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Kinetic Concepts Inc – ‘10-K’ for 12/31/96 – EX-13

As of:  Friday, 3/28/97   ·   For:  12/31/96   ·   Accession #:  831967-97-5   ·   File #:  1-09913   ·   Correction:  This Filing was Corrected by the SEC on 5/6/97. ®

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  As Of                Filer                Filing    For·On·As Docs:Size

 3/28/97  Kinetic Concepts Inc              10-K®      12/31/96    9:227K

Annual Report   —   Form 10-K
Filing Table of Contents

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 


EX-13   —   Annual or Quarterly Report to Security Holders
Exhibit Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Selling, General and Administrative Expenses
"Net earnings
"Other
"Assets
"Common Stock
"Kci


Exhibit 13.1 TABLE OF CONTENTS 20 Years of Clinical Excellence 1 Letter to Shareholders 2-3 Delivering Therapies -- Not Equipment 4 KCI's Clinical Advantage 7 The Most Clinically Proven, Product Line in the Industry 8 Building on a Foundation of Performance 11 Our Product Continuum 12 Financial Table of Contents 13 Year Ended December 31, ---------------------------------------------------------------- FINANCIAL HIGHLIGHTS 1 (in millions, except per 1996 1995 1994 2 1993 1992 share data) ----------------------------------------------------------------- Revenue $269.9 $243.4 $269.6 $268.9 $278.5 Operating earnings 55.4 43.8 124.1 20.5 55.1 Net earnings 39.0 28.4 64.4 8.1 28.5 Earnings per share 0.86 0.63 1.46 0.18 0.63 Cash flow provided by operations........... 62.2 56.8 96.5 56.5 58.0 1 See Consolidated Financial Statements and the Notes thereto on page 22. 2 Results include $43.1 million, or $0.98 per share, from several non-recurring gains. The Letter to Shareholders, Management's Discussion and Analysis of Financial Condition and Results of Operations and other information provided in this annual report contain forward-looking statements that involve risks and uncertainties, including but not limited to, projections of future operating results, market penetration and the financial condition of the Company. Certain risk factors that may impact the forward-looking statements set forth herein are detailed from time to time in the Company's Securities and Exchange Commission filings. 20 YEARS OF CLINICAL EXCELLENCE TWENTY YEARS AGO, KINETIC CONCEPTS, INC. WAS FOUNDED TO IMPROVE THE QUALITY OF CARE FOR CRITICALLY ILL PATIENTS. DR. JIM LEININGER, AN EMERGENCY ROOM PHYSICIAN, NOTICED THAT HIS PATIENTS WOULD OFTEN SURVIVE SERIOUS PHYSICAL TRAUMA, ONLY TO DEVELOP LIFE- THREATENING COMPLICATIONS AS A RESULT OF IMMOBILITY. BECAUSE OF HIS CONCERN, HE PURCHASED THE RIGHTS TO MANUFACTURE A SPECIAL ROTATING HOSPITAL BED THAT HE BELIEVED COULD PREVENT SUCH COMPLICATIONS AND, AS A RESULT, SAVE LIVES. THE BED, THE ROTOREST, PROVIDED KINETIC THERAPY: LATERAL ROTATION OF 40 DEGREES TO EACH SIDE, PREVENTING FLUID BUILD-UP IN THE LUNGS. FROM THAT FIRST BED AND A MAN WITH A VISION, KINETIC CONCEPTS HAS GROWN INTO A GLOBAL CORPORATION THAT DEVELOPS AND MARKETS A BROAD RANGE OF INNOVATIVE HEALING SYSTEMS, INCLUDING SPECIALTY BEDS, MATTRESS REPLACEMENT SYSTEMS AND RELATED MEDICAL DEVICES THAT ADDRESS SKIN BREAKDOWN, CIRCULATORY COMPLICATIONS AND PULMONARY PROBLEMS ASSOCIATED WITH PATIENT IMMOBILITY. WE CELEBRATED OUR TWENTIETH ANNIVERSARY OF SAVING LIVES AND IMPROVING CLINICAL OUTCOMES DURING 1996, AND HAD AN OPPORTUNITY TO REFLECT ON THE MANY CHANGES AND ACCOMPLISHMENTS THAT HAVE TAKEN PLACE ALONG THE WAY. WHAT REMAINS UNCHANGED IN THOSE 20 YEARS IS OUR COMMITMENT -- AT EVERY LEVEL OF THE COMPANY -- TO PROVIDE CLINICAL EXCELLENCE AND IMPROVE PATIENTS' LIVES. OUR PATIENT OUTCOMES SPEAK FOR THEMSELVES. DEAR FELLOW SHAREHOLDERS Meeting clinical challenges and providing solutions. All of our collective efforts at Kinetic Concepts, Inc. are focused on this fundamental goal of patient care. At every level of our organization, we focus on improving patient outcomes -- integrating all the products, therapies and services needed to optimize patient recovery and quality of life in the most cost-effective way possible. As the health care industry changes, we at KCI find ourselves on the vanguard of this changing marketplace. We believe we can best serve cost-conscious health care providers by offering cost-effective therapeutic systems that reduce the incidence of pulmonary complications and skin breakdown and accelerate wound healing. Our team members have accepted this challenge. The recent emphasis on the efficacy of health care delivery is nothing new to us at KCI. Our therapies have always been designed to help patients heal faster and to improve patient outcomes and quality of life. Ultimately, this reduces costs. It is a process that benefits not only our patients but also medical care providers, hospitals, insurers and ultimately our shareholders. THE KCI CLINICAL ADVANTAGE TM. Our focus is best exemplified by what we call the Clinical Advantage TM. Based on a conviction that therapeutic solutions to medical problems must withstand rigorous clinical review before being implemented, we sponsor a wide variety of clinical studies which are subject to vigorous external review. Our studies document both medical efficacy and economic efficiency. This is important because health care delivery systems are being re-examined by care providers on an item-by-item basis for their effect on achieving cost effective patient outcomes. On an even more fundamental level, we want to ensure that each patient who depends on KCI's therapeutic healing systems will benefit from our thorough attention to outcomes testing and research. During 1996, we estimate that KCI was involved in the care of more than half a million people. We have also expanded our geographic reach to include all 50 U.S. states and more than 30 countries globally. All over the world, our team is making a difference. THE KCI CONTINUUM OF CARE TM. No matter what the care setting, our commitment to healing patients faster remains paramount. Whether in an acute, extended care or home setting, we can accommodate a patient's needs with the broadest, most clinically proven product line in the industry. In addition, new technologies and devices are expanding the therapies we can offer within our continuum. ACCOMPLISHMENTS. 1996 was a key year for KCI in enhancing and extending patient outcome research through clinical studies and our proprietary software. And in November, we launched our innovative V.A.C.(R) wound-care device in the United States following a successful introduction in Europe. Financially, 1996 was an outstanding year for KCI. Our focused initiatives in production, finance and distribution produced strong year-over-year earnings results. We completed an eight-million share secondary offering, increasing the liquidity of KCI's stock substantially. We also purchased and retired more than 2.5 million shares of KCI common stock, further reinforcing our strong earnings-per- share. Both our gross and operating margins strengthened significantly in 1996, with our margins increasing by approximately two percentage points. Our margins have improved because our operations are leaner. Our business model continues to produce strong cash flows. We are debt free and our balance sheet remains one of the strongest in our industry. We are positioned better than ever. [Earnings Per Share Graph] $.18 $.57 $.63 $.86 1993 1994 1995 1996 Note: Excludes effects of Unusual Items THE FUTURE. We have produced an ambitious strategic plan for 1997 and beyond. We have surveyed the opportunities ahead of us and the changes and challenges within the industry that will affect our business. Some of the initiatives on our agenda are: * We remain committed to revenue growth. In 1996, revenue grew 11% overall. This was accomplished through a combination of market expansion and penetration plus key market share gains. * KCI's financial strategy also focuses on growing our bottom line at a faster rate than revenue. We believe there is still opportunity to make our product and distribution processes more efficient. * We intend to continue our efforts to differentiate KCI from our competition by leveraging our principal competitive advantage -- our ability to deliver enhanced patient outcomes and demonstrate the effectiveness of Kinetic Therapy TM. Third-party payors are increasingly interested in understanding how well a therapy works and how it will impact their average cost of care. For this purpose, KCI has developed the Genesis software system to accumulate and analyze the information collected by KCI's clinicians in their patient rounds and the Odyssey software program that assists KCI's clinicians and their customers in tracking wound-care outcomes and evaluating treatment protocols. A similar system, PAO2, has been developed for pulmonary care. * KCI will aggressively seek new technologies and high-end technical products to enhance and extend our product line, such as the V.A.C.(R) wound-care system, which is receiving strong acceptance in the U.S. medical community, just as it did in Europe. * The breadth and efficacy of our product line and reach of our distribution network clearly give KCI a competitive advantage. Our pipeline of future products is more exciting than ever. * With almost $60 million in cash and no debt, KCI is well positioned to make product and company acquisitions that fit our business model and are accretive. We will also continue to repurchase KCI common stock, which in 1996 was at the top of our investment list. Our people have made KCI a success. Their enthusiasm, hard work and passion for our Company's mission have brought about great change. They share our energy and commitment to meeting the challenges of the future. We believe that the mission of a medical-care company should be improving patient outcomes. Therapeutic healing saves lives and reduces the average cost of care. We are proud that our products have touched the lives of so many people. Whether the patient is Christopher Reeve, Boris Yeltsin, Stan Fox or any of the thousands of people our efforts and products have helped, we at KCI are "People with Purpose." We measure success not just by how many beds or devices we place, but more importantly, by how effective our products and people are in healing patients. You can expect KCI's continued commitment to success in 1997. /s/ James R. Leininger, M.D. ---------------------------------- JAMES R. LEININGER, M.D. Chairman of the Board of Directors /s/ Raymond R. Hannigan ---------------------------------- RAYMOND R. HANNIGAN President and Chief Executive Officer [PICTURE OF RAY HANNIGAN AND JIM LEININGER] [ GRAPH OF PERCENTAGE OF U.S. POPULATION 65 OR OLDER] Year -------------------- 1950 2000 2050 8.1% 12.8% 20.4% DELIVERING THERAPIES -- NOT EQUIPMENT Kinetic Concepts is a therapeutic company, a people company. We are service-oriented and solution-driven. With an overriding motivation of delivering therapies that improve patient outcomes, KCI today is 2,000 employees worldwide including a domestic network of 250 staff clinicians and 575 service technicians, all committed to KCI's mission of improving the quality of life through healing. When we receive a call that a patient is being transported to a major trauma center, KCI's immediate response is to deliver one of our life-saving therapies and assist in patient movement. We can reach any major trauma center in the U.S. within two hours. We are on call 365 days a year, seven days a week, 24 hours a day, always prepared to bring KCI`s healing surfaces and devices to patients who need them. Whether in an acute, subacute, extended or home care setting, our trained clinicians and technicians work with health care professionals to offer technical expertise on the use