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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ----------------.
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0985318
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of principal executive offices)
(651) 631-0590
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of May 10, 2000 was:
COMMON STOCK, $.10 PAR VALUE 10,569,630 SHARES
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Quarterly Report on Form 10-Q contains various "forward
looking statements" within the meaning of Federal securities laws. These
forward looking statements represent management's expectations or beliefs
concerning future events, including statements regarding anticipated
product introductions; changes in markets, customers and product pricing;
expenditures for research and development; growth in revenue; and taxation
levels. When used in this Form 10-Q, the words "anticipate," "believe,"
"expect," "estimate" and similar expressions are generally intended to
identify forward-looking statements. These and other forward looking
statements made by the Company must be evaluated in the context of a number
of factors that may affect the Company's financial condition and results of
operations, including, but not limited to, the following:
- The Company's products are subject to reimbursement by private and
public healthcare reimbursement agencies that impose limits on
reimbursement and strict rules on applications for reimbursement. The
Company is the subject of a whistleblower suit initiated by a former
employee alleging improper filing of approximately 500,000 Medicare
claims, resulting in overpayments of more than $120,000,000. The
Company has not yet been formally served with the complaint and has
therefore submitted no response. Resolution of that matter as well as
changes in the rates, eligibility or requirements for reimbursement, or
failure to comply with reimbursement requirements, could significantly
impact earnings and financial condition.
- The Company acquired two businesses during the two previous fiscal
years and a third in July 1999. The Company may not be able to
integrate acquired businesses as smoothly as it anticipated and may
find issues with respect to acquired businesses of which it was
unaware.
- Like many medical device companies, the Company has a large balance of
uncollected receivables against which it maintains a reserve for
doubtful accounts. The size of the reserve is judgmental and depends
upon a number of factors, including historical experience in collecting
receivables. If the Company cannot collect an amount of receivables
that is consistent with historical collections, it might be required to
charge off a portion of uncollected receivables in a single quarter,
which could significantly impact earnings.
- The Company has incurred a significant amount of indebtedness to
finance acquired businesses. The interest expense on such indebtedness
reduces earnings and could cause the Company to be short of cash if its
operations do not meet expectations.
- The Company maintains significant amounts of inventory on consignment
at clinics and for distribution to patients. It may not be able to
completely control losses of this inventory and, if inventory losses
are not consistent with historical experience, it might be required to
write off a portion of the carrying value of inventory, which could
significantly impact earnings.
- The clinical effectiveness of the Company's electrotherapy products has
periodically been challenged. Publicity about the effectiveness of
electrotherapy for pain relief or other clinical applications could
negatively impact revenue and earnings.
- The Company formed a United Kingdom subsidiary in fiscal 1999 and
acquired a Swiss company in the first quarter of fiscal 2000. These
operations may be more difficult to supervise, and may be subject to
different economic influences than United States operations and they do
subject the Company to more exposure from currency fluctuations.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited condensed
financial information:
Consolidated Balance Sheets as of March 31, 2000 and
June 30, 1999
Consolidated Statements of Operations for the three
months and nine months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2000 1999
------------- --------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,432,991 $ 561,207
Receivables, less reserve for uncollectible accounts of $5,026,783
and $4,913,635 19,210,079 17,233,469
Inventories
Raw materials 1,453,427 1,825,487
Work in process 338,138 377,771
Finished goods 6,542,763 6,709,525
Deferred tax assets 2,587,686 2,587,686
Prepaid expenses 1,306,945 584,330
------------ ------------
Total current assets 33,872,029 29,879,475
PROPERTY, PLANT AND EQUIPMENT: 11,460,127 11,548,678
Less accumulated depreciation (6,186,248) (6,930,564)
------------ ------------
Net property, plant and equipment 5,273,879 4,618,114
Intangible assets, net 12,335,808 1,150,009
Deferred tax assets 224,952 40,121
Other assets 47,672 11,995
