Document/Exhibit Description Pages Size
1: 10-K Annual Report 31± 142K
2: EX-10 Material Contract 6± 30K
3: EX-10 Material Contract 4± 18K
4: EX-11 Statement re: Computation of Earnings Per Share 2± 9K
5: EX-13 Annual or Quarterly Report to Security Holders 55± 225K
6: EX-16 Letter re: Change in Certifying Accountant 1 7K
7: EX-22 Published Report Regarding Matters Submitted to a 2± 10K
Vote of Security Holders
8: EX-23 Consent of Experts or Counsel 1 8K
9: EX-27 Financial Data Schedule (Pre-XBRL) 1 7K
33
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, 1996
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.
(Exact name of registrant as specified in its charter)
Texas 74-1891727
--------------------- ---------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, TX 78230 (210) 524-9000
----------------------------- --------------------------------
(Address of principal executive (Registrant's telephone number)
offices and zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
--------------------------- -----------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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. [ ]
The aggregate market value of the voting stock held of record by non-
affiliates of the Registrant as of March 1, 1997 was approximately
$298,691,592.
As of March 1, 1997, there were 42,818,044 shares of the Registrant's
Common Stock outstanding.
Portions of the following documents are incorporated by reference into
the designated parts of this Form 10-K: (a) Annual Report to
Shareholders for the fiscal year ended December 31, 1996 (in Parts I
and II) and (b) Definitive Proxy Statement dated March 31, 1997 (the
"Proxy Statement") relating to the Company's 1997 Annual Meeting of
Shareholders (in Part III), which Registrant intends to file not later
than 120 days after the close of the Company's fiscal year.
FORM 10-K TABLE OF CONTENTS
PART I PAGE
Item 1. Business.................................... 3
Item 2. Properties.................................. 16
Item 3. Legal Proceedings........................... 16
Item 4. Submission of Matters to a Vote
of Security Holders......................... 17
Item 4a. Executive Officers of the Registrant........ 17
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters............. 20
Item 6. Selected Financial Data..................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 8. Financial Statements and
Supplementary Data.......................... 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...... 20
PART III
Item 10. Directors and Executive Officers
of the Registrant........................... 23
Item 11. Executive Compensation...................... 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 23
Item 13. Certain Relationships and Related
Transactions................................ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................... 24
Signatures............................... 29
PART I
Item 1. Business
General
Kinetic Concepts, Inc. (the "Company" or "KCI") designs,
manufactures, markets and distributes therapeutic products,
primarily specialty hospital beds, mattress overlays and medical
devices, that treat and prevent the complications of immobility.
By preventing these complications or accelerating the healing
process, the Company's therapies and services can significantly
reduce the cost of patient care while improving clinical
outcomes.
From an initial base of specialty hospital beds designed for
and used almost exclusively in acute care hospitals, the Company
has broadened its existing product line and expanded its
distribution network to serve the extended and home care
settings. More recently, Kinetic Concepts has applied its
therapeutic expertise to develop innovative medical devices to
treat wounds and prevent deep vein thrombosis ("DVT"). The
Company has also developed a product line to aid in the care of
large or obese patients.
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 executive
offices are located at 8023 Vantage Drive, San Antonio, Texas
78230, and its telephone number is (210) 524-9000.
The Company is 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").
KCI Therapeutic Services. KCI Therapeutic Services provides
a complete 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 1000
personnel, many of whom have a medical or clinical background.
Sales are generated by a sales force of more than 300 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 customer
service communications system which enhances its ability to
quickly and efficiently respond to its customers' needs, in some
cases on a 24 hours-a-day, seven days-a-week basis. The Company
distributes its specialty patient support products to acute and
extended care facilities through a network of 144 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 nursing homes on an
as-needed basis. The service personnel also assist in the
placement of the patient on a support surface and in the pick-up
and maintenance of the beds, overlays, sheets and accessories.
The KCTS sales and support staff is comprised of over 300
employees with medical or clinical backgrounds. The principal
responsibility of approximately 130 of these clinicians is making
product rounds and participating in treatment protocols. These
clinicians educate the hospital staff on issues related to
patient treatment, assist in the establishment of protocols and
accumulate outcome data related to the treatment of the patient.