of our products and individual attention to ensure the success of our therapies. Reinforcing our global emphasis on improved health care, Kinetic Concepts has direct operations in eight international markets in western Europe, as well as in Canada and Australia. Our international distribution network encompasses 45 service centers where 200 service technicians deliver therapeutic patient support surfaces, specialty beds and medical devices. Through independent dealers, we also serve 21 additional international markets throughout the world. MEETING THE NEEDS OF A CHANGING PATIENT POPULATION Patients are our focus in all that we do at KCI. We remain keenly aware that the patient in a hospital or in an extended or home care setting could be our mother, our grandfather, our brother or a close friend. That realization guides our commitment, reinforces our dedication and enhances our deep sense of responsibility. Individually and as an organization, we are committed to providing therapeutic healing systems that improve patient outcomes, treat the complications of immobility -- pulmonary, skin and circulatory problems -- as well as problems related to bariatric care and chronic wounds. We address patient problems and deliver our therapies regardless of care setting or level of acuity, giving each patient a level of personal attention and service that sets KCI apart. Keeping in step with changing demographics, KCI offers therapies to meet the needs of an evolving patient population. As the number of older Americans continues to rise and as patients are moved to nursing homes and home care settings, the need for KCI therapies will expand. This is especially true for those patients that deal with circulatory problems or skin breakdown, both of which are highly common indications amongst the elderly. HOSPITALIZED WITH BILATERAL PNEUMONIA AND IN CRITICAL CONDITION, A CALIFORNIA TEACHER WAS FIGHTING FOR HER LIFE. PLACEMENT ON A TRIADYNE BED TO HELP CLEAR HER LUNGS RESULTED IN A 50% IMPROVEMENT IN HER X- RAYS AND LAB RESULTS OVERNIGHT. HER RECOVERY WAS COMPLETE, AND NOW SHE'S BACK DOING WHAT SHE LOVES -- SHARING HER LOVE OF LEARNING WITH HER STUDENTS. [PICTURE OF STUDENT WITH TEACHER IN CLASSROOM] FOLLOWING A SERIOUS AUTO ACCIDENT, A RETIRED ELECTRICIAN FROM KANSAS HAD A CHRONIC, OPEN HIP WOUND THAT WAS UNRESPONSIVE TO TRADITIONAL THERAPIES FOR SEVERAL MONTHS. WITHIN 48 HOURS AFTER RECEIVING V.A.C. THERAPY, HE WAS AMAZED TO SEE THE WOUND CLOSING AND FILLING IN. NOW HE AND HIS FRIENDS ARE ENJOYING THE GREAT OUTDOORS TOGETHER AGAIN. [PICTURE OF MAN WITH DOG SITTING ON A BENCH OUTSIDE] [Picture of person at computer] CLINICAL STUDIES ---------------- KCI's outcome management program is part of a long-term commitment to help our customers provide a more competitive health care system. As the managed care market matures, all health care providers involved will become less focused on managing costs alone and more focused in managing outcomes. KCI'S CLINICAL ADVANTAGE At KCI, we are 2,000 skilled and committed team members, diversified in function and abilities, but united in professionalism, integrity and a commitment to the highest standard of service to our customers and patients. What sets KCI apart in the medical marketplace is a standard we call The Clinical Advantage. At the foundation of KCI's Clinical Advantage is our active sponsorship of independent clinical research. KCI's portfolio of more than 50 active and completed studies supports the medical benefit and cost efficiency of our products and protocols as part of the prevention and healing process, providing the outcome data demanded by today's health care providers. KCI's software programs and integrated clinical data-base, consisting of the Genesis, Odyssey and PAO2 information platforms, combined with our extensive clinical field presence, clinically proven therapies and protocols and supporting cost data define KCI's unique position in the marketplace -- The Clinical Advantage. One of our greatest strengths is our flexibility in meeting the changing requirements of today's health care provider. As both private and government reimbursement programs move toward systems where facilities receive a fixed payment based only upon the patient's initial diagnosis, actuarial information becomes critical. The collection and assessment of such information is essential to predict patient outcomes and develop appropriate pricing structures. That's where The Clinical Advantage can help. From an emergency placement of a trauma patient on a KCI TriaDyne, to assistance in developing a wound-care management program for a patient using the V.A.C., to participation in patient rounds, trained KCI team members make more than 200,000 patient rounds annually. These employees -- many with medical or clinical backgrounds -- assist facility staff in collecting clinical outcome data. To facilitate the collection and processing of this data, KCI has developed three proprietary software programs -- Genesis, Odyssey and PAO2. KCI staff clinicians use Genesis to assist in tracking service responsiveness and patient outcomes. Using hand-held computers, these clinicians make regular rounds to document the effect of KCI therapies on a patient's overall condition. This information is then entered into a central database and analyzed to determine the effectiveness of specific treatment protocols. Odyssey and PAO2 patient assessment and outcome tracking software systems enable KCI customers to standardize the information collected on KCI's wound management and pulmonary management protocols. As they document and track complete wound and pulmonary management programs -- including identifying at-risk patients and determining the cost of achieving patient outcomes -- the facilities share collected data with KCI for inclusion in a national database. This enables the company to compare a facility's program or patient results with similar programs or patients on a local, regional or national basis. Each facility can then enhance its wound and pulmonary management programs and achieve the best possible outcome at the lowest total cost of care. [PICTURE OF V.A.C.(R)] THE V.A.C.(R) ------------- Problem wounds need special solutions. The V.A.C. (Vacuum Assisted Closure) closes wounds when other methods fail. It uses a pump and special sponge to create negative pressure within the wound, drawing the skin together. For some patients, the V.A.C. is the only answer and only KCI has the V.A.C. THE MOST CLINICALLY PROVEN, ADVANCED PRODUCT LINE IN THE INDUSTRY KCI's Continuum of Care provides the broadest range of specialty beds and mattress replacement and overlay systems in the industry, including a multitude of clinically proven therapies which deliver pressure relief and reduction, pulsation, Kinetic Therapy and percussion. Health care providers have the flexibility to increase or decrease the prescribed therapy based on individual patient acuity, which minimizes expenditures while still achieving the desired outcome. The cornerstone of KCI's success is the Company's focus on the needs of each patient. This patient focus has led to the introduction of several new specialty patient surfaces and critical medical devices for wound care, pulmonary care and the care of bariatric patients. As an example, the 1996 national launch of negative pressure therapy through the V.A.C. (Vacuum Assisted Closure) is gaining widespread acceptance as a revolutionary therapy for healing chronic wounds. The V.A.C. uses a portable pump and a special "sponge" dressing to create negative pressure within a wound. The process reduces edema, draws fresh blood cells to the wound site and draws the skin together, producing dramatic healing results in patients with difficult wounds that had been resistant to healing. This dramatic improvement also results in cost savings to the hospital. In fact, Bowman Gray Hospital's 1996 Annual Report indicates that use of the V.A.C. has resulted in a savings to the hospital of over $170,000 in wound-care costs. KCI's KinAir III and TheraPulse specialty beds and the First Step (R) family of overlays are the foundation of our wound-care product continuum. TheraPulse is the most aggressive specialty bed available for wound healing, with clinical studies documenting a 30 percent reduction in overall healing time. In extended care, where Medicare has a 100-day limit on reimbursement, TheraPulse is quickly becoming the product of choice. In 1996, the introduction of Impression, an affordable, self- contained, powered, pressure-relieving mattress replacement system and TheraRest MRS, a static, pressure-reducing system, expanded KCI's continuum to health care providers interested in purchasing some of their wound-care support surfaces. (The Company normally rents its specialty surfaces on an as needed basis.) Also, the First Step (R) TriCell TM was introduced to expand the pressure-relieving therapy of the First Step (R) family of overlays into the rapidly growing home care market. In bariatric care, the KCI BariKare addresses the special needs of the large patient. Introduced in 1995, the BariKare serves as a bed, chair and x-ray table for patients weighing up to 850 pounds. Features such as built-in scales let nurses care for these patients in a safe and dignified manner. In 1996, the introduction of the First Step (R) Select Heavy Duty TM incorporated proven pressure-relieving therapy into a design which fits directly on the BariKare. These products, combined with important accessories like wheelchairs, walkers and commodes, have established KCI as a leader in providing for this underserved patient segment. IN RESPIRATORY FAILURE AFTER CONTRACTING A RARE VIRUS ON A CAMPING TRIP, A 30-YEAR-OLD COMPUTER EXECUTIVE FROM BOSTON WAS BARELY CLINGING TO LIFE WHEN SHE WAS PLACED ON THE ROTOREST. WITHIN MINUTES AFTER THE MAXIMUM DEGREE OF ROTATION WAS APPLIED, HER PULMONARY FUNCTION BEGAN TO IMPROVE. THE ICU NURSES WHERE SPEECHLESS AT THE SPEED OF HER RECOVERY. THIS BRUSH WITH DEATH HAS GIVEN HER LIFE NEW MEANING. [PICTURE OF GIRL] AFTER FALLING INTO A COMMUNITY POOL AND NEARLY DROWNING, AN ATLANTA TWO- YEAR OLD REQUIRED ADVANCED TECHNOLOGY TO REROUTE AND OXYGENATE HIS BLOOD. AMID A TANGLE OF CATHETERS AND TUBES, HE WAS CAREFULLY PLACED ON A PEDIKAIR, WHICH USING ITS PULSATION FEATURE, KEPT HIS LUNG SECRETIONS MOBILIZED PREVENTING PNEUMONIA. NOW FULLY RECOVERED, HE JUST WANTS TO GO SWIMMING AGAIN AND HIS FATHER IS HAPPY TO TAKE HIM. [PICTURE OF TWO YEAR OLD BOY WITH DAD] In addressing the needs of the pulmonary patient, KCI's most advanced healing system, the TriaDyne TM, continues to be the only product available able to deliver pulsation, percussion and true Kinetic Therapy, which has been defined by the U.S. Centers for Disease Control as lateral rotation of at least 40 degrees on each side. Kinetic Therapy has been demonstrated to effectively prevent and treat pulmonary complications. Effective use of Kinetic Therapy through KCI's TriaDyne TM, RotoRest (R) Delta and BioDyne (R), along with patient tracking through PAO2, provides an excellent pulmonary management program for today's health care provider. The immobile patient may also experience circulatory problems. 