------------ ------------
$ 51,754,340 $ 35,699,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable $ 3,000,000 $ 2,400,000
Current maturities of long-term debt 1,982,914 1,241,037
Accounts payable 1,957,403 2,038,732
Accrued liabilities
Payroll 344,372 575,426
Commissions 289,021 491,990
Other 2,053,033 1,560,297
Minority interest 10,733 24,681
------------ ------------
Total current liabilities 9,637,476 8,332,163
LONG-TERM LIABILITIES:
Long-term debt 14,319,536 4,066,914
Deferred tax liabilities 1,389,011 247,328
------------ ------------
Total liabilities 25,346,023 12,646,405
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value: 25,000,000 shares authorized; 1,056,963 1,049,491
issued and outstanding 10,569,630 and 10,494,908 shares
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding --- ---
Additional paid-in capital 20,875,527 20,740,650
Less note receivable from officer/stockholder (210,417) (237,500)
Accumulated other non-owner changes in equity (151,601) (1,637)
Retained earnings 4,837,845 1,502,305
------------ ------------
Total stockholders' equity 26,408,317 23,053,309
------------ ------------
$ 51,754,340 $ 35,699,714
============ ============
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
-------------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- ------------------
Net sales and rental revenue $13,949,721 $10,919,706 $42,604,077 $ 30,886,253
Cost of sales and rentals 4,141,278 3,107,808 12,847,569 8,770,646
----------------- ----------------- ----------------- ------------------
Gross profit 9,808,443 7,811,898 29,756,508 22,115,607
Operating expenses:
Selling, general and administrative 7,888,129 6,262,041 22,887,512 17,517,381
Research and development 340,244 268,158 947,123 713,461
Acquisition expense --- --- --- 79,107
----------------- ----------------- ----------------- ------------------
Total operating expenses 8,228,373 6,530,199 23,834,635 18,309,949
----------------- ----------------- ----------------- ------------------
Income from operations 1,580,070 1,281,699 5,921,873 3,805,658
Other income (expense):
Interest expense (410,628) (148,945) (1,165,330) (405,109)
Gain on sale of building --- --- 1,075,680 ---
Minority interest (3,850) (24,107) 13,948 (24,107)
Other (10,176) (1,913) (97,631) 8,478
----------------- ----------------- ----------------- ------------------
Income before income taxes 1,155,416 1,106,734 5,748,540 3,384,920
----------------- ----------------- ----------------- ------------------
Provision for income taxes 486,000 420,000 2,413,000 1,285,000
----------------- ----------------- ----------------- ------------------
Net income $ 669,416 $ 686,734 $ 3,335,540 $ 2,099,920
================= ================= ================= ==================
Net income per common and
common equivalent share
Basic $ 0.06 $ 0.07 $ 0.31 $ 0.20
================= ================= ================= ==================
Diluted $ 0.06 $ 0.07 $ 0.31 $ 0.20
================= ================= ================= ==================
Weighted average number of shares
outstanding
Basic
10,569,275 10,472,019 10,548,712 10,462,325
================= ================= ================= ==================
Diluted
10,612,967 10,532,783 10,635,278 10,501,956
================= ================= ================= ==================
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31
----------------------------------------------------
2000 1999
------------------------ -------------------------
OPERATING ACTIVITIES:
Net income $ 3,335,540 $ 2,099,920
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Gain on sale of building (1,075,680) ---
Depreciation and amortization 1,568,382 611,111
Change in long-term portion of deferred taxes 85,655 ---
Minority interest (13,948) ---
Change in current assets and liabilities, excluding effects of
business combinations
Receivables 200,314 (2,404,871)
Inventories 2,115,807 (855,906)
Prepaid expenses (615,683) (423,367)
Accounts payable (1,757,582) 112,422
Accrued liabilities (1,061,835) (52,871)
--------------- -------------
Net cash provided by (used in) operating activities 2,780,970 (913,562)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,314,374) (268,201)
Cash paid in asset acquisition, net of cash received (12,598,117) (3,650,000)
Proceeds from sale of building 1,726,930 ---
--------------- -------------
Net cash used in investing activities (12,185,561) (3,918,201)
FINANCING ACTIVITIES:
Proceeds from new financing 15,339,365 2,500,000
Principal payments on long-term obligations (3,403,203) (845,173)
Proceeds from line of credit, net 500,000 2,500,000
Payment of capital lease obligation (1,261,733) ---
Proceeds from exercise of stock options 39,059 3,895
Proceeds from employee stock purchase plan 103,290 53,194
--------------- -------------
Net cash provided by financing activities 11,416,778 4,211,886
Effect of exchange rates on cash and cash equivalents (140,403) ---
--------------- -------------
Net increase (decrease) in cash and cash equivalents 1,871,784 (619,877)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 561,207 919,765