The clinical staff makes approximately 200,000 patient rounds
annually. KCTS accounted for approximately 64%, 61% and 53%,
respectively, of the Company's total revenue in the years ended
December 31, 1996, 1995 and 1994.
KCI Home Care. KCI Home Care rents and sells 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") providers. The Company
believes that selling 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. KCI Home Care accounted for
approximately 5% of the Company's total revenue in 1996.
KCI International. KCI International offers the Company's
therapies and services in ten foreign countries including
Germany, Austria, the United Kingdom, Canada, France, the
Netherlands, Switzerland, Australia, Italy and Denmark. The
Denmark office has recently been expanded to serve all of
Scandinavia. In addition, relationships with independent
distributors in Latin America, the Middle East, Asia and Eastern
Europe allow KCI International to serve the demands of a growing
global market. KCI International accounted for approximately
25%, 25% and 17%, respectively, of the Company's total revenue in
1996, 1995 and 1994. (See Note 13 of Notes to Consolidated
Financial Statements, included in the Company's Annual Report to
Shareholders, for information on foreign and domestic
operations.)
NuTech. NuTech manufactures and markets the PlexiPulse and
PlexiPulse All-in-1 System through an independent sales
representative network although this division is in the process
of developing a dedicated sales force. NuTech accounted for
approximately 6% of the Company's total revenue in 1996.
Therapies/Products
The Company's "Continuum of Care" is focused on preventing
and/or 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, Kinetic Therapy, Bariatric Care,
Mechanical Compression and Negative Pressure products and medical
devices.
Pressure Relief/Pressure Reduction. The Company's Pressure
Relief products include a variety of framed beds and overlays
such as the KinAir III (R), TheraPulse, FluidAir Elite TM,
HomeKair (R), First Step (R) TriCell TM, DynaPulse (R), First
Step (R) Plus , First Step (R) Select and AirWorks (R) Plus. 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 is an
air-fluidized bead bed with a built-in patient weighing system
which 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. 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.
Kinetic Therapy. The U.S. Centers for Disease Control
defines Kinetic Therapy as lateral rotation of at least 40
degrees on each side. 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 TM,
RotoRest (R), RotoRest (R) Delta, BioDyne (R) II and Q2 Plus TM.
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 narrow and more
suited to an ICU environment. The TriaDyne offers several other
novel features not available on other products. The RotoRest and
RotoRest Delta are specialty beds 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 products
have been shown to improve the care of patients suffering from
multiple trauma, spinal cord injury, severe pulmonary
complications, respiratory failure and DVT. 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 safer manner while utilizing fewer hospital personnel. The
most advanced product in this line is the BariKare (R), which can
serve as a chair, bed or X-ray table. This product is used
generally for patients weighing from 300 to 500 pounds but can be
used for patients who weigh up to 850 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 850 pounds.
Medical Devices. The Company also rents and sells various
products manufactured by the Company other than patient support
surfaces. These products include the PlexiPulse (R), PlexiPulse
All-in-1 System TM and The V.A.C. (R)
Mechanical Compression. 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 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.
Negative Pressure. The Company also markets the Vaccum
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 conventional treatment. Treatment
protocols 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.
Product Support -- The Clinical Advantage
The elements which provide KCI a Clinical Advantage in the
marketplace continue to evolve to meet the changing requirements
of today's healthcare provider. As both private and government
reimbursement programs continue to move towards systems where
facilities receive a fixed payment based only upon the patient's
initial diagnosis to cover all medical expenses, actuarial
information becomes more critical to predict patient outcomes and
to develop appropriate pricing structures. The collection of
this valuable data is central to KCI's effort of proving cost
effective patient outcomes.
At the foundation of KCI's Clinical Advantage is an active
program of sponsoring independent clinical research. KCI's
portfolio of over 50 active and completed studies supports the
medical efficacy and cost effectiveness of utilizing our products
and protocols as part of the healing and prevention process. In
addition, KCI research is focused on providing the outcome data
demanded by today's health care provider.