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 clotting and reestablish microcirculation. The PlexiPulse has been proven to be highly effective in preventing DVT (Deep Vein Thrombosis), reducing edema and improving lower limb blood flow. [PICTURE OF PLEXIPULSE(R)] PLEXIPULSE (R) -------------- Nature has an answer for everything, but sometimes it needs some help. The PlexiPulse All-in-1 System re-establishes normal circulation for patients who are confined to a bed. Keeping the blood moving prevents dangerous clots from forming, so patients can get back on their feet. BUILDING ON A FOUNDATION OF PERFORMANCE Last year we set out to realize three primary financial goals. We achieved or surpassed all of them in 1996. We committed to growing our top-line, or revenue, at a double-digit rate, to growing our margins at a faster rate than our top-line and to achieving a sustained gross margin of 40 percent and operating margin of 20 percent. KCI's 1996 revenue increased by 11 percent, reflecting the high market growth rates of the extended care segment, which grew by 32 percent from 1995, as well as market share gains in both the acute care segment in the United States and in the international segment. Based on 1996 net earnings of $39 million, a 37 percent increase over 1995 figures, we succeeded in achieving bottom-line growth in excess of our top-line growth. With a gross profit margin of 40 percent and gross profit surpassing the $100 million mark -- a 33 percent increase from 1993 -- we also surpassed our goal of 20 percent operating profit margins, illustrating our ability to add revenue and leverage our infrastructure with a relatively small increase in expenses. Another highlight of 1996 was an 8 million share secondary offering which increased the liquidity of KCI stock substantially. In addition, we repurchased and retired approximately 2.5 million shares of Kinetic Concepts common stock. We also took the opportunity to favorably negotiate the prepayment of all the remaining notes received from the 1994 disposition of our Medical Services Division. The bottom line of all these actions was an increase in earnings per share from $0.63 in 1995 to $0.86 in 1996 -- an increase of 37 percent. As important as our dedication to enhancing shareholder value is, we never lose sight of KCI's other "bottom line" -- our commitment to the patients our therapeutic systems and medical devices help and our pledge to improving patient outcomes. This overriding sense of responsibility shapes our vision and guides our actions. [FOUR GRAPHS (IN MILLIONS)] REVENUE GROSS PROFIT ---------------------------- ----------------------------- 1993 1994 1995 1996 1993 1994 1995 1996 208,601 222,084 243,443 269,881 59,199 74,289 92,294 107,361 OPERATING PROFIT NET PROFIT ------------------------------ ------------------------------- 1993 1994 1995 1996 1993 1994 1995 1996 19,575 38,636 43,792 55,354 11,032 25,105 28,441 38,987 Note: Prior years exclude unusual items OUR PRODUCT CONTINUUM KCI'S WOUND CARE ---------------------------------------------------------------------- KinAir (R) III TheraPulse (R) FluidAir Elite First Step(R) A framed air- A framed, TM Plus flota- pulsating A framed air sur- Adjustable, un- tion, low air- air support face which uses framed mattress loss surface fluidized overlay with support surface to enhance capi- silicon three to prevent and llary and microspheres to individually treat skin lymphatic provide high air- controlled breakdown and circulation and loss therapy. sections to meet minimize pain. help improve individual healing. needs. ---------------------------------------------------------------------- First Step(R) DynaPulse (R) Impression TM Frist Step(R) Select A pulsating mat- An all-in-one TriCell TM An unframed, low tress powered mattress A pressure air-loss, replacement system used to reliev-ing, low pressure-relief system help treat and air-loss mattress with (unframed) to reduce the therapeutic independent help prevent and incidence of mattress support support channels treat pressure pressure ulcers. system designed to maximize ulcers. to help prevent comfort. and treat pressure ulcers. ---------------------------------------------------------------------- KCI'S PULMONARY CARE ---------------------------------------------------------------------- KCI's TriaDyne Roto Rest(R) BioDyne(R) II Q2 Plus TM TM Delta KCI's most The most Kinetic Therapy An unframed, low advanced framed, aggressive form combined with air-loss therapeutic of Kinetic pressure-relief mattress to patient support Therapy, to maintain skin provide a surface, generally used integrity and customized providing to prevent prevent turning schedule Kinetic Therapy pneumonia in pneumonia. with adjustable SM, pulsation trauma patients. firmness. and per-cussion in addition to low air-loss pressure relief. --------------------------------------------------------------------- KCI'S BARIATRIC CARE --------------------------------------------------------------------- BariKare (R) Bari-800i TM First Step(R) Burke Bariatric Flexible patient A complete care Select Heavy Bundle positioning, com- system for large Duty TM Designed to meet fortable surface or obese An unframed, low the special and accurate patients up to air-loss needs of the weight readings 800 lbs., mattress morbidly obese for patients up designed for use designed to patient. to 850 lbs. in acute care provide pressure settings. relief for the bariatric patient. ---------------------------------------------------------------------- FINANCIAL TABLE OF CONTENTS Selected Consolidated Financial Data 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Consolidated Balance Sheets.......... 22 Consolidated Statements of Earnings.. 23 Consolidated Statements of Cash Flows 24 Consolidated Statements of Share- holders' Equity 25 Notes to Consolidated Financial Statements 26 Independent Auditors' Report 39 Board of Directors 40 [Download Table] KINETIC CONCEPTS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) Year Ended December 31, 1996 1995 1994 1993 1992 ----- ------ ------ ------ ------ Consolidated Statements of Earnings Data: Revenue: Rental and service $225,450 $206,653 $228,832 $232,250 $244,905 Sales and other 44,431 36,790 40,814 36,622 33,586 ------- ------- ------- ------- ------- Total revenue 269,881 243,443 269,646 268,872 278,491 ------- ------- ------- ------- ------- Rental expenses 146,205 137,420 159,235 169,687 156,682 Cost of goods sold 16,315 13,729 19,388 18,666 18,987 ------- ------- ------- ------- ------- Gross profit 107,361 92,294 91,023 80,519 102,822 Selling, general and administrative expenses 52,007 48,502 51,813 53,279 47,710 Unusual items(1) - - (84,868) 6,705 - ------- ------ ------- ------ ------ Operating earnings 55,354 43,792 124,078 20,535 55,112 Interest income (expense), net..................... 9,087 4,554 (4,528) (5,908) (7,195) ------- ------ ------- ------ ------ Earnings before income taxes, minority interest,extraordinary item and cumulative effect of changes in accounting principles.......... 64,441 48,346 119,550 14,627 47,917 Income taxes 25,454 19,905 55,949 7,175 19,405 ------- ------ ------- ------ ------ Earnings before minority interest, extraordinary item and cumulative effects of changes in accounting principles........... 38,987 28,441 63,601 7,452 28,512 Minority interest in subsidiary loss - - 40 560 - Extraordinary item -- debt extinguishment, net - - - (400) - Cumulative effect of change in accounting for inventory (2)........... - - 742 - - Cumulative effect of change in accountinf for income taxes (3) .............. - - - 450 - ------ ------ ------ ------ ------ Net earnings.......... $38,987 $28,441 $64,383 $8,062 $28,512 ====== ====== ====== ===== ====== Earnings per share.... $ 0.86 $ 0.63 $ 1.46 $ 0.18 $ 0.63 ====== ====== ====== ===== ====== Shares used in earnings per share computations...... 45,489 45,457 44,143 44,627 45,060 ====== ====== ====== ====== ====== Cash flow provided by operations............. $62,167 $56,782 $96,451 $56,538 $58,007 ====== ====== ====== ====== ====== Cash dividends paid to common shareholders.... $ 6,607 $ 6,631 $ 6,588 $ 6,638 $ 6,277 ====== ====== ====== ====== ====== Cash dividends per share paid to common shareholders........... $ .15 $ .15 $ .15 $ .15 $ .14 ====== ====== ====== ====== ====== SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED) (in thousands) [Download Table] As of December 31, 1996 1995 1994 1993 1992 ------- ------ ------- ------ -------- Consolidated Balance Sheet Data: Working capital $107,334 $109,413 $ 90,731 $ 60,907 $ 55,473 Total assets $253,393 $243,726 $232,731 $284,573 $286,915 Long-term obligations- noncurrent (4)...... $ - $ - $ 2,636 $101,889 $102,237 Minority interest..... $ - $ - $ - $ 40 $ 990 Redeemable convertible preferred stock..... $ - $ - $ - $ - $ 3,307 Other shareholders' equity.............. $211,078 $210,324 $185,423 $125,707 $123,813 (1) See Note 12 of Notes to Consolidated Financial Statements for information on unusual items. (2) See Note 1 of Notes to Consolidated Financial Statements for information on cumulative effect of change in method of accounting for inventory. (3) See Note 7 of Notes to Consolidated Financial Statements for information on cumulative effect of change in method of accounting for income taxes. (4) See Notes 5 and 6 of Notes to Consolidated Financial Statements for information concerning the Company's borrowing arrangements and lease obligations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The ongoing health care debate continued during 1996 headed by many now familiar challenges, including increased pressure on health care providers to control costs, the accelerating migration of patients from acute care facilities into extended care (e.g., skilled nursing facilities and rehabilitation centers) and home care settings, the consolidation of health care providers and national and regional group purchasing organizations and the growing demand for clinically proven and cost-effective therapies. The pressure to control national health care costs intensified during 1993 as a result of the health care reform debate and has continued through 1996 as Congress attempts to slow the rate of growth of federal health care expenditures as part of its effort to balance the federal budget. While the exact amount and nature of the federal health care budget cuts are yet to be determined, the Company believes that health care providers will continue to experience increased cost control pressures. The expected reductions in future hospital payment rates will increase cost pressures on hospitals but the Company does not believe that the manner in which hospitals are currently reimbursed will change materially in the near future. However, current Congressional proposals would change the method of reimbursement in the extended and home care settings from retrospective cost-based systems to prospective payment systems similar to the system adopted for hospitals in 1983. In a prospective payment system, reimbursement is based on a fixed payment for the care of a patient with a specific diagnosis instead of on costs actually incurred, and decisions on selecting the products and services used in patient care are based on clinical and cost-effectiveness. This "fixed reimbursement" scenario heightens the need for clinically effective therapies. The Company believes it is addressing this need through its Clinical Advantage programs. The Company also believes it has the most clinically proven product line in the industry, including a pulmonary line to prevent and heal pulmonary problems; a skin and wound-care line that prevents and heals skin breakdown and heals wounds, and a bariatric line that provides cost- effective care for the obese patient. Each of these therapies is supported by clinical studies and these studies match actual experience with economic information to support the efficacy of these therapies. 