--------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,432,991 $ 299,888
=============== =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,118,156 $ 293,915
=============== =============
Income taxes paid $ 1,842,984 $ 1,022,859
=============== =============
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 2000
The Company used a term loan and a credit line to finance certain
business combinations accounted for under the purchase method during the
first nine months of fiscal 2000 and 1999. The fair value of the assets and
liabilities of acquired companies at the dates of the acquisitions are
presented as follows:
For the Nine Months Ended
March 31
---------------------------------------------
2000 1999
-------------------- --------------------
Accounts receivable $ 2,176,925 $ 1,710,651
Inventories 1,537,352 1,179,280
Prepaid expenses 514,493 ---
Property and equipment 828,728 623,814
Intangible assets 11,571,716 1,000,000
Other long-term assets 203,224 ---
Accounts payable (1,666,687) (606,971)
Accrued liabilities (1,707,466) (17,633)
Long-term liabilities (860,168) (239,141)
-------------------- --------------------
Net assets acquired $ 12,598,117 $ 3,650,000
==================== ====================
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REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended March 31, 2000 and 1999 but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the periods
presented. Such results are not necessarily indicative of results for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not required for interim
reporting purposes, have been omitted. The accompanying financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1999 included in the Company's
Annual Report on Form 10-KSB.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be recognized at fair value in the
balance sheet and all changes in fair value be recognized currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
The Company does not believe that the implementation of this statement will have
an effect on the Company's results of operations, cash flows or financial
position.
2. BUSINESS COMBINATIONS
On July 19, 1999, the Company acquired all of the outstanding capital stock of
Compex SA, a Swiss-based medical products company, for cash of $10,747,967. The
acquisition was financed principally with debt and provides for additional
contingent consideration of up to $2,000,000 based on performance for the
calendar years 1999 and 2000. The initial purchase consideration exceeded the
net fair value of tangible assets by $9,721,566, of which $1,400,000 represented
the value of Compex's technology, $1,400,000 represented the value of its
workforce and the remaining $6,921,566 of which was assigned to goodwill. The
value of these intangible assets will be amortized over various periods from
five to twenty years. The allocations are preliminary, pending the outcome of
certain pre-acquisition tax contingencies. Additional consideration of
approximately $1,800,000 was earned for performance in calendar year 1999 and
was paid in March 2000. That amount was included in goodwill as of December 31,
1999 and, effective January 1, 2000, was amortized accordingly.
Proforma operating results as if Compex SA had been acquired at the beginning of
fiscal 1999 are as follows:
For the Three Months Ended For the Nine Months Ended
March 31, 1999 March 31, 1999
--------------------------------------- ---------------------------------------
Net sales $ 13,628,000 $ 37,702,000
Income before taxes 808,000 2,490,000
Net Income 471,000 1,454,000
Earnings per share -
Basic $ .04 $ .14
Diluted .04 .14
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On August 7, 1998, the Company acquired substantially all of the assets
(consisting primarily of finished goods inventory and receivables) of the
Homecare business unit of Henley Healthcare, Inc. ("Henley") for a purchase
price of $3,650,000 paid in cash at closing. The cash paid was obtained from
existing funds and borrowings under the Company's bank line of credit, including
a $2,500,000 term loan payable over three years.
3. NOTE PAYABLE AND LONG TERM DEBT
In conjunction with its acquisition of Compex SA, the Company entered into a new
$20,000,000 credit facility which provides for both term and revolving
borrowings at varying rates based either on the bank's prime rate or LIBOR. The
initial term loan of $15,000,000 was used to fund the acquisition and repay the
balance of a mortgage note and a revolving loan provided under a credit facility
with another bank.
Borrowings under the new facility are secured by substantially all assets of the
Company other than those pledged as collateral on existing lease or mortgage
obligations. The interest rate on the term loan was 8.76% at March 31, 2000 and
the weighted average rate on borrowings under the revolving line of credit was
8.88%.
The Company was in compliance with all financial covenants in its credit
agreement as of March 31, 2000 and for the period then ended.