Health care providers around the world who utilize KCI
products and services experience aspects of The Clinical
Advantage every day. Whether it be an emergency placement of a
KCI TriaDyne or the V.A.C.; the participation in developing a
wound care management program; or daily patient rounds to assist
facility staff and collect clinical outcome data, trained KCI
team members make more than 200,000 regular patient rounds
annually. This staff is comprised of over 1000 employees with
more than 30% having a medical or clinical background. In order
for the hospital and KCI to collect and process the data, the
Company has developed Genesis, Odyssey, and PAO2, three
proprietary software programs.
Genesis is utilized by KCI staff clinicians to assist
customers in tracking asset utilization and patient outcomes.
Using hand held computers, KCI clinicians make regular rounds to
document the effect of KCI products on a patient's overall
outcome. At the facility's direction, this information is
entered into a central database and analyzed to determine the
effectiveness of specific treatment protocols.
Odyssey and PAO2 are sold to KCI customers to enable them to
standardize the information collected on their Wound Management
and Pulmonary Management Protocols, respectively. Health care
providers utilize both Odyssey and PAO2 as tools to document and
track complete wound and pulmonary management programs, including
the resultant patient outcome and the cost of achieving that
outcome. Facilities collect data on their wound and pulmonary
patients, and periodically share this information with KCI for
inclusion in a national database. KCI compiles the information
and can generate reports comparing a facility's program or
patient results with those of similar programs or patients on an
internal, regional or national basis. This information enables
each facility to continuously improve its wound and pulmonary
management programs, achieving the best outcome at the lowest
total cost of care.
KCI's integrated clinical database consisting of the
Genesis, Odyssey, an PAO2 information platforms combined with an
extensive clinical field presence, and clinically proven
therapies and protocols define KCI's unique product support
advantage in the marketplace, The Clinical Advantage.
Competition
The Company believes that the principal competitive factors
within the patient support surfaces marketplace are product
efficacy, clinical outcomes, service and cost of care. 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 and voluntary
GPOs. Proprietary GPOs 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
total revenue during 1996 was generated under national agreements
with GPOs.
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. Management expects that a portion of the revenue will
be retained.
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. In certain international
markets, the Company competes principally with Hill-Rom. NuTech
competes primarily with Kendall International in the foot and leg
compression market.
Market Outlook
The Company believes that it is well positioned to take
advantage of the following factors affecting the market for
health care products and services:
Continuing pressure on health care providers to control
costs and improve patient outcomes. The pressure to control
health care costs has intensified since 1993 as a result of the
health care reform debate and continues as Congress attempts to
slow the rate of growth of health care costs as part of an effort
to balance the federal budget. While the exact amount and nature
of any health care budget cuts are not yet determined, the
Company believes that health care providers will continue to
experience increased cost control pressures.
Accelerating migration of patients from acute care
facilities into extended and home care settings. Prompted by cost
reduction pressures from government reimbursement programs,
private insurers and managed care organizations, health care is
now readily available in a wide variety of settings with a broad
variety of cost structures. The role of traditional hospitals has
been somewhat reduced to specific acute care functions such as
emergency and specialty units. Most rehabilitation now occurs in
extended care settings which currently account for approximately
8% of all U.S. health care expenditures. U.S. expenditures on
this market segment are currently in excess of $70 billion and
have grown at an average rate of approximately 9% per year since
1990.
The home care setting has also gained tremendous importance
in health care. Costs associated with treating a patient in the
home are typically 40% to 70% less than if the patient were
treated in a hospital or nursing home. Total U.S. expenditures on
home health care are in excess of $25 billion annually and have
grown at an annual rate of 19% per year since 1990. The
accelerating migration of patients from acute care facilities
into extended and home care settings has created demand for
products which conform to the physical constraints of these
settings and match the relative acuity levels and cost
structures.
Consolidation of health care providers and national and
regional group purchasing organizations. Consolidation of health
care providers and national and regional group purchasing
organizations within the health care industry has greatly
increased the number of patients whose care is covered by a
national organization which, in turn, has resulted in greater
purchasing leverage for national health care provider
organizations. In order to minimize costs, these organizations
actively seek to place patients in the most cost effective care
setting. Serving a national account generally requires that a
vendor provide goods and services suitable for all care settings
across a broad regional or national area.