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 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. While the Company expects these industry trends to continue, it has successfully addressed these trends over the last two years by (i)increasing its marketing efforts beyond its existing base of more than 1000 acute care hospitals to market to an additional 2000 medium to large hospitals in which the Company has had previously a relatively small presence and (ii) the introduction of new high-end therapies and products including the TriaDyne TM, BariKare(R) beds, the V.A.C.TM and the PlexiPulse All-in-1 system. Additionally, through its nationwide distribution network the Company has expanded its presence in both the extended and home care settings. Generally, the Company's customers prefer to rent rather than purchase patient support surfaces, due to such considerations as high initial capital outlays and technologically complex maintenance requirements. As a result, rental revenues are a high percentage of the Company's overall revenue. More recently, sales have increased as a portion of the Company's revenue. The Company believes this trend will continue because certain U.S. health care providers are purchasing products that are less expensive and easier to maintain such as medical devices, mattress overlays and mattress replacement systems. In addition, international health care providers tend to purchase therapeutic surfaces more often than U.S. health care providers, and the Company's revenue from international operations represents an increasing portion of the Company's total revenue. Because of the 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. This demand increases the utilization of certain of the Company's products which were originally developed for acute care settings and provides an additional market for sales of low-cost products such as mattress overlays and mattress replacement systems. Results of Operations 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): [Download Table] 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, net 3 2 4,533 100 ---- ---- ------- 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 Services $181.3 $163.0 International 68.8 60.7 Medical devices 19.2 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 acute care facilities was up $8.1 million, or 7.3%, from the prior year, due in large part to the continued success of KCI's TriaDyne TM, the Company's leading Kinetic Therapy product. Rental revenue from Kinetic Therapy products grew 31% in 1996. Revenue from extended care settings in 1996 increased 32%, or $12.0 million, primarily due to increased patient days and the addition of various new national accounts. Revenue in the home care segment, which accounts for 5% of total Company revenue, decreased $1.8 million, or 12.2%, from 1995 primarily due to a change in Medicare reimbursement policy which had the effect of reducing the number of reimbursable patient days in the period. Revenue from the Company's international operations increased $8.1 million, or 13.3%, to $68.8 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 $19.2 million, an increase of $2.1 million, or 12.3%, from 1995. This increase was substantially due to the introduction of the V.A.C. TM in the United States. 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. 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, new information systems 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: Selling, general and administrative (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 the year 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 $0.63 per share. Higher revenue and controlled spending, combined with the one-time increase in interest income and a lower overall tax rate accounted for the 37% earnings improvement. Average common and common equivalent shares outstanding were substantially unchanged year-to- year. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 The following table sets forth, for the periods indicated, the percentage relationship of each item to total revenue as well as the change in each line item as compared to the prior year ($ in thousands): [Download Table] Year Ended December 31, Revenue Increase Relationship (Decrease) ------------ ------------ 1995 1994 $ Pct ----- ------ ---- ---- Revenue: Rental and service 85% 85% $(22,179) (10%) Sales and other 15 15 (4,024) (10) ---- ---- ------- 100% 100% (26,203) (10) Rental expenses 56 59 (21,815) (14) Cost of goods sold 6 7 (5,659) (29) ---- ---- ------ Gross profit 38 34 1,271 1 Selling, general and administrative expense 20 19 (3,311) (6) Unusual items - (31) 84,868 NM ---- ---- ------ Operating earnings 18 46 (80,286) (65) Interest income (expense), net.................... 2 (1) (9,082) (201) ---- ---- ------ Earnings before income taxes, minority interest and cumulative effect of change in accounting principle.............. 20 45 (71,204) (60) Income taxes 8 21 (36,044) (64) ---- ---- ------ Earnings before minority interest and cumulative effect of change in accounting principle 12 24 (35,160) (55) Minority interest in subsidiary loss.......................... - - (40) - Cumulative effect of change in accounting principle - - (742) - ---- ---- ------- Net earnings 12% 24% $(35,942) (56%) ==== ==== ======= ==== The Company's revenue is derived from three primary markets. The following table sets forth, for the periods indicated, the amount of revenue derived from each of these markets ($ in millions): Year Ended December 31, ----------------------- 1995 1994 -------- - ------ Domestic Surfaces $163.0 $157.7 International 60.7 46.4 Medical devices 17.1 13.9 Other(1) 2.6 51.6 ----- ----- Total revenue $243.4 $269.6 ===== ===== (1) Consists of revenue of Medical Services, KCIFS, MRD and other sales. Unusual Items: In September 1994, the Company settled a patent infringement suit against its principal competitor, Support Systems International, Inc. ("SSI"), a predecessor in interest to Hill-Rom, Inc., for $84.8 million. In connection with the settlement, SSI agreed to withdraw its high-end specialty bed from the market. The comparability of the Company's financial results for the years ended December 31, 1995 and 1994 was significantly impacted by (1) this settlement and (2) the pre-tax gain of $10.1 million from the sale of certain assets of Medical Services. Partially offsetting these items were certain miscellaneous unusual items, primarily dispositions of overstocked inventory and underutilized rental assets and a write-down of the carrying value of the assets of MRD which had a negative impact of $6.8 million. The following is a summary of the unusual items recorded in the prior year (in thousands): SSI patent litigation settlement $ 84,750 Legal fees related to SSI patent litigation settlement (3,154) Pre-tax gain on sale of Medical Services 10,121 Miscellaneous (6,849) ------- Unusual items in operating earnings $ 84,868 ======= Each following reference to "on a pro forma basis" shall mean that the results for the period have been adjusted to reflect the sales of Medical Services and KCIFS as if such sales had occurred on January 1, 1994. Total Revenue: Total revenue in 1995 was $243.4 million, a decrease of $26.2 million, or 9.7%, from 1994. This decrease was directly attributable to the sale of Medical Services in September 1994. Medical Services generated $43.8 million in revenue during 1994. On a pro forma basis, total revenue for 1995 would have increased by $19.9 million, or 9.0%, to $242.0 million from $222.1 million in 1994 primarily as a result of growth in the Company's international operations combined with smaller increases in each of the Company's other primary markets. Revenue from acute care facilities increased $1.7 million, or 1.6%, from 1994, primarily as a result of increased therapy days in the acute care setting, due partly to the successful introduction of new products, including the BariKare (R) and the TriaDyne TM, offset by a continuing shift in product mix toward lower- cost overlays. Revenue from extended care settings in 1995 was $37.5 million, an increase of $3.0 million, or 8.7%, from 1994, primarily due to increased patient days as patients migrated from high-cost, acute care settings to lower-cost, extended care settings. Revenue from home care settings increased $0.6 million or 4.3% from 1994, which reflects the Company's decision to shift to an independent dealer network at the beginning of the year. This network provides easier access to a larger patient population; however, revenue received from dealers is less than that which the Company would receive from direct sales because revenue from dealers is net of dealer service expense. Revenue from the Company's international operations was $60.7 million in 1995, up $14.3 million or 30.8% from 1994. Increased market penetration and increased product sales contributed to this higher international revenue. In addition, international operations benefited from favorable currency exchange rate fluctuations which accounted for $6.6 million of the revenue increase. Revenue from medical device operations was $17.1 million in 1995, an increase of $3.2 million, or 23.0%, from 1994, primarily as a result of greater market penetration of the PlexiPulse. Rental Expenses: Rental expenses for 1995 were $137.4 million, a decrease of $21.8 million, or 13.7%, from 1994. This decrease was a result of the sale of Medical Services in September 1994. On a pro forma basis, rental expenses for 1995 would have been $137.4 million, an increase of $2.2 million, or 1.6%, over 1994. On a pro forma basis, as a percentage of total revenue, rental expenses would have been 56.8% in 1995 compared to 60.9% in 1994. This decrease is primarily attributable to the pro forma increase in revenue, as the majority of these costs are relatively fixed, combined with a reduction in field headcount and depreciation expense. Gross Profit: Gross profit in 1995 was $92.3 million, an increase of $1.3 million, or 1.4%, over 1994. On a pro forma basis, gross profit in 1995 would have been $90.8 million, an increase of $16.5 million, or 22.2%, from 1994. On a pro forma basis, as a percentage of revenue, gross profit margin would have increased to 37.5% in 1995 from 33.5% in 1994 as a result of the increase in pro forma revenue, the relatively fixed nature of the rental expenses, and the reduction in headcount and depreciation expense as discussed above. Selling, General and Administrative Expenses: Selling, general and administrative expenses for 1995 were $48.5 million, a decrease of $3.3 million, or 6.4%, from 1994 as a result of the sale of Medical Services in September 1994. On a pro forma basis, selling, general and administrative expenses would have been $44.7 million, an increase of $9.0 million, or 25.3%, in 1995 from 1994. On a pro forma basis, as a percentage of revenue, selling, general and administrative expenses would have been 18.5% in 1995 compared to 16.1% in 1994. These increases related primarily to common overhead costs, previously allocated to Medical Services, which have been absorbed by the Company, and costs associated with certain key investments, e.g., improved information systems. Operating Earnings: Operating earnings for 1995 were $43.8 million, a decrease of $80.3 million, or 64.7%, from 1994, primarily as a result of the one-time benefit of the patent litigation settlement and the sale of Medical Services in 1994. On a pro forma basis, and excluding the patent litigation settlement and the other unusual items, operating earnings for 1995 would have been $46.1 million, an increase of $7.5 million or 19.4% from 1994. On a pro forma basis and excluding the patent litigation settlement and the other unusual items, as a percentage of revenue, operating earnings would have increased to 19.1% for 1995 from 17.4% in 1994 substantially due to the improved gross profit discussed above. Net Interest Income: Net interest income for 1995 was $4.6 million as compared to net interest expense of $4.5 million in 1994. This change was a result of the repayment of the Company's outstanding long-term debt at the end of the third quarter of 1994. On a pro forma basis, net