4. SEGMENT INFORMATION
Rehabilicare and its consolidated subsidiaries operate their business in one
reportable segment, the manufacture and distribution of electromedical pain
management and rehabilitation products. The Company's chief operating decision
makers use consolidated results to make operating and strategic decisions. Net
revenue from United States and foreign sources (primarily Europe) was as
follows:
For the Nine Months Ended March 31
--------------------------------------------------------------------
2000 1999
------------------------------ -----------------------------------
U.S. revenues $ 31,010,778 $ 30,257,423
Foreign revenues 11,593,299 628,830
---------------- ------------
Total $ 42,604,077 $ 30,886,253
================ ============
Net revenue by product line was as follows:
For the Nine Months Ended March 31
--------------------------------------------------------------------
2000 1999
------------------------------ ----------------------------------
Rehabilitation products $ 18,515,274 $ 8,070,198
Pain management 10,930,577 10,922,217
Accessories and supplies 13,158,226 11,893,838
--------------- --------------
$ 42,604,077 $ 30,886,253
=============== ==============
No single customer represents over 10% of the Company's consolidated
revenues.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, manufactures and distributes electromedical pain
management and rehabilitation products used for clinical, home health care,
sports medicine and occupational medicine applications. The Company
operates in one business segment, distributing its products through sales
to medical product dealers and distributors and, in the United States,
through direct rental or sale to patients. The latter approach involves
placing electrotherapy units with physicians, physical therapists and other
health care providers who then refer those units to patients after
determining an appropriate treatment regimen. Units are left on consignment
with the health care providers for such referral. The Company then bills
the patient or the patient's insurance carrier directly after being
notified that a unit has been prescribed and provided to the patient. The
Company takes responsibility for subsequent patient follow-up, including
additional months rental; sale of the unit, if appropriate; and sale of
additional supplies required for continued use of the electrotherapy units.
This distribution approach requires the Company to maintain significant
investments in inventories and receivables.
In the fiscal year ended June 30, 1998, the Company began implementation of
a strategy to increase its business through consolidation with other
companies in the pain management and rehabilitation markets. The strategy
began with the merger with Staodyn, Inc. on March 17, 1998 in a transaction
accounted for as a pooling-of-interests. On August 7, 1998, the Company
acquired certain assets of the Homecare division of Henley Healthcare, Inc.
and the operations of that business are included in the consolidated
financial statements from that date forward. In January 1999, the Company
established a majority-owned subsidiary, Rehabilicare (UK), Ltd., near
London, England. Rehabilicare (UK) subsequently acquired substantially all
of the assets of the Company's former distributor in the United Kingdom,
effective February 1, 1999. Its operations are included from that date
forward. Sales to the distributor prior to that date are included in net
revenue. Finally, on July 19, 1999, the Company acquired all of the
outstanding capital stock of Compex SA based in Lausanne, Switzerland. Its
operations are included in the consolidated financial statements from the
date of acquisition.
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RESULTS OF OPERATIONS
The following table sets forth information from the statements of operations as
a percentage of revenue for the periods indicated:
Three Months Ended Nine Months Ended
March 31 March 31
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Net sales and rental revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales and rentals (29.7) (28.5) (30.2) (28.4)
Gross profit 70.3 71.5 69.8 71.6
Operating expenses -
Selling, general and administrative (56.6) (57.3) (53.7) (56.7)
Research and development (2.4) (2.5) (2.2) (2.3)
Non-recurring merger items -- -- -- (0.3)
----- ----- ----- -----
Total operating expenses (59.0) (59.8) (55.9) (59.3)
Income from operations 11.3 11.7 13.9 12.3
Other income (expense), net (3.0) (1.6) (2.9) (1.4)
Gain on sale of building -- -- 2.5 --
Income tax provision (3.5) (3.8) (5.7) (4.1)
Net income 4.8 6.3 7.8 6.8
Revenue was $13,950,000 for the third quarter of fiscal 2000, a 28% increase
from $10,920,000 in the third quarter of fiscal 1999. Revenue for the nine
months ended March 31, 2000 increased 38% to $42,604,000 from $30,886,000 in the
nine months ended March 31, 1999. The increases were primarily attributable to
the acquisition of Compex, which accounted for $3,624,000 of revenue for the
third quarter and $10,643,000 for the nine months ended March 31, 2000. U.S.
revenue declined 5% during the third quarter compared with the prior year as a
result of a reduction in the number of patient referrals and the average revenue
generated by each referral. The Company believes these declines are directly
attributable to the whistleblower suit which was disclosed in early February
2000. That suit has adversely impacted morale and productivity in the field
sales and patient support operations. The Company further believes that the
situation has stabilized during subsequent months. The primary reason for the
increase in U.S. revenue for the nine months ended March 31, 2000 was the full
integration of the former Staodyn and Rehabilicare sales organizations, a
process which started immediately after approval of the merger on March 17,
1998.