Growing demand for clinically proven and cost effective
therapies. Cost containment efforts have spread across all
aspects of the health care industry. Both private and government
reimbursement programs are moving toward systems which feature
prospective payment. Under this system, health care providers
receive a fixed payment determined by historical cost to cover
all expenses associated with a specific illness. Expenses that
exceed the amount reimbursed must be borne by the provider. The
risk of bearing these expenses has prompted providers to demand
documentation that a product or procedure will deliver the
desired clinical outcome at a cost savings over traditional
therapies.
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.
Growth in international markets. Health care systems in
established economies are increasingly seeking methods to provide
improved care at a reduced cost and are thereby becoming aware of
the benefits of therapeutic patient support surfaces. The
delivery of improved levels of health care is also growing in
certain emerging economies.
Emergence of disease state niche markets. The industry trend
toward consolidation has yielded additional leverage to national
health care provider networks and these networks are beginning to
request packages of products and services that offer total
solutions to specific diseases such as diabetes or cancer. The
process of bundling disease state packages may create niche
markets for providers of specialty products and services. Those
providers with the appropriate logistical capabilities may have
the opportunity to serve these growing niche markets on a
national scale.
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 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 1996. The
Company intends to continue its research and development efforts.
Manufacturing
The Company's manufacturing processes for its specialty
beds, mattress overlays, mattress replacement systems 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, 1996, the Company had 36 issued U.S.
patents relating to its specialized beds, mattresses and related
products. The Company also has 18 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 27 registered trademarks and service marks in the
United States Patent and Trademark Office.
Employees
As of December 31, 1996, the Company had approximately 2,066
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
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.
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 GMPs) and 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 those devices which must receive premarket approval
by the FDA 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). All of the Company's current
products have been classified as Class I or Class II devices.
Before a new device can be introduced in the market, the
manufacturer must generally file an application for and obtain
FDA clearance of a 510(k) notification or approval of a Premarket
Approval ("PMA") Application. A 510(k) clearance will be granted
if the submitted information establishes that the proposed device
is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to certain Class III devices. 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 scrutiny 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.
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 giving or receiving
kickbacks or other remuneration in connection with the purchase
or rental of health care items and services. The federal Medicare
and Medicaid 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,
imprisonment, and exclusion from participation in the Medicare
and Medicaid programs.
These provisions have been broadly interpreted to apply to
certain relationships between manufacturers/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 recent actions which suggest that
relationships between manufacturers/suppliers of durable medical
equipment or medical supplies and SNFs (or other providers)
currently may be under scrutiny. In May 1995, the OIG announced
an enforcement initiative, "Operation Restore Trust," that
targeted 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
durable medical equipment ("DME") industries. 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.
Several states also have anti-remuneration or other similar
laws that may restrict the payment or receipt of remuneration in
connection with the purchase or rental of medical supplies. State
laws vary in scope and have been infrequently interpreted by
courts and regulatory agencies, but may apply 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.
Other Laws. The Company also is 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.
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. As a
result, demand 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. Most of the Company's
products are furnished in a hospital, SNF 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") which
is assigned to each Medicare beneficiary who is a hospital
inpatient, 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.
Certain specialty hospitals (e.g., long-term care,
rehabilitation and childrens 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.
Skilled Nursing Facility Setting. 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.
Home Setting. The Company's products are also provided to
Medicare beneficiaries in the home 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). Provided that various Medicare Part B
coverage criteria are met, certain of the Company's products,
including air fluidized beds, air-powered flotation 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.
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.
Uncertainty of Health Care Reform. There are widespread
efforts to control health care costs in the U.S. and worldwide.