interest income for 1995 would have been $4.9 million compared to net interest income of $1.2 million in 1994. This difference was primarily due to the fact that the 1995 results include interest income and a reduction in interest expense resulting from the additional cash provided by the patent litigation settlement. In addition, interest income for 1995 included $1.7 million representing the principal received in excess of the discounted value of the Mediq/PRN notes. Income Taxes: The Company's effective income tax rate for 1995 was 41.2% compared to 46.8% in 1994. This decrease was primarily a result of the recognition in 1995 of certain foreign tax credits and the September 1994 write-off of the goodwill associated with Medical Services. Other: During 1994, the cumulative losses allocated to the minority interest holder of MRD exceeded the balance of such holder's investment. As a result, the Company recognized $3.8 million of losses in 1994. These losses and the diminished opportunities within the refurbishment business contributed towards the Company's decision to liquidate the assets and discontinue the operations of MRD. Concurrently, the Company wrote off unamortized goodwill of $1.5 million and wrote down inventories to net realizable value. Change in Accounting Principle: During the first quarter of 1994, the Company recorded the cumulative effect of a change in its inventory accounting method which resulted in a one-time after-tax earnings increase of $742,000, or $0.02 per share. Net Earnings: Net earnings for 1995 were $28.4 million, or $0.63 per share, a decrease of $36.0 million from $64.4 million, or $1.46 per share, in 1994. This decrease was primarily due to the 1994 benefit from the patent litigation settlement and the net loss from the sale of KCIFS in 1995, and offset in part by the net loss from the sale of Medical Services and other unusual items in 1994. On a pro forma basis and excluding the effect of the patent litigation settlement and other unusual items, net earnings would have increased by 38.6% to $29.4 million, or $0.65 per share, in 1995 from $21.2 million, or $0.48 per share, in 1994. On a pro forma basis and excluding the effect of the patent litigation settlement and other unusual items, as a percentage of revenue, net margin would have increased to 12.1% in 1995 from 9.5% in 1994, primarily as a result of the improvement in gross profit discussed above. Financial Condition Inventories at December 31, 1996 increased $1.2 million, or 6.3%, from the end of 1995, due primarily to increased mattress overlay levels in the foreign subsidiaries, including inventories acquired as part of the Astec Medical acquisition. In addition, the introduction of the V.A.C. in the United States has resulted in a slight increase to the overall inventory balance. The note receivable from principal shareholder at December 31, 1995 related to a loan made to James R. Leininger, M.D., the principal shareholder and chairman of the Company's Board of Directors. In January 1996, the note receivable, including accrued interest, was collected in full. Other notes receivable at December 31, 1995 consisted of three notes receivable from Mediq/PRN, with an aggregate face value of $10.0 million, received as partial consideration in the 1994 sale of the Medical Services Division. In October 1996, the Company negotiated the early repayment of all the remaining notes and recognized a non- recurring gain of approximately $5.2 million before taxes. Other assets at December 31, 1996 increased $8.6 million, or 39.3%, to $30.4 million compared to $21.9 million in 1995, due primarily to an investment in an asset subject to a leveraged lease. See Note 10 to the Company's consolidated financial statements for further discussion of this item. Deferred income taxes at December 31, 1996 were $5.1 million, an increase of $4.7 million from year-end 1995. The increase from the prior year is primarily due to accelerated tax depreciation on the TriaDyne 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 1996 the net impact of these timing issues resulted in a net deferred tax liability comprised of deferred tax liabilities totaling $13.3 million offset by deferred tax assets totaling $8.2 million. 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 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. 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 Company, Inc. (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 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 filed a lawsuit against the Company alleging that the Company's TriaDyne TM bed infringes a patent issued to Hill-Rom December of 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 on the marketing of the TriaDyne bed. The Company is party to several lawsuits arising in the ordinary course of its business and is contesting adjustments proposed by the Internal Revenue Service to prior years' tax returns. Provisions have been made in the Company's financial statements for estimated exposures related to these lawsuits and adjustments. See "Consolidated Financial Statements." In the opinion of management, the disposition of these items will not have a material adverse effect on the Company's business, financial condition or results of operations. The manufacturing and marketing of medical products necessarily entails an inherent risk of product liability claims. The Company currently has certain liability claims pending for which provision has been made in the Company's financial statements. Management believes that resolution of these claims will not have a material adverse effect on the Company's business, financial condition or results of operations. The Company has not experienced any significant losses due to product liability claims and currently maintains umbrella liability insurance coverage. Liquidity and Capital Resources At December 31, 1996, the Company had current assets of $144.2 million and current liabilities of $36.9 million resulting in a working capital surplus of $107.3 million, compared to a surplus of $109.4 million at December 31, 1995. In 1996, the Company made net capital expenditures of $21.7 million. The 1996 capital expenditures primarily relate to the Company's TriaDyne TM, TriCell and FluidAir TM products, various mattress overlay products and the design and development of new information systems. Other than a commitment for new product inventory for $706,000, the Company has no material long-term capital commitments. The Company's Credit Agreement permits unsecured borrowings of up to $50.0 million. At December 31, 1996, the entire borrowing base of $50.0 million was available. The interest rate payable on borrowings under the Credit Agreement is, at the election of the Company, the Bank of America's reference rate or the London interbank offered rate quoted to Bank of America for one, two, three or six month Eurodollar deposits adjusted for appropriate reserves plus 40 basis points. The Credit Agreement requires that the Company maintain specified ratios and meet certain financial targets and also contains certain customary covenants. At December 31, 1996, the Company was in compliance with all covenants. During 1996, the Company generated $62.2 million in cash from operating activities compared to $56.8 million in the prior year. The primary reason for this difference was an improvement in operating results partially offset by increased receivable and inventory levels. Investment activities for 1996 used $17.6 million, including net capital expenditures of $21.7 million and a $7.2 million investment in an asset subject to a leveraged lease agreement, partly offset by the early repayment of notes receivable from Mediq/PRN. Financing activities for 1996 used $37.3 million consisting primarily of the purchase and retirement of treasury stock and dividends paid to shareholders. In 1996, the Company repurchased and retired nearly 2.5 million shares of common stock under a program which authorizes the Company to purchase up to 3 million shares. Subsequent to 1996, the Company's Board of Directors approved a program which authorizes the Company to purchase up to an additional 3 million shares. At December 31, 1996, cash and cash equivalents totaling $59.0 million were available for general corporate purposes. Subsequent to December 31, 1996, the Company has completed two separate asset acquisitions for a combined purchase price of approximately $10 million in cash plus other considerations. Based upon the current level of operations, the Company believes that cash flow from operations and cash reserves will be adequate to meet its anticipated requirements for working capital and capital expenditures through 1997. KINETIC CONCEPTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) [Download Table] December 31, 1996 1995 ------- -------- ASSETS Current assets: Cash and cash equivalents $ 59,045 $ 52,399 Accounts receivable, net 58,241 56,032 Inventories 20,042 18,854 Note receivable from principal shareholder -- 10,291 Prepaid expenses and other 6,860 4,865 ------- ------- Total current assets 144,188 142,441 Net property, plant and equipment 65,224 62,276 Other notes receivable, net -- 3,187 Goodwill, less accumulated amortization of $12,021 in 1996 and $10,625 in 1995 13,541 13,968 Other assets, less accumulated amortization of $5,614 in 1996 and $5,638 in 1995.................. 30,440 21,854 ------- ------- $253,393 $243,726 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,974 $ 2,512 Current installments of capital lease obligations 118 -- Accrued expenses 29,792 26,490 Income tax payable 2,970 4,026 ------ ------ Total current liabilities 36,854 33,028 ------ ------ Capital lease obligations, excluding current installments............. 396 -- Deferred income taxes, net 5,065 374 ------ ------ 42,315 33,402 ------ ------ Commitments and contingencies (Note 11) Shareholders' equity: Common stock; issued and outstanding 42,355 in 1996 and 44,331 in 1995 42 44 Additional paid-in capital -- 12,123 Retained earnings 210,816 197,290 Cumulative foreign currency translation adjustment............................ 555 1,052 Notes receivable from officers.......... (335) (185) ------ ------- 211,078 210,324 ------- ------- $253,393 $243,726 ======= ======= See accompanying notes to consolidated financial statements. KINETIC CONCEPTS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (in thousands, except per share data) [Download Table] Year Ended December 31, 1996 1995 1994 ------ ------ ------- Revenue: Rental and service $225,450 $206,653 $228,832 Sales and other 44,431 36,790 40,814 ------- ------- ------- Total revenue 269,881 243,443 269,646 ------- ------- ------- Rental expenses 146,205 137,420 159,235 Cost of goods sold 16,315 13,729 19,388 ------- ------- ------- 162,520 151,149 178,623 ------- ------- ------- Gross profit 107,361 92,294 91,023 Selling, general and administrative expenses........................ 52,007 48,502 51,813 Unusual items -- -- (84,868) ------- ------- ------- Operating earnings 55,354 43,792 124,078 Interest income (expense), net 9,087 4,554 (4,528) ------- ------- ------- Earnings before income taxes, minority interest and cumulative effect of change in accounting principle 64,441 48,346 119,550 Income taxes 25,454 19,905 55,949 ------- ------- ------- Earnings before minority interest and cumulative effect of change in accounting principle..................... 