International business other than Compex was not significant as a percent of
total revenue in the third quarter and nine month periods in both years.
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Gross profit was $9,808,000 or 70% of revenue in the third quarter of fiscal
2000 and $29,757,000 or 70% of revenue for the nine months ended March 31, 2000
compared with $7,812,000 or 72% of revenue and $22,116,000 or 72%, respectively,
in the comparable periods of fiscal 1999. Cost of sales included a one-time
charge of $645,000 in the first quarter of fiscal 2000 related to the step-up in
basis of inventory recorded in connection with the Compex acquisition. Its
inventory turns rapidly so the entire step-up flowed through the first quarter.
Without that charge, gross margin would have been 71% of revenue for the nine
months. The slight reductions are due primarily to the revenue declines
previously discussed and minor changes in the mix of product sales and rentals.
Selling, general and administrative expenses increased 26% to $7,888,000 in the
third quarter of fiscal 2000 from $6,262,000 in fiscal 1999 but remained the
same as a percentage of revenue at approximately 57%. For the nine months ended
March 31, 2000, those expenses increased 31% to $22,888,000 from $17,517,000 in
fiscal 1999 but decreased as a percentage of revenue from 56% to 54%. Several
factors contributed to those decreases. Fiscal 1999 included expenses of
carrying the former Staodyn building in Longmont, Colorado which was sold in
July 1999 and the costs of continuing operations in facilities formerly operated
by Henley Healthcare which were closed during fiscal 1999. Decreases were also
realized with the elimination of virtually all administrative costs associated
with the former operations of Staodyn and Henley Healthcare and various
economies of scale resulting from the Company's acquisition activity. The impact
of those factors was offset in the third quarter by incremental marketing and
selling expenses incurred by Compex in connection with its aggressive growth
plan.
Research and development expense increased about 27% for the third quarter and
33% for the nine months ended March 31, 2000 but remained at approximately 2% of
revenue from year to year. The fiscal 2000 year to date expenses include
approximately $465,000 incurred by Compex. The Company substantially completed
development of a new family of TENS products during fiscal 1999 and believes
that the current expenditure level will be adequate to fund current product
enhancement and development programs.
Interest expense increased from $405,000 to $1,165,000 for the nine month period
ended March 31, 2000 as a result of the acquisition of Compex in July 1999, and
higher interest rates.
Operating results for fiscal 2000 include a gain on the sale of the former
Staodyn building in Longmont, Colorado in the amount of $1,076,000. The Company
exercised its option to purchase that building in the first quarter of fiscal
1999 and closed the purchase and immediate sale on July 7, 1999. Lease payments
and operating costs associated with that building were expensed as incurred
throughout fiscal 1999.
The provision for income taxes increased from 38% of income before taxes in the
third quarter and nine months ended March 31, 1999, to 42% in the comparable
periods of fiscal 2000. The Company now operates in various countries in Europe
as well as the United States. Some countries have higher tax rates than the
United States as well as different rules on the deductibility of certain
expenses and the availability of certain credits for taxes paid to other
jurisdictions. The Company believes that 42% is a reasonable estimate of the
effective rate for fiscal 2000 based on most recent estimates of the expected
sources of revenue and expenses for entire year.
As a result of all the above changes, net income increased from $2,100,000 in
the nine month period ended March 31, 1999 of fiscal 1999 to $3,336,000 for the
nine month period ended March 31, 2000 in fiscal 2000. Diluted earnings per
share increased from $.20 to $.31. Before the one time gain related to the
building sale and the one time charge related to the Compex inventory step-up
are eliminated, net income for the nine months was $3,085,000 or $.29 per share.
Compex accounted for just over $.02 of
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that amount after deducting goodwill amortization and interest expense on
acquisition debt from it's operating income.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company generated cash of $1,872,000 in the nine months ended March 31,
2000. The most significant cash transaction during the period was the
acquisition of Compex for $10,748,000, all of which was financed by additional
bank borrowings. As a part of that transaction, the Company consolidated its
other bank debt into a new $20 million credit facility which provides for both
term and revolving loans. Net additional proceeds from borrowings related to the
acquisition and other operating expenses was $11,891,000. The purchase price for
Compex was increased by $1,777,000 based on certain operating results of Compex
for the calendar year 1999. This payment was made in March 2000. An additional
$233,000 could be paid in March 2001 based on certain operating results for
calendar 2000. The credit facility was designed to cover those amounts in the
event cash flow from operations is not sufficient to fund them.