Various federal and state legislative initiatives regarding
health care reform and similar issues continue to be at the
forefront of social and political discussion. For example, the
United States Congress is currently considering various
legislative proposals to reform the Medicare and Medicaid
programs. Some current proposals call for reduced payments to
hospitals under the prospective payment system, limitations on
payment for and recognition of ancillary items or services,
establishment of a PPS for Medicare reimbursement of SNF costs,
freezes in DME fee schedule payment amounts, and the
establishment of new programs that would give states greater
discretion in designing and administering state Medicaid
programs. If enacted into law, any of these proposals could
affect future demand for and reimbursement of the Company's
products. 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 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 is
being used 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 2,500 square foot house.
The Company leases approximately 144 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 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 is just beginning and it is not possible
to predict the outcome of this litigation or the damages which
might be awarded, the Company believes that its claims are
meritorious.
On October 31, 1996 the Company received a counterclaim
which had been filed by Hillenbrand Industries, Inc. in the
antitrust lawsuit which the Company filed in 1995. The
counterclaim alleges that the Company's antitrust lawsuit and
other actions were designed to enable KCI to monopolize the bed
market. Although it is not possible to predict the outcome of
this litigation, the Company believes that the counterclaim is
without merit.
In late December 1996, Hill-Rom, a subsidiary of Hillenbrand
Industries, Inc., filed a lawsuit against the Company alleging
that the Company's TriaDyne bed infringes a patent issued to Hill-
Rom December 24, 1996. This suit was filed in the United States
District Court for the District of South Carolina. Substantive
discovery in the case has not begun. Based upon its preliminary
investigation, the Company does not believe that the TriaDyne bed
infringes the Hill-Rom patent or that this lawsuit will have a
material adverse impact on the marketing of the TriaDyne bed.
The Company is a party to several lawsuits arising in the
ordinary course of its business and is contesting adjustments
proposed by the Internal Revenue Service to prior years' tax
returns. 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 currently maintains adequate
liability insurance coverage.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security
holders during the fourth fiscal quarter of 1996.
Item 4a. Executive Officers of the Registrant
Certain information is set forth below concerning the
executive officers of the Company, each of whom has been elected
to serve until the 1997 annual meeting of directors and until his
successor is duly elected and qualified. The executive officers
of the Company and their ages and positions as of March 1, 1997
are as follows:
Name Age Position
Raymond R. Hannigan 57 Director, President and
Chief Executive Officer
Peter A. Leininger, M.D. 54 Director and Executive Vice
President
Bianca A. Rhodes 38 Senior Vice President,
Finance and Chief Financial
Officer
Dennis E. Noll 42 Senior Vice President,
General Counsel and
Secretary
Frank DiLazzaro 38 President, KCI
International
Christopher M. Fashek 47 President, KCI Therapeutic
Services
Richard C. Vogel 43 Vice President and General
Manager, NuTech
Michael C. Wells 44 Vice President and General
Manager, KCI Home Care
John H. Vrzalik, Sr 54 Vice President, Engineering
Martin J. Landon 37 Vice President, Accounting
and Corporate Controller
Michael J. Burke 49 Vice President,
Manufacturing
Scott S. Brooks 48 Vice President, National
Accounts
Larry P. Baker 43 Vice President, Corporate
Services
George P. Peace 41 Vice President, Information
Systems
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.
Peter A. Leininger, M.D., joined the Company as its Vice
President, Medical in 1978, became Chief Administrative Officer
and Senior Vice President of the Company in January 1994 and was
named Executive Vice President in September 1995. Dr. Peter
Leininger became a member of the Company's Board of Directors in
1980. Prior to 1978, Dr. Peter Leininger maintained a private
medical practice and functioned as the southeast regional
distributor for the Company's products. Peter A. Leininger, M.D.
is the brother of James R. Leininger, M.D.
Bianca A. Rhodes joined the Company as its Senior Vice
President, Finance and Chief Financial Officer in September 1993.
From July 1992 to April 1993, Ms. Rhodes served as Senior Vice
President, Finance, Chief Financial Officer and Corporate
Treasurer of Intelogic Trace, Inc. (a national computer services
company). From 1990 to June 1992, Ms. Rhodes served as Vice
President, Finance and Corporate Treasurer of Intelogic Trace,
Inc. and prior to 1990, Ms. Rhodes served as Corporate Treasurer
of Intelogic Trace, Inc.