38,987 28,441 63,601 Minority interest in subsidiary loss -- -- 40 Cumulative effect of change in accounting for inventory -- -- 742 ------- ------- ------- Net earnings $ 38,987 $ 28,441 $ 64,383 ======= ======= ======= Earnings per common and common equivalent share: Earnings before cumulative effect of change in accounting principle $ 0.86 $ 0.63 $ 1.44 Cumulative effect of change in accounting for inventory -- -- 0.02 ------- ------- ------- Earnings per share $ 0.86 $ 0.63 $ 1.46 Shares used in earnings per share computations 45,489 45,457 44,143 ======= ======= ======= See accompanying notes to consolidated financial statements. KINETIC CONCEPTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) [Download Table] Year Ended December 31, 1996 1995 1994 ------- ------- -------- Cash flows from operating activities: Net earnings $38,987 $28,441 $ 64,383 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 21,794 22,760 38,795 Provision for uncollectible accounts receivable 2,457 1,883 1,100 Noncash portion of unusual items - - 4,797 Loss (gain) on KCIFS and Medical Services dispositions - 2,933 (10,121) Gain on early repayment of notes receivable...... (5,180) - - Change in assets and liabilities net of effects from purchase of subsidiaries and unusual items: Decrease (increase) in accounts receivable, net....... (4,626) (2,695) 7,316 Decrease (increase) in notes receivable......... 3,187 6,014 (9,201) Decrease (increase) in inventory............. (1,034) (998) 2,735 Decrease (increase) in prepaid and other assets....... (1,927) (593) 3,947 Increase (decrease) in accounts payable............ 1,525 (895) (3,672) Increase (decrease) in accrued expenses........... 3,349 (520) 2,781 Increase (decrease) in income taxes payable............ (1,056) (3,999) 5,378 Increase (decrease) in deferred income taxes............ 4,691 4,451 (11,787) ------- ------- ------ Net cash provided by operating activities................. 62,167 56,782 96,451 ------- ------- ------ Cash flows from investing activities: Additions to property, plant and equipment..................... (27,783) (36,104) (13,814) Decrease (increase) in inventory to be converted into equipment for short-term rental............................. 700 (1,000) 4,250 Dispositions of property, plant and equipment....................... 5,400 3,231 2,869 Proceeds from sale of KCIFS and Medical Services divisions............... - 7,182 65,300 Excess principal repayment on discounted notes receivable.................... 5,180 - - Business acquired in purchase transactions, net of cash acquired.. (1,146) - - Decrease (increase) in finance lease receivables, net ................... - 339 (1,561) Note received from principal shareholder 10,000 (10,000) - Increase in other assets............ (9,960) (6,531) (9,230) ------ ------ ----- Net cash provided (used) by investing activities...... (17,609) (42,883) 47,814 ------- ------ ------ Cash flows from financing activities: Repayments of notes payable and long-term obligations.................. - (800) (102,625) Borrowing (repayments)of capital lease obligations.................. 457 (64) (2,382) Proceeds from the exercise of stock options................ 4,264 4,919 915 Purchase and retirement of treasury stock (35,241) (2,849) (1,157) Cash dividends paid to shareholders (6,607) (6,631) (6,588) Other (150) (185) (791) ------ ------ ------ Net cash used by financing activities......... (37,277) (5,610) (112,628) ------ ------ ------- Effect of exchange rate changes on cash and cash equivalents........ (635) 869 1,324 ------ ------ ------- Net increase in cash and cash equivalents 6,646 9,158 32,961 Cash and cash equivalents, beginning of year..................... 52,399 43,241 10,280 ------ ------ ------ Cash and cash equivalents, end of year $59,045 $52,399 $ 43,241 ====== ====== ======= See accompanying notes to consolidated financial statements. [Enlarge/Download Table] KINETIC CONCEPTS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Three Years Ended December 31, 1996 (in thousands, except per share data) Notes Receivable Cumulative from Cumulative Foreign Officers Currency for Total Additional Trans- Excerise Share- Common Paid-In Retained lation Treasury Loan to of Stock holders' holders' Stock Capital Earnings Adjusment Stock ESOP Options Equity _______ _______ ________ _________ _______ ______ _______ _________ Balances at December 31, 1993 .. $ 46 $18,803 $117,685 $ (1,602) $(8,510) $(655) $ (60) $125,707 Net earnings .. -- -- 64,383 -- -- -- -- 64,383 Exercise of stock options .. -- 803 -- -- -- -- -- 803 Forgiveness of officer receivable -- -- -- -- -- -- 60 60 Tax benefit realized from stock option plan -- 112 -- -- -- -- -- 112 Treasury stock purchased .. -- -- -- -- (1,157) -- -- (1,157) Treasury stock retired......... (2) (9,665) -- -- 9,667 -- -- -- Cash dividends on common and preferred preferred stock -- $0.15 per share -- -- (6,588) -- -- -- -- (6,588) Payments on loan to ESOP .. -- -- -- -- -- 655 -- 655 Foreign currency translation adjustment -- -- -- 1,448 -- -- -- 1,448 ---------------------------------------------------------------------------------------------- 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 realized 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 ================================================================================= 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 1996 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 and voluntary purchasing organizations ("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 revenue during 1996 was generated under national agreements with GPOs. The Company operates directly in ten foreign countries including Germany, Austria, the United Kingdom, Canada, France, the Netherlands, Switzerland, Australia, Sweden and Italy(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 2). (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) 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. 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. (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Betterments which extend the useful life of the equipment are capitalized. (g) Depreciation and Amortization 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. (h) 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. (i) Other Assets Other assets consist principally of patents, trademarks, system development costs, 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. (j) 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. (k) Common Stock and Earnings Per Common and Common Equivalent Share Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options (using the treasury stock method). Earnings per share computed on a fully diluted basis is not presented as it is not significantly different from earnings per share computed on a primary basis. (l) 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. (m) 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. (n) 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. (o) Stock Options During October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." The new Statement allows companies to continue accounting for stock-based compensation under the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees"; however, companies are encouraged to adopt a new accounting method based on the estimated fair value of employee stock options. Companies that do not follow the new fair value based method will be required to provide expanded disclosures in footnotes to the financial statements. The Company has elected to continue accounting for stock-based compensation under the provisions of APB Opinion 25 and has provided the required by disclosures (See Note 9). NOTE 2. 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 resulted 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 and 1994 were not material as compared to the overall results of the Company. In December of 1994, the Company adopted a plan to liquidate the assets of Medical Retro Design, Inc. ("MRD"). Pursuant to that plan, the Company sold certain operating assets of MRD to HBR Healthcare Co. under an Asset Purchase Agreement effective March 27, 1995. The sales price was approximately $250,000. In conjunction with the sale, KCI and its affiliates agreed not to refurbish certain hospital beds and related furniture for a period of three years. Goodwill of $1.5 million associated with MRD was written off in 1994. The write-off was treated as an unusual item. The operating results of MRD for 1995 and 1994 were immaterial to the overall results of the Company. On September 30, 1994, the Company sold certain assets (the "Assets") used exclusively by Medical Services to Mediq/PRN under an Asset Purchase Agreement. Upon consummation of this transaction, Mediq/PRN acquired the Assets and assumed certain liabilities of Medical Services. The sales price was approximately $84.1 million. In conjunction with the sale, the Company and its affiliates agreed not to rent or distribute a portfolio of critical care and life support equipment for five years. Gross proceeds included a cash payment of approximately $65.3 million and promissory notes in the aggregate principal amount of $18.8 million. The net proceeds of $72.8 million, pre- tax gain of $10.1 million, and after-tax net loss of $2.5 million were calculated, as follows (in thousands): Cash $65,300 Notes receivable (See Note 3) 9,852 Fees and commissions (2,329) ------ Net proceeds 72,823 Equipment and inventory sold (38,959) Goodwill (25,778) Accounts receivable provision (479) Capital leases assumed 2,514 ------ Pre-tax gain on disposition 10,121 ------ Tax expense (12,601) ------ Net loss on disposition $(2,480) ====== Tax expense exceeded the pre-tax gain amount due to the nondeductibility of $25.8 million in unamortized goodwill. During the second quarter of 1996, the Company acquired Astec Medical, a small overlay company in the United Kingdom. This firm produces a well-received product which will enable the Company to further penetrate the community hospital market throughout Europe. Subsequent to December 31, 1996, the Company acquired H.F. Systems, Inc. of Los Angeles. H.F. Systems offers a complete line of therapeutic specialty support surfaces primarily to the West Coast extended care marketplace. The purchase price was approximately $8 million in cash and other considerations. NOTE 3. Notes Receivable In August 1995, the Company loaned $10.0 million to James R. Leininger, M.D., the principal shareholder and chairman of the Company's Board of Directors. The note was secured by a Stock Pledge Agreement covering one million shares of common stock in Kinetic Concepts, Inc. Interest was payable in annual installments at the rate of 7.94%. In January 1996, the note receivable was collected in full. Other notes receivable included notes received from Mediq/PRN as part of the proceeds on the sale of Medical Services effective September 30, 1994. At the time of the sale, the Company received an opinion from an independent investment banker on the notes receivable which was used to arrive at the carrying values. In October of 1996, the Company negotiated the early repayment of all remaining notes for $8.5 million, plus interest accrued through closing. As a result of this transaction, the Company recognized a one-time gain of $5.2 million before income taxes which has been included as interest income as of December 31, 1996. The values of the various notes receivable at December 31, 1995 for accounting purposes are described below (in thousands): Year Ended December 31, --------------------- Principal Balance 1996 1995 -------- -------- Note from PRN Holding, Inc. with 10% interest due quarterly in arrears beginning March 1996 and principal due September 1999 $ -- $10,000 Less discount and valuation allowance................. -- (6,813) ------ Notes receivable, noncurrent $ -- $ 3,187 ===== ====== NOTE 4. Supplemental Balance Sheet Data Accounts receivable consist of the following (in thousands): December 31, 1996 1995 ------- -------- Trade accounts receivable $63,613 $60,149 Employee and other receivables 2,160 2,060 ------ ------- 65,773 62,209 Less allowance for doubtful receivables 7,532 6,177 ------ ------- $58,241 $56,032 ====== ====== Inventories consist of the following (in thousands): December 31, 1996 1995 ------ ------- Finished goods $ 5,586 $ 2,890 Work in process 1,893 1,040 Raw materials, supplies and parts 17,113 20,174 ------- ------ 24,592 24,104 Less amounts expected to be converted into equipment for short-term rental 4,550 5,250 ------- ------- $20,042 $18,854 ======= ======= Net property, plant and equipment consist of the following (in thousands): December 31, 1996 1995 ----- ------ Land $ 1,007 $ 742 Buildings 14,254 13,418 Equipment for short-term rental 133,896 110,858 Machinery, equipment and furniture 36,821 27,610 Leasehold improvements............... 