The only other significant investing activity during the period was the purchase
of $1,314,000 of property and equipment in the normal course of operation.
As previously mentioned, the Company also generated cash of $465,000 from the
sale of a building, net of payment of the capitalized lease obligations.
Cash was used to fund an increase in receivables of $2,277,000 during the nine
months ended March 31, 2000. Compex receivables at the end of the quarter were
$2,135,000 so without that acquisition, receivables would actually have
increased by $142,000. Managing receivables represents one of the biggest
business challenges to the Company. The process of determining what products
will be reimbursed by third party payors and the amounts to be paid for those
products is very complex and the reimbursement environment is constantly
changing. That risk is spread across many payors throughout the United States.
The determination of an appropriate reserve for uncollectible accounts at the
end of each reporting period includes various factors including historical
trends and relationships and experience with insurance companies or other third
party payors. The Company believes that the reserve at March 31, 2000 is
adequate to cover future losses on its receivables based primarily on collection
history and trends. The provision for uncollectible accounts recorded in the
income statement may fluctuate significantly from quarter to quarter as such
trends change. The reserve was 20.7% of receivables at March 31, 2000 compared
to 22.2% at June 30, 1999. That ratio will be favorably impacted in the future
as a result of including receivables from Compex and Rehabilicare UK which are
more traditional trade receivables and not dependent on third party payors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 7, 2000, the Company reported that it had been advised by a
reporter for The Tampa Tribune that it was the subject of a
whistleblower suit filed in Tampa, Florida. The Company has not been
formally served with the complaint but has obtained a copy of the suit
from the United States District Court of the Middle District of
Florida. The suit was initiated by Elizabeth Mies, a former employee of
Rehabilicare, on December 31, 1998, and the United States Government
intervened as a coplaintiff under the False Claims Act on November 8,
1999. It was under seal (was not available for review) until January
21, 2000.
The suit alleges that Rehabilicare, Staodyn, Inc. (a corporation
acquired through a subsidiary of Rehabilicare in 1998), and Henley
Healthcare, Inc. (from which Rehabilicare acquired certain assets of a
division in 1998), improperly filed approximately 500,000 Medicare
claims, that they were overpaid more than $120,000,000 on such claims
and that the total statutory amount recoverable under the suit could be
$15.4 billion. The suit is based primarily on an allegation that all
three companies submitted claims to the government on the basis of
certificates of medical necessity faxed from physicians, rather than on
signed originals, but also alleges that the companies altered those
certificates and overbilled for accessories contained in a "standard
medicare kit."
Rehabilicare does not agree with the number of reimbursement payments
the complaint alleges were received, noting that Medicare reimbursement
constitutes only a small portion of the Company's revenues.
As previously reported, the Company had completed a limited audit of
Medicare files during the summer of 1999 and determined that many of
the files were incomplete or incorrectly completed. The audit found no
evidence that the Company had submitted claims for which it did not
provide products or services and no evidence of intentional wrongdoing.
Prior to the time it became aware of the whistleblower suit, the
Company, through its outside legal counsel, had attempted to contact
the United States Attorney's office in Florida, as well as the Durable
Medical Equipment Regional Carriers that administer the Medicare
reimbursement program, to discuss whether return of any of the
reimbursements for the incomplete files was required. There was no
response to such requests. The Company's legal counsel have
subsequently established contact with attorneys for the plaintiffs and
are attempting to clarify the allegations and work toward a timely
resolution of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.7 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K, dated March 16, 2000, was filed during the quarter
ended March 31, 2000, to report the resignation of
PricewaterhouseCoopers LLP as the Company's independent auditors.
A Form 8-K, dated April 24, 2000, was filed after the quarter ended
March 31, 2000, to report the engagement of Ernst & Young LLP as
the Company's new independent auditors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REHABILICARE INC.
May 15, 2000 /s/ David B. Kaysen
- --------------------------- --------------------------------------------
Date David B. Kaysen
President and Chief Executive Officer
May 15, 2000 /s/ W. Glen Winchell
- --------------------------- --------------------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
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