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.
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.
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.
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 C. Wells joined the Company as Regional Vice
President, KCTS, in August 1994 and served in that role until
June 1996 when he was promoted to the position of Vice President
and General Manager, KCI Home Care. Prior to joining the
Company, he served in Sales Management and Infusion Management
roles from 1988 to August 1994 with Homedco, which currently
operates today as the Apria Healthcare Group. From 1978 to 1988,
Mr. Wells held Marketing and Sales Management positions with
Baxter Healthcare, formerly American Hospital Supply Corporation.
John H. Vrzalik, Sr. joined the Company in 1977, was
promoted to Vice President, Engineering in 1979 and has served in
that position since that time.
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, Chief Financial
Officer.
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, most recently serving as General
Manager, Sterling Health HK/China since 1992.
Scott S. Brooks, Vice President, National Accounts, joined
the Company in June 1990 as Director of Sales and Marketing of
KCI Medical Services. From April 1991 to March 1993, Mr. Brooks
served as Regional Vice President of KCI Therapeutic Services,
Inc. From April 1993 to February 1994, Mr. Brooks served as Vice
President, National Accounts of the Company. From March 1994 to
March 1995, Mr. Brooks served as the President of Medical Retro
Design, a subsidiary of the Company. Prior to June 1990, Mr.
Brooks served as Vice President of Simmons Healthcare.
Larry P. Baker joined the Company in 1987 as the Director of
Human Resources. Since 1993, Mr. Baker has held the position of
Vice President, Corporate Services.
George P. Peace joined the Company in November 1994 as Vice
President of Information Systems. From October 1992 to October
1994, Mr. Peace served as Vice President of Information Systems
of La Quinta Inns Inc. Prior to October 1992, Mr. Peace served
as Director of Information Systems Operations of La Quinta Inns
Inc.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock ("Common Stock") trades on The
Nasdaq Stock Market under the symbol: KNCI. The range of the
high and low bid prices of the Common Stock for each of the
quarters during the 1996 and 1995 fiscal years is contained on
the inside back cover of the Company's 1996 Annual Report to
Shareholders under the caption "Market Prices of Common Stock"
and is incorporated herein by reference.
The Company's Board of Directors declared quarterly cash
dividends on the Common Stock in 1996 and 1995. The cash
dividends totaled $0.15 per common share in each of 1996 and
1995. The Company's Board of Directors will consider future
dividends on a quarterly basis. The Company's credit agreement
contains certain covenants which limit the Company's ability to
declare and pay cash dividends.
As of March 1, 1997, the approximate number of holders of
record of the Common Stock was 417.
Item 6. Selected Financial Data
Incorporated in this Item 6, by reference, is that portion
of the Company's 1996 Annual Report to Shareholders appearing on
page 13 under the caption "Selected Consolidated Financial Data."
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Incorporated in this Item 7, by reference, is that portion
of the Company's 1996 Annual Report to Shareholders appearing on
pages 14 to 22 under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Item 8. Financial Statements and Supplementary Data
Incorporated in this Item 8, by reference, are the
Consolidated Balance Sheets and related Consolidated Statements
of Earnings, Cash Flows, Shareholders' Equity and notes thereto
and Independent Auditors' Report appearing on pages 23 to 39 in
the Company's 1996 Annual Report to Shareholders. (See Item 14(a)
of this Report.)
Item 9. Changes in and Disagreements with Accountants on
Accounting Matters and Financial Disclosure
KPMG Peat Marwick LLP was the Company's certifying
accountant for the year ended December 31, 1996. 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 that it will be dismissed
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 as the conclusion
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.
The Company has requested KPMG Peat Marwick LLP to furnish a
letter addressed to the Securities and Exchange Commission
stating whether it agrees with the above statements. A copy of
the letter is attached as Exhibit 16 to this report.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated in this Item 10, by reference, are those
portions of the Company's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders appearing on pages 1 to 3 therein
under the caption "Election of Directors" and on page 17 therein
under the caption "Timeliness of Certain SEC Filings." See also
the information in Item 4a of Part I of this Report.