1,388 1,042 Inventory to be converted into equipment............................ 4,550 5,250 ------- ------- 191,916 158,920 Less accumulated depreciation and amortization..................... 126,692 96,644 ------- ------- $65,224 $62,276 ======= ======= Accrued expenses consist of the following (in thousands): December 1996 1995 -------- ------- Payroll, commissions and related taxes......................... $13,162 $12,589 Insurance accruals.............. 2,887 3,470 Other accrued expenses.......... 13,743 10,431 ------ ------- $29,792 $26,490 ====== ====== The carrying amount of financial instruments in current assets and current liabilities approximate fair value because of the short maturity of these instruments. NOTE 5. Note Payable and Long-Term Obligations The Company entered into a revolving credit and term loan agreement (the "Credit Agreement") with a bank as agent for itself and certain other financial institutions. The Credit Agreement provides for a $50 million one-year revolving credit facility with a two-year renewal option. Any advances under the Credit Agreement are due at the end of the period covered by the Credit Agreement. At December 31, 1996, the entire $50 million balance was available. The interest rate payable on borrowings under the Credit Agreement is at the election of the Company: (i) the Bank's reference rate, or (ii) the London inter-bank offered rate quoted to the Bank for one, two, three, or six month Eurodollar deposits adjusted for appropriate reserves ("LIBOR") plus 40 basis points. The Credit Agreement requires that the Company maintain specified ratios and meet certain financial targets. The Credit Agreement also contains certain events of default, includes certain provisions governing a change in control of the Company, and establishes various fees to be paid by the Company. At December 31, 1996, the Company was in compliance with all covenants. Interest paid on debt during 1996, 1995 and 1994 amounted to $0.2 million, $0.4 million and $5.4 million, respectively. 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, 1996 the gross amount of equipment under capital leases totaled $619,000 and related accumulated depreciation totaled $175,000. The Company leases 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 $13.5 million, $12.0 million and $10.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1996 are as follows: Capital Operating Leases Leases ------- -------- 1997.................................. $208 $10,498 1998.................................. 160 7,947 1999.................................. 160 5,221 2000.................................. 93 3,771 2001 ................................. - 1,073 Later years........................... - - ----- -------- Total minimum lease payments......... $621 $28,510 ====== ======= Less amount representing interest 107 Present value of net minimum capital lease payments..................... 514 Less current portion............... 118 Obligations under capital leases excluding current installments..... 396 NOTE 7. Income Taxes Earnings before income taxes consists of the following (in thousands): Year Ended December 31, 1996 1995 1994 ------- ------- ------- Domestic $51,771 $37,542 $110,287 Foreign 12,670 10,804 9,263 ------ ------ -------- $64,441 $48,346 $119,550 ====== ====== ======= Income tax expense attributable to income from continuing operations consists of the following (in thousands): 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 ======= ======= ======== Year Ended December 31, 1994 ----------------------------- Current Deferred Total --------- -------- ------- Federal $56,697 $(11,031) $45,666 State 8,212 (756) 7,456 International 3,282 -- 3,282 ------ ------- ------ $68,191 $(11,787) $56,404 ====== ====== ====== 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: [Download Table] Year Ended December 31, 1996 1995 1994 ------ ------ ------- Computed "expected" tax expense $22,554 $16,921 $41,843 Goodwill 442 533 9,307 State income taxes, net of Federal benefit ........................ 2,028 1,571 4,846 Tax-exempt interest from municipal bonds .......................... (445) -- -- Foreign income taxed at other than U.S. rates.................... 1,145 1,836 350 Utilization of foreign net operating loss carryforwards............. (123) (231) (814) Nonconsolidated foreign net operating loss .............. 67 492 566 Foreign, other............... (441) (1,450) 271 Effect of change in inventory accounting method.......... -- -- 455 Other, net................. 227 233 (420) ------ ------ ------ $25,454 $19,905 $56,404 ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and December 31, 1995 are presented below: 1996 1995 -------- -------- Deferred Tax Assets: Accounts receivable, principally due to allowance for doubtful accounts $4,458 $3,591 Intangible assets, deducted for book purposes but capitalized and amortized for tax purposes 1 323 Net operating loss carryforwards 67 492 Inventories, principally due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986 664 702 Notes receivable, basis difference -- 397 Legal fees, capitalized and amortized for tax purposes 670 402 Accrued liabilities..................... 1,015 519 Deferred foreign tax asset.............. 325 -- Other................................... 1,089 41 ----- ----- Total gross deferred tax assets 8,289 6,467 Less valuation allowance (67) (492) ----- ----- Net deferred tax assets 8,222 5,975 Deferred Tax Liabilities: Plant and equipment, principally due to differences in depreciation and basis (11,722) (5,686) Deferred state tax liability (973) (421) Investments, principally due to differences in tax treatment of certain components (506) -- Other.......................... (86) (242) -------- ------- Total gross deferred tax liabilities (13,287) (6,349) -------- -------- Net deferred tax liability $ (5,065) $ (374) ======== ======= At December 31, 1996, the Company had $1.1 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 $712,000 can be used indefinitely and the remainder expire from 1997 through 2001. The Company anticipates that the reversal of existing taxable temporary differences and future taxable income will provide sufficient taxable income to realize the tax benefit of the remaining deferred tax assets. In accordance with the Company's accounting policy, U.S. deferred taxes have not been provided on undistributed earnings of foreign subsidiaries at the end of 1996, as the Company intends to reinvest these earnings permanently in the foreign operations or to repatriate such earnings only when it is advantageous for the Company to do so. The amount of the unrecognized tax liability for these undistributed earnings was not material at the end of 1996 due to the availability of foreign tax credits. Income taxes paid during 1996, 1995 and 1994 were $15.4 million, $15.1 million and $57.3 million, respectively. NOTE 8. Shareholders' Equity and Employee Benefit Plans Common Stock: The Company is authorized to issue 100 million shares of Common Stock, $.001 par value (the "Common Stock"). The number of shares of Common Stock issued and outstanding at the end of 1996 and 1995 was 42,355,000 and 44,331,000, 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 2,563,000 shares during 1996 and 77,000 shares during 1995. As of December 31, 1996, there were 360,000 remaining shares to be repurchased in the program. 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. Subsequent to 1996, the Company's Board of Directors approved a program which authorizes the Company to purchase up to an additional 3 million shares. Preferred Stock: The Company is authorized to issue up to 20 million shares of Redeemable Preferred Stock, par value $0.001 per share, in one or more series. As of December 31, 1996 and December 31, 1995, none were issued. Employee Stock Ownership Plan: The Company has established an Employee Stock Ownership Plan (the "ESOP") covering employees of the Company who meet minimum age and length of service requirements. The ESOP enables eligible employees to acquire a proprietary interest in the Company. As of December 31, 1996, all shares of stock owned by the ESOP have been allocated to employees. Based on the number of shares planned to be allocated for the year, ESOP expense recorded during 1996, 1995 and 1994 amounted to $0, $263,000 and $476,000, 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 1996, 1995 and 1994, the Company made matching contributions an charged to expense $498,000, $265,000 and $314,000, respectively. NOTE 9. Stock Option Plans In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation." While the new 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 Accounting 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. The 1987 Kinetic Concepts, Inc. Key Contributor Stock Option Plan (the "Key Contributor Stock Option Plan") covers up to an aggregate of 5,750,000 shares of the Company's Common Stock. Options may be granted under the Key Contributor Stock Option Plan to employees (including officers), non-employee directors and consultants of the Company. The exercise price of the options is determined by a committee of the Board of Directors of the Company. The Key Contributor Stock Option Plan permits the Board of Directors to declare the terms for payment when such options are exercised. Options may be granted with a term not exceeding ten years. The 1988 Kinetic Concepts, Inc. Directors Stock Option Plan (the "Directors Stock Option Plan") covers an aggregate of 300,000 shares of the Company's Common Stock and may be granted to non-employee directors of the Company. The exercise price of options granted under the Directors Stock Option Plan shall be the fair market value of the shares of the Company's Common Stock on the date that such option is granted. The 1995 Kinetic Concepts, Inc. Senior Executive Management Stock Option Plan (the "Senior Executive Stock Option Plan") covers a total of 1,400,000 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 shall be established by the Board of Directors but may not in any case be less than the fair market value of the shares of common stock of the Company on the date of grant. Vesting of options granted is subject to certain terms and conditions. The Senior Executive Stock Option Plan is subject to final approval by the Company's shareholders. 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 two fiscal years ended December 31, 1996 and 1995, respectively, was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.1% and 6.0% dividend yields of 0.9% and 2.1%, volatility factors of the expected market price of the Company's common stock of .