr. James R. Leininger, Cecilia
Leininger and Raymond R. Hannigan.
10.25 Option Agreement, dated August 23, 1995,
between Dr. James R. Leininger, Cecilia
Leininger and Bianca A. Rhodes.
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).
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 Kinetic Concepts Management Equity Plan
effective October 1, 1997 (filed as Exhibit
10.33 on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference).
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.
* 23.1 Consent by Ernst & Young dated March 27, 1998
to incorporation by reference of their report
dated February 6, 1998 in Registration
Statements on Form S-8 previously filed by
the Company.
* 23.2 Consent by KPMG Peat Marwick dated March 30,
1998 to incorporation by reference of their
report dated February 5, 1996 in Registration
Statements on Form S-8 previously filed by
the Company.
* 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 last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San Antonio, State of
Texas on March 30, 1998.
KINETIC CONCEPTS, INC.
By: /S/ ROBERT JAUNICH II
---------------------------
Robert Jaunich II, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Registration Statement has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Date
By: /S/ ROBERT JAUNICH II March 30, 1998
--------------------------
Robert Jaunich II
Chairman of the Board of
Directors
By: /S/ RAYMOND R. HANNIGAN March 30, 1998
--------------------------
Raymond R. Hannigan
Chief Executive Officer and
President
By: /S/ MARTIN J. LANDON March 30, 1998
---------------------------
Martin J. Landon
Vice President, Accounting and
Corporate Controller
(Principal Accounting Officer)
SIGNATURES (CONTINUED)
Signature Date
By: /S/ JAMES R. LEININGER,M.D. March 30, 1998
---------------------------
James R. Leininger M.D.
Director
By: /S/ JAMES T. FARRELL March 30, 1998
---------------------------
James T. Farrell
Director
By: /S/ N. COLIN LIND March 30, 1998
---------------------------
N. Colin Lind
Director
By: /S/ JEFFREY W. UBBEN March 30, 1998
---------------------------
Jeffrey W. Ubben
Director
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1997
Balance Additions
at Charged Additions 12/31/95
Beginning to Costs Charged Balance
of and to Other at End of
Description Period Expenses Accounts Deductions Period
- ----------- ---------- --------- --------- ---------- ---------
Allowance for
doubtful accounts $8,600 $1,883 $ -- $4,306 $ 6,177
===== ===== ====== ===== ======
Balance Additions
at Charged Additions 12/31/96
Beginning to Costs Charged Balance
of and to Other at End of
Description Period Expenses Accounts Deductions Period
- ------------ --------- --------- -------- ---------- ---------
Allowance for
doubtful accounts $6,177 $2,457 $ -- $1,102 $ 7,532
===== ===== ====== ===== ======
Balance Additions
at Charged Additions 12/31/97
Beginning to Costs Charged Balance
of and to Other at End of
Description Period Expenses Accounts Deductions Period
- ----------- --------- --------- --------- ---------- ---------
Allowance for
doubtful accounts $7,532 $5,888 $ -- $2,216 $11,204
===== ===== ====== ===== ======