Item 11. Executive Compensation
Incorporated in this Item 11, by reference, is that portion
of the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders appearing on pages 7 to 10 under the
caption "Executive Compensation" and on page 3 therein under the
caption "Director Compensation" and also on page 4 therein under
the caption "Compensation Committee Interlocks and Insider
Participation."
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Incorporated in this Item 12, by reference, is that portion
of the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders appearing on pages 4 to 6 under the
caption "Securities Holdings of Principal Shareholders, Directors
and Officers."
Item 13. Certain Relationships and Related Transactions
Incorporated in this Item 13, by reference, is that portion
of the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders, appearing on page 11 under the caption
"Certain Transactions."
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,
incorporated herein by reference to the Company's 1996
Annual Report to Shareholders, are filed as a part of
this report:
Consolidated Balance Sheets as of December 31, 1996
and 1995
Consolidated Statements of Earnings for the three
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the three
years `ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1996, 1995 and
1994
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, 1996 are filed as part of this Report:
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts -
Years ended December 31, 1996, 1995 and 1994
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).
Exhibits (continued)
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.
*10.32 Form of Option Instrument with respect to
Senior Executive Stock Option Plan
* 11.1 Earnings Per Share Computation.
* 13.1 Kinetic Concepts, Inc. 1996 Annual Report to
Shareholders (furnished for the information
of the Commission and not deemed to be
"filed," except for those portions expressly
incorporated herein by reference)
* 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.
* 22.1 List of Subsidiaries.
* 23.1 Consent by KPMG Peat Marwick dated March 28,
1997 to incorporation by reference of their
reports 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 28, 1997.
KINETIC CONCEPTS, INC.
By: /s/ JAMES R. LEININGER,M.D.
----------------------------
James R. Leininger,M.D..
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.
Signatures Title Date
/s/ JAMES R. LEININGER, M.D. Chairman of the March 28, 1997
--------------------------- Board of Directors
James R. Leininger, M.D.
/s/ RAYMOND R. HANNINGAN Chief Executive March 28, 1997
-------------------------- Officer and
Raymond R. Hannigan President
/s/ BIANCA A. RHODES Chief Financial March 28, 1997
-------------------------- Officer and
Bianca A. Rhodes Senior Vice President
(Principal Accounting
Officer)
/s/ PETER A. LEININGER, M.D. Director March 28, 1997
----------------------------
Peter A. Leininger, M.D.
/s/ SAM A. BROOKS Director March 28, 1997
----------------------------
Sam A. Brooks
/s/ FRANK A. EHMANN Director March 28, 1997
---------------------------
Frank A. Ehmann
/s/ WENDY L. GRAMM, PhD Director March 28, 1997
---------------------------
Wendy L. Gramm, PhD
/s/ BERNHARD T. MITTEMEYER,M.D. Director March 28, 1997
-------------------------------
Bernhard T. Mittemeyer,M.D.
Independent Auditors' Report
The Board of Directors and Shareholders
Kinetic Concepts, Inc.:
Under date of February 5, 1997, we reported on the consolidated
balance sheets of Kinetic Concepts, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31,
1996, as contained in the 1996 annual report to shareholders.
These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K
for the year 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 responsibility of the Company's management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.
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 set forth therein.
/s/ KPMG PEAT MARWICK LLP
---------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, 1997
Schedule VIII
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Three years ended December 31, 1996
Balance Additions Additions 12/31/94
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- -------- ----------- ---------
Allowance for
doubtful
accounts $7,500 $1,429 $ - $ 329 $8,600
======= ====== ======= ====== =======
Balance Additions Additions 12/31/95
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- -------- -------- ---------- ----------
Allowance for
doubtful
accounts $8,600 $1,883 $ - $4,306 $6,177
====== ====== ======= ====== ======
Balance Additions Additions 12/31/96
at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
---------- ---------- ---------- --------- ---------- ----------
Allowance for
doubtful
accounts $6,177 $2,457 $ - $1,102 $7,532
====== ====== ======== ======= =======
Dates Referenced Herein and Documents Incorporated by Reference
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