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): 1996 1995 --------- ------- Net Earnings as Reported $38,987 $28,441 Pro Forma Net Earnings $37,996 $28,238 Earnings Per Shareas Reported $ 0.86 $ 0.63 Pro Forma Earnings Per Share $ 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 such, the pro forma compensation cost reflected above may not be representative of future results. The following table summaries information about stock options outstanding at December 31, 1996 (shares in thousands): [Download Table] Weighted Average Weighted Weighted Options Remaining Average Options Average Range of Outstanding Contract Excerise Excercisable Excercise Excerise Prices at 12/31/96 Life(yrs) Price at 12/31/96 Price ---------------- --------- --------- ------- -------- ---------- $ 3.00 to $4.63 1,166 6.9 $ 4.22 594 $ 4.23 $ 5.00 to $9.50 1,272 7.5 $ 6.26 435 $ 6.14 $11.13 to $17.00 901 9.2 $15.61 292 $14.23 ------- ------ ----- ------ -------- 3,339 8.0 $ 8.68 1,321 $ 7.07 A summary of the Company's stock option activity, and related information, for years ended December 31, 1996, 1995 and 1994 follows (options in thousands): [Download Table] 1996 1995 1994 ----------------- --------------- --------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- ------ -------- ------- ------- ------- Options Outstanding - Beginning of Year............ 2,833 $ 5.21 3,029 $ 4.50 2,668 $5.35 ----- ------ ----- ------ ----- ----- Granted......... 1,317 $14.47 873 $ 6.89 2,124 $4.15 ----- ------ ----- ----- ----- ---- Exercised....... (628) $ 5.05 (792) $ 4.56 (199) $4.07 ----- ------ ------ ------ ------ ------ Forfeited........ (183) $ 9.34 (277) $ 4.57 (1,564) $5.53 ----- ------ ----- ------ ----- ------ Options Outstanding End of Year....... 3,339 $ 8.68 2,833 $ 5.21 3,029 $4.50 ------ ------ ----- ------ ------ ------- Exercisable at End of Year..... 1,321 $ 7.07 ----- ------ ------ ------ ------- -------- Weighted-Average Fair Value of Options Granted During th Year $ 5.80 $ 2.19 Exercise prices for options outstanding as of December 31, 1996 ranged from $3.00 to $17.00. The weighted average remaining contractual life of those options is 8.0 years. The following table summarizes the activity in the Company's 1987 Key Contributor Stock Option Plan (in thousands, except per share data): Shares Option Price Per Share -------- ---------------------- Outstanding, January 1, 1994 2,606 $3.00 to $8.625 Granted...................... 2,116 $3.375 to $6.00 Canceled..................... (1,556) $3.50 to $8.625 Exercised.................... (199) $3.50 to $5.75 ------------------------------------ Outstanding, December 31, 1994 2,967 $3.00 to $8.625 ------------------------------------ Granted...................... 865 $5.50 to $11.75 Canceled..................... (277) $3.375 to $8.1875 Exercised.................... (760) $3.375 to $6.75 ------------------------------------ Outstanding, December 31, 1995 2,795 $3.00 to $11.75 ------------------------------------ Granted...................... 806 $11.75 to $17.00 Canceled..................... (183) $3.625 to $16.50 Exercised.................... (618) $3.50 to $16.50 ------------------------------------ Outstanding, December 31,1996 2,800 $3.00 to $17.00 The following table summarizes the activity in the Company's 1988 Eligible Directors Stock Option Plan (in thousands, except per share data): Shares Option Price Per Share ------ ----------------------- Outstanding, January 1, 1994 62 $4.125 to $9.375 Granted 8 $3.75 to $4.50 Exercised -- $-- Lapsed (8) $5.00 to $5.25 ----------------------------------- Outstanding, December 31, 1994 62 $3.75 to $9.375 ----------------------------------- Granted 8 $8.125 to $9.25 Exercised (32) $4.125 to $5.875 Lapsed -- $-- ----------------------------------- Outstanding, December 31, 1995 38 $3.75 to $9.375 ----------------------------------- Granted 31 $14.625 to $16.125 Exercised (10) $4.375 to $9.375 Lapsed -- $-- ----------------------------------- Outstanding, December 31, 1996 59 $3.75 to $16.125 In July, 1991, the Company granted options to three non- employee directors of the Company to acquire a total of 30,000 shares of the Company's Common Stock at $5.00 per share (the fair market value at date of grant). At December 31, 1996, 20,000 options are exercisable and expire ten years from the grant date. During 1994, the Chairman of the Board issued options for 440,000 of his shares at fair market value of $5.74 to the newly appointed Chief Executive Officer. At December 31, 1996, 340,000 options are exercisable and expire three years from the grant date. Note 10. Other Assets A summary of other long-term assets follows (in thousands): 1996 1995 -------- ------ Investment in assets subject to leveraged leases......... $14,766 $ 7,566 Information systems development projects........ 3,124 5,601 Investment in long-term securities ................ 4,989 4,872 Intangible assets.......... 3,660 3,475 Deposits and other......... 8,529 5,978 -------- ------- $35,068 $27,492 (Less) accumulated amortization.............. (4,628) (5,638) -------- -------- $30,440 $21,854 ======= ======= Long-term securities consist primarily of government backed securities held by the Company's wholly owned captive insurance company and are carried at market value, which is not significantly different than cost. The carrying value of the long-term securities approximates fair value. On December 30, 1996, the Company acquired beneficial ownership of a Grantor Trust. The Trust assets consist of a McDonnell Douglas DC-10 aircraft and three engines. In connection with the acquisition, KCI paid cash equity of $7.2 million and assumed non-recourse debt of $47.0 million. The DC- 10 aircraft is on lease to the Federal Express Corporation through June 2012. 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. NOTE 11. 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. 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 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 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 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. 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. See discussion of self-insurance program at Note 1 and leases at Note 6. NOTE 12. Unusual Items During the third quarter of 1994, the Company recorded a gain from the settlement of a patent infringement lawsuit brought against SSI. The settlement was $84.75 million. Net of legal expenses, this transaction added $81.6 million of pre-tax income to the 1994 results. In addition, a $10.1 million pre-tax gain from the sale of Medical Services was recognized. The Company recorded certain other unusual items, primarily planned dispositions of under-utilized rental assets and over-stocked inventories of $6.8 million. These items together total $84 million and are included in Unusual Items on the 1994 Statement of Earnings. 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: Year Ended December 31, 1996 Domestic Foreign Elimination 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 $156,273 $49,622 $(11,547) $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 $157,615 $43,787 $ (10,075) $191,327 ======== ======= ========= Corporate assets 52,399 ------- Total assets $243,726 ======== Year Ended December 31, 1994 Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ Total revenue: Unaffiliated customers $223,202 $46,444 $ - $269,646 Intercompany transfers 5,489 -- (5,489) -- -------- ------ ------ -------- Total $228,691 $46,444 $(5,489) $269,646 ======== ====== ======= ======== Operating earnings $117,368 $ 7,737 $(1,027) $124,078 ======== ====== ======= ======== Total assets: Identifiable assets $156,248 $41,756 $(8,514) $189,490 ======== ====== ====== Corporate assets 43,241 ------- Total assets $232,731 ======= 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, 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 Earnings per common and common equivalent share $0.19 $0.18 $0.19 $0.30 Year Ended December 31, 1995 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenue $57,027 $59,790 $61,606 $65,020(a) Operating earnings $ 9,577 $ 8,717 $12,734 $12,764 Net earnings $ 6,098 $ 5,716 $ 8,535 $ 8,092 Earnings per common and common equivalent share $0.14 $0.13 $0.19 $0.18 Earnings per share for the full year may differ from the total of the quarterly earnings per share due to rounding differences. Independent Auditors' Report The Board of Directors and Shareholders Kinetic Concepts, Inc.: We have audited the accompanying consolidated balance sheets of Kinetic Concepts, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the years in the three-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 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method of applying overhead to inventory in 1994. /s/ KPMG PEAT MARWICK LLP ------------------------- KPMG PEAT MARWICK LLP San Antonio, Texas February 5, 1997 BOARD OF DIRECTORS JAMES R. LEININGER, M.D. Chairman of the Board of Directors RAYMOND R. HANNIGAN President and Chief Executive Officer PETER A. LEININGER, M.D. Executive Vice President SAM A. BROOKS Chairman, Renal Care Group, Inc. FRANK A. EHMANN Retired Former Executive Vice President and Co-Chief Operating Officer Baxter Travenol Laboratories, Inc. WENDY L GRAMM, PH.D. Economist Director of the Regulatory Analysis Program at the Center for Study of Public Choice at George Mason University BERNHARD T. MITTEMEYER, M.D. Professor of Urological Surgery at the Texas Tech University School of Medicine EXECUTIVE OFFICERS RAYMOND R. HANNIGAN President and Chief Executive Officer PETER A. LEININGER, M.D. Executive Vice President BIANCA A. RHODES Senior Vice President, Finance and Chief Financial Officer DENNIS E. NOLL Senior Vice President, General Counsel and Secretary MICHAEL J. BURKE Vice President, Manufacturing and Engineering LARRY P. BAKER Vice President, Corporate Services OPERATING DIVISION EXECUTIVES CHRISTOPHER M. FASHEK President KCI Therapeutic Services, Inc. FRANK DiLAZZARO President KCI International, Inc. RICHARD C. VOGEL Vice President and General Manager KCI New Technologies, Inc. MICHAEL C. WELLS Vice President and General Manager KCI Home Care INVESTOR INFORMATION BIANCA A. RHODES Senior Vice President, Finance and Chief Financial Officer 210-524-9000 FORM 10-K A copy of the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available without charge from Investor Relations, Kinetic Concepts, Inc. LISTING NASDAQ National Market System, Ticker Symbol KNCI TRANSFER AGENT AND REGISTRAR FIRST NATIONAL BANK OF BOSTON c/o BostonEquiServe Shareholder Services Division P.O. Box 644 Boston, MA 02102-0644 (617) 575-3400 ANNUAL MEETING The Company's annual meeting of shareholders will be held on Tuesday, May 13, 1997 at 9:00 a.m. (CST) at: Omni San Antonio Hotel Grand Ballroom 9821 Colonnade Blvd. San Antonio, TX 78230 AUDITORS KPMG PEAT MARWICK LLP 112 East Pecan Suite 2400 San Antonio, Texas 78205 MARKET PRICES OF COMMON STOCK 1996 1995 -------------------- ----------------------- High Low High Low First Qtr $13.875 $10.438 $8.250 $6.563 Second Qtr 17.375 13.125 8.125 6.625 Third Qtr 16.063 13.500 11.625 7.000 Fourth Qtr 15.000 11.875 13.000 10.000 Trademarks - TriaDyne TM, BariKare(R), PlexiPulse(R), All-in-1 System TM, The V.A.C. (R), TheraPulse(R), KinAir(R), DynaPulse (R), First Step(R), and Home Kair(R) are trademarks of Kinetic Concepts, Inc. Clinical Advantage SM, Kinetic Therapy SM, Genesis SM, Odyssey SM, and Continuum of Care SM are service marks of Kinetic Concepts, Inc. Certain of these products are subject to patent and/or pending patent. (C) Copyright 1997 Kinetic Concepts, Inc. All rights reserved. KCI 8023 VANTAGE DRIVE - SAN ANTONIO, TX 78230 . WWW.KCI1.COM "Commit thy way unto the Lord; trust also in Him; and He shall bring it to pass" -- Psalms 37:5

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-K’ Filing    Date    Other Filings
5/13/97DEF 14A
Corrected on:5/6/97
Filed on:3/28/97S-8
2/5/97
For Period End:12/31/96
12/30/96
12/26/96
10/31/96
12/31/9510-K,  DEF 14A
8/16/95
6/15/95
3/27/95
1/1/95
12/31/9410-K,  10-K/A
9/30/9410-Q,  8-K
1/1/94
12/31/93
2/21/92
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